<PAGE>
FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION FILE NO: 333-18243
PROSPECTUS
2,750,000 SERIES IV WARRANTS
2,750,000 SHARES OF COMMON STOCK UNDERLYING SERIES IV WARRANTS
QUESTRON TECHNOLOGY, INC.
This Prospectus relates to the offering of 2,750,000 Series IV Common Stock
Purchase Warrants ("Series IV Warrants") of Questron Technology, Inc., a
Delaware corporation (the "Company"), and 2,750,000 shares of Common Stock, par
value $.001 per share ("Common Stock") underlying the Series IV Warrants
(collectively, the "Securities"). The Securities are being offered by the
security holders identified in this Prospectus (the "Selling Securityholders").
The Securities offered hereby may not be transferred for eighteen (18) months
from the date hereof, subject to earlier release at the sole discretion of
Biltmore Securities, Inc. ("Biltmore"). The certificates evidencing such
securities include a legend with such restrictions. Biltmore may release the
securities held by the Selling Securityholders at any time after all securities
subject to the over-allotment option have been sold or such option has expired.
In other offerings where Biltmore has acted as the managing underwriter, it has
released similar restrictions applicable to selling securityholders prior to
the expiration of the lock-up period and in some cases immediately after the
exercise of the Over-Allotment Option or the expiration of the Over-Allotment
period. Each Series IV Warrant entitles the holder thereof to purchase one
share of Common Stock at a price of $5.75 per share for a period of four years
commencing one year from the date hereof at which time the Series IV Warrants
will expire. The Series IV Warrants are redeemable by the Company for $.05 per
Warrant, at any time after one year from the date of this Prospectus, upon
thirty (30) days' prior written notice, if the closing bid price of the Common
Stock, as reported by the Nasdaq SmallCap Market ("Nasdaq") exceeds $8.50 per
share, for any twenty (20) trading days ending within ten (10) days of the
notice of redemption. Upon thirty (30) days' written notice to all holders of
the Series IV Warrants, the Company shall have the right to reduce the exercise
price and/or extend the term of the Series IV Warrants in compliance with the
requirements of Rule 13e-4 to the extent applicable. See "Description of
Securities" and "Selling Securityholders."
The distribution of the Shares offered hereby by the Selling Securityholders
may be effected on one or more transactions that may take place on the
over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more dealers for
resale of such securities as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Securityholders. See "Plan of
Distribution."
The Selling Securityholders and intermediaries through whom such securities
may be sold may be deemed "underwriters" within the meaning of the Securities
Act with respect to the securities offered, and any profits realized or
commissions received may be deemed underwriting compensation. The Company has
agreed to indemnify the Selling Securityholders against certain liabilities,
including liabilities under the Securities Act of 1933 ("Securities Act").
On the date of this Prospectus, a registration statement filed under the
Securities Act with respect to an underwritten public offering by the Company
of 1,000,000 units ("Units"), each Unit consisting of one share of Series B
Convertible Preferred Stock ("Series B Preferred Stock") and one Series IV
Warrant and up to 150,000 additional Units to cover over-allotments, if any,
was declared effective by the Securities and Exchange Commission (the
"Commission"). The Company will receive net proceeds of approximately
$4,820,000 from the sale of the Units in the underwritten public offering, and
will receive approximately $783,000 in additional net proceeds if the
over-allotment option is exercised in full after payment of underwriting
discounts and commissions and estimated expenses of the underwritten public
offering. Sales of securities by the Selling Securityholders or even the
potential of such sales, would likely have an adverse affect on the market
price of the Securities.
The Company will not receive any of the proceeds from the sale of the
Securities by the Selling Securityholders. All costs incurred in the
registration of the Securities of the Selling Securityholders are being borne
by the Company. See "Selling Securityholders."
Prior to this offering, there has been no public market for the Units,
Series B Preferred Stock or Series IV Warrants. The Company has applied for
inclusion of the Units, Series B Preferred Stock and Series IV Warrants on the
Nasdaq SmallCap Market, under the symbols QUSTU, QUSTP and QUSTW, respectively,
although there can be no assurances that such securities will be accepted for
quotation or, if accepted, that an active trading market will develop. In
addition, if the Company's securities are accepted for quotation and active
trading develops, the Company is required to maintain certain minimum criteria
established by Nasdaq and there can be no assurance that the Company will be
able to continue to fulfill such criteria. See "Risk Factors." The Common Stock
of the Company is listed on the Nasdaq SmallCap Market under the symbol "QUST".
On March 3, 1997, the closing bid price per share of the Common Stock as
reported by the Nasdaq SmallCap Market was $5.00. See "Price Range for Common
Stock and Dividends." For additional information regarding the factors
considered in determining the initial public offering price of the Units and
the exercise price of the Series IV Warrants, see "Description of Securities"
and "Underwriting."
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE SECURITIES INCLUDED
IN THE UNITS AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS
OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS," WHICH BEGINS ON PAGE 8 AND
"DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------------
The date of this Prospectus is March 4, 1997.
<PAGE>
NOTE ON FORWARD-LOOKING STATEMENTS
Certain information set forth in this Prospectus includes "Forward-Looking
Statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and is subject to certain risks and uncertainties, including those
identified under the caption "Risk Factors." Readers are cautioned not to place
undue reliance on these statements, which speak only as of the date hereof. The
Company undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect unanticipated events or developments.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). The reports and other information filed by the Company can be
inspected and copied without charge at the Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following
regional offices of the Commission: Seven World Trade Center, 13th Floor, New
York, New York 10048, and Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained
from the Public Reference Section of the Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
Registration statements and other documents and reports that are filed
electronically through the Electronic Data Gathering, Analysis and Retrieval
System (including the Registration Statement) are publicly available through
the Commission's web site on the Internet (http://www.sec.gov).
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement for a more complete description of the matter involved, each such
statement being qualified in its entirety by such reference. The Company will
provide without charge to each person who receives this Prospectus, upon
written or oral request of such person, a copy of any of the information that
is incorporated by reference herein (excluding exhibits to the information that
is incorporated by reference unless the exhibits are themselves specifically
incorporated by reference) by contacting the Company at Questron Technology,
Inc., 6400 Congress Avenue, Suite 200, Boca Raton, Florida 33487, Attention:
Treasurer; telephone (407) 241-5251.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including information contained under the caption "Risk Factors,"
and financial statements, including notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise indicated, the information in this Prospectus does
not give effect to the exercise of the Underwriter's Over-Allotment Option
described under "Underwriting." UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS GIVES EFFECT TO THE ONE-FOR-TEN REVERSE SPLIT OF THE ISSUED AND
OUTSTANDING COMMON STOCK AND THE REDUCTION IN THE AUTHORIZED NUMBER OF SHARES
OF COMMON STOCK FROM 50,000,000 SHARES TO 20,000,000 SHARES, BOTH OF WHICH
ACTIONS WERE APPROVED BY THE STOCKHOLDERS OF THE COMPANY AT THE 1996 ANNUAL
MEETING WHICH WAS HELD ON DECEMBER 27, 1996 AND TOOK EFFECT ON JANUARY 2, 1997.
The proposed reduction in the number of authorized shares of Preferred Stock
was not approved. See "Description of Securities." Each prospective investor is
urged to read this Prospectus in its entirety.
THE COMPANY
Questron Technology, Inc. (the "Company") is a publicly owned company which,
through its wholly-owned subsidiary Quest Electronic Hardware, Inc. ("Quest"),
is a specialized distributor of fasteners and electronic hardware sold to
electronic equipment manufacturers. The Company also conducts an alternative
dispute resolution service through its wholly-owned subsidiary Judicate of
Philadelphia, Inc. The Company proposes to acquire the business of Comp Ware,
Inc., a Delaware corporation which does business as Webb Distribution ("Webb"),
and the closing of the offering made hereby (the "Offering") is conditioned
upon and is to occur simultaneously with the closing of the Company's
acquisition of Webb. Webb is a privately owned specialized distributor of
electronic hardware, fasteners and components. The Company has entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement") dated as of December
16, 1996 with the stockholders of Webb to acquire all of the issued and
outstanding stock of Webb. Under the Stock Purchase Agreement, the stockholders
of Webb have agreed to exchange their shares of Webb for $3,250,000 in cash,
1,500,000 Series IV Warrants and two notes (the "Notes") in the aggregate
amount of $750,000 (each for $375,000). Note A shall mature eighteen months
from the Effective Date, bear interest at 10% per annum and is payable at
maturity as to both principal and interest. Note B shall mature five years from
the Effective Date, is payable in equal monthly installments over such five
year period from the Effective Date and shall bear interest at 10% per annum.
The Company delivered to the majority stockholder of Webb the 1,500,000 Series
IV Warrants as a deposit on account of the purchase price under said agreement
at the time of the signing of the Stock Purchase Agreement. Such warrants are
being held in escrow subject to the completion of the acquisition of Webb.
These Series IV Warrants will be cancelled if the Webb acquisition does not
close. Proceeds received by the majority stockholder of Webb from a sale of the
Series IV Warrants may, in some cases, reduce the Company's obligations under
the Notes. See "Business--Proposed Acquisition of Webb."
It is intended that the business of Webb will operate as a wholly-owned
subsidiary of the Company. The Company may elect to merge Webb into Quest at a
future date. The Company intends to use the net proceeds from this Offering to
pay the $3,250,000 cash portion of the consideration for the acquisition of
Webb, to repay $1,180,000 of Webb indebtedness and to repay $390,000 of the
Company's indebtedness.
Webb and Quest each act as specialized distributors of fasteners and
electronic hardware sold to electronic equipment manufacturers. The businesses,
with operating locations in Austin, Boston, Colorado Springs, Dallas, Reno, and
San Jose, serve more than 1,000 customers in the high technology electronic
equipment manufacturing industry, including leading computer,
telecommunications and medical instrumentation companies.
The Company was incorporated as Judicate, Inc. in the State of Delaware on
August 1, 1983. The Company subsequently changed its name to Questron
Technology, Inc. on April 2, 1996. The principal executive offices of the
Company are located at 6400 Congress Avenue, Suite 200, Boca Raton, Florida
33487 and its telephone number is (407) 241-5251.
3
<PAGE>
QUEST ELECTRONIC HARDWARE, INC.
Questron, through its wholly-owned subsidiary Quest, acts as a specialized
distributor of fasteners and electronic hardware sold to electronic equipment
manufacturers. Prior to Quest's acquisition from Arrow Electronics, Inc. in
March 1995, the fasteners business had operated as a distributor of fasteners
and electronic hardware for more than twenty years. Management's goal is to
expand the business through a combination of continued penetration of existing
markets and expansion into new markets, including geographic expansion.
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 is seeking to expand its business
geographically, particularly into the eastern U.S through the Webb acquisition.
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 enhanced by implementing a comprehensive marketing plan, including the
present strategy of adding marketing programs responsive to customers' specific
requirements (e.g., bin replenishment programs), further penetration of
existing accounts and identification of new accounts and geographic expansion.
The U.S. market for the distribution of 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.
COMP WARE, INC. D/B/A 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 ("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.
SEE "RISK FACTORS," "MANAGEMENT," "BUSINESS" AND "CERTAIN TRANSACTIONS"
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING
THE COMPANY AND ITS BUSINESS.
4
<PAGE>
THE OFFERING*
<TABLE>
<CAPTION>
<S> <C>
Securities Offered by the Selling
Securityholders (1) ........................... 2,750,000 Series IV Warrants; 2,750,000 shares of
Common Stock issuable upon exercise of the Series IV
Warrants
Use of Net Proceeds ............................ None of the proceeds from the sale of the Series IV
Warrants hereunder will go to the Company (2).
OUTSTANDING EQUITY SECURITIES IMMEDIATELY PRIOR
TO THE OFFERING
Shares of Common Stock (2) ..................... 1,535,925
OUTSTANDING EQUITY SECURITIES IMMEDIATELY
SUBSEQUENT TO THE OFFERING (3)
Shares of Common Stock (4) ..................... 1,535,925
Shares of Series B Preferred Stock (5) ........ 1,000,000
Comparative Share Ownership After Offering:
Present Stockholders .......................... 1,535,925 Shares
New Investors (4) ............................. 1,437,500 Shares
NASDAQ SYMBOLS
Common Stock ................................... QUST
Units (Proposed) ............................... QUSTU
Series B Preferred Stock (Proposed) ............ QUSTP
Series IV Warrants (Proposed) .................. QUSTW
</TABLE>
- ------------
* ALL FIGURES CONTAINED HEREIN REFLECT ONE-FOR-TEN REVERSE SPLIT OF THE
ISSUED AND OUTSTANDING COMMON STOCK WHICH BECAME EFFECTIVE ON JANUARY 2,
1997 AS WELL AS A REDUCTION IN THE NUMBER OF AUTHORIZED SHARES OF COMMON
STOCK, BOTH OF WHICH WERE APPROVED AT THE 1996 ANNUAL MEETING WHICH WAS
HELD ON DECEMBER 27, 1996.
(1) The Company is concurrently offering 1,000,000 Units at a price of $6.00
per Unit (the "Concurrent Offering"). Each Unit consists of one share of
Series B Preferred Stock and one Series IV Warrant. Each share of Series
B Preferred Stock will automatically convert, without any action on the
part of the holder thereof or the Company, into 1.4375 shares of Common
Stock on the second anniversary of the Effective Date. Each Series IV
Warrant entitles the holder to purchase one share of Common Stock at an
exercise price of 115% of the closing bid price per share of the Common
Stock on the day preceding the Effective Date during the four year
period commencing one year from the Effective Date. The Series IV
Warrants are redeemable upon certain conditions. Should the Series IV
Warrants included in the Units be exercised, of which there is no
assurance, the Company will receive the proceeds therefrom aggregating
up to an additional $5,750,000. See "Description of Securities."
(2) The proceeds from the sale of Series IV Warrants held by the majority
stockholder of Comp Ware, Inc. d/b/a Webb Distribution ("Webb") may
reduce the obligations under promissory notes to be issued by the
Company in connection with the acquisition of Webb. If all of the Series
IV Warrants which are the subject of this Prospectus are exercised, the
Company will receive proceeds of $15,812,500.
(3) Assumes securities offered under the Concurrent Offering have been sold.
(4) Does not include shares of Common Stock issuable (i) upon the exercise
of the Series IV Warrants included in the Units or offered by the
Selling Securityholders; (ii) upon the exercise of Biltmore's
over-allotment option to purchase up to 150,000 Units, or (iii) upon
exercise of Biltmore's unit purchase option.
(5) Each share of Series B Preferred Stock is convertible into 1.4375 shares
of Common Stock.
5
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Prospectus.
The statement of operations data for the years ended December 31, 1995 and
1994 and the balance sheet data as of December 31, 1995 are derived from, and
should be read in conjunction with, the Company's financial statements and
notes thereto audited by Moore Stephens, P.C., independent auditors, included
elsewhere in this Prospectus.
The selected financial data as of and for the nine months ended September
30, 1996 and 1995 have been derived from unaudited financial statements also
appearing herein which, in the opinion of management, include all adjustments
(consisting of only normal, recurring adjustments) necessary for a proper
statement of the results of operations for such unaudited periods. The results
of operations for the nine months ended September 30, 1996 and 1995 are not
necessarily indicative of the results to be expected for the entire year or for
any other period.
The pro forma balance sheet data have been prepared assuming that the
acquisition of Webb and other events described in the footnotes below had
occurred as of September 30, 1996. The pro forma statement of operations data
has been prepared as if the events described in the footnotes below had
occurred at the beginning of the earliest fiscal year presented and were
carried forward through the latest interim period presented.
Balance Sheet Data:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996(UNAUDITED)
DECEMBER 31, 1995 -------------------------------
ACTUAL ACTUAL PRO FORMA (1)
----------------- ------------- ---------------
<S> <C> <C> <C>
Current assets ....... $ 5,053,762 $ 5,052,502 $ 8,000,529
Total assets ......... 12,432,998 12,514,539 19,243,787
Current liabilities . 2,070,094 1,737,134 2,992,427
Total liabilities ... 4,255,094 3,947,134 5,506,382
Working capital ...... 2,983,668 3,315,368 5,008,102
Stockholders' equity 8,177,904 8,567,405 13,762,405
</TABLE>
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(1) Gives effect to the following transactions:
(i) the acquisition of Webb; and
(ii) the sale of 1,000,000 Units by the Company and the net proceeds
therefrom and the uses thereof.
6
<PAGE>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
1995 1996 1996
ACTUAL ACTUAL PRO FORMA (1)
------------ ------------ --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Total revenues ........................... $ 4,908,757 $ 8,264,940 $ 14,353,886
Operating income ......................... 404,134 673,515 1,246,839
Net income ............................... 229,117 389,501 929,038
Net income per common share .............. $ 0.02 $ 0.03 $ 0.31
Weighted average number of common shares
and common share equivalents outstanding 13,707,612 15,399,846 2,977,485(2)
Ratio of earnings to fixed charges ...... 3.1 to 1.0 2.9 to 1.0 5.5 to 1.0
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1995
ACTUAL ACTUAL PRO FORMA (1)
----------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
Total revenues ........................... $ 844,025 $ 7,259,155 $ 15,052,334
Operating income ......................... (641,081) 584,906 1,173,155
Net income ............................... (641,033) 352,187 902,926
Net income per common share .............. $ (0.23) $ 0.03 $ .32
Weighted average number of common shares
and common share equivalents outstanding 2,793,402 13,795,632 2,817,063(2)
Ratio of earnings to fixed charges ...... (3) 2.9 to 1.0 5.6 to 1
</TABLE>
- ------------
(1) Adjusted to reflect: (i) the reductions of interest expense associated
with the repayment of certain debt; (ii) the reduction of salaries
resulting from the retirement of the majority selling stockholder; (iii)
the additional charges related to the amortization of the cost of the
Webb acquisition in excess of the net assets acquired; and (iv) the
reduction in income tax expense through the use of available tax loss
carryforwards.
(2) Reflects the effect of the one-for-ten reverse stock split and the
common share equivalents related to the convertible preferred stock to
be issued pursuant to the Offering.
(3) Earnings are inadequate to cover fixed charges. The coverage deficiency
is $606,811.
7
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. ONLY THOSE PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT SHOULD
PURCHASE THESE SECURITIES. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN INVESTMENT
DECISION, SHOULD CAREFULLY READ THIS PROSPECTUS AND CONSIDER, ALONG WITH OTHER
MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:
FORWARD LOOKING STATEMENTS
When used in this Prospectus and the documents incorporated herein by
reference, the words "believes", "anticipates", "expects" and similar
expressions are intended to identify in certain circumstances, forward-looking
statements. Such statements are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those projected,
including the risks described in the "Risk Factors" section. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such statements. The Company also undertakes no obligation to update these
forward-looking statements.
