<PAGE>
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, 1996
- ----- 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 (I.R.S. Employer
of incorporation or organization) Identification Number)
6400 Congress Avenue, Suite 200A, Boca Raton, FL 33487
- ------------------------------------------------ ----------------------
(Address of principal executive offices)) (Zip Code)
Issuer's telephone number: (561) 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, $.001 Par Value
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(Title of class)
Units, Consisting of One Share of the Company's Series B Convertible
Preferred Stock and One Series IV Common Stock Purchase Warrant
- ------------------------------------------------------------------------------
(Title of class)
Series B Convertible Preferred Stock, $.01 Par Value
- ------------------------------------------------------------------------------
(Title of class)
Series IV Common Stock Purchase Warrant
- ------------------------------------------------------------------------------
(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 1996 were $11,036,142.
As of March 21, 1997, the aggregate market value of common stock held
by non-affiliates of the registrant was approximately $6,181,719. In addition,
as of March 21, 1997, the aggregate market value of Units, each consisting of
One Series B Convertible Preferred Stock and One Series IV Common Stock
Purchase Warrant, was $12,218,750.
As of March 21, 1997, there were 1,535,484 shares of the issuer's
Common Stock and 1,150,000 shares of the issuer's Series B Convertible
Preferred Stock outstanding.
Transitional Small Business Disclosure Format: YES NO X
---- ----
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PART I
ITEM 1. BUSINESS.
Reverse Stock Split
At the 1996 Annual Meeting of Shareholders held on December 27, 1996,
the shareholders approved a one-for-ten reverse stock split. Unless otherwise
indicated, the information contained herein gives effect to the one-for-ten
reverse stock split of the issued and outstanding Common Stock and the
reduction in the authorized number of shares of Common Stock from 50,000,000
to 20,000,000.
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 believes 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
The Company 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) 384,409 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
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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 the 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 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 connection with a subsequent increase in the amount which may be borrowed
by Quest under the Revolving Facility of the Loan Agreement, the Company
entered into a guarantee agreement whereby the Company guaranteed the
obligation of Quest under the Loan Agreement. In addition, Quest granted a
security interest in substantially all of its assets to the Bank. In addition,
Quest's obligations under the Loan Agreement have been guaranteed by
Gulfstream.
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 116,000 shares of Common Stock at a purchase price of $15.00 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. In addition, pursuant to an Exchange
Agreement, dated November 8, 1996, upon the attainment of certain earnings
targets for the Company, Gulfstream will be entitled to receive options to
acquire additional shares of Common Stock at an exercise price equal to the
fair market value of the Common Stock at the date of grant (See Item 11 -
"Exchange Agreement").
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
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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. In addition, pursuant to an Exchange Agreement, dated November 8,
1996, upon the attainment of certain earnings targets for the Company,
Schwiebert will be entitled to receive options to acquire additional shares of
Common Stock at an exercise price equal to the fair market value of the Common
Stock at the date of grant (See Item 11 - "Exchange Agreement").
On March 10, 1997 the Company completed an offering of 1,150,000
Units at a price of $6.00 per unit. Each Unit consisted of one share of the
Company's Series B Convertible Preferred Stock and one redeemable Series IV
Common Stock Purchase Warrant of the Company. The net proceeds of this
offering were used in part by the Company to acquire the business of Comp
Ware, Inc., a Delaware corporation which does business as Webb Distribution
("Webb") - (See "Webb Distribution" below). The remaining amount of net
proceeds was used to pay down debt of Webb and the Company, with any
additional remaining amounts retained by the Company for working capital.
QUEST ELECTRONIC HARDWARE, INC. ("QUEST")
Quest is a specialized distributor of fasteners and electronic
hardware sold to electronic equipment manufacturers. The business serves
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 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. 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, principally through the Company's
acquisition of Webb, is beginning to expand its business into the eastern U.S.
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Markets
Quest's sales have increased at a compound annual growth rate of 17%
over the past four years. This sales growth was achieved principally 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 is divided into two major segments: large manufacturers of
fasteners, who supply large industrial users directly; and distributors, who
service smaller industrial users. Such distributors, however, 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.
Competition
Quest principally competes with a number of small distributors
located within the markets it serves and, to a lesser extent, its own
suppliers. There are a small number of larger companies serving regional
geographic markets that also compete directly with Quest. Fasteners
distribution is very fragmented in terms of customers served, as well as the
products carried. Such fragmentation allows Quest to conduct its business 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.
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
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
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directly with the manufacturer. The ten largest customers account for
approximately 50% of Quest's sales, with no one customer contributing more
than 16%.
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. 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 insurance policies.
WEBB DISTRIBUTION
Webb Distribution, Inc. was incorporated in the State of Connecticut
in May 1989 as a distributor of electronic hardware fasteners and components.
In February 1995, Webb Distribution, Inc. was merged into Comp Ware, Inc., a
newly created Delaware corporation, in a migratory merger and currently
conducts business under the name Webb Distribution. The business is
concentrated in the New England area. The Company's principal executive
offices are located at 2 Lowell Avenue, Winchester, MA 08190.
The business of Webb is substantially similar to the business of
Quest, serving customers in the high technology equipment manufacturing
industry. Webb serves a variety of different markets on both a direct order
basis and in providing services such as bin stock replenishment. Along with
serving the original equipment manufacturers markets, Webb also serves
industrial, military, sheet metal and metal fabrication industries.
With over 300 suppliers and many product categories and types, Webb
does not regard any one supplier of products as essential to its operations.
Webb, through its suppliers, is able to serve many market segments, as
evidenced by its more than 800 active industrial, commercial and military
customers.
Webb's annual sales amounted to $7.8 million for the year ended
December 31, 1995 and $7.9 million for the year ended December 31, 1996.
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Webb has a total of 28 employees, which include sales, purchasing,
marketing, accounting, operations and warehouse personnel. Webb's employees
are not covered by any collective bargaining agreement. Management believes
that its relationship with its employees is satisfactory.
On March 10, 1997, the Company acquired 100% of the stock of Comp
Ware, Inc. d/b/a Webb Distribution ("Webb"), a privately owned company. The
purchase price of Webb consisted of:
(i) 1,500,000 Series IV Warrants (the "Webb Warrants")
issued to the majority shareholder of Webb as a
down payment under the Stock Purchase Agreement;
(ii) $3,250,000 in cash;
(iii) Note A in the amount of $375,000. Principal
and interest at the rate of 10% are due and
payable 18 months from the Effective Date; and
(iv) Note B in the amount $375,000. Principal and
interest at the rate of 10% are payable monthly
over five years from the Effective Date.
The Company's obligations under the Notes may be reduced on a dollar
for dollar basis in the event and to the extent that the former majority
stockholder receives net proceeds greater than $375,000 from a sale of the
Webb Warrants. In addition, the Notes will be canceled in the event that the
Underwriter releases the lock-up in connection with a proposed transaction to
sell the Webb Warrants and the majority stockholder of Webb declines to sell
such warrants following such release.
Such acquisition was effected pursuant to a Stock Purchase Agreement
dated as of December 16, 1996. The Company will account for such acquisition
using the purchase method of accounting.
The proceeds from the above Offering were used in part to finance the
cash portion of the purchase price of Webb. The remaining cash ($2,353,000)
was used to repay the outstanding balance on Quest's revolving credit facility
($750,000) and to repay the outstanding balance on Webb's revolving credit
facility ($1,000,000), with the remaining balance ($603,000) retained by the
Company for working capital.
JUDICATE OF PHILADELPHIA, INC. ("JUDICATE")
The Company also provides alternative dispute resolution ("ADR")
services through its wholly owned subsidiary Judicate of Philadelphia, Inc.
("Judicate"). 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.
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As of March 21, 1997, Judicate employed three full-time persons; one
in an executive position and two 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.
Questron Technology, Inc., in the aggregate of all its businesses,
has a total of 75 employees.
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ITEM 2. PROPERTIES.
The Company is headquartered at 6400 Congress Avenue, Suite 200A,
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 $217,923 in 1996. The
aggregate minimum rental commitments under all non-cancelable operating leases
for the year ending December 31, 1997 is $184,812.
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ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor Webb is a party to any material legal
proceedings and to the best of the Company's belief, none is contemplated or
has been threatened.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 27, 1996, at the Annual Meeting of Shareholders, the
shareholders of the Company elected the following Directors and approved the
following proposals put forth by management and the Board of Directors (the
number of shares below are after giving effect to the one-for-ten reverse
stock split):
Election of Directors:
<TABLE>
<CAPTION>
For Withheld
------------------ -------------------
<S> <C> <C>
Milton M. Adler 1,413,406 13,858
Robert V. Gubitosi 1,413,406 13,857
Mitchell Hymowitz 1,413,406 13,857
William McSherry, Jr. 1,413,406 13,858
Dominic A. Polimeni 1,413,406 13,858
</TABLE>
<TABLE>
<CAPTION>
Affirmative Negative
Proposal Votes Votes Abstained
----------------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
To amend the Company's certificate of incorporation to effect a one-for
ten reverse split of the Company's outstanding common stock (requires
affirmative votes of 50% of the
outstanding common stock) 1,263,013 59,697 104,553
To amend the Company's certificate of incorporation to decrease the
number of authorized shares of common stock of the Company to
20,000,000 shares (requires affirmative votes of 50% of the outstanding
common stock)
1,270,106 25,041 132,117
To approve the Company's 1996 Stock Option Plan (requires
affirmative votes of 50% of the votes cast) 572,321 112,850 742,093
To ratify the appointment of Moore Stephens, P.C. as the
independent accountants for the Company (requires affirmative
votes of 50% of the votes cast) 1,309,387 11,592 106,284
</TABLE>
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On December 27, 1996, at the Annual Meeting of Shareholders, the
shareholders of the Company did not approve the following proposal put forth
by management and the Board of Directors (the number of shares below are after
giving effect to the one-for-ten reverse stock split):
<TABLE>
<CAPTION>
Affirmative Negative
Proposal Votes Votes Abstained
----------------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
Toamend the Company's certificate of incorporation to decrease the
number of authorized shares of preferred stock of the Company to
6,000,000 shares (requires affirmative votes of 50% of the outstanding
common stock)
649,305 20,650 757,308
</TABLE>
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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 (as adjusted for the one-for-ten reverse stock split) 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
1995:
First Quarter $ 27.50 $ 18.13
Second Quarter $ 33.75 $ 20.00
Third Quarter $ 25.00 $ 16.25
Fourth Quarter $ 39.38 $ 13.75
1996:
First Quarter $ 31.25 $ 15.00
Second Quarter $ 18.75 $ 7.50
Third Quarter $ 10.63 $ 6.88
Fourth Quarter $ 6.88 $ 2.50
On March 21, 1997, the Company's Common Stock as reported on the
NASDAQ Small Cap Market system was $6.25 (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 common stock 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.
The Series B Preferred Stock will be entitled, as and when declared
by the Board of Directors, to receive, in respect of the two years before the
Series B Preferred Stock is converted, an annual dividend per share payable
either in cash or shares of Common Stock, at the option of the Company, equal
to $0.115 or 2% of the $5.75 value of the Series B Preferred Stock included in
the Units.
Other than the foregoing, the Company does not anticipate the
declaration or payment of any dividends in the foreseeable future. There can
be no assurance that cash dividends of any kind will ever be paid.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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RESULTS OF OPERATIONS
For the year ended December 31, 1996 compared with 1995.
The results of operations for the year ended December 31, 1996
include the operating results of Quest Electronic Hardware, Inc. ("Quest"),
the Company's fasteners and electronic hardware distribution business, and the
operating results of the Company's alternative dispute resolution ("ADR")
business.
The following summarizes the results of operations for each of the
Company's businesses and corporate for the year ended December 31, 1996:
<TABLE>
<CAPTION>
QUEST ADR CORPORATE TOTAL
----------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Revenue $10,883,393 $ 152,749 $ $11,036,142
Costs and expenses 9,563,410 250,411 307,817 10,121,638
----------------- ----------------- ------------------- -----------------
Operating income 1,319,983 (97,662 ) (307,817 ) 914,504
Interest expense 299,191 -- 1,478 300,669
----------------- ----------------- ------------------- -----------------
Income (loss) before taxes 1,020,792 (97,662 ) (309,295 ) 613,835
Tax provision 64,383 -- -- 64,383
================= ================= =================== =================
Net income (loss) $ 956,409 $ (97,662 ) $ (309,295 ) $ 549,452
================= ================= =================== =================
</TABLE>
The significant growth in the Company's revenues for year ended
December 31, 1996 over the year ended December 31, 1995 is due to the
acquisition of Quest on March 31, 1995. Revenues for Quest were $10,883,393
for the year ended December 31, 1996 and $6,982,902 for the year ended
December 31, 1995, reflecting only nine months of sales for Quest. The annual
sales level of nearly $11 million in 1996 represents a record level of
revenues for the business. The growth in revenues of Quest is attributable to
its expansion into the Austin, Texas market as well as growth in the other
markets that it serves. The opening of a new branch in Austin is primarily
directed at servicing Applied Materials, which signed a three-year Master
Purchase Order and Sales Agreement with Quest on November 13, 1995. Revenues
of the ADR business declined by $123,504 and $567,772 for the years ended
December 31, 1996 and 1995, respectively, compared with the comparable periods
in the prior years. This decline reflects the effects of increased
competition, which continue to erode the Company's revenues. The Company is
continuing to evaluate its alternatives with respect to the future operation
of its ADR business, including the possible sale, disposition or
discontinuance of the business.
The Company's operating income was $914,504 for the year ended
December 31, 1996 compared with operating income of $584,906 for the prior
year. The improvements over the year ended December 31, 1996 compare to the
prior year are primarily due to the operating income achieved by Quest of
$1,319,983 compared with operating income from Quest of $962,102 in the prior
year. Quest's
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operating income of $1,319,983 for the year ended December 31,
1996 represents 12% of its revenues, a relationship which is slightly less
than the historical performance of the business primarily due to increased
operating costs associated with Quest's expansion into the Austin market
coupled with the temporary pause in the semiconductor industry experienced in
the second half of 1996.
Interest expense for the years ended December 31, 1996 and 1995
amounted to $300,669 and $205,555, respectively. The increase in interest
expense principally reflects the full year cost of borrowings associated with
the acquisition of the fasteners and electronic hardware distribution business
(see Note 3 of Notes to Consolidated Financial Statements) compared with only
nine months' cost of borrowings for the prior year.
The provision for income taxes for the year ended December 31, 1996
principally reflects state income tax provisions for states in which Quest
does business. The provision for income taxes also includes a minimal
provision for federal income taxes for federal alternative minimum tax. The
Company is not expected to have a regular federal income tax liability for
1996 as a result of the availability of net operating loss income tax
carryforwards of approximately $13.5 million as of December 31, 1995, expiring
in the years 1999 through 2010.
Net income for the year ended December 31, 1996 amounted to $549,452
compared with net income of $352,187 in the prior year. These improvements
reflect the increased operating income of Quest, partially reduced by
increases in interest expense, income taxes and the operating losses of the
ADR business.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had $74,400 in cash and
short-term investments, compared to $39,358 as of December 31, 1995. As of
December 31, 1996, the Company had working capital of $3,042,762, compared
with working capital of $2,983,668 as of December 31, 1995.
For the year ended December 31, 1996, the net cash provided by the
Company's operating activities amounted to $498,346, principally reflecting a
decrease in inventory, accounts receivable and other receivables, as well as
the profits of Quest offset in part by the increase in other assets and the
decrease in accounts payable and accrued expenses. Corporate expenses and the
operations of the Company's ADR business continued to use cash, although at a
reduced rate compared with prior years. As previously discussed, the Company
is continuing to evaluate its alternatives with respect to the future
operations of the ADR business and there can be no assurance that the Company
will continue its ADR operations.
For the year ended December 31, 1996, the net cash used in the
Company's investing activities amounted to $55,479 for the acquisition of
fixed assets, primarily computer and warehouse equipment to support the
continued growth of Quest's fastener distribution business. The Company does
not have significant commitments for capital expenditures as of December 31,
1996 and no significant commitments are anticipated for 1997.
For the year ended December 31, 1996, the net cash used by the
Company's financing activities amounted to $407,825, which consists of
advances drawn on its revolving credit facility of $12,500 less $412,500 of
principal repaid on the term debt and $7,825 of filing fees paid in connection
with the
15
<PAGE>
offering of Units, consisting of one share of Series B Convertible Preferred
Stock and one Series IV Common Stock Purchase Warrant, completed on March 10,
1997.
At December 31, 1996 $960,000 was borrowed and outstanding under the
revolving facility. The remaining amount of the $1,500,000 revolving facility,
or $540,000, was fully available at December 31, 1996 for future working
capital needs. Amounts outstanding under the revolving facility bear interest
at a rate equal to 1.0% above the lender's prime rate. As of February 28,
1997, the interest rate on the amount outstanding under the revolving facility
was 9.25%. 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.
On March 10, 1997, the Company completed an Offering consisting of
Units comprised of: (i) newly issued shares of the Company's preferred stock
which are convertible into shares of Common Stock; and (ii) warrants to
purchase shares of Common Stock. The Offering generated net proceeds to the
Company of approximately $5.6 million. These proceeds were primarily used to
partially fund the acquisition of Comp Ware, Inc. d/b/a Webb Distribution in
New England and to repay the balance on Quest's revolving credit facility as
well as the balance on Webb's revolving credit facility.
The Company intends to continue 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 and Webb. 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 1997, exclusive of any cash
requirements which may come about as a result of other business acquisitions.