COMBINED OPERATIONS SUBSEQUENT TO THE ACQUISITION; OFFERING PROCEEDS MAY BE
RETURNED WITHOUT INTEREST
The Company has entered into the Stock Purchase Agreement, pursuant to which
the Company has agreed to purchase all issued and outstanding stock of Webb.
The consummation of the Offering is conditioned upon and is to occur
simultaneously with the acquisition of Webb. If the acquisition of Webb is not
so completed, the closing of this Offering will not occur and all proceeds of
this Offering will be returned to investors without interest. If the
acquisition does occur, upon consummation of the transactions contemplated
hereby, the Company's revenues will be derived from the businesses of both its
existing business and Webb. Management of the Company, after the acquisition,
will be composed of the current management of the Company. The Company can make
no assurances that this combination of businesses will prove as successful as
each business was independently. See "Dependence on Management and Limitations
on Certain Experience."
NO ASSURANCE OF FUTURE PROFITABILITY OR PAYMENT OF DIVIDENDS
No assurance can be given that the future operations of the Company or its
subsidiaries will be profitable. Should the operations of the Company or its
subsidiaries remain profitable, it is likely that the Company or its
subsidiaries would retain much or all of the earnings in order to finance
future growth and expansion. Therefore, the Company does not presently intend
to pay dividends on its Common Stock. See "Dividend Policy."
DIVIDENDS ON PREFERRED STOCK PAYABLE IN CASH OR SHARES, AT OPTION OF THE
COMPANY
The Company will be obligated to pay dividends at the rate of $0.115 or 2%
per share of Series B Preferred Stock in respect of the two year period prior
to its conversion. Such dividends may be paid in cash or shares of Common
Stock, at the Company's option, and, if paid in shares, there can be no
assurance that the holder will be able to sell the shares so received for the
value of such dividend. See "Description of Securities--Preferred Stock."
SUBSTANTIAL ACCUMULATED DEFICIT
As of September 30, 1996, the Company had an accumulated deficit of
$14,966,558. This deficit is attributable to the operation of the Company prior
to March 1995.
IMMEDIATE AND SUBSTANTIAL DILUTION
An investor in this offering will experience immediate and substantial
dilution of 70.75% or $2.83 per share of Common Stock (based upon $5.75 of the
Unit price being allocated to the share of Series B
8
<PAGE>
Preferred Stock included in the Unit and each share of Series B Preferred Stock
being convertible into 1.4375 shares of Common Stock). As of September 30,
1996, the Company had a net tangible book value of $1,829,759 or $1.19 per
share of Common Stock, derived from the Company's September 30, 1996 balance
sheet. After giving effect to the sale of the shares offered hereby at an
assumed price of $6.00 per Unit (of which $5.75 is allocable to the share of
Series B Preferred Stock included in the Unit), after deducting underwriting
discounts and estimated offering expenses, and after giving effect to the Webb
acquisition, net tangible book value would have been $3,464,324 or $1.17 per
share of Common Stock (based upon each share of Series B Preferred Stock being
convertible into 1.4375 shares of Common Stock).
DEPENDENCE UPON MAJOR CUSTOMERS
Quest serves more than 250 industrial and commercial customers. The ten
largest customers account for approximately 50% of Quest's sales, with one
customer accounting for 14% of those sales. Webb serves more than 800
customers. The 10 largest customers of Webb account for approximately 38% of
Webb's sales, with one customer accounting for 8% of sales. Sales to these
twenty customers account for approximately 45% of the combined revenues of
Quest and Webb. See "Business."
These sales arrangements are terminable upon short notice and none of these
customers is obligated to continue to use the services of Quest or Webb at all
or at existing prices. In addition, these customers could demand price
concessions by Quest and/or Webb which could adversely affect profits and
profit margins. The termination by these customers of their relationship with
the Company and/or Webb or a substantial decrease in prices paid by these
customers would have a material adverse affect upon the business, properties,
financial condition, results of operations and prospects of the Company.
The dependence on major customers subjects Quest and Webb to significant
financial risk in the operation of their businesses should a major customer
terminate, for any reason, its business relationship with Quest or Webb. In
such an event, the financial condition of the Company may be adversely affected
and the Company may be required to obtain additional financing, the
availability of which there can be no assurance.
The continuing ability of Quest and Webb to maintain these customer
relationships and to build new relationships is dependent, among other things,
upon their ability to maintain the high quality standards demanded by their
customers.
POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company intends to fund its operations and other capital needs for the
next twelve months substantially from operations, available borrowings under
the Company's credit agreement with a bank, and the proceeds of this Offering,
however there can be no assurance that such funds will be sufficient for these
purposes. The Company will use the proceeds of this Offering as partial
consideration for the acquisition of Webb and the repayment of certain
indebtedness as described in "Use of Proceeds." In addition, a portion of the
Webb purchase price has been deferred by means of the delivery of two notes
(the "Notes") in the aggregate amount of $750,000 (each for $375,000). Note A
shall mature eighteen months from the Effective Date, bear interest at 10% per
annum and is payable at maturity as to both principal and interest. Note B
shall mature five years from the Effective Date, is payable in equal monthly
installments over such five year period from the Effective Date and shall bear
interest at 10% per annum. In the event that the Company needs additional
financing to fund its operations and capital needs, there can be no assurance
that such financing will be available, or that it will be available on
acceptable terms. See "Use of Proceeds."
DEPENDENCE ON MANAGEMENT AND LIMITATIONS ON OBLIGATIONS OF MANAGEMENT
The Company's business is principally dependent on certain key management
personnel for the operation of its business. In particular, Dominic A. Polimeni
has played the primary role in the promotion, development and management of the
Company. A subsidiary of the Company has entered into an employment agreement
with Mr. Polimeni, which expires on March 21, 2000. The agreement does not
require Mr. Polimeni to devote his full time and attention to the business of
the Company and only
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requires Mr. Polimeni to devote such portion of his business time and energies
to the business and affairs of the Company as is needed to perform his duties
under the agreement. If the employment of Mr. Polimeni terminates, or he is
unable to perform his duties, the Company may be adversely affected. The
Company does not maintain key man life insurance relating to Mr.
Polimeni. See "Business" and "Management."
POTENTIAL CONFLICTS OF INTEREST
In addition to acting as Chairman, President and Chief Executive Officer of
the Company, Mr. Polimeni is also a Managing Director and a 50% stockholder of
Gulfstream Financial Group, Inc. ("Gulfstream"), a privately held financial
consulting and investment banking firm. Mr. Gubitosi, who is a Director of
Operations of a subsidiary of the Company, is also a Managing Director of
Gulfstream and Mr. Gubitosi's wife owns the remaining 50% of Gulfstream.
Situations may arise by reason of these relationships which will represent a
conflict of interest.
SUBSTANTIAL COMPETITION
The market for the Company's products is highly competitive, and the Company
encounters substantial competition from domestic businesses. Some of the
Company's competitors have substantially greater financial resources and
technical expertise than the Company and may offer lower prices on competing
products. In addition, such competitors may have substantially greater
managerial capabilities than the Company and, consequently, the Company may be
at a substantial competitive disadvantage in the conduct of its business.
Increased competition could result in product price reductions, reduced margins
and loss of market share, all of which could have a material adverse effect on
the Company's results of operations and financial condition. See "Business."
LITIGATION INVOLVING UNDERWRITER MAY AFFECT SECURITIES
The Company has been advised by Biltmore Securities Inc., the underwriter in
the Concurrent Offering (the "Underwriter") that on or about May 22, 1995, the
Underwriter and Elliot Loewenstern and Richard Bronson, principals of the
Underwriter, and the Commission agreed to an offer of settlement (the "Offer of
Settlement") in connection with a complaint filed by the Commission in the
United States District Court for the Southern District of Florida alleging
violations of the federal securities laws, Section 17(a) of the Securities Act
of 1933, Section 10(b) and 15(c) of the Securities Exchange Act of 1934, as
amended, and Rules 10b-5, 10b-6 and 15c1-2 promulgated thereunder. The
complaint also alleged that in connection with the sale of securities in three
(3) initial public offerings in 1992 and 1993, the Underwriter engaged in
fraudulent sales practices. The proposed Offer of Settlement was consented to
by the Underwriter and Messrs. Loewenstern and Bronson without admitting or
denying the allegations of the complaint. The Offer of Settlement was approved
by Judge Gonzales on June 6, 1995. Pursuant to the final judgment (the "Final
Judgment"), the Underwriter:
o was required to disgorge $1,000,000 to the Commission, which amount was
paid in four (4) equal installments on or before June 22, 1995; and
o agreed to the appointment of an independent consultant ("Consultant").
Such Consultant was obligated, on or about November 1, 1996 (or at such later
date as may be extended by the Consultant without court approval):
o to review the Underwriter's policies, practices and procedures in six
(6) areas relating to compliance and sales practices;
o to formulate policies, practices and procedures for the Underwriter that
the Consultant deems necessary with respect to the Underwriter's
compliance and sales practices;
o to prepare a report devoted to and which details the aforementioned
policies, practices and procedures (the "Report");
o to deliver the Report to the President of the Underwriter and to the
staff of the Southeast Regional office of the Commission;
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o to prepare, if necessary, a supervisory procedures and compliance
manual for the Underwriter, or to amend the Underwriter's existing
manual; and
o to formulate policies, practices and procedures designed to provide
mandatory ongoing training to all existing and newly hired employees of
the Underwriter. The Final Judgment further provides that, within thirty
(30) days of the Underwriter's receipt of the Report, unless such time is
extended, the Underwriter shall adopt, implement and maintain any and all
policies, practices and procedures set forth in the Report.
On or about December 19, 1996, the Consultant completed the Report which was
thereafter delivered to the Underwriter. The Report addresses the areas
relating to compliance and sales practices referred to above. The Underwriter
is reviewing the Report and undertaking steps to implement the recommendations
and procedures in the Report, in accordance with the provisions of the Final
Judgment.
The Final Judgment also provides that an independent auditor ("Auditor")
shall conduct four special reviews of the Underwriter's policies, practices and
procedures, the first such review to take place six (6) months after the Report
has been delivered to the Underwriter and thereafter at six-month intervals.
The Auditor is also authorized to conduct a review, on a random basis and
without notice to the Underwriter, to certify that any persons associated with
the Underwriter who have been suspended or barred by any Commission order are
complying with the terms of such orders.
On July 10, 1995, the action as against Messrs. Loewenstern and Bronson was
dismissed with prejudice. Mr. Bronson has agreed to a suspension from
associating in any supervisory capacity with any broker, dealer, municipal
securities dealer, investment advisor or investment company for a period of
twelve (12) months, dating from the beginning of such suspension. Mr.
Loewenstern agreed to a suspension from associating in any supervisory capacity
with any broker, dealer, municipal securities dealer, investment advisor or
investment company for a period of twelve (12) months commencing upon the
expiration of Mr. Bronson's suspension.
In the event that the requirements of the foregoing judgment adversely
affect the Underwriter's ability to act as a market maker for the Company's
stock, and additional brokers do not make a market in the Company's securities,
the market for and liquidity of the Company's securities may be adversely
affected. In the event that other broker-dealers fail to make a market in the
Company's securities, the possibility exists that the market for and the
liquidity of the Company's securities may be adversely affected to such an
extent that public security holders may not have anyone to purchase their
securities when offered for sale at any price. In such event, the market for,
liquidity and prices of the Company's securities may not exist. See
"Underwriting." FOR ADDITIONAL INFORMATION REGARDING THE UNDERWRITER, INVESTORS
MAY CALL THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. AT (800)
289-9999.
Recent State Action Involving the Underwriter--Possible Loss of Liquidity
The State of Indiana has commenced an action seeking, among other things, to
revoke the Underwriter's license to do business in such state. The hearing in
this matter was scheduled for October 7, 1996 and has been adjourned pending
settlement discussions. Such proceeding, if ultimately successful, may
adversely affect the market for and liquidity of the Company's securities if
additional broker-dealers do not make a market in the Company's securities.
Moreover, should Indiana investors purchase any of the securities sold in this
Offering from the Underwriter prior to the possible revocation of the
Underwriter's license in Indiana, such investors will not be able to resell
such securities in such state through the Underwriter but will be required to
retain a new broker-dealer firm for such purpose. The Company cannot ensure
that other broker-dealers will make a market in the Company's securities. In
the event that other broker-dealers fail to make a market in the Company's
securities, the possibility exists that the market for and the liquidity of the
Company's securities may be adversely affected to an extent that public
security holders may not have anyone to purchase their securities when offered
for sale at any price. In such event, the market for, liquidity and prices of
the Company's securities may not exist. The Company does not intend to seek
qualification for the sale of the Securities in the State of Indiana. It should
be noted that although the Underwriter may not be the sole market maker in the
Company's securities, it will most likely be the dominant market maker in the
Company's securities. See "Underwriting."
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SELLING GROUP MEMBERS SUBJECT TO NASD AND STATE REGULATORY PROCEEDINGS
The Underwriter and certain persons who may become members of the selling
group are the subject of NASD and/or state regulatory proceedings. See "Risk
Factors--Litigation Involving Underwriter May Affect Securities."
BROAD DISCRETION IN APPLICATION OF PROCEEDS
The management of the Company has broad discretion to adjust the application
and allocation of the net proceeds of this Offering, including funds received
upon exercise of the Series IV Warrants. As a result of the foregoing, the
success of the Company will be substantially dependent upon the discretion and
judgment of the management of the Company with respect to the application and
allocation of the net proceeds hereof. Of the net proceeds of the Offering,
$3,250,000 will be immediately used to pay a portion of the purchase price for
the Webb acquisition and $1,570,000 will be used to reduce certain outstanding
debt. Pending the application of the net proceeds, the funds will be invested
by the Company in temporary, short-term interest-bearing obligations. See "Use
of Proceeds," "Business" and "Management."
VOTING CONTROL; POTENTIAL ANTI-TAKEOVER EFFECT
After giving effect to this Offering and to the acquisition of Webb (without
giving effect to the sales of any securities by the Selling Securityholders but
assuming conversion of the Series B Preferred Stock), the officers, directors
and principal stockholders of the Company will beneficially own approximately
16.77% of the Company's Common Stock and will have the right to acquire up to
an additional 32.16% of the Common Stock pursuant to outstanding options and
warrants. See "Securities Ownership." Accordingly, such persons may, with the
votes of an additional 1.07% of the Company's Common Stock, be able to approve
major corporate transactions including those involving amendments to the
Certificate of Incorporation of the Company or the sale of substantially all of
the Company's assets and may be able to elect all of the directors of the
Company and to control the Company's affairs. This voting control may have the
effect of delaying or preventing a change in control of the Company and may
adversely affect the rights of the holders of the shares of Common Stock of the
Company. In addition, the Company is subject to a State of Delaware statute
regulating business combinations which may also hinder or delay a change of
control.
LIMITATION ON DIRECTOR LIABILITY
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation limits the liability of directors to the Company
or its stockholders for monetary damages for breach of a director's fiduciary
duty, except for liability in four specific instances. These four areas are:
(i) any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, (iii) unlawful payments of
dividends or unlawful stock purchases or redemptions as provided in Section 174
of the Delaware General Corporation Law, or (iv) any transaction from which the
director derived an improper personal benefit. As a result of these limitations
on a Director's liability, stockholders may have more limited rights to recover
against directors for breach of fiduciary duty than they would have otherwise.
REQUIREMENTS OF CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN
CONNECTION WITH THE EXERCISE OF THE SERIES IV WARRANTS WHICH MAY NOT BE
EXERCISABLE AND MAY THEREFORE BE VALUELESS
The Company will be able to issue the securities offered hereby and shares
of its Common Stock upon the exercise of the Series IV Warrants only if (i)
there is a current prospectus relating to the securities offered hereby under
an effective registration statement filed with the Commission and (ii) such
Common Stock is, to the extent required, then qualified for sale or exempt
therefrom under applicable state securities laws of the jurisdictions in which
the various holders of Series IV Warrants reside. There can be no assurance,
however, that the Company will be successful in maintaining a current
registration statement. After a registration statement becomes effective, it
may require updating by the filing of a
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post-effective amendment. A post-effective amendment is required under the
Securities Act of 1993 ("Securities Act") (i) anytime after nine months
subsequent to the effective date thereof when any information contained in the
prospectus is over 16 months old; (ii) when facts or events have occurred which
represent a fundamental change in the information contained in the registration
statement; or (iii) when any material change occurs in the information relating
to the plan or distribution of the securities registered by such registration
statement. The Prospectus forming a part of this Registration Statement will
remain current within the meaning of the Securities Act for not more than nine
months following the date of this Prospectus, or until December 4, 1997,
assuming a post-effective amendment is not filed by the Company. The Company
intends to qualify the sale of the Units in a limited number of states,
although certain exemptions under certain state securities ("Blue Sky") laws
may permit the Series IV Warrants to be transferred to purchasers in states
other than those in which the Series IV Warrants were initially qualified. The
Company will be prevented, however, from issuing Common Stock upon exercise of
the Series IV Warrants in those states where exemptions are unavailable and the
Company has failed to qualify the Common Stock issuable upon exercise of the
Series IV Warrants. The Company may decide not to seek, or may not be able to
obtain qualification of the issuance of such Common Stock in all of the states
in which the ultimate purchasers of the Series IV Warrants reside. In such a
case, the Series IV Warrants of those purchasers will expire and have no value
if such warrants cannot be exercised or sold. Accordingly, the market for the
Series IV Warrants may be limited because of the Company's obligation to
fulfill both of the foregoing requirements. See "Description of Securities."
ADDITIONAL AUTHORIZED SHARES AVAILABLE FOR ISSUANCE MAY ADVERSELY AFFECT THE
MARKET
After giving effect to the one-for-ten reverse stock split and the reduction
in authorized Common Stock, the Company is authorized to issue 20,000,000 of
its shares of its Common Stock and 10,000,000 shares of Preferred Stock. There
are currently 1,535,925 shares of Common Stock issued and outstanding and upon
completion of the proposed offering, there will be a total of 1,000,000 shares
of Series B Preferred Stock outstanding. Of the remaining 5,000,000 authorized
shares of Preferred Stock, 900,000 shares were previously issued under terms
which provided that they could not be reissued at a later date. All 900,000 of
such shares were previously converted into Common Stock. In addition, the
following securities have been reserved for issuance: 1,437,500 shares of
Common Stock issuable, commencing two years from the Effective Date, upon
conversion of the Series B Preferred Stock; 1,000,000 shares of Common Stock
issuable upon exercise of the Series IV Warrants offered to investors in this
Offering; 150,000 Units issuable pursuant to the Underwriter's Over-Allotment
Option; 150,000 shares of Series B Preferred Stock included in the
Underwriter's Over-Allotment Option which are convertible into 215,625 shares
of Common Stock; 150,000 shares of Common Stock issuable upon exercise of the
Series IV Warrants included in the Underwriter's Over-Allotment Option; 100,000
Units issuable upon exercise of the Underwriter's Unit Purchase Option; 100,000
shares of Series B Preferred Stock included in the Underwriter's Unit Purchase
Option which are convertible into 143,750 shares of Common Stock; 100,000
shares of Common Stock which are issuable upon exercise of the Series IV
Warrants included in the Underwriter's Unit Purchase Option; 2,750,000 shares
of Common Stock issuable upon exercise of the Series IV Warrants of the Selling
Securityholders; 176,767 shares of Common Stock issuable upon the exercise of
certain other outstanding options and warrants and 1,500,000 performance
options which may hereafter be granted conditional upon achievement of certain
financial results. The foregoing does not give effect to Common Stock issuable
for the payment of Series B Preferred Stock dividends. The Selling
Securityholders have agreed not to sell, transfer or assign any of the
2,750,000 Series IV Warrants offered under the alternate prospectus ("Alternate
Prospectus") for a period of 18 months following the Effective Date without the
consent of the Underwriter. In other offerings where the Underwriter has acted
as the managing underwriter, it has released similar restrictions applicable to
selling securityholders prior to the expiration of the lock-up period and in
some cases immediately after the exercise of the Over-Allotment Option or the
expiration of the Over-Allotment Option period. After the conversion of the
Series B Preferred Stock and the exercise of all such warrants and options the
Company will have 9,009,567 shares of Common Stock outstanding and 10,990,433
shares of authorized but unissued Common Stock available for issuance without
further stockholder approval. As a result, any issuance of additional shares of
Common Stock may cause current stockholders of the Company to suffer
significant dilution which may adversely affect the market. See "Description of
Securities" and "Underwriting."
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LACK OF PRIOR PUBLIC MARKET FOR THE UNITS, SERIES B PREFERRED STOCK AND
SERIES IV WARRANTS BEING OFFERED
No prior public market has existed for the Units, Series B Preferred Stock
and Series IV Warrants offered hereby and no assurance can be given that one
will develop subsequent to this Offering. The Company has applied for inclusion
of the Units, Series B Preferred Stock and Warrants on the Nasdaq SmallCap
Market, although there can be no assurance that an active trading market will
develop, even if the securities are accepted for quotation. Additionally, if
the Company's securities are accepted for quotation and active trading
develops, the Company is required to maintain certain minimum criteria
established by Nasdaq, of which there can be no assurance that the Company will
be able to continue to fulfill such criteria. The Company's Common Stock is
currently listed on the Nasdaq SmallCap Market under the symbol "QUST." The
Underwriter may make a market in the securities of the Company upon the closing
of this Offering, but there is no assurance that it will be successful in its
efforts. The loss or failure of market makers for the Company's securities will
have a material adverse effect on the market for the Company's securities. See
"Description of Securities."
PROPOSED CHANGES TO NASDAQ LISTING REQUIREMENTS
On November 6, 1996, the Board of Directors of Nasdaq approved proposed
changes to the entry standards and maintenance standards necessary to qualify
for listing on both the Nasdaq National Market (the "National Market") and the
Nasdaq SmallCap Market (the "SmallCap Market"). After a 30-day comment period,
the Nasdaq Board of Directors will consider any comments, make modifications of
the proposed changes, if warranted, and file the rule changes with the
Securities and Exchange Commission for final approval. Among the proposed
changes to the Nasdaq SmallCap Market listing and maintenance criteria are the
following: eliminating the alternative test to the $1 minimum bid price;
extending the corporate governance standards currently required by the National
Market to the SmallCap issuers; increasing the quantitative standards; and
implementing a requirement that auditors of Nasdaq-listed companies be subject
to peer review. If the proposed or other changes to the listing and maintenance
criteria are approved by the Securities and Exchange Commission, there can be
no assurance that the Company will be able to fulfill such criteria.
DELISTING OF SECURITIES TO ADVERSELY AFFECT MARKET
In the event that the securities offered hereby and/or the Common Stock were
to no longer meet applicable Nasdaq requirements and were delisted from Nasdaq,
the Company would attempt to have its securities traded in the over-the-counter
market via the Electronic Bulletin Board or the "pink sheets." In such event,
holders of the Company's securities would likely encounter greater difficulty
in disposing of these securities and/or in obtaining accurate quotations as to
the prices of the Company's securities.
WARRANTS SUBJECT TO REDEMPTION
The Series IV Warrants shall be exercisable for one share of Common Stock at
an exercise price of 115% of the closing bid price per share of the Common
Stock on the day immediately preceding Effective Date for a four year period
commencing one year from the Effective Date. The Series IV Warrants are
redeemable by the Company for $.05 per Series IV Warrant, at any time after one
year from the Effective Date, upon 30 days' prior notice, if the closing bid
price of the Common Stock, as reported by the Nasdaq SmallCap Market exceeds
$8.50 per share, for any 20 consecutive trading days ending within ten days of
the notice of redemption. In the event that the Series IV Warrants are called
for redemption, the Series IV Warrant holders may not be able to exercise their
Series IV Warrants if the Company has not updated this Prospectus in accordance
with the requirements of the Securities Act or these securities have not been
qualified for sale under the laws of the state where the Series IV Warrant
holder resides. See "Requirements of Current Prospectus and State Blue Sky
Registration in Connection with the Exercise of the Series IV Warrants Which
May Not Be Exercisable and May Therefore Be Valueless." In addition, in the
event that the Series IV Warrants have been called for redemption, such call
for redemption could force the warrant holder to either (i) assume the
necessary updating to the prospectus and state blue sky qualifications has been
effected, exercise the Series IV Warrants and pay the exercise price at a time
when,
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in the event of a decrease in market price from the period preceding the
issuance of the call for redemption, it may be less than advantageous
economically to do so, or (ii) accept the redemption price, which, in the event
of an increase in the price of the stock, could be substantially less than the
market value thereof at the time of redemption. Upon 30 days' written notice to
all holders of the Series IV Warrants, the Company shall have the right to
reduce the exercise price and/or extend the term of the Series IV Warrants in
compliance with the requirements of Rule 13e-4 to the extent applicable. See
"Certain Transactions," "Description of Securities," "Selling Securityholders"
and "Underwriting."
UNDERWRITER'S INFLUENCE ON THE MARKET MAY HAVE ADVERSE CONSEQUENCES
A significant number of securities may be sold, in the ordinary course of
business, to customers of the Underwriter. Such customers subsequently may
engage in transactions for the sale or purchase of such securities through or
with the Underwriter. Although it has no legal obligation to do so, the
Underwriter from time to time in the future may make a market in and otherwise
effect transactions in the Company's securities. To the extent the Underwriter
acts as market maker in the securities, it may be a dominating influence in
that market. The price and liquidity of such securities may be affected by the
degree, if any, of the Underwriter's participation in the market, inasmuch as a
significant amount of such securities may be sold to customers of the
Underwriter. Such customers subsequently may engage in transactions for the
sale or purchase of such securities through or with the Underwriter. Such
market making activities, if commenced, may be discontinued at any time or from
time to time by the Underwriter without obligation or prior notice. If a
dominating influence at such time, the Underwriter's discontinuance may
adversely affect the price and liquidity of the securities.
Further, unless granted an exemption by the Securities and Exchange
Commission to Rule 10b-6, the Underwriter may be prohibited from engaging in
any market making activities with regard to the Company's securities for the
period from two or nine business days prior to any solicitation of the exercise
of Series IV Warrants until the later of the termination of such solicitation
activity or the termination, by waiver or otherwise, of any right that the
Underwriter may have to receive a fee for the exercise of Series IV Warrants
following the solicitation. As a result, the Underwriter may be unable to
continue to provide a market for the Company's securities during certain
periods while the Series IV Warrants are exercisable which may adversely affect
the price and liquidity of the securities.
EXERCISE OF SERIES IV WARRANTS MAY HAVE DILUTIVE EFFECT ON MARKET
The Series IV Warrants will provide, during their term, an opportunity for
the holder to exercise the Warrants and profit from a rise in the market price
of the Common Stock, of which there is no assurance, with resulting dilution in
the ownership interest in the Company held by the then present stockholders.
Holders of the Series IV Warrants most likely would exercise the Series IV
Warrants and purchase the underlying Common Stock at a time when the Company
may be able to obtain capital on terms more favorable than those provided by
such Warrants, in which event the terms on which the Company may be able to
obtain additional capital would be affected adversely.
See "Underwriting."
"PENNY STOCK" REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF
SECURITIES
The Commission has adopted regulations which generally define "penny stock"
to be any equity security that has a market price (as defined) less than $5.00
per share or an exercise price of less than $5.00 per share, subject to certain
exceptions. In the event of authorization of the Units, Series B Preferred
Stock and Series IV Warrants for quotation on the Nasdaq SmallCap Market, such
securities will initially be exempt from the definition of "penny stock." If
such securities or the Common Stock are removed from listing on Nasdaq at any
time following the Effective Date, the Company's securities may become subject
to rules that impose additional sales practice requirements on broker-dealers
who sell such securities to persons other than established customers and
accredited investors (generally, those persons with assets in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's written consent to the transaction prior to the
purchase. In addition, for any transaction involving a penny stock, unless
exempt,
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the rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on
the limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Company's securities and may
affect the ability of purchasers in this Offering to sell the Company's
securities in the secondary market.
In the event that the Company were not able to qualify its securities for
listing on the Nasdaq SmallCap Market, the Company would attempt to have its
securities traded in the over-the-counter market via the Electronic Bulletin
Board or the "pink sheets." In such event, holders of the Company's securities
may encounter substantially greater difficulty in disposing of their securities
and/or in obtaining accurate quotations as to the prices of the Company's
securities.
UNDERWRITER AND SELLING SECURITYHOLDERS TO RECEIVE SUBSTANTIAL BENEFITS IN
CONNECTION WITH THE OFFERING
The Underwriter will receive substantial benefits from the Company in
connection with this Offering. These benefits include underwriting
discounts/commissions, a non-accountable expense allowance, an Underwriter's
Unit Purchase Option, warrant exercise fees and an advisory fee in connection
with certain services to be provided in the future. In addition, the
Underwriter has been granted certain rights under the Unit Purchase Option,
which rights include the ability to require the Company to include the
Underwriter's securities in a registration statement under the Securities Act.
The exercise of these rights will result in the Company incurring substantial
expenses and may cause the Company to register an offering of its securities at
a time which is detrimental to the Company's plans. See "Underwriting." The
Selling Securityholders will receive substantial benefits in connection with
this Offering. These benefits include having the Series IV Warrants owned by
them included in the Registration Statement of which this Prospectus is a part
at the Company's expense. Certain of the Selling Securityholders are affiliated
with the Company. See "Selling Securityholders."
RELEASE OF LOCK-UP MAY ADVERSELY AFFECT THE MARKET
The registration statement of which this Prospectus is a part also covers
the offering of 2,750,000 Series IV Warrants, which are being offered by the
Selling Securityholders. The securities held by the Selling Securityholders may
be sold commencing eighteen months from the date of this Prospectus subject to
earlier release at the sole discretion of the Underwriter. In other offerings
where the Underwriter has acted as the managing underwriter, it has released
similar restrictions applicable to selling securityholders prior to the
expiration of the lock-up period and in some cases immediately after the
exercise of the Over-Allotment Option or the expiration of the Over-Allotment
Option period. Certificates evidencing these securities will bear a legend
reflecting such restrictions. The Underwriter may release the securities held
by the Selling Securityholders at any time after all securities subject to the
Over-Allotment Option (as hereinafter defined) have been sold or such option
has expired. The resale of the securities held by the Selling Securityholders
is subject to prospectus delivery and other requirements of the Securities Act.
Sales of such securities or the potential of such sales at any time may have an
adverse effect on the market prices of the securities offered hereby. See
"Selling Securityholders."
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET
There are currently 384,409 shares of the Company's outstanding Common Stock
that are "restricted securities" which were acquired on March 31, 1995 and
which, in the future, may be sold upon compliance with Rule 144 adopted under
the Securities Act. Rule 144, as amended, provides, in essence, that a person
holding "restricted securities" for a period of one year may sell every three
months a number of shares equal to the greater of (a) one percent of the
Company's issued and outstanding shares, or (b) the average weekly volume of
sales during the four calendar weeks preceding the sale. The amount of
"restricted securities" which a person who is not an affiliate of the Company
may sell is not so limited, since
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non-affiliates may sell without volume limitation their shares held for two
years. Therefore, during each three month period, a holder of restricted
securities who has held them for at least the one year period may sell under
Rule 144 up to 15,477 shares. Nonaffiliated persons who hold for the two year
period described above may sell unlimited shares once their holding period is
met. The Company has also agreed not to issue any additional securities other
than as contemplated by this Prospectus for a period of twenty-four (24) months
following the Effective Date without the consent of the Underwriter. See also
"Release of Lock-Up May Adversely Affect Market."
Prospective investors should be aware that the possibility of sales may, in
the future, have a depressive effect on the price of the Series B Preferred
Stock, Common Stock or Series IV Warrants in any market which exists or may
develop and, therefore, the ability of any investor to market his shares may be
dependent directly upon the number of shares that are offered and sold.
Affiliates of the Company may sell their shares during a favorable movement in
the market price of the Company's securities which may have a depressive effect
on its price per share. See "Description of Securities."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 Units offered
in the Concurrent Offering, assuming an offering price of $6.00 per Unit, are
estimated to be $4,820,000 (after deducting approximately $600,000 in
underwriting discounts and other expenses of the Concurrent Offering estimated
to be $580,000 which includes the Underwriter's nonaccountable expense
allowance, but giving no effect to the exercise of the Over-Allotment Option or
the Unit Purchase Option).
The Company expects such proceeds to be utilized approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE AMOUNT
OF NET PROCEEDS PERCENT
------------------ ---------
<S> <C> <C>
Webb acquisition(1) ..... $3,250,000 67.43%
Webb debt retirement(2) . 1,088,000 22.57%
Quest debt retirement(3) 482,000 10.00%
------------------ ---------
TOTAL .................. $ 4,820,000 100.00%
================== =========
</TABLE>
- ------------
(1) In addition to the cash consideration to be paid at the Closing in
connection with the Webb acquisition, the Company is delivering to the
former majority stockholder of Webb two notes (the "Notes") in the
aggregate amount of $750,000 (each for $375,000). Note A shall mature
eighteen months from the Effective Date, bear interest at 10% per annum
and is payable at maturity as to both principal and interest. Note B
shall mature five years from the Effective Date, is payable in equal
monthly installments over such five year period from the Effective Date
and shall bear interest at 10% per annum. 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 of Webb receives
net proceeds greater than $375,000 from a sale of the Series IV Warrants
issued as part of the purchase price.
(2) Represents the payment of all of Webb's indebtedness to a financial
institution under a loan agreement, consisting of a $500,000 loan, with
interest at 10%, due January 1, 1997 and a $588,000 demand Note with
interest at 10%.
(3) Reflects a partial repayment of Quest's Revolving Facility under its
Loan and Security Agreement with a financial institution, which is due
March 31, 1998 with interest at 9.25%.
Although it is uncertain whether or not the Company's shares of Common Stock
will rise to a level at which the Series IV Warrants would be exercised, if
subscribers in the Concurrent Offering elect to exercise all of the Series IV
Warrants included in the Units, the Company will realize gross proceeds of
approximately $5,750,000. Management anticipates that the proceeds from the
exercise of the Series IV Warrants would be contributed to working capital of
the Company. Nevertheless, the Company may at the time of exercise allocate a
portion of the proceeds to any other corporate purposes. Accordingly, investors
who exercise their Series IV Warrants will entrust their funds to management,
whose specific intentions regarding the use of such funds are not currently
known.
The amounts set forth above are estimates. Should a reapportionment or
redirection of funds be determined to be in the best interests of the Company,
the actual amount expended to finance any category of expenses may be increased
or decreased by the Company's Board of Directors, at its discretion.
The Company believes that the net proceeds of the Concurrent Offering,
together with funds generated from operations, will be sufficient to conduct
its operations for at least 18 months. The terms of the underwriting agreement
with the Underwriter does restrict the Company from obtaining additional
capital financing.
To the extent that the Company's expenditures are less than projected or the
proceeds of the Concurrent Offering increase as a result of the exercise by the
Underwriters of the Over-Allotment Option, the resulting balances will be used
to pay off additional indebtedness. Conversely, to the extent that such
expenditures require the utilization of funds in excess of the amounts
anticipated, additional financing may be sought from other sources, although
there can be no assurance that such additional financing, if available, will be
on terms acceptable to the Company. The net proceeds of the Concurrent Offering
that are not expended immediately may be deposited in interest bearing
accounts, or invested in government obligations, certificates of deposit or
similar short-term, low risk investments.
18
<PAGE>
DILUTION
As of September 30, 1996, the Company had a net tangible book value of
$1,829,759 or $1.19 per share of Common Stock. Net tangible book value per
share means the tangible assets of the Company, less all liabilities, divided
by the number of shares of Common Stock outstanding. After giving effect to the
sale of the Units offered hereby at an assumed price of $6.00 per Unit ($5.75
of which is allocated to the Series B Preferred Stock), after deducting
underwriting discounts and estimated offering expenses, and after giving effect
to the Webb acquisition, net tangible book value would have been $3,464,324, or
$1.17 per share of Common Stock (based on each share of Series B Preferred
Stock being convertible into 1.4375 shares of Common Stock). The result will be
an immediate dilution to new investors of 70.75% or $2.83 per share of Common
Stock. "Dilution" is determined by subtracting net tangible book value per
share after the offering from the offering price to investors. The following
table illustrates this dilution assuming no exercise of the over-allotment
option(1):
<TABLE>
<CAPTION>
<S> <C> <C>
Public offering price allocated to Preferred Stock ............ $ 5.75
Conversion ratio of Preferred Stock into Common Stock ......... 1.4375
Public offering price attributable to Common Stock issuable
upon conversion of Preferred Stock ............................ $ 4.00
Net tangible book value per share of Common Stock before the
offering ..................................................... $1.19
Decrease per share of Common Stock attributable to the sale by
the Company of the Units offered hereby ...................... 0.02
-------
Net tangible book value per share of Common Stock after the
offering(2) ................................................... $ 1.17
--------
Dilution per share to new investors ............................ $ 2.83
========
</TABLE>
- ------------
(1) If the over-allotment option is exercised in full, dilution to new
investors will be $2.67.
(2) Based on each share of Series B Preferred Stock being converted into
1.4375 shares of Common Stock.
Except as noted, the above-table assumes no exercise of the Warrants, the
over-allotment option or the Underwriter's option. See "Description of
Securities."