16
<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, 1996, 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, 1996. 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
audit 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,
1996, and the consolidated results of their operations and their cash flows
for each of the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 19, 1997
17
<PAGE>
<TABLE>
<CAPTION>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1996
ASSETS
1996
----------------
<S> <C>
Current assets:
Cash and cash equivalents $ 74,400
Accounts receivable, less allowance for
doubtful accounts of $53,773 1,228,803
Other receivables 14,638
Inventories 3,168,767
Other current assets 83,417
----------------
Total current assets 4,570,025
Property and equipment - net 373,367
Cost in excess of net assets of business acquired,
less accumulated amortization of $303,356 6,694,153
Other assets 394,249
================
Total assets $ 12,031,794
================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 977,263
Current portion of long-term debt 550,000
----------------
Total current liabilities 1,527,263
Long-term debt 1,785,000
----------------
Total liabilities 3,312,263
----------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value; authorized 10,000,000 --
shares; none issued and outstanding
Common stock, $.001 par value; authorized 20,000,000
shares; issued 1,547,333 shares 1,547
Additional paid-in capital 23,880,069
Accumulated deficit (14,806,607)
----------------
9,075,009
Less: treasury stock, 11,849 shares, at cost (355,478)
----------------
Total shareholders' equity 8,719,531
================
Total liabilities and shareholders' equity $ 12,031,794
================
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
<S> <C> <C>
Revenue:
Sales $ 10,883,393 $ 6,982,902
Fee income 152,749 276,253
--------------------- ---------------------
11,036,142 7,259,155
--------------------- ---------------------
Operating costs and expenses:
Cost of products and services sold 6,408,196 4,146,564
Selling, general & administration expenses 3,442,382 2,180,886
Non-recurring charges -- 146,867
Depreciation and amortization 271,060 199,932
--
------------------- ---------------------
10,121,638 6,674,249
--------------------- ---------------------
Operating income 914,504 584,906
Interest expense 300,669 205,555
------------------- --------------------
Income before income taxes 613,835 379,351
Provision for income taxes 64,383 27,164
--------------------- ---------------------
Net income $ 549,452 $ 352,187
===================== =====================
Net income per common share $ .36 $ .26
===================== =====================
Average number of common shares and common share
equivalents outstanding 1,539,048 1,379,563
===================== =====================
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE>
<TABLE>
<CAPTION>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
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, 1995 14,000 $ 1,400 673,381 $ $17,260,549 $(15,708,246) $
673 --
Issuance of Shares:
Conversion of
Preferred Stock into
Common Stock (14,000 ) (1,400 ) 28,000 28 1,372 -- --
Private Placement -- -- 116,000 116 1,468,786 -- --
Exercise of Warrants -- -- 278,695 279 851,314 -- --
Exercise of Options -- -- 55,000 55 343,695 -- --
In connection with
the acquisition of
Quest Electronic
Hardware, Inc. -- -- 396,257 396 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 -- -- 1,547,333 1,547 23,887,894 (15,356,059) (355,478)
Filing fees related to
the -- -- -- -- (7,825) -- --
Offering of Units
Net Income for the Year -- -- -- -- -- 549,452 --
=========== =========== ============ ========= ============== =============== ============
Balance -
December 31, 1996 -- $ -- 1,547,333 $ 1,547 $23,880,069 $(14,806,607) $(355,478)
=========== =========== ============ ========= ============== =============== ============
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE>
<TABLE>
<CAPTION>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
--------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided (used) $549,452 $ 352,187
by operating activities:
Depreciation and amortization 271,060 199,932
Write-down of assets -- 40,553
Provision for doubtful accounts 9,975 25,162
Gain on sale of fixed assets 2,184 --
Change in assets and liabilities:
Decrease (increase) in accounts receivable 108,350 (467,176)
Decrease in other receivables 38,170 56,672
Decrease (increase) in inventories 385,496 (1,583,507)
Increase in prepaid expenses and other assets (323,510) (33,509)
(Decrease) increase in accounts payable and accrued
expenses (542,831) 566,581
--------------------- ---------------------
Net cash provided (used) by operating activities 498,346 (843,105)
--------------------- ---------------------
Cash flows from investing activities:
Net cash consideration paid for acquired business -- (5,262,268)
Proceeds from sale of fixed assets 280
Acquisition of property and equipment (55,759) (419,766)
--------------------- ---------------------
Net cash used for investing activities (55,479) (5,682,034)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from short-term borrowings -- 300,000
Proceeds from borrowings under revolving facility 12,500 947,500
Proceeds from borrowings under term loan facility -- 2,200,000
Proceeds from private placement -- 1,740,000
Costs associated with private placement -- (271,098)
Proceeds from exercise of warrants -- 911,578
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) (412,500)
Filing fees related to Offering of Units (7,825)
--------------------- ---------------------
--------------------- ---------------------
Net cash (used) provided by financing activities (407,825) 5,043,767
--------------------- ---------------------
Increase (decrease) in cash and cash equivalents 35,042 (1,481,372)
Cash and cash equivalents at beginning of period 39,358 1,520,730
===================== =====================
Cash and cash equivalents at end of period $ 74,400 $ 39,358
===================== =====================
Supplemental disclosure of cash flow information: Cash paid during the year
for:
Interest $310,221 $ 182,970
Income taxes 38,000 --
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In 1995, the Company adjusted property and equipment to estimated
fair value as follows:
1995
--------------
Cost of property written down $ 668,176
Accumulated depreciation (627,623)
--------------
Net book value 40,553
Estimated fair value --
==============
Adjustment for write-down $ 40,553
==============
During 1995, the Company issued 384,409 shares of common stock in
connection with the acquisition of a subsidiary and issued 28,000 shares of
common stock upon the conversion of 14,000 preferred shares.
See Notes to Consolidated Financial Statements.
22
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Questron Technology, Inc. ("Questron" or the "Company"), 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
Basis of Presentation - At the Annual Meeting of Shareholders held on
December 27, 1996, the shareholders approved a one-for-ten reverse stock
split. The information in the financial statements has been restated to
reflect the reverse stock split.
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. At December 31, 1996, the Company did not have any 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 years ended December 31, 1996 and December 31, 1995,
sales to one customer of Quest amounted to approximately $1,800,000 and
$1,000,000, respectively, or approximately 16% and 14% of revenue,
respectively. Accounts receivable from this customer amounted to approximately
$263,000 in 1996 and $273,000 in 1997.
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.
23
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
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. 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.
Net income per common share - Net income per common share is based on
the weighted average number of common shares and common share equivalents
outstanding. Common share equivalents amounted to 3,564 and 226,257 for 1996
and 1995, respectively. Net income per common share on a fully diluted basis
does not result in material dilution and, accordingly, is not presented.
Advertising and Marketing - Advertising and marketing expense,
primarily comprised of printed media published in trade publications, is
expensed as incurred. Advertising and marketing expense amounted to $17,409
and $1,677 for the years ended December 31, 1996 and 1995, respectively.
Stock Options and Similar Equity Instruments - On January 1, 1996,
the Company adopted the disclosure requirements of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," for stock options and similar equity instruments (collectively
"Options") issued to employees and Directors, however, the Company will
continue to apply the intrinsic value based method of accounting for options
issued to employees prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" rather than the fair value
based method of accounting prescribed by SFAS No. 123. SFAS No. 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods and services from non-employees. Those transactions must be
accounted for based on the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
24
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
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 384,409 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.
The following pro forma information presents the results of the
combined operations, for the year ended December 31, 1995, of Questron
Technology, Inc. and Subsidiaries and Quest Electronic Hardware, Inc.,
treating the latter as if it were a subsidiary of Questron for the full year
then ended. This pro forma information does not purport to be indicative of
what would have occurred had the acquisition been completed as of January 1,
1995 or results which may occur in the future.
25
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Pro forma information for the year ended December 31, 1995:
Total Revenues $ 9,586,789
Net Income $ 596,801
Net Income Per Share $ .43
Average number of common shares and common share
equivalents outstanding 1,379,563
3. LONG-TERM DEBT
Long-term debt at December 31, 1996 consisted of the following:
1996
------------
Term loan, due in equal quarterly installments through
March 31, 1999, with interest payable
monthly at the prime rate plus 1.5% $ 1,375,000
Revolving facility, due on March 31, 1998, with interest
payable monthly at the prime rate plus
1.0% 960,000
--------------
2,335,000
Less installments due within one year 550,000
==============
$ 1,785,000
==============
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, 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,
1996, Quest had unused borrowing capacity of $540,000 under the Loan Agreement.
The bank's prime rate was 8.25% for the years ended December 31, 1996.
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, 2001
are : 1997-$550,000; 1998-$1,510,000; 1999-$275,000; 2000-$ 0; and 2001-$ 0.
26
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consisted of the
following:
1996
-------------
Office equipment $ 78,331
Computer equipment 418,512
Furniture and fixtures 14,094
Leasehold improvements 20,117
-------------
Total 531,054
Less: accumulated depreciation and amortization 157,687
=============
Total $ 373,367
=============
Depreciation and amortization expense related to property and
equipment for the years ended December 31, 1996 and 1995 was $98,907 and
$68,729, respectively. At December 31, 1996, 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
At the Annual Meeting of Shareholders held on December 27, 1996, the
shareholders approved a one-for-ten reverse stock split. The following
information reflects the effects of the reverse stock split.
As of December 31, 1996, the Company was authorized to issue
20,000,000 shares of common stock and 10,000,000 of preferred stock. The
outstanding shares of common stock are fully paid and non-assessable.
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 2,000 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 11,600 options to purchase Company common
stock at an exercise price of $35.00 per share. These options expire March 31,
2000.
In connection with a November 1994 private placement, 220,000 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 $3.50 per
share. The Series III warrants expire November 14, 2004, and any warrant not
exercised by that date will be null and void. At December 31, 1996 and 1995,
there were 4,000 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 11,849 shares of its common stock in full satisfaction of
such amounts owed. Such shares are reflected as treasury stock.
27
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
6. STOCK OPTIONS
1992 Stock Option Plan
In June 1992, the Board unanimously approved the adoption of the
"1992 Plan" which was approved by the stockholders 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 have been granted
(together, the "Options"). Each option was 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 were eligible to receive ISOs under the 1992 Plan.
All non-management employees and non-employee consultants and Company Judges
were eligible to receive Non-Qualified Options under the 1992 Plan.