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1996, (ii) pro forma combined to give effect to the transactions
described in the footnote to the table, (iii) as adjusted to reflect the sale
of the Units in the Concurrent Offering and (iv) as adjusted for the
one-for-ten reverse split of the Company's Common Stock and the reduction in
the number of authorized shares of Common Stock. The table should be read in
conjunction with the Financial Statements, the notes thereto and the pro forma
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUESTRON PROFORMA
SEPTEMBER 30, 1996 COMBINED (1)
------------------ --------------
<S> <C> <C>
Short-term debt ............................................ $ 550,000 $ 709,352
Long-term debt ............................................. 2,210,000 2,513,955
------------------ --------------
2,760,000 3,223,307
------------------ --------------
Stockholders' Equity
Preferred stock, $.01 par value ........................... -- 10,000
Common stock, $.001 par value; 20,000,000 shares
authorized; 1,547,774 issued at September 30, 1996 and
proforma combined ........................................ 1,547 1,547
Additional paid-in capital ................................. 23,887,894 29,072,894
Retained earnings (deficit) ................................ (14,966,558) (14,966,558)
Less: treasury stock, 11,849 shares, at cost ............... (355,478) (355,478)
------------------ --------------
Total stockholders' equity ............................... 8,567,405 13,762,405
------------------ --------------
Total capitalization ..................................... $ 11,327,405 $ 16,985,712
================== ==============
</TABLE>
- ------------
(1) Gives effect to the following transactions: (i) the acquisition of Webb
for $3,250,000 in cash, 1,500,000 Series IV Warrants and two notes in
the aggregate amount of $750,000 (each for $375,000). Note A shall
mature eighteen months from the Effective Date, bear interest at 10% per
annum and is payable at maturity as to both principal and interest. Note
B shall mature five years from the Effective Date, is payable in equal
monthly installments over such five year period from the Effective Date
and shall bear interest at 10% per annum; and (ii) the sale of 1,000,000
Units by the Company and the net proceeds therefrom, at a price of $6.00
per Unit. Each Unit consists of one share of the Company's Series B
Convertible Preferred Stock and one redeemable Series IV Warrant to
purchase one share of Common Stock.
20
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded on the NASDAQ SmallCap Market under
the symbol "QUST."
The following table sets forth the reported high and low bid quotations (AS
ADJUSTED FOR THE ONE-FOR-TEN REVERSE SPLIT OF THE COMPANY'S COMMON STOCK) 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.
<TABLE>
<CAPTION>
COMMON STOCK
------------------
HIGH LOW
-------- --------
<S> <C> <C>
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
1997:
First Quarter
(through March 3, 1997) $ 5.00 $ 3.25
</TABLE>
On March 3, 1997, the closing bid price for the Company's Common Stock as
reported on the NASDAQ SmallCap Market system was $5.00. On that date there
were approximately 1,000 holders or record of Common Stock (including entities
which hold stock in street name on behalf of other beneficial owners).
The Company has not paid any cash dividends on its Common Stock to date. The
Company anticipates that for the foreseeable future it will follow a policy of
retaining earnings, if any, in order to finance the expansion and development
of its business. Payment of dividends is within the discretion of the Company's
Board of Directors and will depend upon the earnings, capital requirements and
operating and financial condition of the Company, among other factors.
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.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATIONS
GENERAL
The Company has entered into a Stock Purchase Agreement with the
stockholders of Comp Ware, Inc., a Delaware corporation doing business as Webb
Distribution ("Webb"). Pursuant to the agreement, the Company will acquire all
of the issued and outstanding stock of Webb. The stockholders of Webb will
receive at closing $3,250,000 in cash, 1,500,000 Series IV Warrants and two
notes (the "Notes") in the aggregate amount of $750,000 (each for $375,000).
Note A shall mature eighteen months from the Effective Date, bear interest at
10% per annum and is payable at maturity as to both principal and interest.
Note B shall mature five years from the Effective Date, is payable in equal
monthly installments over such five year period from the Effective Date and
shall bear interest at 10% per annum. The majority stockholder of Webb received
as a down payment at the signing of the Stock Purchase Agreement 1,500,000
Series IV Warrants which will be cancelled in the event that the Webb
acquisition does not close. 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 Series IV Warrants issued as part of the purchase price.
Webb is a specialized distributor of electronic hardware, fasteners and
components which serves customers in the high technology electronic equipment
manufacturing industry. Webb operates primarily in the New England region. By
acquiring the operations of Webb, the Company hopes to expand its market in the
U.S. for fasteners and related products. By consolidating its administrative
activities and accessing Webb's customer base, the Company anticipates that it
will be able to use its combined resources in order to develop new services
based upon the demand of its existing customers or upon requests from potential
new customers.
PLAN OF OPERATIONS
The Company, upon completion of the Offering, will market and sell its
electronic hardware, fasteners, and components products and services through
Quest and Webb.
The Company will use a portion of the net proceeds from the Offering which
are expected to be approximately $4,820,000 (assuming that the Underwriter's
overallotment option is not exercised) to pay the $3,250,000 cash consideration
in connection with the acquisition of Webb and to retire the following
outstanding indebtedness of Quest and Webb:
<TABLE>
<CAPTION>
<S> <C>
Webb debt retirement $1,088,000
Quest debt retirement 482,000
------------
Total debt retired . $1,570,000
============
</TABLE>
RESULTS OF OPERATIONS--QUESTRON
For the three and nine months ended September 30, 1996 compared with 1995
The results of operations through September 30, 1996 include the operating
results of Quest Electronic Hardware, Inc. ("Quest"), the Company's fasteners
and electronic hardware distribution business, and the operating results of the
Company's alternative dispute resolution ("ADR") business.
22
<PAGE>
The following summarizes the results of operations for each of the Company's
businesses and corporate for the three month and nine month periods ended
September 30, 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1996
-----------------------------------------------------
QUEST ADR CORPORATE TOTAL
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenue .................... $2,525,884 $ 31,920 $ -- $2,557,804
Costs and expenses ......... 2,201,645 57,212 67,031 2,325,888
------------ ------------ ----------- ------------
Operating income (loss) ... 324,239 (25,292) (67,031) 231,916
Interest expense ........... 75,095 -- 283 75,378
------------ ------------ ----------- ------------
Income (loss) before taxes 249,144 (25,292) (67,314) 156,538
Tax provision .............. 9,733 -- -- 9,733
------------ ------------ ----------- ------------
Net income (loss) .......... $ 239,411 $ (25,292) $(67,314) $ 146,805
============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
-----------------------------------------------------
QUEST ADR CORPORATE TOTAL
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue .................... $8,141,107 $123,833 $ -- $8,264,940
Costs and expenses ......... 7,167,900 196,103 227,422 7,591,425
------------ ----------- ------------ ------------
Operating income (loss) ... 973,207 (72,270) (227,422) 673,515
Interest expense ........... 233,385 -- 1,246 234,631
------------ ----------- ------------ ------------
Income (loss) before taxes 739,822 (72,270) (228,668) 438,884
Tax provision .............. 49,383 -- -- 49,383
------------ ----------- ------------ ------------
Net income (loss) .......... $ 690,439 $(72,270) $(228,668) $ 389,501
============ =========== ============ ============
</TABLE>
The significant growth in the Company's revenues for the nine months ended
September 30, 1996 over the nine months ended September 30, 1995 is due to the
acquisition of Quest on March 31, 1995. Revenues for Quest were $2,525,884 and
$8,141,107 for the three month and nine month periods ended September 30, 1996,
respectively. The nine month sales level of more then $8 million 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 for the three month and nine month periods ended
September 30, 1996 declined 31% and 45%, respectively, compared with the
comparable periods in the prior year. This decline reflects the Company's
downsizing and restructuring of the ADR business in response to increased
competition and historical losses. The Company is continuing to evaluate its
alternatives with respect to the future operation of its ADR business,
including the possible sale, disposition or discontinuance of the business.
The Company's operating income was $231,916 for the three months ended
September 30, 1996 compared with operating income of $319,519 for the
comparable period of the prior year. The decline in operating income for the
three month period ended September 30, 1996 compared with the comparable prior
year period is primarily due to increased operating costs associated with
Quest's expansion into the Austin market coupled with an 11% decline in sales
from the immediately preceding quarter as a result of the recent pause in the
semiconductor industry, which management believes to be temporary. In August
1996, Quest reduced its costs of operations to a level more consistent with
this reduced level of sales. Management believes that once the semiconductor
industry rebounds, which recent months suggest is beginning to occur, Quest
will be able to restore an increased level of sales. For the nine month period
ended September 30, 1996, operating income was $673,515 compared with operating
income of $404,134 for the comparable prior year period. The improvements over
the nine month period ended September 30, 1996 compared to the comparable prior
year period are primarily due to the operating income achieved by Quest of
$973,207 compared with operating income from Quest of $692,003 for the
comparable prior year period. Quest's operating income of $324,239 and $973,207
for the three month and nine month periods ended September 30, 1996 represent
approximately 12% of its revenues, a relationship which is slightly less than
the historical performance of the business primarily due to increased operating
costs relative to sales, which costs are principally associated with the
opening of the Austin branch.
23
<PAGE>
Interest expense for the three month and nine month periods ended September
30, 1996 amounted to $75,378 and $234,631, respectively, which principally
reflects the cost of borrowings associated with the acquisition and operation
of the fasteners and electronic hardware distribution business. For the
comparable periods of the prior year, the Company's results include interest
expense of $72,526 and $130,502, respectively.
The provision for income taxes for the three month and nine month periods
ended September 30, 1996 principally reflects state income tax provisions for
states in which Quest does business. The provision for income taxes also
includes a minimal provision for federal income taxes for the federal
alternative minimum tax. The Company is not expected to have a regular federal
income tax liability for 1996, as a result of the availability of net operating
loss income tax carryforwards of approximately $13.1 million as of December 31,
1995, expiring in the years 2000 through 2009.
Net income for the three months ended September 30, 1996 amounted to
$146,805 compared with net income of $228,918 for the comparable period of the
prior year. This decline reflects the start-up costs and investment associated
with Quest's expansion into Austin, Texas. Due to the recent pause in the
semiconductor industry, the investment in the Austin market has yet to provide
the anticipated results of such an expansion. Net income for the nine months
ended September 30, 1996 amounted to $389,501 compared with net income of
$229,117 for the comparable period of the prior year. This improvement reflects
the operating income of Quest (partially reduced by interest expense and income
taxes) and the reduction in operating losses of the ADR business.
For the year ended December 31, 1995 compared with 1994
The results of operations for the year ended December 31, 1995 include the
operating results for the nine months ended December 31, 1995, of Quest, the
fasteners and electronic hardware distribution business acquired by the Company
on March 31, 1995 (see Note 2 of Notes to Consolidated Financial Statements)
and the operating results of the Company's ADR business for year ended December
31, 1995.
The following summarizes the results of operations for each of Questron's
businesses for the year ended December 31, 1995:
<TABLE>
<CAPTION>
QUEST(1) ADR CORPORATE(2) TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue .................... $6,982,902 $276,253 $ -- $7,259,155
Costs and expenses ......... 6,020,800 301,508 351,941 6,674,249
------------ ------------ ------------ ------------
Operating Income ........... 962,102 (25,255) (351,941) 584,906
Interest expense ........... 201,096 -- 4,459 205,555
------------ ------------ ------------ ------------
Income (loss) before taxes 761,006 (25,255) (356,400) 379,351
Tax provision .............. 27,164 -- -- 27,164
------------ ------------ ------------ ------------
Net income (loss) .......... $ 733,842 $(25,255) $(356,400) $ 352,187
============ ============ ============ ============
</TABLE>
- ------------
(1) The operating results for Quest are for the nine months ended December
31, 1995.
(2) Corporate expenses include non-recurring charges of $146,867,
principally associated with the downsizing and restructuring of
Questron's ADR business.
The significant growth in Questron's revenues for the year ended December
31, 1995 over the year ended December 31, 1994 is due to the acquisition of
Quest. Revenues for Quest for the period April 1, 1995 through December 31,
1995 were $6,982,902. Revenues of the ADR business declined by $567,772 and
$1,732,573 for the years ended December 31, 1995 and 1994, respectively,
compared with the comparable periods in the prior year. This decline reflects
Questron's continuing program of downsizing and restructuring its ADR business
in response to increased competition and historical losses. Such restructuring
has resulted in bringing the ADR business, excluding corporate expenses and
non-recurring charges, to a modest operating loss for the year ended December
31, 1995 of $25,255. Questron 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.
24
<PAGE>
Questron's operating income was $584,906 for the year ended December 31,
1995 compared with an operating loss of $641,081 for the prior year. These
improvements are due to the operating income achieved by Quest of $962,102
since its acquisition on March 31, 1995, as well as the significant reductions
in costs and expenses of the ADR business. Such expenses were $301,508 for the
year ended December 31, 1995 compared with $1,485,106 in the prior year.
Expenses for 1995 include non-recurring charges of $146,867, principally
associated with the downsizing and restructuring of Questron's ADR business.
Such charges include the write-off of fixed assets and idle equipment
associated with the downsizing of the ADR business, as well as lease
termination costs, the relocation to more suitable office space, forfeiture of
security deposits and other costs associated with the downsizing and
restructuring of the ADR business. Quest's operating income of $962,102 for the
nine months ended December 31, 1995 represents 14% of its revenues, a
relationship which is consistent with the historical performance of the
business.
Interest expense for the years ended December 31, 1995 and 1994 amounted to
$205,555 and $34,222, respectively. The increase in interest expense
principally reflects the cost of borrowings associated with the acquisition of
the fasteners and electronic hardware distribution business (see Note 3 of
Notes to the Company's Consolidated Financial Statements for the year ended
December 31, 1995). For the comparable prior year period, the Company's results
include $34,270 of interest income resulting from the investment of excess
cash.
The provision for income taxes for the year ended December 31, 1995
principally reflects state income tax provisions for states in which Quest does
business. No provision for federal income taxes is required, as Questron has no
federal tax liability for 1995 as a result of the availability of net operating
loss income tax carryforwards; of approximately $13.1 million as of December
31, 1995, expiring in the years 2000 through 2009.
Net income for the year ended December 31, 1995 amounted to $352,187
compared with a net loss of $641,033 in the prior year. These improvements
reflect the operating income of Quest, partially reduced by interest expense
and income taxes, and the reduction in operating expenses of the ADR business.
LIQUIDITY AND CAPITAL RESOURCES--QUESTRON
As of September 30, 1996, the Company had $360,235 in cash and short-term
investments, compared to $39,358 as of December 31, 1995. As of September 30,
1996, the Company had working capital of $3,315,365, compared with working
capital of $2,983,668 as of December 31, 1995.
For the nine months ended September 30, 1996, the net cash provided by the
Company's operating activities amounted to $343,459 principally reflecting the
profits of Quest and a decrease in inventory and other receivables, offset in
part by the decrease in accounts payable and accrued expenses and the increase
in other assets. 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 nine months ended September 30, 1996, the net cash used in the
Company's investing activities amounted to $47,582 for the acquisition of fixed
assets, primarily computer and warehouse equipment to support the continued
growth of Quest's fastener distribution business. The Company did not have
significant commitments for capital expenditures as of September 30, 1996 and
no significant commitments are anticipated for the remainder of 1996 and the
first half of 1997.
For the nine months ended September 30, 1996, the net cash provided by the
Company's financing activities amounted to $25,000 which consists of advances
drawn on its revolving credit facility of $437,500 less $412,500 of principal
repaid on the term debt.
For the year ended December 31, 1995, the net cash used in Questron's
operating activities amounted to $843,105, principally reflecting cash
requirements associated with increased accounts receivable and inventories
associated with the business of Quest. Such cash requirements were partially
offset by an increase in accounts payable and profits generated by Quest.
Corporate expenses and the operations of Questron's ADR business continued to
use cash, although at a much reduced rate compared with prior years.
25
<PAGE>
For the year ended December 31, 1995, the net cash used in Questron's
investing activities amounted to $5,682,034, including $5,262,268 net cash
consideration paid for the acquisition of the fasteners and electronic hardware
distribution business. In addition, Questron had capital expenditures of
$419,766, primarily related to the acquisition of computer system equipment for
Quest. Questron does not have significant commitments for capital expenditures
as of December 31, 1995 and no significant commitments are anticipated for
1996.
For the year ended December 31, 1995, the net cash provided by Questron's
financing activities amounted to $5,043,767, including $2,200,000 of long-term
bank borrowings under a term loan facility and $1,468,902 in net proceeds
derived from the private placement of Questron's Common Stock. In addition,
Questron received net proceeds of $851,593 from the exercise of warrants and
$343,750 from the exercise of stock options. Questron also repaid borrowings
obtained earlier in 1995 under short-term notes payable and made $412,500 in
principal payments under the term loan facility. In December 1995, in
connection with certain obligations amounting to $355,478 owed to Questron by
two of its former officers and directors, the Company received 118,493 shares
of its Common Stock in full satisfaction of such amounts owed.
In conjunction with the acquisition of the fasteners and electronic hardware
distribution business, Quest initially obtained an $800,000 revolving facility
as a part of its loan agreement with a bank to provide working capital
financing for its business. In November 1995, Quest signed a three-year Master
Purchase Order and Sales Agreement with a major customer in Austin, Texas.
Management believes that this agreement, together with other sales
opportunities in the Austin market, could result in a material increase in
Quest's annual sales. In view of this increased level of sales and other
potential growth opportunities, Quest increased its revolving facility to
$1,500,000, under terms and conditions generally consistent with those already
in effect for the original facility. At September 30, 1996, $1,385,000 was
borrowed and outstanding under the revolving facility. The remaining amount of
the $1,500,000 revolving facility, or $115,000, was fully available at
September 30, 1996 for future working capital needs. At December 31, 1995,
$947,500 was borrowed and outstanding under the revolving facility. Of the
remaining $552,500 revolving facility amount, $527,500 was fully available at
December 31, 1995 for future working capital needs. Amounts outstanding under
the revolving facility bear interest at a rate equal to: (i) 1.5% above the
lender's prime rate should Quest's tangible net worth be less than or equal to
$1,750,000; or (ii) 1.0% above the lender's prime rate should Quest's tangible
net worth be in excess of $1,750,000. As of October 27, 1996, the interest rate
on the amount outstanding under the revolving facility was 9.25%. As of March
29, 1996, the interest rate on the amount outstanding under the revolving
facility was 9.75%. In order to secure the obligations of Quest under the
revolving facility and the related term loan facility under the loan and
security agreement with the lender, the Company entered into guarantee and
stock pledge agreements with the lender whereby the Company guaranteed the
obligations of Quest under the loan agreement and 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 stockholder of Questron guaranteed
the obligations of Quest under the loan agreement.