Transactions under the 1992 Stock Option Plans during the years ended
December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
---------------- --------------------- ---------------- --------------------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 5,130 $199.36 55,447 $ 7.23
Options granted/adjusted 4,683 $203.40
Options exercised (55,000) $ 6.25
Options canceled and
terminated (2,963) $167.63
-------- ------- --------- -------
Outstanding - end of year(1) 2,167 $237.56 5,130 $199.36
======== ======= ========= =======
Options exercisable at year end 2,167 $237.56 5,130 $199.36
======== ======= ========= =======
Share available on December 31
for options that may be granted 0 0 0 0
======== ======= ========= =======
Weighted Average Life of Options 1 Year 2 Years
======== =========
</TABLE>
In addition to the above, the Company has granted non-incentive stock
options pursuant to consulting agreements. Transactions under these agreements
during the years ended December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
---------------- --------------------- ---------------- --------------------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 11,600 $ 35.00 51,359 $ 2.49
Options granted/adjusted 22,936 $ 18.93
Options exercised (62,695) $ 2.49
Options canceled and
terminated
-------- ------- --------- -------
Outstanding - end of year(1) 11,600 $ 35.00 11,600 $ 35.00
======== ======= ========= =======
Options exercisable at year end 11,600 $ 35.00 11,600 $ 35.00
======== ======= ========= =======
Weighted Average Life of Options 3.25 Years 4.25 Years
========== ==========
</TABLE>
(1) With exercise prices ranging from $35.00 to $337.50 per share, after
giving effect to the one-for-ten reverse stock split, which was
approved on December 27, 1996.
<PAGE>
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 1,500 per year. Awards
under the Plan had been made previously, subject to shareholder approval.
Tranactions under the Plan during the years ended December 31, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
---------------- --------------------- ---------------- --------------------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 10,500 $ 16.74 6,000 $ 11.25
Options granted 3,000 $ 19.06 4,500 $ 24.08
Options exercised
Options canceled and
terminated (1,500) $ 11.25
-------- ------- --------- -------
Outstanding - end of year 12,000 $ 18.01 10,500 $ 16.74
======== ======= ========= =======
Options exercisable at year end 12,000 $ 18.01 10,500 $ 16.74
======== ======= ========= =======
Weighted Average Life of Options 7.875 Years 8.43 Years
=========== ==========
</TABLE>
28
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
If the Company had accounted for the issuance of all options pursuant
to the fair value based method of SFAS No. 123, the Company would have recorded
compensation expense totaling $50,627 and $96,210 for the years ended
December 31, 1996 and December 31, 1995, respectively, and the Company's net
income and net income per share would have been as follows:
1996 1995
-------- --------
Net Income as Reported $549,452 $352,187
======== ========
Pro Forma Net Income $498,825 $255,977
======== ========
Net Income Per Share As Reported $ .36 $ .26
======== ========
Pro Forma Net Income Per Share $ .32 $ .19
======== ========
The fair value of options at date of grant was estimated using the
fair value based method with the following weighted average assumptions for the
years ended December 31, 1996 and 1995:
December 31, 1996 December 31, 1995
----------------- -----------------
Expected Life (Years) 10 10
Interest Rate 6% 5.8%
Annual Rate of Dividends 0% 0%
Volatility 94.56% 90%
The weighted average fair value of options at date of grant using
the fair value based method during 1996 and 1995 is estimated at $16.90 and
$21.40, respectively.
No compensation cost was recognized for stock-based employee awards.
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 $43,249 in 1996 and $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 $189,252 and
$112,249 was charged to operations for the years ended December 31, 1996 and
1995, respectively. Aggregate minimum rental commitments under all
non-cancelable operating leases approximate $350,495 as of December 31, 1996.
Such commitments on annual basis are as follows:
Years ending December 31,
1997 $ 184,812
1998 83,198
1999 42,120
2000 40,365
===============
$ 350,495
===============
9. INCOME TAXES
The Company had net operating loss carryforwards for the years ended
December 31, 1996 and 1995 and, therefore, no regular federal income taxes have
been provided. The provision for income taxes included in the consolidated
statement of income is principally for state income taxes to which the Company
and its subsidiaries are subject. The provision for income taxes also includes
a minimal provision for federal income taxes for the federal alternative
minimum tax.
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" requires the establishment of a deferred tax
asset for all deductible temporary differences and operating loss carryforwards
and a deferred tax liability for all taxable temporary differences.
Accordingly, no net deferred tax asset or liability is reflected in the
consolidated financial statements.
<PAGE>
As of December 31, 1996, the Company had a deferred tax asset of
approximately $175,000 related to its operating loss carryforwards.
Additionally, at the same date, the Company had a deferred tax liability of
approximately the same amount arising from the difference in the amortization
period of goodwill.
A reconciliation of the federal statutory rate to the Company's
effective tax rate is as follows:
Year Ended December 31,
-----------------------
1996 1995
----------- ----------
Federal statutory rate 34% 34%
State income taxes 7% 7%
Federal tax benefit of net operating loss
carryforwards (adjusted for Alternative
Minimum Tax in 1996) 32% 34%
----------- ----------
Effective tax rate 9% 7%
29
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
As of December 31, 1996, the 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
---------------------
1999 $ 232,585
2000 535,648
2001 1,242,960
2002 1,413,510
2003 1,573,987
2004 1,100,173
2005 579,718
2006 782,129
2007 2,945,421
2008 2,336,094
2009 591,906
2010 167,497
=====================
$ 13,501,628
=====================
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,
1996:
Carrying
Amount Fair Value
------------------ -----------------
Cash and cash equivalents $ 74,400 $ 74,400
Receivables 1,243,441 1,243,441
Accounts payable and accrued expenses 977,263 977,263
Current portion of long-term debt 550,000 550,000
Long-term debt 1,785,000 1,785,000
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
30
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
on current rates at which the Company could borrow funds with similar
remaining maturities, which amount approximates its carrying value.
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,
as well as the procurement of financing as needed by the Company and Quest.
For such services Gulfstream is paid a fee of $150,000 per year. In addition,
upon the attainment of certain earnings targets for the Company, Gulfstream
will be entitled to receive options to acquire additional shares of Common
Stock at an exercise price equal to the fair market value of the Common Stock
at the date of grant. 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 the Company,
this individual will be entitled to receive options to acquire additional
shares of Common Stock at an exercise price equal to the fair market value of
the Common Stock at the date of grant. 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") has issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishment of liabilities after December 31, 1996.
The provisions of SFAS No. 125 must be applied prospectively, retroactive
application is prohibited, and early application is not allowed. SFAS No. 125
supersedes SFAS No. 77, "Reporting by Transferors for Transfers of Receivables
with Recourse." While both SFAS No. 125 and SFAS No. 77 require a surrender of
"control" of financial assets to recognize a sale, the SFAS No. 125
requirements of sale are generally more stringent. SFAS
31
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
No. 125 is not expected to have a material impact on the Company because they
have not been recognizing sales under SFAS No. 77 and will also not be under
SFAS No. 125. Some provisions of SFAS No. 125, which are unlikely to apply to
the Company, have been deferred by the FASB.
The FASB has issued SFAS No. 128, "Earnings Per Share" and SFAS No.
129, "Disclosure of Information About Capital Structure." Both are effective
for financial statements issued for periods ending after December 15, 1997.
SFAS No. 128 simplifies the computation of earnings per share by replacing the
presentation of primary earnings per share with a presentation of basic
earnings per share. The statement requires dual presentation of basic and
diluted earnings per share by entities with complex capital structures. Basic
earnings per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity similar
to fully diluted earnings per share.
While the Company has not analyzed SFAS No. 128 sufficiently to
determine its long-term impact on per share reported amounts, SFAS No. 128
should not have a significant effect on historically reported per share income
amounts.
SFAS No. 129 does not change any previous disclosure requirements,
but rather consolidates existing disclosure requirements for ease of
retrieval.
14. SEGMENT INFORMATION
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, 1996 and for the year then
ended is as follows:
<TABLE>
<CAPTION>
Quest Judicate Corporate Consolidated
----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Revenue $ 10,883,393 $ 152,749 $ -- $ 11,036,142
----------------- ------------------ ----------------- ------------------
Operating income (loss) 1,319,983 (97,662) (307,817) 914,504
Interest expense 299,191 -- 1,478 300,669
Provision for income taxes 64,383 -- -- 64,383
----------------- ------------------ ----------------- ==================
Net income (loss) $ 956,409 $ (97,662) $ (309,295) $ 549,452
================= ================== ================= ==================
Depreciation and
amortization $ 170,452 $ -- $ 100,608 $ 271,060
================= ================== ================= ==================
Capital expenditures $ 55,759 $ -- $ -- $ 55,759
================= ================== ================= ==================
Identifiable assets $ 8,199,564 $ 29,077 $ 3,803,153 $ 12,031,794
================= ================== ================= ==================
</TABLE>
32
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
15. SUBSEQUENT EVENTS
OFFERING OF UNITS - On March 10, 1997, the Company completed an Offering of
1,150,000 Units of its securities, each Unit consisting of one share of Series
B Convertible Preferred Stock ("Series B Preferred Stock") and one Series IV
Common Stock Purchase Warrant ("Series IV Warrant"), at a gross sales price of
$6.00 per unit. The net proceeds to the Company, after deducting underwriting
discounts and other expenses of the Offering, were $5,603,000.
ACQUISITION OF WEBB DISTRIBUTION - On March 10, 1997, the Company acquired
100% of the stock of Comp Ware, Inc. d/b/a Webb Distribution ("Webb"), a
privately owned company. The purchase price of Webb consisted of:
(i) 1,500,000 Series IV Warrants (the "Webb Warrants")
issued to the majority shareholder of Webb as a
down payment under the Stock Purchase Agreement;
(ii) $3,250,000 in cash;
(iii) Note A in the amount of $375,000. Principal and
interest at the rate of 10% are due and
payable 18 months from the Effective Date; and
(iv) Note B in the amount $375,000. Principal and
interest at the rate of 10% are payable monthly
over five years from the Effective Date.
The Company's obligations under the Notes may be reduced on a dollar
for dollar basis in the event and to the extent that the former majority
stockholder receives net proceeds greater than $375,000 from a sale of the
Webb Warrants. In addition, the Notes will be canceled in the event that the
Underwriter releases the lock-up in connection with a proposed transaction to
sell the Webb Warrants and the majority stockholder of Webb declines to sell
such warrants following such release.
Such acquisition was effected pursuant to a Stock Purchase Agreement
dated as of December 16, 1996. The Company will account for such acquisition
using the purchase method of accounting.
The proceeds from the above Offering were used in part to finance the
cash portion of the purchase price of Webb. The remaining cash ($2,353,000)
was used to repay the outstanding balance on Quest's revolving credit facility
($750,000) and to repay the outstanding balance on Webb's revolving credit
facility ($1,000,000), with the remaining balance ($603,000) retained by the
Company for working capital.
The following unaudited pro forma information presents the results of
the combined operations of Questron Technology, Inc. and Subsidiaries and Webb
Distribution, treating the latter as if it were a subsidiary of Questron for
the year ended December 31, 1996. This pro forma information does not
33
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
purport to be indicative of what would have occurred had the acquisition been
completed as of January 1, 1996 or results which may occur in the future.
Total Revenues $ 18,912,776
Net Income $ 1,317,993
Net Income Per Share $ .38
Average number of common shares and common share
equivalents outstanding 3,456,652
The business of Webb is substantially similar to the business of
Quest, serving customers in the high technology equipment manufacturing
industry. Webb serves a variety of different markets on both a direct order
basis and in providing services such as bin stock replenishment. Along with
serving the original equipment manufacturers ("OEM's") markets, Webb also
serves industrial, military, sheet metal and metal fabrication industries.
With over 300 suppliers and many product categories and types, Webb
does not regard any one supplier of products as essential to its operations.
Webb, through its suppliers, is able to serve many market segments, as
evidenced by its more than 800 active industrial, commercial and military
customers.
Webb's annual sales amounted to $7.8 million for the year ended
December 31, 1995 and $6.1 million for the nine months ended September 30, 1996.
34
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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 50 Chairman, President and Chief Executive
Officer
Milton M. Adler 69 Secretary, Treasurer, Controller and Director
Robert V. Gubitosi 49 Director
Mitchell Hymowitz 34 Director
William J. McSherry, Jr. 49 Director
</TABLE>
Each of the Directors of the Company holds office until the next
annual meeting of stockholders, or until their successors are elected and
qualified. The Company's by-laws currently provide for not less than three
directors nor more than nine directors. Currently, there are five directors in
the Company. The by-laws permit the Board of Directors to fill any vacancy and
such director may serve until the next annual meeting of stockholders or until
his successor is elected and qualified. Officers serve at the discretion of
the Board of Directors. There are no family relationships among any of the
officers or directors of the Company except that Dominic A. Polimeni is the
brother-in-law of Robert V.
Gubitosi.
The principal occupation and business experience for each officer and
director of the Company for the last five years as follows:
DOMINIC A. POLIMENI has been President, Chief Operating Officer and a
Director of the Company since March 1995, and Chairman and Chief Executive
Officer of the Company since February 1996. He has also been Chairman, Chief
Executive Officer and Chief Financial Officer of Quest Electronic Hardware,
Inc. since October 1994. Since May 1996, Mr. Polimeni has been a director of
Healtcare Imaging Services, Inc., a publicly held company based in Middletown,
New Jersey which provides health care management and services. Since March
1996, Mr. Polimeni has also been a director of TMCI Electronics, Inc., a
publicly held company based in San Jose, California which provides custom
manufacturing and value-added services to the information technology industry.
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
36
<PAGE>
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.
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.
37
<PAGE>
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, 1996, other than initial
statements of beneficial ownership by Messrs. Gubitosi and McSherry, all such
reports were filed on a timely basis.
38
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth the compensation
of the named executive for the periods indicated. No executive officer
received total annual salary and bonus 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 1996 $100,000 -- --
Chairman, President 1995 $75,000 -- --
and Chief Executive 1994 -- -- --
Officer
</TABLE>
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------------------------------------------------------
Awards Payouts
------ ------------------------
(a) (b) (f) (g) (h) (i)
Restricted Securities
Name and Stock Underlying LTIP All other
Principal Position Year Awards ($) Options/SARs(#) Payouts ($) Compensation ($)
- ------------------ ---- ---------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Dominic A. Polimeni 1996 -- -- -- --
Chairman, President 1995 -- -- -- --
and Chief Executive 1994 -- -- -- --
Officer
</TABLE>
39
<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, pursuant to an
Exchange Agreement date November 8, 1996, upon the attainment of certain
earnings targets for the Company, Gulfstream will be entitled to receive
options to acquire additional shares of Common Stock at an exercise price
equal to the fair market value of the Common Stock at the date of grant (See
Item 11 - "Exchange Agreement").
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
$15,000 per quarter. In addition, pursuant to an Exchange Agreement date
November 8, 1996, upon the attainment of certain earnings targets for the
Company, Schwiebert will be entitled to receive options to acquire additional
shares of Common Stock at an exercise price equal to the fair market value of
the Common Stock at the date of grant (See Item 11 - "Exchange Agreement").
OPTION/SAR GRANTS
There were no grants during 1996 of stock options or stock
appreciation rights to any to any person named in the Summary Compensation
Table. For information relating to warrants and rights granted to Gulfstream,
a company owned by Dominic A. Polimeni and Joan R. Gubitosi, and to Phillip D.
Schwiebert, see Item 11 - "Exchange Agreement."
40
<PAGE>
OPTION/SAR EXERCISES
Set forth below is information concerning exercises of options during
1996 and the year-end value of unexercised options for the persons named in
the Summary Compensation Table:
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options/SAR's at Fiscal Year In-the-Money Options/SARs at
Acquired on Value End (#) Fiscal Year End ($)
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
</TABLE>
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, 1996.
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 3,000 shares of the
Company's Common Stock may be granted.
All non-employee directors shall receive an option to purchase 1,500
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, 12,000 options
have been granted to date at exercise prices of $11.25 per share and $24.06
per share.
1996 STOCK OPTION PLAN
At the annual meeting of stockholders held on December 27, 1996, the
stockholders approved a 1996 Stock Option Plan (the "1996 Plan"). Under the
1996 Plan, either Incentive Stock Options or Non-Qualified Stock Options may
be granted; however, the former may be granted only to employees of the
Company and its subsidiaries. Pursuant to the terms of the 1996 Plan, a total
of 250,000 shares of the Company's Common Stock (as adjusted to reflect the
one-for-ten reverse split) will be reserved and available for distribution as
awards under the 1996 Plan.
EMPLOYEE STOCK OWNERSHIP PLAN
The Board of Directors intends to establish an employee stock
ownership plan during fiscal 1997.
41
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of March 21,
1997, 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 (All amounts shown have been adjusted to reflect the
one-for-ten reverse split of the outstanding Common Stock):
<TABLE>
<CAPTION>
Position With the Number of Percentages of
Name & Address Company Shares Shares
- ---------------------------------------------- ------------------------------- --------------------- ---------------
<S> <C> <C> <C>
Dominic A. Polimeni (1) Chairman, President and Chief 380,273 (2) 22.97 %
Executive Officer
Milton M. Adler (1) Director, Secretary, 667 (3) *
Treasurer and Controller
Robert V. Gubitosi (1) Director -- (4) --
Mitchell Hymowitz (l) Director 4,500 (5) *
William J. McSherry, Jr. (l) Director 3,500 (6) *
Joan R. Gubitosi 380,273 (2) 22.97 %.
c/o Gulfstream Financial Group, Inc.
6400 Congress Ave., Suite 200A
Boca Raton, FL 33487
Phillip D. Schwiebert President and Chief Operating 166,136 (7) 10.61 %.
c/o Quest Electronic Hardware, Inc. Officer of Quest Electronic
1180 Murphy Avenue Hardware, Inc., a subsidiary
San Jose, CA of the Company
The Miami Project to Cure Paralysis 100,000 6.51 %
The University of Miami
School of Medicine
1600 NW Tenth Avenue
Miami, FL 33136
All officers and directors as a group 389,040 23.00 %
* Less than 1 %
</TABLE>
42
<PAGE>
(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. The 380,273 shares reported above consist of 260,273
shares owned by Gulfstream and options to purchase 120,000 shares at
$3.75 per share. This number does not include warrants to purchase
1,000,000 shares of Common Stock granted pursuant to the November 8,
1996 Exchange Agreement, as defined below. In addition, pursuant to
the Exchange Agreement, upon the attainment of certain earnings
targets for the Company, Gulfstream will be entitled to receive
options to acquire additional shares of Common Stock at an exercise
price equal to the fair market value of the Common Stock at the date
of grant.
(3) Consists of Options to purchase 667 shares of Common Stock at
$127.50 per share granted pursuant to the 1992 Stock option Plan.
(4) Mr. Gubitosi's wife, Joan R. Gubitosi, has shared beneficial
ownership of 380,273 shares of Common Stock (see Footnote 2). Mr.