In order to fund the cash portion of the purchase price for Webb and to
repay certain indebtedness of both Quest and Webb, Questron entered into a
letter of intent with an underwriter to sell 1,000,000 Units at a price of
$6.00 per Unit, each Unit consisting of one share of the Company's Series B
Convertible Preferred Stock and one redeemable Series IV Common Stock Purchase
Warrant of the Company. Of the estimated $4,820,000 net proceeds from the sale
of the Units, $3,250,000 will be paid to the Selling Securityholders of Webb at
the Closing of such sale and $1,570,000 will be used to repay certain
indebtedness of Quest and Webb. See "Use of Proceeds." Questron intends to
continue identifying and evaluating potential merger and acquisition candidates
engaged in lines of business complementary to the fasteners and electronic
hardware distribution business conducted by both Quest and by the Webb
business. 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.
26
<PAGE>
RESULTS OF OPERATIONS--WEBB
For the nine months ended September 30, 1996 compared with 1995
The following summarizes the results of operations of Webb for the nine
months ended September 30, 1996 compared with the nine months ended September
30, 1995:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
<S> <C> <C>
Revenue ............. $6,088,946 $5,673,320
Costs and expenses . 5,598,862 5,295,182
------------------ ------------------
Operating income ... 490,084 378,138
Interest expense ... 109,536 122,545
------------------ ------------------
Income before taxes 380,548 255,593
Tax provision ....... 171,300 115,040
------------------ ------------------
Net income .......... $ 209,248 $ 140,553
================== ==================
</TABLE>
Revenues for Webb for the nine months ended September 30, 1996 were
$6,088,946, an increase of 7.3% compared with the nine months ended September
30, 1995. This growth in revenues reflects Webb's increased market penetration
and continuing growth of Webb's bin replenishment programs.
Operating income for Webb for the nine months ended September 30, 1996
amounted to $490,084, or 8.0% of sales, compared with $378,138, or 6.7% of
sales, for the comparable prior year period. The improvement in operating
income as a percentage of sales principally reflects higher gross margins as a
result of a shift in the mix of the business to higher gross margin accounts,
while expenses as a percentage of sales remained relatively constant.
Webb's interest expense for the nine months ended September 30, 1996
amounted to $109,536, representing a reduction of $13,009 compared with
interest expense for the nine months ended September 30, 1995. The reduction in
interest expense for the period principally reflects reduced borrowings
necessary to fund the working capital requirements of Webb.
The provision for income taxes for Webb for the nine months ended September
30, 1996 amounted to $171,300 compared with $115,040 for the nine months ended
September 30, 1995. The provision for income taxes for both periods reflects
federal and state income taxes.
Net income for Webb for the nine months ended September 30, 1996 amounted to
$209,248 compared with $140,553 for the comparable prior year period. The
increase in net income principally reflects increased revenues and gross margin
for the period, offset in part by operating expenses which held relatively
constant as a percentage of sales.
For the year ended December 31, 1995 compared with 1994
The following summarizes the results of operations of Webb for the year
ended December 31, 1995 compared with the year ended December 31, 1994:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
<S> <C> <C>
Revenue ............. $7,793,179 $8,880,742
Costs and expenses . 7,315,920 8,525,325
----------------- -----------------
Operating income ... 477,259 355,417
Interest expense ... 161,545 117,732
----------------- -----------------
Income before taxes 315,714 237,685
Tax provision ....... 113,681 63,129
----------------- -----------------
Net income .......... $ 202,033 $ 174,556
================= =================
</TABLE>
27
<PAGE>
Revenues for Webb for the year ended December 31, 1995 were $7,793,179, a
decrease of 12.2% compared with the year ended December 31, 1994. The decline
in revenues reflects the termination of a sales agreement which Webb had with
IBM (which termination was the result of a change in status for Webb from a
small disadvantaged business to a small business), partially offset by new
business with other accounts.
Operating income for Webb for the year ended December 31, 1995 amounted to
$477,259, or 6.1% of sales, compared with the $355,417, or 4.0% of sales for
the year ended December 31, 1994. The improvement in operating income as a
percentage of sales principally reflects the replacement of low gross margin
business from IBM with new customers and new bin replenishment programs at
higher gross margins, partially offset by an increase in operating expenses as
a percentage of sales as a result of a change in operating cost structure
following the termination of the IBM agreement.
Webb's interest expense for the year ended December 31, 1995 amounted to
$161,545, representing an increase of $43,813 compared with interest expense
for the year ended December 31, 1994. The increase in interest expense for the
year principally reflects increased borrowings necessary to fund the working
capital requirements of Webb.
The provision for income taxes for Webb for the year ended December 31, 1995
amounted to $113,681 compared with $63,129 for the year ended December 31,
1994. The provision for income taxes in 1995 and 1994 reflects federal and
state income taxes. In addition, in 1994 Webb's tax status changed from an S
Corporation to a C Corporation, which resulted in a change in accounting for
income taxes.
Net income for Webb for the year ended December 31, 1995 amounted to
$202,044 compared with $174,556 for the year ended December 31, 1994. The
increase in net income principally reflects increased gross margin, offset in
part by increased operating expenses as well as increases in interest expense
and the provision for income taxes.
28
<PAGE>
BUSINESS
OVERVIEW
Questron Technology, Inc. (the "Company") consists of two wholly-owned
subsidiaries, Quest Electronic Hardware, Inc. ("Quest") and Judicate of
Philadelphia, Inc. ("Judicate"). Judicate provides alternative dispute
resolution services. Quest is a distributor of fasteners and electronic
hardware. The Company has signed an agreement to acquire Comp Ware, Inc.
d/b/a Webb Distribution ("Webb"), a distributor of electronic hardware,
fasteners and components. Webb serves customers in the high technology
electronic equipment manufacturing industry, primarily in the New England
region. It is intended that, upon consummation of the acquisition of Webb by
Questron, that the businesses of Quest and Webb will operate as wholly-owned
subsidiaries of the Company. The Company may determine to merge these two
subsidiaries at a future date.
By acquiring Webb's business, the Company hopes to expand its market in the
U.S. for fasteners and related products. By consolidating its administrative
activities and accessing Webb's customer basis, the Company anticipates that it
will be able to use its combined resources in order to develop new services
based upon the demand of its existing customers or upon requests from potential
new customers.
BUSINESS OF THE COMPANY
Change of Name
At a Special Meeting of Stockholders held on April 2, 1996, the
stockholders of Judicate, Inc. approved the change of the Company's name to
Questron Technology, Inc. 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 Questron'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 ("ADR") services 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 Questron's ADR marketing areas. These competitive
pressures adversely affected the profitability of the business and the Company
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 the
Company's ADR services and operations were handled by Judicate of Philadelphia,
Inc. (a wholly-owned subsidiary) and the ADR business was operating with a
substantially reduced staff of administrative and sales personnel.
The foregoing caused the Company to explore acquisition opportunities, 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, 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
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.
29
<PAGE>
Simultaneously with the foregoing events, Quest acquired the fasteners
distribution business (the "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 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 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 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 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
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 Business was provided by available cash.
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 is seeking to expand its business
geographically, particularly into the eastern U.S. through the Webb
acquisition.
30
<PAGE>
Markets
Quest's sales have increased at a compound annual growth rate of 17% over
the past four years. This sales growth was achieved from word-of-mouth
referrals without the benefit of a comprehensive marketing program or
geographic expansion. Management believes that Quest's future growth will be
achieved by implementing a comprehensive marketing plan, including the present
strategy of adding marketing programs responsive to customer's specific
requirements (e.g., bin replenishment programs), further penetration of
existing accounts, identification of new accounts and geographic expansion.
The U.S. market for the distribution of 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.
The Company believes that 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 directly with the
manufacturer. The ten largest customers account for approximately 50% of
Quest's sales, with no one customer contributing more than 14%.
Organization, Management and Employees
Quest has a total of 44 employees, which include sales, purchasing,
marketing, accounting, operations and warehouse personnel. Quest's employees
are not covered by any collective bargaining agreement. Management believes
that its relationship with its employees is satisfactory.
Quest uses its computer systems for accounting, inventory management and
order processing. All of Quest's transactions, which include order processing,
invoicing, and inventory receiving and shipping, are processed locally by
employees through their local computer system. The local system permits each of
the
31
<PAGE>
locations to process all of 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 blanket insurance policies.
Facilities
The Company is headquartered at 6400 Congress Avenue, Suite 200, Boca Raton,
Florida 33487.
Quest Electronic Hardware, Inc. operates from six well equipped modern
facilities, all of which are leased, as follows:
(i) San Jose, California -includes 3,300 square feet of office space and
10,000 square feet of warehouse space under a lease expiring December 31,
1997 and is Quest's principal warehouse, which space is 90% utilized;
(ii) 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;
(iii) 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;
(iv) 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;
(v) 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
(vi) Boca Raton, Florida -occupies 2,000 square feet of office space
sublet under a lease expiring May 31, 2000, which space is approximately
80% utilized.
Total rent expense for Quest amounted to $112,249 in 1995. The aggregate
minimum rental commitments under all non-cancelable operating leases for the
year ending December 31, 1996 is $184,712.
Judicate of Philadelphia, Inc. ("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.
As of April 3, 1996, Judicate employed four full-time persons; one in an
executive position and three in sales, marketing, administrative, and clerical
activities. As of that date, Judicate had approximately 600 Company Judges
listed on its National Panel of Judges, enabling Judicate to offer dispute
resolution services in all 50 states, the District of Columbia, Puerto Rico and
the United States Virgin Islands. In addition, Judicate has compiled a panel of
90 Company Neutrals (almost exclusively practicing attorneys), to preside over
its commercial mediations and arbitrations. The Company Judges and Company
Neutrals are independent contractors and are not employees of the Company.
Judicate's employees are not covered by any collective bargaining agreement.
Management believes that its relationship with its employees is satisfactory.
32
<PAGE>
Judicate of Philadelphia, Inc. entered into a lease agreement commencing
February 1, 1994 and ending February 1, 1996 for its Philadelphia facility
consisting of 6,940 square feet which included two court rooms and three
mediation rooms for a base rental of $48,000 annually. Judicate of
Philadelphia, Inc. negotiated a settlement of this lease and entered into a
monthly renewable lease agreement commencing on August 1, 1995 for a more
suitable facility consisting of 500 square feet for a base rental of $6,000
annually. Its premises are located in a modern office building in downtown
Philadelphia.
BUSINESS OF WEBB
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 $6.1 million for the nine months ended September 30, 1996.
PROPOSED ACQUISITION OF WEBB
The Company has entered into a Stock Purchase Agreement dated as of December
16, 1996 (the "Webb Agreement") whereby it has agreed to acquire all of the
outstanding stock of Comp Ware, Inc. d/b/a Webb Distribution, a Delaware
corporation ("Webb"), from the current stockholders of Webb (the "Webb
Stockholders"). The purchase price for the acquisition will consist of:
(i) 1,500,000 Series IV Warrants (the "Webb Warrants") issued to the
majority shareholder of Webb as a down payment under the Webb Agreement,
which warrants are to be cancelled in the event that the Webb acquisition
does not close. Such warrants are being held in escrow subject to the
completion of the acquisition of Webb;
(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 Webb Warrants are being registered by the Company for resale by the
majority stockholder of Webb pursuant to the Registration Statement of which
this Prospectus is a part. 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 cancelled 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.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
It is anticipated that, upon consummation of the acquisition, the current
management of Questron will continue to operate the Company. The Board of
Directors is currently comprised of the following:
<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 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 Healthcare Imaging
Services, Inc., a publicly held company based in Middletown, New Jersey which
provides healthcare 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 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. 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,
Controller of the Company since January 1992, Treasurer of the Company since
February 1992 and Secretary since October 1993. 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 & Co. He holds a bachelor of business
administration degree from Hofstra University. Mr. Gubitosi is the
brother-in-law of Mr. Polimeni.
34
<PAGE>
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.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation of the named executives for
the periods indicated. No executive officer had total annual salary and bonus
during any such period equal to or greater than $100,000.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------- -------------------------- -------------------------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
RESTRICTED SECURITIES
STOCK UNDERLYING
NAME AND OTHER ANNUAL AWARDS OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION ($) SARS(#) PAYOUTS COMPENSATION
- ------------------------ --------- --------- ------- -------------- ------------ ------------ --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dominic A. Polimeni .... 1995(1) $75,000 -- -- -- -- -- --
Chairman, President and 1994 -- -- -- -- -- -- --
Chief Executive Officer 1993 -- -- -- -- -- -- --
Stephen J. Drescher .... 1995(1) $52,000 -- -- -- -- -- --
Former Chairman and 1994 $52,000 -- -- -- 25,000(2) -- --
Chief Executive Officer 1993 $19,000 -- -- -- -- -- --
</TABLE>
- ------------
(1) Mr. Polimeni served as President and Chief Operating Officer of the
Company during the period March-December 1995. Mr. Drescher acted as
Chairman and Chief Executive Officer until January 1996. In February
1996, Mr. Polimeni was elected to the additional capacities of Chairman
and Chief Executive Officer. Prior to March 1995, Mr. Polimeni was not
associated with the Company.
(2) Options to acquire 25,000 shares at $6.25 per share were granted to Mr.
Drescher in 1994 pursuant to the 1992 Amended and Restated Management
Incentive Option Plan.
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,
provides for a base salary of $100,000 per annum and requires Mr. Polimeni to
devote such portion of his business time and energies to the business and
affairs of the Company as is needed to perform his duties under the agreement.
See also "Certain Transactions" with respect to a Management Advisory and
Consulting Agreement between the Company and Gulfstream Financial Group, Inc.,
a company owned by Mr. Polimeni and Joan R. Gubitosi.
OPTION/SAR GRANTS
There were no grants during 1995 of stock options or stock appreciation
rights to any person named in the Summary Compensation Table. For information
relating to warrants and rights granted to Gulfstream, a company owned by
Dominic A. Polimeni and Joan R. Gubitosi, and to Phillip D. Schwiebert, see
"Securities Ownership--Exchange Agreements."
35
<PAGE>
OPTION/SAR EXERCISES
Set forth below is information concerning exercises of options during 1995
and the year-end value of unexercised options for the persons named in the
Summary Compensation Table:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED-IN-
OPTIONS/SAR'S AT THE-MONEY OPTIONS/SARS
SHARES ACQUIRED VALUE FISCAL YEAR END (#) AT FISCAL YEAR END ($)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------- --------------- ---------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Dominic A. Polimeni ..... -- -- -- --
Chief Executive Officer,
Chairman and President
Stephen J. Drescher ..... 25,000 $656,250 -- --
Former Chief Executive
Officer and Chairman
</TABLE>
The value realized is based on the difference between the exercise price of
$6.25 per share and the average of the high and low bid prices for the Common
Stock on April 28, 1995, the date of exercise.
COMPENSATION OF DIRECTORS
Other than the 1994 Director Non-Qualified Stock Option Plan (the "Director
Plan") described below, the Company does not have a standard policy regarding
compensation of members of the Board of Directors. Other than as reported
below, the members of the Board of Directors did not receive compensation for
their services as such during the year ended December 31, 1995. The Company has
no present intention to compensate non-employee directors of the Company
following the completion of the offering other than pursuant to the Director
Plan.
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 Director Non-Qualified Stock Option Plan was
approved by the Company's stockholders at a special meeting. The plan, as
amended and approved, is hereinafter referred to as the "Director Plan."
Pursuant to the terms of the Director Plan, options for an aggregate of 30,000
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. Options to acquire an aggregate of 9,000 shares at
exercise prices of $3.875 per share, $11.25 per share, $19.06 per share and
$24.06 per share are currently outstanding under the Director Plan.
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.
36
<PAGE>
No options were granted under the 1992 Plan during 1995. The Board of
Directors has terminated the 1992 Plan and no additional options will be
granted thereunder.
THE 1992 AMENDED AND RESTATED MANAGEMENT INCENTIVE OPTION PLAN
In December 1991, the Board approved the Company's 1992 Management Incentive
Option Plan (the "Incentive Plan"). In September and October 1992, effective as
of the date of the original plan, the Board approved certain amendments to the
original plan which were ratified by the stockholders of the Company on January
8, 1993. Pursuant to the terms of the Incentive Plan non-qualified options to
purchase up to 53,333 shares of the Company's Common Stock may have been
granted to officers, directors, key employees and consultants of the Company.
No options were granted under the Incentive Plan during 1995. The Board of
Directors has terminated the Incentive Plan and no additional options will be
granted thereunder.
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.
CERTAIN 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 from Phillip D. Schwiebert all of the
outstanding capital stock of Quest Electronic Hardware, Inc. This transaction
is described under "Securities Ownership--Security Ownership of Management and
Principal Stockholders." Pursuant to the Management Advisory and Consulting
Agreement therein described, the Company has also 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. See also "Securities Ownership--Exchange Agreement"
for the terms of a related exchange agreement.
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. The obligation to
repay this loan was satisfied by Gulfstream and Mr. 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. 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 Mr. 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.
The Company believes that the foregoing transactions were on terms no less
favorable than could have been obtained from unaffiliated parties. Any future
transactions with affiliates will be on terms no less favorable than could be
obtained from unaffiliated parties and will be approved by a majority of the
independent and disinterested directors.
37
<PAGE>
SECURITIES OWNERSHIP
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of February 21, 1997,
known to the Company regarding beneficial ownership of the Company's Common
Stock by (i) any person who is known by the Company to own beneficially more
than five percent of the outstanding shares of the Company's Common Stock; (ii)
the Company's directors; and (iii) all executive officers and directors as a
group. The following calculations were based upon 1,535,925 shares of the
Company's Common Stock issued and outstanding as of the above date. ALL AMOUNTS
SHOWN HAVE BEEN ADJUSTED TO REFLECT THE ONE-FOR-TEN REVERSE SPLIT OF THE
OUTSTANDING COMMON STOCK WHICH BECAME EFFECTIVE ON JANUARY 2, 1997.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
-----------------------
POSITION WITH NUMBER BEFORE AFTER
NAME & ADDRESS THE COMPANY OF SHARES OFFERING OFFERING*
- ------------------------------------- -------------------------- ------------ ---------- -----------
CHAIRMAN, PRESIDENT AND
<S> <C> <C> <C> <C>
Dominic A. Polimeni(1) ............... Chief Executive Officer 380,273(2) 22.96% 12.29%
Director, Secretary,
Milton M. Adler(1) ................... Treasurer and Controller 767(3) ** **
Robert V. Gubitosi(1) ................ Director 0(4) -- --
Mitchell Hymowitz(1) ................. Director 6,000(5) ** **
William J. McSherry, Jr.(1) .......... Director 5,000(6) ** **
Joan R. Gubitosi ..................... 380,273(2) 22.96% 12.29%
c/o Gulfstream Financial
Group, Inc.