Gubitosi disclaims beneficial ownership of such shares.
(5) Consists of options to purchase 1,500 shares of Common Stock at
$11.25 per share, options to purchase 1,500 shares of Common Stock at
$24.06 per share and options to purchase 1,500 shares of Common Stock
at $19.06 per share granted pursuant to the 1994 Director
Non-Qualified Stock Option Plan.
(6) Includes options to purchase 1,500 shares of Common Stock at
$19.06 per share granted pursuant to the 1994 Director Non-Qualified
Stock Option Plan.
(7) The 166,136 shares reported above consist of 136,136 shares owned by
Schwiebert and options to purchase 30,000 shares at $3.75 per share.
In addition, pursuant to the Exchange Agreement, upon the attainment
of certain earnings targets for the Company, Schwiebert will be
entitled to receive options to acquire additional shares of Common
Stock at an exercise price equal to the fair market value of the
Common Stock at the date of grant.
As of the close of business on March 31, 1995, the Company acquired
from Gulfstream Financial Group, Inc. ("Gulfstream"), a Florida corporation
owned by Dominic A. Polimeni and Joan R. Gubitosi, and from 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:
a. Gulfstream became the direct beneficial owner of 22.10%
of common stock, par value $.001 per share
("Common Stock"), of the Company outstanding at March 31,
1995;
b. 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
43
<PAGE>
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
c. 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.
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.
EXCHANGE AGREEMENT
In connection with the Webb acquisition and the related Offering of
Units, Gulfstream and Philip Schwiebert, shareholders of the Company, entered
into an Exchange Agreement dated as of November 8, 1996 (the "Exchange
Agreement") pursuant to which Gulfstream and Schwiebert have agreed to
exchange their rights to receive warrants to purchase up to 10% and 5%,
respectively, of the Common Stock outstanding as of March 31, 1995. Based upon
the number of shares of Common Stock outstanding on such date (after giving
effect to the exercise of all the outstanding options and warrants), the
foregoing represented the right of Gulfstream and Schwiebert to acquire up to
264,172 and 132,086 shares of Common Stock, respectively, at $1.00 per share
(after giving effect to the one-for-ten reverse split).
The Board of Directors deemed it desirable to enter into the Exchange
Agreement by reason of the fact that the rights previously granted to
Gulfstream and Schwiebert would have resulted in substantial charges to the
Company's earnings by reason of accounting rules now in effect and would have
resulted in substantial dilution to the other stockholders. Under the options,
warrants and rights granted under the Exchange Agreement, no charge to
earnings should result as a result of their being exercisable at the fair
market value at the date of grant in lieu of $1.00 per share. In addition,
pursuant to the Exchange Agreement the Company has substantially increased the
pre-tax income targets needed to earn certain of the awards from $1.4 million,
$1.8 million, $2.2 million and $2.6 million to $2.5 million, $3.5 million and
$4.5 million. Under the prior arrangements, one half of the awards would have
been earned upon completion of the acquisition of Webb, thereby resulting in a
substantial charge to earnings and substantial dilution to stockholders. Under
the Exchange Agreement, no awards which are conditioned on meeting the pre-tax
income targets set forth below will be earned until the $2.5 million pre-tax
income target is met or exceeded. Finally, although Gulfstream and Schwiebert
have the opportunity to earn a substantially greater number of shares, the
amount of consideration which will have to be paid for such shares has
substantially increased as well. Based upon current market prices, the price
to be paid per share acquired will have increased under the Exchange Agreement
from $1.00 to at least $3.75.
Pursuant to the Exchange Agreement, Gulfstream and Schwiebert
received the following in exchange for the rights previously granted under
their agreements.
44
<PAGE>
Gulfstream: 1) Options to acquire 120,000 shares of Common
Stock for a per share exercise price equal
to $3.75; and
2) Series IV Warrants to acquire 1,000,000 shares
of Common Stock.
Schwiebert: 1) Options to acquire 30,000 shares of Common
Stock for a per share exercise price equal
to $3.75; and
2) Series IV Warrants to acquire 250,000 shares of
Common Stock.
In addition, Gulfstream and Schwiebert will be entitled to receive
options to acquire additional shares of Common Stock at an exercise price
equal to the fair market value of the Common Stock at the date of grant if the
pre-tax income targets set forth below are met or exceeded in any fiscal year
up to and including fiscal year 2001:
No. of Additional No. of Additional
Gulfstream Shares Schwiebert Shares Pre-tax Income at Least
333,333 166,667 $2,500,000
333,333 166,667 $3,500,000
333,334 166,666 $4,500,000
45
<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. Pursuant to a Management and Advisory Consulting Agreement,
the Company has agreed to compensate Gulfstream for advisory and consulting
services at the rate of $150,000 per year. This agreement expires on March 31,
2000 and can be terminated by either party on 90 days notice.
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.
46
<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 48.
(b) Report on Form 8-K.
The were no reports on Form 8-K filed during the last quarter of
1996 through the date hereof.
47
<PAGE>
QUESTRON TECHNOLOGY, INC.
INDEX TO FINANCIAL STATEMENTS
(Item 13 (a))
Page
----
Report of Independent Auditors 17
Consolidated Balance Sheet as of December 31, 1996 18
For the years ended December 31, 1996 and 1995:
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, 1996 and 1995 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: March 28, 1997
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 March 28, 1997:
<TABLE>
<CAPTION>
<S> <C>
(1) Principal Executive Officer: (3) A Majority of the Board of Directors:
/s/ Dominic A. Polimeni /s/ Milton M. Adler
--------------------------- --------------------
Dominic A. Polimeni, Chief Executive Officer Milton M. Adler, Director
/s/ Robert V. Gubitosi
-----------------------
Robert V. Gubitosi, Director
(2) Principal Financial and Accounting /s/ Mitchell Hymowitz
----------------------
Officer: Mitchell Hymowitz, Director
/s/ Milton M. Adler /s/ William J. Mc Sherry, Jr.
--------------------------- --------------------
Milton M. Adler, William J. McSherry, Jr., Director
Treasurer
/s/ Dominic A. Polimeni
-----------------------
Dominic A. Polimeni, Director
</TABLE>
49
<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, 1996
- ------ 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
incorporation or organization) Identification Number)
6400 Congress Avenue, Suite 200, Boca Raton, FL 33487
- ----------------------------------------------- --------------------
(Address of principal executive offices)) (Zip Code)
Issuer's telephone number: (561) 241 - 5251
----------------
50
<PAGE>
INDEX TO EXHIBITS
3.0 Certificate of Incorporation, incorporated by reference to Exhibit
3(i) to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1987 (File
No. 0-13324).
3.1 Certificate of Amendment, dated March 20, 1985, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
4.1 to Amendment No. 1 of the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on March
9, 1995 (File No. 33-44331).
3.2 Certificate of Amendment, dated June 9, 1989, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
4.1 to Amendment No. 1 of the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on March
9, 1995 (File No. 33-44331).
3.3 Certificate of Correction, dated May 17, 1991, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
4.1 to Amendment No. 1 of the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on March
9, 1995 (File No. 33-44331).
3.4 Certificate of Amendment, dated December 20, 1993, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
3(i) 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).
3.5 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-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1993 (File
No. 0-13324).
3.6 Certificate of Correction, dated July 19, 1994, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
4.1 to Amendment No. 1 to the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on March
9, 1995 (File No. 33-44331).
3.7 Certificate of Amendment, dated April 2, 1996, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
3.5 to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1995 (File
No. 0-13324)
3.8 Certificate of Amendment, filed December 31, 1996, to
Certificate of Incorporation of the Registrant, incorporated by
reference to Exhibit 3.10 to Amendment No. 1 to the Registrant's Form
SB-2 filed with the Securities and Exchange Commission on February
25, 1997 (File No. 333-18243)
51
<PAGE>
3.9 By-Laws of the Registrant, incorporated by reference to Exhibit
3b(ii) to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1987 (File
No. 0-13324).
3.10 Amendment to By-Laws of the Registrant, incorporated by reference to
Exhibit 3.4 of the Registrant's Form 10-KSB filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1992
(File No. 0-13324).
4.0 Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4.0 to Amendment No. 1 to the Registrant's Form SB-2 filed
with the Securities and Exchange Commission on February 25, 1997
(File No. 333-18243)
4.1 Specimen Preferred Stock Certificate, incorporated by reference
to Exhibit 4.1 to Amendment No. 1 to the Registrant's Form SB-2 filed
with the Securities and Exchange Commission on February 25, 1997
(File No. 333-18243)
4.2 Certificate of Designations, Preferences and Rights of the
Registrant's Series B Convertible Preferred Stock, incorporated by
reference to Exhibit 4.2 to Amendment No. 1 to the Registrant's Form
SB-2 filed with the Securities and Exchange Commission on February
25, 1997 (File No. 333-18243)
4.3 Form of Series IV Warrant Agreement, incorporated by reference
to Exhibit 4.3 to Amendment No. 1 to the Registrant's Form SB-2 filed
with the Securities and Exchange Commission on February 25, 1997
(File No. 333-18243)
4.4 Form of Series III Warrant Agreement, dated as of November 7, 1994,
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).
4.5 Form of Underwriters' Purchase Option, incorporated by reference
to Exhibit 4.5 to Amendment No. 1 to the Registrant's Form SB-2 filed
with the Securities and Exchange Commission on February 25, 1997
(File No. 333-18243)
4.6 Stock Purchase Warrant Certificate for Purchase of Common Stock of
Questron Technology, Inc., incorporated by reference to Exhibit 4.6
to Amendment No. 1 to the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on February 25, 1997 (File No.