6400 Congress Ave., Suite 200
Boca Raton, FL 33487
Phillip D. Schwiebert ................
President and Chief
c/o Quest Electronic Operating Officer of Quest
Hardware, Inc. Electronic Hardware, Inc.,
1180 Murphy Avenue a subsidiary of the
San Jose, CA 95131 Company 166,136(7) 10.61% 5.53%
The Miami Project to Cure Paralysis . 100,000 6.51% 3.36%
The University of Miami
School of Medicine
1600 NW Tenth Avenue
Miami, FL 33136
All officers and directors as a group
(five persons) ...................... 392,040 23.54% 12.63%
</TABLE>
- ------------
* For the purposes of this calculation, the number of shares of Common
Stock outstanding has been deemed to include shares of Common Stock
issuable upon conversion of the Series B Preferred Stock which are
included in the Units which are the subject of the Concurrent Offering.
** Less than 1%
(1) c/o Questron Technology, Inc., 6400 Congress Avenue, Suite 200, Boca
Raton, FL 33487.
(2) These shares are owned by Gulfstream Financial Group, Inc.
("Gulfstream"). Joan R. Gubitosi and Mr. Polimeni are executive officers
and the stockholders of Gulfstream and share voting and investment power
with respect to 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. Pursuant
to a Management Advisory and Consulting Agreement, dated as of November
29, 1994, between the Company and Gulfstream, Gulfstream was previously
entitled to be awarded as incentive compensation
38
<PAGE>
warrants to purchase up to 10.0% of the Company's Common Stock
outstanding at March 31, 1995 (for purposes of such calculation, the
common stock outstanding at March 31, 1995 assumes the conversion of
all outstanding warrants, options and preferred stock), at a price of
$1.00 per share, upon the attainment of certain earnings targets. These
rights have been modified. See "Securities Ownership--Exchange
Agreement."
(3) Includes 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 $3.875
per share, 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 $3.875 per
share and 1,500 shares of Common Stock at $19.06 per share granted
pursuant to the 1994 Director Non-Qualified Stock Option Plan. This
figure also includes 2,000 shares acquired in a March of 1995 private
placement of the Company's securities.
(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.
This number does not include warrants to purchase 250,000 shares of
Common Stock granted pursuant to the November 8, 1996 Exchange
Agreement, as defined below. Pursuant to an Employment Agreement, dated
as of November 29, 1994, between Quest and Phillip D. Schwiebert, Mr.
Schwiebert was previously entitled to be awarded as incentive
compensation warrants to purchase up to 5.0% of the Company's Common
Stock outstanding at March 31, 1995 (for purposes of such calculation,
the common stock outstanding at March 31, 1995 assumes the conversion of
all outstanding warrants, options and preferred stock), at a price of
$1.00 per share, upon the attainment of certain earnings targets. These
rights have been modified. See "Securities Ownership--Exchange
Agreement."
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 22.1% of the shares
of Common Stock of the Company outstanding at March 31, 1995;
(b) Gulfstream, in consideration of its services to the Company under a
Management Advisory and Consulting Agreement, dated as of November 29,
1994, was to be entitled to be awarded as incentive compensation, subject
to certain conditions and restrictions, warrants to purchase up to 10.0% of
the Common Stock outstanding at March 31, 1995 (for purposes of such
calculation, the Common Stock outstanding at March 31, 1995 assumes the
conversion of all outstanding warrants, options and preferred stock), at a
price of $1.00 per share, upon the attainment of certain earnings targets.
See "Securities Ownership--Exchange Agreement";
(c) Dominic A. Polimeni ("Polimeni"), a Director, Executive Officer and
principal stockholder of Gulfstream, and the Chairman, Chief Executive
Officer and Chief Financial Officer of Quest, which became a subsidiary of
the Company, was named President and Chief Operating Officer of the Company
(Mr. Polimeni was subsequently named Chairman, President and Chief
Executive Officer of the Company); and
(d) Phillip D. Schwiebert ("Schwiebert"), the President and Chief
Operating Officer of Quest, became the beneficial owner of 11.6% of the
shares of Common Stock of the Company outstanding at March 31, 1995, and,
pursuant to an Employment Agreement, dated as of November 29, 1994, by
39
<PAGE>
and between Quest and Schwiebert, was to be entitled to be awarded as
incentive compensation, subject to certain conditions and restrictions,
warrants to purchase up to 5.0% of the Company's Common Stock outstanding
at March 31, 1995 (for purposes of such calculation, the Common Stock
outstanding at March 31, 1995 assumes the conversion of all outstanding
warrants, options and preferred stock), at a price of $1.00 per share,
upon the attainment of certain earnings targets. See "Securities
Ownership--Exchange Agreement."
Subsequent to the foregoing events, certain principal stockholders of the
Company (Jordan R. Belfort, Richard Bronson, Elliot Loewenstern and Daniel
Porush) who, in the aggregate, beneficially owned approximately 45% of the
Company's outstanding stock disposed of the bulk of these shares. Messrs.
Bronson and Loewenstern are principals of the Underwriter. In addition, the
Board of Directors of the Company underwent a 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 Concurrent Offering and the Webb acquisition,
Gulfstream and Philip Schwiebert, shareholders of the Company, have 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 2,641,720
and 1,320,860 shares of Common Stock, respectively, at $.10 per share. After
giving effect to the one-for-ten reverse split, the foregoing represents the
right to acquire 264,172 and 132,086 shares of post-split Common Stock,
respectively, at $1.00 per share.
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 $.10 per share ($1.00 per share after giving
effect to the one-for-ten reverse split). 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 proposed 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 and giving
effect to the proposed reverse split, 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.
ALL AMOUNTS HAVE BEEN ADJUSTED TO REFLECT THE ONE-FOR-TEN REVERSE SPLIT.
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. If the proposed offering is not consummated, the
exercise price shall be $4.3125 per share.
40
<PAGE>
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.
If the proposed offering is not consummated, the exercise
price shall be $4.3125 per share.
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:
<TABLE>
<CAPTION>
NO. OF ADDITIONAL NO. OF ADDITIONAL
GULFSTREAM SHARES SCHWIEBERT SHARES PRE-TAX INCOME AT LEAST
- ----------------- ----------------- -----------------------
<S> <C> <C>
333,333 166,667 $2,500,000
333,333 166,667 $3,500,000
333,334 166,666 $4,500,000
</TABLE>
The following table summarizes the effect of the Exchange Agreement. ALL
AMOUNTS HAVE BEEN ADJUSTED TO REFLECT THE ONE-FOR-TEN REVERSE SPLIT.
<TABLE>
<CAPTION>
BEFORE EXCHANGE AGREEMENT AFTER EXCHANGE AGREEMENT
--------------------------------------------- ---------------------------------------------
MAXIMUM NO. AGGREGATE MAXIMUM NO. AGGREGATE
OF SHARES TO BE EXERCISE PRICE PERCENTAGE OF SHARES TO BE EXERCISE PRICE PERCENTAGE
PURCHASED TO BE PAID OF STOCK PURCHASED TO BE PAID* OF STOCK**
--------------- -------------- ------------ --------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gulfstream .. 264,172 $264,172 13.68% 2,120,000 $8,512,500 47.80%
Schwiebert .. 132,086 $132,086 6.84% 780,000 $3,065,625 17.59%
</TABLE>
- ------------
* In the case of the options, an exercise price of $3.75 per share of the
Common Stock was used for the purpose of determining the aggregate
exercise price to be paid. In the case of the Warrants, an exercise
price of $4.3125 per share of the Common Stock was used for the purpose
of determining the aggregate exercise price to be paid.
** These amounts do not give effect to any issuances of shares as a result
of the Concurrent Offering or the Webb acquisition.
41
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
Each of the Units consists of one share of Series B Preferred Stock and one
Series IV Warrant. The Series B Preferred Stock and Series IV Warrants shall be
detachable and may trade separately 30 days following the date of this
Prospectus or on such earlier date as may be determined by the Underwriter in
its sole discretion. Should the Series IV Warrants included in the Units be
exercised, of which there is no assurance, the Company will receive the
proceeds therefrom, aggregating up to an additional $5,750,000.
COMMON STOCK
The authorized Common Stock of the Company consists of 20,000,000 shares of
Common Stock, $.001 par value per share. This amount reflects the reduction in
the number of authorized shares of Common Stock from 50,000,000 to 20,000,000
which was approved at the 1996 Annual Meeting of Stockholders which was held on
December 27, 1996. As of the date of this Prospectus there are 1,535,925 issued
and outstanding shares of Common Stock and 11,849 shares held in treasury
(ADJUSTED TO REFLECT THE ONE-FOR-TEN REVERSE SPLIT). Immediately prior to the
date of this Prospectus, there were approximately 1,000 stockholders of record
of the Company. Holders of the Common Stock do not have preemptive rights to
purchase additional shares of Common Stock or other subscription rights. The
Common Stock carries no conversion rights and is not subject to redemption or
to any sinking fund provisions. All shares of Common Stock are entitled to
share equally in dividends from sources legally available therefor when, as and
if declared by the Board of Directors and, upon liquidation or dissolution of
the Company, whether voluntary or involuntary, to share equally in the assets
of the Company available for distribution to stockholders. All outstanding
shares of Common Stock are validly authorized and issued, fully paid and
nonassessable, and all shares to be sold and issued as contemplated hereby,
will be validly authorized and issued, fully paid and nonassessable. The Board
of Directors is authorized to issue additional shares of Common Stock, not to
exceed the amount authorized by the Company's Certificate of Incorporation, and
to issue options and warrants for the purchase of such shares, on such terms
and conditions and for such consideration as the Board may deem appropriate
without further stockholder action. The above description concerning the Common
Stock of the Company does not purport to be complete. Reference is made to the
Company's Certificate of Incorporation and By-laws which are available for
inspection upon proper notice at the Company's offices, as well as to the
applicable statutes of the State of Delaware for a more complete description
concerning the rights and liabilities of stockholders.
Each holder of Common Stock is entitled to one vote per share on all matters
on which such stockholders are entitled to vote. Since the shares of Common
Stock do not have cumulative voting rights, the holders of more than fifty
percent (50%) of the shares voting for the election of directors can elect all
the directors if they choose to do so and, in such event, the holders of the
remaining shares will not be able to elect any person to the Board of
Directors.
PREFERRED STOCK
The authorized Preferred Stock of the Company consists of 10,000,000 shares
of Preferred Stock, $.01 par value per share. Immediately prior to the date of
this Prospectus, there were no shares of Preferred Stock outstanding.
Previously, 900,000 shares of Preferred Stock had been issued under terms which
prohibited their reissuance. The Company's proposal to reduce the number of
authorized shares of Preferred Stock from 10,000,000 to 6,000,000 was not
approved at the Annual Meeting of Stockholders which was held on December 27,
1996.
The terms and conditions of the 1,000,000 shares of Series B Preferred Stock
included in the Units are set forth in a Certificate of Designations and
Preferences which is being filed as an exhibit to the Registration Statement of
which this Prospectus is a part. Each share of Series B Preferred Stock shall
be automatically converted without any action on the part of the Company or the
holder thereof into 1.4375 shares of Common Stock on the second anniversary of
the Effective Date. This conversion ratio is equal to 80% of the closing bid
price per share as represented on the Nasdaq SmallCap Market for the Common
stock on the day immediately preceding the Effective Date compared with an
offering price of $5.75 per
42
<PAGE>
share of Series B Preferred Stock. Annual dividends on the Series B Preferred
Stock in respect of the two year period prior to conversion at the rate of
$0.115 per share. Holders of Series B Preferred Stock will be entitled to one
vote for each share of Common Stock into which such Preferred Stock is
convertible. Each share of Series B Preferred Stock will be entitled to a
liquidation preference equal to $0.01 per share.
Up to 8,100,000 additional shares of Preferred Stock may be issued from time
to time in one or more series and the Board of Directors, without further
approval of the stockholders, is authorized to fix the dividend rights and
terms, conversion rights, voting rights, redemption rights, liquidation
preferences and other rights and restrictions relating to any such series. The
issuances of additional shares of Preferred Stock, while providing flexibility
in connection with possible financings, acquisitions and other corporate
purposes, could, among other things adversely affect the voting power of the
holders of other securities of the Company and may, under certain
circumstances, have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company.
SERIES IV WARRANTS
The Series IV Warrants shall be exercisable commencing one year from the
date of this Prospectus. The date of this Prospectus shall hereinafter be
referred to as the "Effective Date". Each Series IV Warrant entitles the holder
to purchase during the four year period commencing one year from the Effective
Date one share of Common Stock at an exercise price of $5.75 which is 115% of
the closing bid price per share of Common Stock on the day immediately
preceding the Effective Date. The Common Stock underlying the Warrants will,
upon exercise of the Warrants, be validly issued, fully paid and nonassessable.
The Series IV Warrants will be subject to redemption by the Company, at any
time after one year from the Effective Date, for $.05 per Warrant, upon 30
days' prior written notice, if the closing bid price of the Common Stock, as
reported by the Nasdaq SmallCap Market, exceeds $8.50 per share for any 20
consecutive trading days ending within ten days prior to the date of the notice
of redemption.
The Series IV Warrants can only be exercised when there is a current
effective registration statement covering the shares of Common Stock underlying
the Series IV Warrants. If the Company does not or is unable to maintain a
current effective registration statement the Series IV Warrant holders will be
unable to exercise the Series IV Warrants and the Series IV Warrants may become
valueless. Moreover, if the shares of Common Stock underlying the Series IV
Warrants are not registered or qualified for sale in the state in which a
Series IV Warrant holder resides, such holder might not be permitted to
exercise the Series IV Warrants. See "Risk Factors--Requirements of Current
Prospectus and State Blue Sky Registration in Connection with the Exercise of
the Series IV Warrants Which May Not Be Exercisable and May Therefore Be
Valueless."
The Company will deliver Series IV Warrant certificates to the purchasers of
Units representing one Series IV Warrant for each Unit purchased. Thereafter,
Series IV Warrant certificates may be exchanged for new certificates of
different denominations, and may be exercised or transferred by presenting them
at the offices of the Transfer Agent. Holders of the Series IV Warrants may
sell the Series IV Warrants if a market exists rather than exercise them.
However, there can be no assurance that a market will develop or continue as to
such Series IV Warrants. If the Company is unable to qualify its Common Stock
underlying such Series IV Warrants for sale in certain states, holders of the
Company's Series IV Warrants in those states will have no choice but to either
sell such Series IV Warrants or allow them to expire.
Each Series IV Warrant may be exercised by surrendering the Series IV
Warrant certificate, with the form of election to purchase on the reverse side
of the Series IV Warrant certificate properly completed and executed, together
with payment of the exercise price to the Series IV Warrant Agent. The Series
IV Warrants may be exercised in whole or from time to time in part. If less
than all of the Series IV Warrants evidenced by a Series IV Warrant certificate
are exercised, a new Series IV Warrant certificate will be issued for the
remaining number of Series IV Warrants.
Holders of the Series IV Warrants are protected against dilution of the
equity interest represented by the underlying shares of Common Stock upon the
occurrence of certain events, including, but not limited to, issuance of stock
dividends other than dividends paid in respect of the Series B Preferred
43
<PAGE>
Stock. If the Company merges, reorganizes or is acquired in such a way as to
terminate the Series IV Warrants, the Series IV Warrants may be exercised
immediately prior to such action. In the event of liquidation, dissolution or
winding up of the Company, holders of the Series IV Warrants are not entitled
to participate in the Company's assets.
For the life of the Series IV Warrants, the holders thereof are given the
opportunity to profit from a rise in the market price of the Common Stock of
the Company. The exercise of the Series IV Warrants will result in the dilution
of the then book value of the Common Stock of the Company held by the public
investors and would result in a dilution of their percentage ownership of the
Company. The terms upon which the Company may obtain additional capital may be
adversely affected through the period that the Series IV Warrants remain
exercisable. The holders of these Series IV Warrants may be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain equity capital on terms more favorable than those provided for by the
Series IV Warrants.
Because the Series IV Warrants included in the Units being offered hereby
may be transferred, it is possible that the Series IV Warrants may be acquired
by persons residing in states where the Company has not registered, or is not
exempt from registration such that the shares of common stock underlying the
Series IV Warrants may not be sold or transferred upon exercise of the Series
IV Warrants. Series IV Warrant holders residing in those states would have no
choice but to attempt to sell their Series IV Warrants or to let them expire
unexercised. Also, it is possible that the Company may be unable, for
unforeseen reasons, to cause a registration statement covering the shares
underlying the Series IV Warrants to be in effect when the Series IV Warrants
are exercisable. In that event, the Series IV Warrants may expire unless
extended by the Company as permitted by the Series IV Warrant because a
registration statement must be in effect in order for warrant holders to
exercise their Series IV Warrants.
In the event that the Series IV Warrants are called for redemption, the
Series IV Warrant holders may not be able to exercise their Series IV Warrants
if the Company has not updated this Prospectus in accordance with the
requirements of the Act or these securities have not been qualified for sale
under the laws of the state where the Series IV Warrant holder resides. See
"Requirements of Current Prospectus and State Blue Sky Registration in
Connection with the Exercise of the Series IV Warrants Which May Not Be
Exercisable and May Therefore Be Valueless." In addition, in the event that the
Series IV Warrants have been called for redemption, such call for redemption
could force the Series IV Warrant holder to either (i) assuming the necessary
updating to the Prospectus and state blue sky qualifications have been
effected, exercise the Series IV Warrants and pay the exercise price at a time
when, in the event of a decrease in market price from the period preceding the
issuance of the call for redemption, it may be less than advantageous
economically to do so, or (ii) accept the redemption price, which, in the event
of an increase in the price of the stock, could be substantially less than the
market value thereof at the time of redemption.
RESTRICTED SHARES ELIGIBLE FOR FUTURE SALE
There are currently 384,409 shares of the Company's outstanding Common Stock
that are "restricted securities" which were acquired on March 31, 1995 which in
the future, may be sold upon compliance with Rule 144 adopted under the
Securities Act. Rule 144, as amended, provides, in essence, that a person
holding "restricted securities" for a period of one year may sell every three
months a number of shares equal to the greater of (a) one percent of the
Company's issued and outstanding shares, or (b) the average weekly volume of
sales during the four calendar weeks preceding the sale. The amount of
"restricted securities" which a person who is not an affiliate of the Company
may sell is not so limited, since non-affiliates may sell without volume
limitation their shares held for two years. Therefore, during each three month
period, a holder of restricted securities who has held them for at least the
one year period may sell under Rule 144 up to 15,477 shares. Non-affiliated
persons who hold for the two-year period described above may sell unlimited
shares once their holding period is met. The Company has also agreed not to
issue any additional securities other than as contemplated by this Prospectus
for a period of twenty-four (24) months following the Effective Date without
the consent of the Underwriter.
The registration statement of which this Prospectus is a part also covers
the offering of 2,750,000 Series IV Warrants which are being offered by the
Selling Securityholders. The securities held by the
44
<PAGE>
Selling Securityholders may be sold commencing eighteen (18) months from the
date of this Prospectus subject to earlier release at the sole discretion of
the Underwriter. In other offerings where the Underwriter has released similar
restrictions applicable to selling securityholders prior to the expiration of
the lock-up period and in some cases immediately after the exercise of the
over-allotment option or the expiration of the over-allotment option.
Certificates evidencing these securities will bear a legend reflecting such
restrictions. The Underwriter may release the securities held by the Selling
Securityholders at any time after all securities subject to the Over-Allotment
Option (as hereinafter defined) have been sold or such option has expired. The
resale of the securities held by the Selling Securityholders is subject to
prospectus delivery and other requirements of the Securities Act. Sales of such
securities or the potential of such sales at any time any have an adverse
effect on the market prices of the securities offered hereby. See "Selling
Securityholders."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the securities of the Company is
American Stock Transfer & Trust, 40 Wall Street, New York, New York 10005,
telephone number (212) 936-5100.
REPORTS TO SECURITYHOLDERS
The Company will furnish to holders of its Units, Series B Preferred Stock,
Common Stock and Series IV Warrants annual reports containing audited financial
statements. The Company may issue other unaudited interim reports to its
securityholders as it deems appropriate.
CONCURRENT SALES
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering ("Concurrent
Offering") of 1,000,000 Units ("Units") by the Company was declared effective
by the Securities and Exchange Commission ("Commission"), Washington, D.C.
20549, and the Company commenced the sale of Units offered thereby. The Units
are comprised of one share of Series B Preferred Stock and one Series IV
Warrant to purchase a share of Common Stock. Sales of securities under this
Prospectus by the Selling Securityholders or even the potential of such sales
may have an adverse effect on the market price of the Company's securities.
SELLING SECURITYHOLDERS
The registration statement, of which this Prospectus forms a part, also
relates to the registration of 2,750,000 Series IV Warrants offered by the
selling securityholders identified in the table below (the "Selling
Securityholders"). The securities held by the Selling Securityholders may be
sold commencing 18 months from the date of this Prospectus, subject to earlier
release at the sole discretion of the Underwriter. The certificates evidencing
the foregoing securities will bear a legend with such restrictions. The
Underwriter may release the securities held by the Selling Securityholders at
any time after all securities subject to the Over-Allotment Option have been
sold or such option has expired. The Over-Allotment Option will expire 30 days
from the date of this Prospectus. In other offerings where the Underwriter has
acted as the managing underwriter, it has released similar restrictions
applicable to selling stockholders prior to the expiration of the lock-up
period and in some cases immediately after the exercise of the Over-Allotment
Option or the expiration of the Over-Allotment Option period. The resale of the
securities of the Selling Securityholders is subject to prospectus delivery and
other requirements of the Securities Act. Sales of such securities or the
potential of such sales at any time may have an adverse effect on the market
prices of the securities offered hereby.
45
<PAGE>
The following table sets forth certain information with respect to the
Selling Securityholders. The Securities to which this Prospectus relates may be
sold from time to time in whole or in part by the Selling Securityholders as
described herein.
<TABLE>
<CAPTION>
SHARES OF SERIES IV SHARES OF PERCENT
COMMON WARRANTS THAT COMMON OF CLASS
STOCK OWNED MAY BE OFFERED STOCK OWNED
PRIOR TO PURSUANT TO OWNED AFTER AFTER
SELLING SECURITYHOLDERS THIS OFFERING THIS PROSPECTUS* OFFERING OFFERING**
- -------------------------------- --------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C>
Gulfstream Financial Group, Inc. 380,273 1,000,000 380,273 12.29%
6400 Congress Ave.
Suite 200
Boca Raton, FL 33487
Phillip D. Schwiebert 166,136 250,000 166,136 5.53%
c/o Quest Electronic
Hardware, Inc.
1180 Murphy Ave.
San Jose, CA 95131
A.J. Dinicola -- 1,500,000 -- --
</TABLE>
c/o Webb Distribution
Two Lowell Ave.
Winchester, MA 08190
- ------------
* This Prospectus also relates to the shares of Common Stock issuable upon
exercise of the Series IV Warrants.
** For the purposes of this calculation, the number of shares of Common
Stock outstanding has been deemed to include shares of Common Stock
issuable upon conversion of the Series B Preferred Stock which are the
subject of the Concurrent Offering. Assumes no exercise of the Series IV
Warrants offered under this Prospectus.
The Series IV Warrants are being offered by the Selling Securityholders, in
the corresponding amounts above, under this alternate Prospectus. Gulfstream
owns in excess of 5% of the Company's Common Stock and Mr. Polimeni, the
Chairman, Chief Executive Officer and President of the Company, is an officer,
director and 50% stockholder of Gulfstream. Mr. Schwiebert also owns in excess
of 5% of the Common Stock and is an employee of a subsidiary of the Company.
See "Securities Ownership" and "Certain Transactions." Mr. Dinicola is the
majority stockholder of Webb. All costs incurred by the Company in connection
with the registration of the Securities of the Selling Securityholders are
being borne by the Company.
The securities offered hereby may be sold from time to time directly by the
Selling Securityholders. The Company will not receive any of the proceeds from
such sale. However, the Company's obligations under the Notes to be delivered
in connection with the Webb acquisition may be reduced by the proceeds from the
sale of Series IV Warrants by Mr. Dinicola. In addition, the Company may
receive proceeds of $5.75 per share (less any warrant solicitation fee payable)
in the event Series IV Warrants are exercised. Alternatively, the Selling
Securityholders may from time to time offer such securities through
underwriters, dealers or agents. The Selling Securityholders are not required
to effect sales through Biltmore. The distribution of securities by the Selling
Securityholders may be effected in one or more transactions that may take place
on the over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more
broker-dealers for resale of such shares as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by the Selling Securityholders in
connection with such sales of securities. The securities offered by the Selling
Securityholders may be sold by one or more of the following methods, without
limitations: (a) a block trade in which a broker or dealer so engaged will
attempt to sell the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction; (b) purchases by a broker
or dealer as principal and resale by such broker or dealer for its account
pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Securityholders may
arrange for other brokers or dealers
46
<PAGE>
to participate. The Selling Securityholders and intermediaries through whom
such securities are sold may be deemed "underwriters" within the meaning of the
Act with respect to the securities offered, and any profits realized or
commissions received may be deemed underwriting compensation.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be
distributed which will set forth the numbers of securities being offered and
the terms of the offering, including the name or names of any underwriters,
dealers or agents, if any, the purchase price paid by any underwriter for
shares purchased from the Selling Securityholders and any discounts,
commissions or concessions allowed or reallowed or paid to dealers, and the
proposed selling price to the public.
Under the Securities Exchange Act of 1934 ("Exchange Act"), and the
regulations thereunder, any person engaged in a distribution of the securities
of the Company offered by this Prospectus may not simultaneously engage in
market-making activities with respect to such Securities of the Company during
the applicable "cooling off" period (nine days) prior to the commencement of
such distribution. In addition, and without limiting the foregoing, the Selling
Securityholders will be subject to applicable provisions of the Exchange Act
and the rules and regulations thereunder, including without limitation, Rule
10b-6 and 10b-7, in connection with the transactions in such securities, which
provisions may limit the timing of purchases and sales of such securities by
the Selling Securityholders.
PLAN OF DISTRIBUTION
The Securities offered hereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of Securities by the Selling Securityholders may be effected in
one or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such Securities as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary
or specifically negotiated brokerage fees or commissions may be paid by the
Selling Securityholders in connection with such sales of Securities. The
Securities offered by the Selling Securityholders may be sold by one or more of
the following methods, without limitations: (a) a block trade in which a broker
or dealer so engaged will attempt to sell the Securities as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits
purchasers, and (d) face-to-face transactions between sellers and purchasers
without a broker-dealer. In effecting sales, brokers or dealers engaged by the
Selling Securityholders may arrange for other brokers or dealers to
participate. The Selling Securityholders and intermediaries through whom such
Securities are sold may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation.
In order to comply with the securities laws of certain states, if
applicable, the Securities will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
securities may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with by the Company and
the Selling Securityholders.
Under the Exchange Act and the regulations thereunder, any person engaged in
the distribution of the securities may not simultaneously engage in
market-making-activities with respect to the securities for a period of two to
nine business days prior to the commencement of such distribution. In addition
and without limiting the foregoing, each Selling Securityholder will be subject
to applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation, Rules 10b-6, 10b-6A and 10b-7, which
provisions may limit the timing of the purchases and sales of securities by the
Selling Securityholders.
47
<PAGE>
The Company has agreed to pay all fees and expenses incident to the
registration of the Securities, except selling commissions and fees and
expenses of counsel or any other professionals or other advisors, if any, to
the Selling Securityholders.
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.
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon for
the Company by Gould & Wilkie, One Chase Manhattan Plaza, New York, New York
10005.
EXPERTS
The financial statements of the Company, both as of and for the periods
ended December 31, 1995 and 1994, included in the Registration Statement and
this Prospectus have been included herein in reliance on the report of Moore
Stephens, P.C., independent certified public accountants, and upon the
authority of such firm as experts in accounting and auditing.
The financial statements of Webb, both as of and for the periods ended
December 31, 1995 and 1994, included in the Registration Statement and this
Prospectus have been included herein in reliance on the report of Estabrook &
Co., Inc., P.C., independent certified public accountants, and upon the
authority of such firm as experts in accounting and auditing.
48
<PAGE>
INDEX TO FINANCIAL STATEMENTS
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C>
PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED):
Introduction ...................................................................... P-1
Pro Forma Combined Balance Sheet as of September 30, 1996
(unaudited) ...................................................................... P-2
Pro Forma Combined Statement of Operations for the nine months ended
September 30, 1996 (unaudited) ................................................... P-4
Pro Forma Combined Statement of Operations for the year ended
December 31, 1995 (unaudited) .................................................... P-5
Notes to Pro Forma Combined Financial Statements (unaudited) ...................... P-6
HISTORICAL FINANCIAL STATEMENTS OF QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES:
Report of Independent Auditors .................................................... F-1
Consolidated Balance Sheet as of September 30, 1996 (unaudited) and
December 31, 1995 ................................................................ F-2
Consolidated Statement of Operations for the nine months ended
September 30, 1996 and 1995 (unaudited) and for the years ended
December 31, 1995 and 1994 ....................................................... F-3
Consolidated Statement of Shareholders' Equity for the nine months ended September
30, 1996 and 1995 (unaudited) and for the years ended
December 31, 1995 and 1994 ....................................................... F-4 -F-5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995 (unaudited) and for the years ended
December 31, 1995 and 1994 ....................................................... F-6 -F-9
Notes to Consolidated Financial Statement ......................................... F-10 -F-19
HISTORICAL FINANCIAL STATEMENTS OF COMP WARE, INC., D/B/A WEBB DISTRIBUTION, INC.:
Report of Independent Auditors .................................................... F-20
Balance Sheet as of September 30, 1996 (unaudited) and December 31, 1995 .......... F-21
Statement of Operations and Retained Earnings for the nine months ended September
30, 1996 and 1995 (unaudited) and for the years ended
December 31, 1995 and 1994 ....................................................... F-22
Statement of Stockholders' Equity ................................................. F-23
Statement of Cash Flows for the nine months ended September 30, 1996 and 1995
(unaudited) and for the years ended December 31, 1995 and 1994 ................... F-24 -F-27
Notes to Financial Statements ..................................................... F-28 -F-34
</TABLE>
P-1
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma combined balance sheet as of September 30, 1996 and
the combined statement of operations for the nine months then ended and the
year ended December 31, 1995 give effect to the following: (i) the Unit
offering, the proceeds therefrom and the uses thereof and (ii) the acquisition
of Webb, as described in the following paragraphs.
The Company is offering 1,000,000 units at a price of $6.00 per Unit in a
proposed public offering. Each Unit consists of one share of the Company's
Series B Convertible Preferred Stock, par value $.01 per share, and one
redeemable Series IV Common Stock Purchase Warrant. The Company anticipates net
proceeds of $4,820,000 from the offering. The Company intends to use the net
proceeds of the Offering to pay the $3,250,000 cash portion of the
consideration for the acquisition of Webb and to repay certain indebtedness of
the Company and Webb in the aggregate amount of $1,570,000.
The Company has entered into a Stock Purchase Agreement (the "Stock Purchase
Agreement") dated as of December 16, 1996 with the stockholders of Webb to
acquire all of the issued and outstanding stock of Webb, in a business
combination accounted for as a purchase. Under the Stock Purchase Agreement,
the stockholders of Webb have agreed to exchange their shares of Webb for
$3,250,000 in cash, 1,500,000 Series IV Common Stock Purchase Warrants and two
notes (the "Notes") in the aggregate amount of $750,000 (each for $375,000).
Note A shall mature eighteen months from the Effective Date of the proposed
public offering and bear interest at 10% per annum. Note B shall mature in
equal monthly installments over a five year period from the same date and bear
interest at 10% per annum. At the time of the signing of the Stock Purchase
Agreement, the Company delivered to the majority stockholder of Webb the
1,500,000 Series IV Warrants as a deposit on account of the purchase price
under said agreement. The Company has valued these Series IV Warrants at $.25
per Warrant. These Series IV Warrants will be cancelled if the Webb acquisition
does not close. Any proceeds received by the majority stockholder of Webb from
a sale of the Series IV Warrants in excess of $375,000 shall reduce the
Company's obligations under the Notes. The amount of the purchase price
($4,375,000) in excess of the estimated fair value of the net assets acquired
will be recorded as "cost in excess of net assets acquired" and amortized over
forty years.
The pro forma information is based on the historical financial statements of
the Company and Webb, giving effect to the transactions under the purchase
method of accounting and the assumptions and adjustments in the accompanying
notes to the pro forma financial statements. The pro forma balance sheet
assumes that the transactions occurred as of the balance sheet date.
The pro forma statements of operations give effect to these transactions as
if they had occurred at the beginning of the fiscal year presented (i.e.,
January 1, 1995) and were carried forward through the interim period presented.
The historical statement of operations will reflect the effects of these
transactions from the date on which they occurred.
The pro forma combined statements have been prepared by the Company's
management based upon the historical financial statements of the Company and
Webb. These pro forma statements may not be indicative of the results that
actually would have occurred if the combination had been in effect on the date
indicated or which may be obtained in the future. The pro forma financial
statements should be read in conjunction with the financial statements and
notes of the Company and Webb appearing elsewhere herein.
P-2
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICALS
-------------------------------
PRO FORMA PRO FORMA
QUESTRON WEBB ADJUSTMENTS COMBINED
-------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 360,235 $ 1,716(1) $ 4,820,000 $ 361,951
(2) (3,250,000)
(3) (1,570,000)
Accounts Receivable--Net .......... 1,266,903 1,094,890 2,361,793
Other Receivables ................. 15,853 -- -- 15,853
Inventories ....................... 3,344,073 1,715,137 -- 5,059,210
Deferred Income Taxes ............. -- 115,839 -- 115,839
OTHER CURRENT ASSETS ............. 65,438 20,445 85,883
-------------- --------------- ------------- --------------
TOTAL CURRENT ASSETS ............. 5,052,502 2,948,027 -- 8,000,529
-------------- --------------- ------------- --------------
Property and Equipment--Net ....... 399,505 109,931 -- 509,436
Cost in Excess of Net Assets of
Business Acquired--Net ............ 6,737,646 --(2) 3,560,435 10,298,081
OTHER ASSETS ..................... 324,886 135,855 -- 460,741
-------------- --------------- ------------- --------------
TOTAL ASSETS ..................... $ 12,514,539 $3,193,813 $ 3,560,435 $ 19,268,787
============== =============== ============= ==============
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Notes payable ..................... $ -- $ 588,218(3) $ (588,218) $ --
Accounts payable and
Accrued expenses ................. 1,187,134 1,095,941 -- 2,283,075
Current portion of long-term debt 550,000 22,448 -- 572,448
Current portion of notes
payable shareholders ............. -- 61,904(2) 75,000 136,904
-------------- --------------- ------------- --------------
TOTAL CURRENT LIABILITIES ......... 1,737,134 1,768,511(2) (513,218) 2,992,427
-------------- --------------- ------------- --------------
LONG-TERM DEBT:
Notes payable--Shareholders--Net
of Current Portion ............... -- 30,954(2) 675,000 705,954
Notes Payable--Net of Current
Portion .......................... 2,210,000 579,783(3) (981,782) 1,808,001
-------------- --------------- ------------- --------------
TOTAL LONG-TERM DEBT ............... 2,210,000 610,737 (306,782) 2,513,955
-------------- --------------- ------------- --------------
COMMITMENTS AND CONTINGENCIES ..... -- -- -- --
SHAREHOLDERS' EQUITY:
Preferred Stock ................... -- --(1) 10,000 10,000
Common Stock ...................... 1,547 6,512(2) (6,512) 1,547
Additional Paid-in Capital ....... 23,887,894 340,857(1) 4,810,000 29,072,894
(2) 375,000
(2) (340,857)
Retained Earnings (deficit) ...... (14,966,558) 467,196(2) (467,196) (14,966,558)
Less: Treasury Stock .............. (355,478) -- -- (355,478)
-------------- --------------- ------------- --------------
TOTAL SHAREHOLDERS' EQUITY ......... 8,567,405 814,565 4,380,435 13,762,405
-------------- --------------- ------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ............................ $ 12,514,539 $3,193,813 $ 3,560,435 $ 19,268,787
============== =============== ============= ==============
</TABLE>
P-3
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICALS
--------------------------
PRO FORMA PRO FORMA
QUESTRON WEBB ADJUSTMENTS COMBINED
------------ ------------ -------------- -------------
<S> <C> <C> <C> <C>
Total revenue ..................... $ 8,264,940 $6,088,946 $ -- $14,353,886
66,760 (A)
Total operating costs and expenses 7,591,425 5,598,862 (150,000)(B) 13,107,047
------------ ------------ -------------- -------------
Operating income (loss) ........... 673,515 490,084 83,240 1,246,839
Total other income (expense) ..... (234,631) (109,537) 117,750 (C) (226,418)
------------ ------------ -------------- -------------
Income before income taxes ........ 438,884 380,547 200,990 1,020,421
Provision for income taxes ........ 49,383 171,300 (129,300)(D) 91,383
------------ ------------ -------------- -------------
Net income ........................ $ 389,501 $ 209,247 $ 330,290 $ 929,038
============ ============ ============== =============
Net income per common share ...... $ 0.03 $ .31
============ =============
Average number of common shares
and common share equivalents
outstanding ...................... 15,399,846 2,977,485
============ =============
</TABLE>
P-4
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICALS
---------------------------
PRO FORMA PRO FORMA
QUESTRON WEBB ADJUSTMENTS COMBINED
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Total revenue ..................... $ 7,259,155 $7,793,179 $ -- $15,052,334
89,010 (A)
Total operating costs and expenses 6,674,249 7,315,920 (200,000)(B) 13,879,179
------------- ------------ -------------- -------------
Operating income (loss) ........... 584,906 477,259 110,990 1,173,155
Total other income (expense) ..... (205,555) (161,545) 157,000 (C) (210,100)
------------- ------------ -------------- -------------
Income before income taxes ........ 379,351 315,714 267,990 963,055
Provision for income taxes ........ 27,164 113,681 (80,716)(D) 60,129
------------- ------------ -------------- -------------
Net income ........................ $ 352,187 $ 202,033 $ 348,706 $ 902,926
============= ============ ============== =============
Net income per common share ...... $ 0.03 $ .32
============= =============
Average number of common
shares and common share
equivalents outstanding .......... 13,795,632 2,817,063
============= =============
</TABLE>
P-5
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
The Company is pursuing a public offering of units, consisting of one share
of Series B Preferred Stock and one Series IV Warrant. The Company anticipates
selling 1,000,000 units at an initial offering price of $6.00 per unit.