333-18243)
10.1 The Company's 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).
10.2 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).
10.3 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
52
<PAGE>
10-K filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1994 (File No. 0-13324).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
53
<PAGE>
10.13 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. incorporated by
reference to Exhibit 10.25 to the Registrant's Form 10-KSB filed with
the Securities and Exchange Commission for the fiscal year ended
December 31, 1995 (File No. 0-13324).
10.14 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. incorporated by reference
to Exhibit 10.26 to the Registrant's Form 10-KSB filed with the
Securities and Exchange Commission for the fiscal year ended December
31, 1995 (File No. 0-13324).
10.15 Amendment No. 3, dated as of February 23, 1995, to the Loan and
Security Agreement, dated as of March 31, 1995, Between Silicon
Valley Bank and Quest Electronics Hardware, Inc. incorporated by
reference to Exhibit 10.27 to the Registrant's Form 10-KSB filed with
the Securities and Exchange Commission for the fiscal year ended
December 31, 1995 (File No. 0-13324).
10.16 Letter agreement, dated December 29, 1995, between the Registrant and
Stephen J Drescher, incorporated by reference to Exhibit 10.28 to the
Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1995 (File No.
0-13324)
10.17 Letter agreement, dated December 29, 1995, between the Registrant and
Paul L. Burton, incorporated by reference to Exhibit 10.29 to the
Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1995 (File No.
0-13324)
10.18 1996 Stock Option Plan, incorporated by reference to Exhibit 10.19
to Amendment No. 1 to the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on February 25, 1997 (File No.
333-18243)
10.19 Exchange Agreement, dated November 8, 1996 by and among the
Registrant, Gulfstream Financial Group, Inc. and Phillip D.
Schwiebert, incorporated by reference to Exhibit 10.21 to Amendment
No. 1 to the Registrant's Form SB-2 filed with the Securities and
Exchange Commission on February 25, 1997 (File No. 333-18243)
10.20 Stock Purchase Agreement dated as of December 16, 1996 relating to
Webb Distribution, Inc., incorporated by reference to Exhibit 2.0 to
Amendment No. 1 to the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on February 25, 1997 (File No.
333-18243)
10.21 Form of Underwriting Agreement, incorporated by reference to Exhibit
2.0 to Amendment No. 1 to the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on February 25, 1997 (File No.
333-18243)
10.22 Stock Option Grant Agreement between the Company and Gulfstream
Financial Group, Inc. made as of November 8, 1996.
10.23 Stock Option Grant Agreement between the Company and Phillip D.
Schwiebert made as of November 8, 1996
11.1 Statement Re: Computation of Per Share Earnings for years ended
December 31, 1995 and 1994.
54
<PAGE>
21.1 Statement of Subsidiaries.
23.1 Consent of Moore Stephens, P.C. dated March 19, 1997.
55
<PAGE>
Exhibit 10.22
NO. OF SHARES: 120,000
QUESTRON TECHNOLOGY, INC.
STOCK OPTION GRANT AGREEMENT
THIS AGREEMENT, made as of November 8, 1996, among QUESTRON
TECHNOLOGY, INC., a Delaware corporation ("Company"), with an address of 6400
Congress Avenue, Suite 200, Boca Raton, Florida 33487 and Gulfstream Financial
Group, Inc. ("Optionee"), with an address of 6400 Congress Avenue, Suite 200,
Boca Raton, Florida 33487.
1. GRANT OF OPTION
The Company, effective November 8, 1996 ("Date of Grant"), hereby
grants to the Optionee the right and the option ("Option") to
purchase all or any part of an aggregate of 120,000 shares of the
Company's Common Stock ($.001 per share par value) ("Common Stock")
on the terms and conditions herein set forth. Dividends, subscription
rights, etc. declared with respect to Common Stock prior to the
exercise of the Option are not included in the Option. This Option is
granted pursuant to an Exchange Agreement dated as of November 8,
1996 by and among the Company, the Optionee and the other party named
therein.
2. PURCHASE PRICE
The purchase price of the shares of Common Stock subject to the
Option shall be $3.75 per share subject to the adjustment as provided
in Section 4 below.
3. TERMS OF OPTION
A. EXPIRATION DATE. Notwithstanding anything herein to the
contrary, this option shall be exercisable during the ten
(10) years from the date hereof or such shorter time as
prescribed herein.
B. EXERCISE. This Option shall be exercised on or after May 8,
1997, in whole, or, from time to time, in part, by written
notice received by the Secretary or Treasurer of the Company
not later than 5:00 P.M. prevailing local time, on or prior
to the day the Option is to expire, specifying the number of
shares of Common Stock to be purchased, and accompanied by
full payment by certified or bank check or such other
instrument as the Company may accept. Payment in full or in
part may also be made in the form of shares of Common Stock
owned by the Optionee, which shall be free and clear of all
liens, encumbrances and restrictions of any kind whatsoever
and Optionee may be requested to represent and warrant to
such effect and to take such other steps with respect to
this form of payment as the Company shall require. Any such
exercise shall also be subject to receipt by the Company of
the representation and undertaking set forth in Section 4C
hereof. Upon such payment the Company will thereafter
deliver or cause to be delivered to the Optionee, at the
office of the Company, a certificate or certificates for the
number of shares with respect to which this Option is being
exercised, registered in the name of the Optionee; provided,
however, that if any law or regulation or order of the
Securities and Exchange Commission or other body
59
<PAGE>
having jurisdiction in the premises shall require the
Company or Optionee (or other individual or individuals) to
take any action in connection with the shares then being
purchased, the delivery of the certificate or certificates
for such shares shall be delayed for the period necessary to
take and complete such action.
C. SECURITIES LAW RESTRICTIONS. The Company is under no
obligation to file a registration statement under the
Securities Act of 1933 ("Act") with respect to the shares of
Common Stock subject to the Option. Unless a registration
statement under the Act has been filed and remains effective
with respect to such shares, the Company shall require that
the offer and sale of such shares be exempt from the
registration provisions of the Act. As a condition of such
exemption, the Company shall require a representation and
undertaking, in form and substance satisfactory to counsel
for the Company, that the Optionee is acquiring the shares
for the Optionee's own account for investment and not with a
view to the distribution or resale thereof and shall
otherwise require such representations and impose such
conditions as shall establish to the Company's satisfaction
that the offer and sale of such shares issuable upon the
exercise of the Option will not constitute a violation of
the Act or any similar state act affecting the offer and
sale. If such shares are issued in an exempt transaction,
such shares shall bear the following restrictive legend:
"The shares represented by this
certificate have not been registered under
the Securities Act of 1933 and may not be
sold, pledged, or otherwise transferred
except pursuant to an effective
registration statement under said Act,
Rule 144 or an opinion of counsel
acceptable to the Company that some other
exemption from registration is available."
If said shares were registered under the Act, to the extent that
Optionee is an "affiliate" of the Company, any reoffers or resales of
Common Stock acquired pursuant to the Plan, must be held indefinitely
unless (i) distribution of said Stock has been made registered under
the Act, (ii) a sale of said Stock is made in conformity with the
provisions of Rule 144 issued by the Securities and Exchange
Commission under the Act, or (iii) in the opinion of counsel
acceptable to the Company some other exemption from registration is
available.
4. ADJUSTMENTS
In the event of any merger, reorganization, consolidation,
recapitalization (including but not limited to the issuance of Common
Stock or any securities convertible into Common Stock in exchange for
securities of the Company), stock dividend, stock split or reverse
stock split, extraordinary distribution with respect to the Common
Stock or other similar change in corporate structure affecting the
Common Stock, such substitution or adjustments shall be made in the
aggregate number of shares of Common Stock then subject to the Option
and in the Option price as may be determined to be appropriate by the
Board of Directors of the Company, in its sole discretion; provided,
however, that the number of shares of Common Stock subject to this
Option shall always be a whole number.
5. TAXES
The Company's obligation to deliver shares of Common Stock upon
exercise of this Option in whole or in part, shall be subject to
satisfaction of any applicable federal, state and local tax
obligations.
6. ACCEPTANCE OF PROVISIONS
The execution of this Agreement by the Optionee shall constitute the
Optionee's acceptance of and agreement to all of the terms and
conditions of this Agreement.
7. NOTICES
60
<PAGE>
All notices and other communications required or permitted under this
Agreement shall be in writing and shall be given either by (i)
personal delivery or regular mail or, (ii) first class registered or
certified mail, return receipt requested. Except as otherwise
provided in Section 4B hereof on the exercise, in whole or in part,
of the Option, any such communication shall be deemed to have been
given on the date of receipt in the cases referred to in clause (i)
of the preceding sentence and on the second day after the date of
mailing in the cases referred to in clause (ii) of the preceding
sentence. All such communications to the Company shall be addressed
to it, to the attention of its Secretary or Treasurer, at its the
principal office at the address first set forth above, and to the
Optionee at its addresses first set forth above, or, in each case, to
such other person or address as may be designated by like notice
hereunder.
8. SHARES RESERVED
The Company shall at all times during the term of this Agreement
reserve and keep available such number of shares of its Common Stock
as will be sufficient to satisfy the requirements of this Agreement,
and shall pay all original issue taxes on the exercise of this
Option, and all other fees and expenses necessarily incurred by the
Company in connection therewith.
9. SUCCESSORS
This Agreement shall be binding upon any successor of the Company.
10. MISCELLANEOUS
This Agreement contains a complete statement of all the arrangements
between the parties with respect to its subject matter, and this
Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware applicable to agreements made and to be
performed exclusively in Delaware. The headings in this Agreement are
solely for convenience of reference and shall not affect its meaning
or interpretation.
QUESTRON TECHNOLOGY, INC. OPTIONEE
GULFSTREAM FINANCIAL GROUP, INC.
By: By:
-------------------- ---------------------
President President
61
<PAGE>
Exhibit 10.23
NO. OF SHARES: 30,000
QUESTRON TECHNOLOGY, INC.
STOCK OPTION GRANT AGREEMENT
THIS AGREEMENT, made as of November 8, 1996, among QUESTRON
TECHNOLOGY, INC., a Delaware corporation ("Company"), with an address of 6400
Congress Avenue, Suite 200, Boca Raton, Florida 33487 and Phillip D.
Schwiebert ("Optionee"), with an address of 1180 Murphy Avenue, San Jose,
California 95131.
1. GRANT OF OPTION
The Company, effective November 8, 1996 ("Date of Grant"), hereby
grants to the Optionee the right and the option ("Option") to
purchase all or any part of an aggregate of 30,000 shares of the
Company's Common Stock ($.001 per share par value) ("Common Stock")
on the terms and conditions herein set forth. Dividends, subscription
rights, etc. declared with respect to Common Stock prior to the
exercise of the Option are not included in the Option. This Option is
granted pursuant to an Exchange Agreement dated as of November 8,
1996 by and among the Company, the Optionee and the other party named
therein.
2. PURCHASE PRICE
The purchase price of the shares of Common Stock subject to the
Option shall be $3.75 per share subject to the adjustment as provided
in Section 4 below.
3. TERMS OF OPTION
A. EXPIRATION DATE. Notwithstanding anything herein to the
contrary, this option shall be exercisable during the
ten (10) years from the date hereof or such shorter time
as prescribed herein.
B. EXERCISE. This Option shall be exercised on or after May 8,
1997, in whole, or, from time to time, in part, by written
notice received by the Secretary or Treasurer of the Company
not later than 5:00 P.M. prevailing local time, on or prior
to the day the Option is to expire, specifying the number of
shares of Common Stock to be purchased, and accompanied by
full payment by certified or bank check or such other
instrument as the Company may accept. Payment in full or in
part may also be made in the form of shares of Common Stock
owned by the Optionee, which shall be free and clear of all
liens, encumbrances and restrictions of any kind whatsoever
and Optionee may be requested to represent and warrant to
such effect and to take such other steps with respect to
this form of payment as the Company shall require. Any such
exercise shall also be subject to receipt by the Company of
the representation and undertaking set forth in Section 4C
hereof. Upon such payment the Company will thereafter
deliver or cause to be delivered to the Optionee, at the
office of the Company, a certificate or certificates for the
number of shares with respect to which this Option is being
exercised, registered in the name of the Optionee; provided,
however, that if
62
<PAGE>
any law or regulation or order of the Securities and
Exchange Commission or other body having jurisdiction in the
premises shall require the Company or Optionee (or other
individual or individuals) to take any action in connection
with the shares then being purchased, the delivery of the
certificate or certificates for such shares shall be delayed
for the period necessary to take and complete such action.
C. SECURITIES LAW RESTRICTIONS. The Company is under no
obligation to file a registration statement under the
Securities Act of 1933 ("Act") with respect to the shares of
Common Stock subject to the Option. Unless a registration
statement under the Act has been filed and remains effective
with respect to such shares, the Company shall require that
the offer and sale of such shares be exempt from the
registration provisions of the Act. As a condition of such
exemption, the Company shall require a representation and
undertaking, in form and substance satisfactory to counsel
for the Company, that the Optionee is acquiring the shares
for the Optionee's own account for investment and not with a
view to the distribution or resale thereof and shall
otherwise require such representations and impose such
conditions as shall establish to the Company's satisfaction
that the offer and sale of such shares issuable upon the
exercise of the Option will not constitute a violation of
the Act or any similar state act affecting the offer and
sale. If such shares are issued in an exempt transaction,
such shares shall bear the following restrictive legend:
"The shares represented by this
certificate have not been registered under
the Securities Act of 1933 and may not be
sold, pledged, or otherwise transferred
except pursuant to an effective
registration statement under said Act,
Rule 144 or an opinion of counsel
acceptable to the Company that some other
exemption from registration is available."
If said shares were registered under the Act, to the extent that
Optionee is an "affiliate" of the Company, any reoffers or resales of
Common Stock acquired pursuant to the Plan, must be held indefinitely
unless (i) distribution of said Stock has been made registered under
the Act, (ii) a sale of said Stock is made in conformity with the
provisions of Rule 144 issued by the Securities and Exchange
Commission under the Act, or (iii) in the opinion of counsel
acceptable to the Company some other exemption from registration is
available.
4. ADJUSTMENTS
In the event of any merger, reorganization, consolidation,
recapitalization (including but not limited to the issuance of Common
Stock or any securities convertible into Common Stock in exchange for
securities of the Company), stock dividend, stock split or reverse
stock split, extraordinary distribution with respect to the Common
Stock or other similar change in corporate structure affecting the
Common Stock, such substitution or adjustments shall be made in the
aggregate number of shares of Common Stock then subject to the Option
and in the Option price as may be determined to be appropriate by the
Board of Directors of the Company, in its sole discretion; provided,
however, that the number of shares of Common Stock subject to this
Option shall always be a whole number.
5. TAXES
The Company's obligation to deliver shares of Common Stock upon
exercise of this Option in whole or in part, shall be subject to
satisfaction of any applicable federal, state and local tax
obligations.
6. ACCEPTANCE OF PROVISIONS
The execution of this Agreement by the Optionee shall constitute the
Optionee's acceptance of and agreement to all of the terms and
conditions of this Agreement.
63
<PAGE>
7. NOTICES
All notices and other communications required or permitted under this
Agreement shall be in writing and shall be given either by (i)
personal delivery or regular mail or, (ii) first class registered or
certified mail, return receipt requested. Except as otherwise
provided in Section 4B hereof on the exercise, in whole or in part,
of the Option, any such communication shall be deemed to have been
given on the date of receipt in the cases referred to in clause (i)
of the preceding sentence and on the second day after the date of
mailing in the cases referred to in clause (ii) of the preceding
sentence. All such communications to the Company shall be addressed
to it, to the attention of its Secretary or Treasurer, at its the
principal office at the address first set forth above, and to the
Optionee at its addresses first set forth above, or, in each case, to
such other person or address as may be designated by like notice
hereunder.
8. SHARES RESERVED
The Company shall at all times during the term of this Agreement
reserve and keep available such number of shares of its Common Stock
as will be sufficient to satisfy the requirements of this Agreement,
and shall pay all original issue taxes on the exercise of this
Option, and all other fees and expenses necessarily incurred by the
Company in connection therewith.
9. SUCCESSORS
This Agreement shall be binding upon any successor of the Company.
10. MISCELLANEOUS
This Agreement contains a complete statement of all the arrangements
between the parties with respect to its subject matter, and this
Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware applicable to agreements made and to be
performed exclusively in Delaware. The headings in this Agreement are
solely for convenience of reference and shall not affect its meaning
or interpretation.
QUESTRON TECHNOLOGY, INC. OPTIONEE
By:
- ---------------------- ---------------------------
President Phillip D. Schwiebert
64
<PAGE>
Exhibit 11.1
QUESTRON TECHNOLOGY, INC.
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
1996
------------
Average number of shares of common stock outstanding
during the year 1,535,484
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 3,564
----------
Fully diluted average number of shares of common
stock and common stock equivalents outstanding
during the year 1,539,048
==========
Net income (loss) available to common shareholders $ 549,452
==========
Net income (loss) per common share $ .36
==========
56
<PAGE>
Exhibit 21.1
QUESTRON TECHNOLOGY, INC.
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
AT MARCH 31, 1997
<TABLE>
<CAPTION>
Name of Subsidiary Date of State of
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
CompWare, Inc. d/b/a Webb Distribution November 21, 1994 Delaware
</TABLE>
57
<PAGE>
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, 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. and in the Registration Statement on Form S-3 (No. 333-7049)
and related Prospectus pertaining to the registration of 1,070,000 shares of
Questron Technology, Inc. common stock of our report dated March 19, 1997 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,
1996.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 19, 1997
58
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Income for the 12 months ended December 31, 1996
and the Consolidated Balance Sheet for the year ended December 31, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 74,400
<SECURITIES> 0
<RECEIVABLES> 1,243,441
<ALLOWANCES> 53,773
<INVENTORY> 3,168,767
<CURRENT-ASSETS> 4,570,025
<PP&E> 531,054
<DEPRECIATION> 157,687
<TOTAL-ASSETS> 12,031,794
<CURRENT-LIABILITIES> 1,527,263
<BONDS> 0
0
0
<COMMON> 1,547
<OTHER-SE> 9,073,462
<TOTAL-LIABILITY-AND-EQUITY> 12,031,794
<SALES> 10,883,393
<TOTAL-REVENUES> 11,036,142
<CGS> 6,408,196
<TOTAL-COSTS> 9,850,578
<OTHER-EXPENSES> 271,060
<LOSS-PROVISION> 9,975
<INTEREST-EXPENSE> 300,669
<INCOME-PRETAX> 613,835
<INCOME-TAX> 64,383
<INCOME-CONTINUING> 549,452
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 549,452
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