Simultaneously with the closing of the proposed public offering, the Company
intends to acquire all outstanding shares of the capital stock of Comp Ware,
Inc. d/b/a Webb Distribution for $3,250,000 in cash, Notes in the aggregate
amount of $750,000 and 1,500,000 Series IV Warrants. The Company also intends
to repay certain indebtedness in the amount of approximately $1,570,000 from
the proceeds of the Offering.
ADJUSTMENTS TO BALANCE SHEETS:
<TABLE>
<CAPTION>
<S> <C> <C>
1. To reflect the net proceeds from the public offering:
1,000,000 units x $6.00 per unit $6,000,000
Less: Expenses of Offering 1,180,000
------------
Net Proceeds $4,820,000
============
2. To reflect the acquisition of Webb:
Cash $3,250,000
Notes payable (current portion) $ 75,000
Notes payable (long-term portion) 675,000 750,000
---------
Issuance of 1,500,000 Series IV Warrants 375,000
----------
Total purchase price 4,375,000
Less: Net assets acquired (814,565)
----------
Cost in excess of net assets acquired $3,560,435
============
3. To reflect the repayment of certain indebtedness from the use
of proceeds:
Notes payable--financial institution (Webb) $1,088,218
Notes payable--financial institution (Questron) 481,782
------------
Total (current portion--$588,218; long-term portion $1,570,000
$981,782) ============
</TABLE>
ADJUSTMENTS TO STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
NINE
MONTHS ANNUAL
---------- ----------
<S> <C> <C> <C>
(A) To reflect additional charges for the amortization of the cost in
excess of net assets acquired over the estimated useful life of
for years on a straight line basis $ 66,760 $ 89,010
========== ==========
(B) To reflect the reduction of salaries resulting from the retirement
of the majority selling stockholder $150,000 $200,000
========== ==========
(C) To reflect the reduction of interest expense due to payoff of
certain indebtedness, using an effective interest rate of 10% $117,750 $157,000
========== ==========
(D) To reflect the reduction in income tax expense through the use of
Questron Technology, Inc.'s tax loss carryforwards $129,300 $ 80,716
========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURES TO THE PRO FORMA COMBINED STATEMENT OF OPERATIONS:
To the extent that the underwriter exercises the Over-Allotment Option to
purchase 150,000 Units, the Company will realize additional net proceeds of
$783,000. The Company intends to utilize such additional net proceeds to reduce
outstanding indebtedness. Accordingly, interest expense for the nine month
period ended September 30, 1996 and for the year ended December 31, 1995 would
be reduced by an additional $58,725 and $78,300, respectively. In addition, net
income for the nine months ended September 30, 1996 and the year ended December
31, 1995 would be $982,504 and $976,337, respectively. Earnings per share for
these periods would be $.33 for the nine months ended September 30, 1996 and
$.35 for the year ended December 31, 1995.
P-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Questron Technology, Inc.
We have audited the accompanying consolidated balance sheet of Questron
Technology, Inc. and its subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, changes in shareholders' equity, and
cash flows for each of the two years in the period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Questron Technology, Inc. and its subsidiaries as of December 31, 1995, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
April 2, 1996
F-1
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents ........................................... $ 360,235 $ 39,358
Accounts receivable, less allowance for doubtful accounts of $50,773
and $43,798, respectively .......................................... 1,266,903 1,347,128
Other receivables ................................................... 15,853 52,808
Inventories ......................................................... 3,344,073 3,554,263
Other current assets ................................................ 65,438 60,205
--------------- --------------
TOTAL CURRENT ASSETS ................................................... 5,052,502 5,053,762
Property and equipment--net ............................................ 399,505 418,980
Cost in excess of net assets of business acquired, less accumulated
amortization of $257,772 and $131,203, respectively ................... 6,737,646 6,866,305
Other assets ........................................................... 324,886 93,951
--------------- --------------
TOTAL ASSETS ........................................................ $ 12,514,539 $ 12,432,998
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses ................................. $ 1,187,134 $ 1,520,094
Current portion of long-term debt ..................................... 550,000 550,000
--------------- --------------
TOTAL CURRENT LIABILITIES .............................................. 1,737,134 2,070,094
Long-term debt ......................................................... 2,210,000 2,185,000
--------------- --------------
TOTAL LIABILITIES ..................................................... 3,947,134 4,255,094
--------------- --------------
Commitments and contingencies ..........................................
Shareholders' equity:
Preferred stock, $.01 par value; authorized 10,000,000 shares;
none issued and outstanding ............................................ -- --
Common stock, $.0001 par value; authorized 50,000,000 shares; issued
and outstanding 15,473,335 shares in 1996 and 1995 ..................... 1,547 1,547
Additional paid-in capital ............................................. 23,887,894 23,887,894
Accumulated deficit .................................................... (14,966,558) (15,356,059)
--------------- --------------
8,922,883 8,533,382
Less: treasury stock, 118,493 shares, at cost .......................... (355,478) (355,478)
--------------- --------------
TOTAL SHAREHOLDERS' EQUITY ............................................. 8,567,405 8,177,904
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................. $ 12,514,539 $ 12,432,998
=============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- --------------------------
1996 1995 1995 1994
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Sales ....................................... $ 8,141,107 $ 4,682,402 $ 6,982,902 $ --
Fee income .................................. 123,833 226,355 276,253 844,025
------------ ------------ ------------ ------------
8,264,940 4,908,757 7,259,155 844,025
------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of products and services sold ......... 4,854,502 2,817,002 4,146,564 272,660
Selling, general and administration expenses 2,543,394 1,442,705 2,180,886 1,154,034
Non-recurring charges ....................... -- 125,000 146,867 --
Depreciation and amortization ............... 193,529 119,916 199,932 58,412
------------ ------------ ------------ ------------
7,591,425 4,504,623 6,674,249 1,485,106
------------ ------------ ------------ ------------
Operating Income (loss) ...................... 673,515 404,134 584,906 (641,081)
------------ ------------ ------------ ------------
Interest income (expense):
Interest expense ............................ (234,631) (130,502) (205,555) (34,222)
Interest income ............................. -- -- -- 34,270
------------ ------------ ------------ ------------
(234,631) (130,502) (205,555) 48
------------ ------------ ------------ ------------
Income (loss) before income taxes ............ 438,884 273,632 379,351 (641,033)
Provision for income taxes ................... 49,383 44,515 27,164 --
------------ ------------ ------------ ------------
Net income (loss) ............................ $ 389,501 $ 229,117 $ 352,187 $ (641,033)
============ ============ ============ ============
Net income (loss) per common share ........... $ .03 $ .02 $ .03 $ (.23)
============ ============ ============ ============
Average number of common shares and common
share equivalents outstanding ............... 15,399,846 13,707,612 13,795,632 2,793,402
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
---------------------- ---------------------- PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNTS SHARES AMOUNTS CAPITAL DEFICIT STOCK EQUITY
----------- --------- ----------- --------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE--JANUARY 1,
1994 .................. 880,000 $ 8,800 1,758,077 $177 $15,882,537 $(15,067,213) $-- $ 824,301
Issuance of shares:
Conversion of
preferred stock into
common stock ......... (740,000) (7,400) 1,480,000 148 7,252 -- -- --
Exercise of warrants . -- -- 718,704 71 413,411 -- -- 413,482
To placement agent in
lieu of fees in
connection with
exercise of warrants -- -- 61,824 6 -- -- -- 6
Private placement .... -- -- 2,515,200 251 957,349 -- -- 957,600
To Placement Agent in
Lieu of Fees in
connection with
Private Placement ... -- -- 200,000 20 -- -- -- 20
Net Loss for the Year . -- -- -- -- -- (641,033) -- (641,033)
----------- --------- ----------- --------- ------------- --------------- ---------- --------------
BALANCE--DECEMBER 31,
1994--FORWARD ......... 140,000 1,400 6,733,805 673 17,260,549 (15,708,246) -- 1,554,376
</TABLE>
F-4
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
---------------------- ----------------------- PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNTS SHARES AMOUNTS CAPITAL DEFICIT STOCK EQUITY
----------- --------- ------------ --------- --------------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE--DECEMBER 31,
1994--FORWARDED ....... 140,000 $ 1,400 6,733,805 $ 673 $17,260,549 $(15,708,246) $ -- $1,554,376
Issuance of Shares:
Conversion of
Preferred Stock into
Common Stock ......... (140,000) (1,400) 280,000 28 1,372 -- -- --
Private Placement .... -- -- 1,160,000 116 1,468,786 -- -- 1,468,902
Exercise of Warrants . -- -- 2,786,956 279 851,314 -- -- 851,593
Exercise of Options .. -- -- 550,000 55 343,695 -- -- 343,750
In connection with the
acquisition of Quest
Electronic Hardware,
Inc. -- -- 3,962,574 396 3,962,178 -- -- 3,962,574
Shares received by the
Company in
satisfaction of
certain obligations
of former officers
and directors ........ -- -- -- -- -- -- (355,478) (355,478)
Net Income for the
Year ................. -- -- -- -- -- 352,187 -- 352,187
----------- --------- ------------ --------- ------------- --------------- ------------ ------------
Balance--December 31,
1995 ................. -- -- 15,473,335 1,547 23,887,894 (15,356,059) (355,478) 8,177,904
Net Income for the
nine months ended ... -- -- -- -- -- 389,501 -- 389,501
----------- --------- ------------ --------- ------------- --------------- ------------ ------------
BALANCE--SEPTEMBER 30,
1996 (UNAUDITED) ..... -- $ -- 15,473,335 $1,547 $23,887,894 $(14,966,558) $(355,478) $8,567,405
=========== ========= ============ ========= ============= =============== ============ =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------ ---------------------------
1996 1995 1995 1994
----------- ----------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................... $ 389,501 $ 229,117 $ 352,187 $(641,033)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization .... 193,529 119,916 199,932 58,412
Write-down of assets .............. -- -- 40,553 136,335
Provision for doubtful accounts .. 6,975 -- 25,162 50,918
Loss on sale of fixed assets ..... 2,184 -- -- --
Change in assets and liabilities:
Decrease (increase) in:
Accounts receivable ............... 73,250 (722,907) (467,176) (19,091)
Other receivables ................. 36,955 -- 56,672 (109,480)
Inventories ....................... 210,190 (154,861) (1,583,507) --
Prepaid expenses and other
assets ........................... (236,168) 24,170 (33,509) 44,334
Increase (decrease) in accounts
payable and accrued expenses ..... (332,957) 147,538 566,581 (13,776)
----------- ----------- ------------- ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES--FORWARD ..... 343,459 (357,027) (843,105) (493,381)
----------- ----------- ------------- ------------
</TABLE>
F-6
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- ---------------------------
1996 1995 1995 1994
----------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET CASH--OPERATING ACTIVITIES--
FORWARDED ............................. $ 343,459 $ (357,027) $ (843,105) $ (493,381)
----------- ------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash consideration paid for
acquired business .................... -- (5,229,847) (5,262,268) --
----------- ------------- ------------- ------------
Proceeds from sale of fixed assets ... 280 -- -- --
Acquisition of property and equipment (47,862) (138,692) (419,766) --
----------- ------------- ------------- ------------
NET CASH USED FOR INVESTING ACTIVITIES (47,582) (5,368,539) (5,682,034) --
----------- ------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings .. -- 300,000 300,000 --
Proceeds from borrowings under
revolving facility ................... 437,500 216,000 947,500 --
Proceeds from borrowings under term
loan facility ........................ -- 2,200,000 2,200,000 --
Proceeds from private placement ...... -- 1,740,000 1,740,000 957,600
Costs associated with private
placement ............................ -- (238,039) (271,098) --
Proceeds from exercise of stock
options .............................. -- 281,250 343,750 --
Proceeds from exercise of warrants ... -- -- 911,578 413,482
Costs associated with exercise of
warrants ............................. -- -- (59,985) --
Treasury shares received in
satisfaction of obligations .......... -- -- (355,478) --
Repayment of short-term debt .......... -- -- (300,000) --
Repayment of long-term debt ........... (412,500) (275,000) (412,500) --
----------- ------------- ------------- ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES ........................... 25,000 4,224,211 5,043,767 1,371,082
----------- ------------- ------------- ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS--FORWARD .................. 320,877 (1,501,355) (1,481,372) 877,701
----------- ------------- ------------- ------------
</TABLE>
F-7
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------------- ----------------------------
1996 1995 1995 1994
----------- -------------- -------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS--FORWARDED ............... $320,877 $(1,501,355) $(1,481,372) $ 877,701
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIODS ........................... 39,358 1,520,730 1,520,730 643,029
----------- -------------- -------------- ------------
CASH AND CASH EQUIVALENTS AT END OF
PERIODS ............................. $360,235 $ 19,375 $ 39,358 $1,520,730
=========== ============== ============== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the periods for:
Interest ............................ $234,631 $ 130,502 $ 182,970 $ 34,222
Income taxes ........................ $ 45,000 $ -- $ -- $ --
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In 1995 and 1994, the Company adjusted property and equipment to estimated
fair value as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Cost of Property Written Down $ 668,176 $ 340,153
Accumulated Depreciation .... (627,623) (178,818)
----------- -----------
Net Book Value ............... 40,553 161,335
Estimated Fair Value ......... -- 25,000
----------- -----------
Adjustment for Write-Down ... $ 40,553 $ 136,335
=========== ===========
</TABLE>
During 1995, the Company issued 3,962,574 shares of common stock in
connection the acquisition of a subsidiary and issued 280,000 shares of common
stock upon the conversion of 140,000 preferred shares.
During 1994, 200,000 shares of common stock were issued to a placement agent
in lieu of fees in connection with a private placement. Additionally, 250,000
shares of common stock for consulting services and 61,824 shares of common
stock in lieu of fees in connection with the exercise of warrants were issued
to the same placement agent. The Company also issued 1,480,000 shares of common
stock upon conversion of 740,000 preferred shares during 1994.
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE
NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
On April 2, 1996, the shareholders of the Company voted to change the name
of the Company from Judicate, Inc. to Questron Technology, Inc. ("Questron" or
the "Company"). Questron, through its subsidiary Quest Electronic Hardware,
Inc. ("Quest"), is a specialized distributor of fasteners and electronic
hardware sold to electronic equipment manufacturers and, through its subsidiary
Judicate of Philadelphia, Inc. ("Judicate"), a supplier of alternate dispute
resolution ("ADR") services. Quest was formed on October 13, 1994. On March 31,
1995, Quest purchased the fasteners distribution business from Arrow
Electronics, Inc. ("Arrow"). Prior to this business acquisition, Quest had no
operating activities of its own, accordingly, the consolidated results of
operations for the year ended December 31, 1995 include only 9 months of
operating activities for Quest. Simultaneously with this business acquisition,
the then shareholders of Quest completed a common stock exchange with Questron,
in which Quest became a 100% owned subsidiary of Questron (see Note 2 of Notes
to Consolidated Financial Statements).
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
and all its majority owned subsidiaries. All significant intercompany
transactions are eliminated.
Cash and Cash Equivalents
The Company considers certain highly liquid investments with original
maturities of three months or less to be cash equivalents.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company extends credit to its customers which results in accounts
receivable arising from its normal business activities. The Company does not
require collateral from its customers, but routinely assesses the financial
strength of its customers and, based upon factors surrounding the credit risk
of its customers, believes that its receivable credit risk exposure is limited.
Such estimate of the financial strength of such customers may be subject to
change in the near term.
During the year ended December 31, 1995, sales to one customer of Quest
amounted to approximately $1,000,000 or approximately 14% of revenue. Accounts
receivable from this customer amounted to approximately $273,000.
Inventories
Inventories, which consist solely of finished products, are stated at the
lower of cost or market. Cost is determined on the first-in, first-out (FIFO)
method.
F-10
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE
NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
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:
<TABLE>
<CAPTION>
<S> <C>
Office Equipment .......... 5Years
Computer Equipment ........ 5Years
Furniture and Fixtures ... 7Years
Leasehold Improvements ... 5Years
</TABLE>
Cost in Excess of Net Assets of Business Acquired
The cost in excess of net assets of business acquired is being amortized on
a straight line basis over 40 years. The Company has concluded that the cost in
excess of net assets of business acquired has an indeterminable life based on
historic, current and projected operating results of the business acquired (see
Note 2 of notes to consolidated financial statements). The Company's policy is
to record an impairment loss against the balance of the net unamortized cost in
excess of net assets of business acquired in the period when it is determined
that the carrying amount of the asset may not be recoverable. At each balance
sheet date, the Company evaluates the realizability of the asset for each
business acquired having a material change. This determination is based on an
evaluation of such factors as the occurrence of a significant event, a
significant change in the environment in which the business operates, or if the
expected future non-discounted cash flow of the business would become less than
the carrying value of the asset. The Company's historic recurring losses and
negative cash flows from operations have been abated and, accordingly,
management believes these factors will not negatively impact the profits and
cash flows of the business acquired.
Net Income (Loss) Per Common Share
Net income (loss) per common share is based on the weighted average number
of common shares and common share equivalents outstanding. Common share
equivalents amounted to 45,004 for the nine months ended September 30, 1996 and
2,262,565 for the year ended December 31, 1995. The weighted average number of
common shares outstanding for 1994 does not include common share equivalents
since the inclusion of such share equivalents would be anti-dilutive. Net
income per common share on a fully diluted basis does not result in material
dilution and, accordingly, is not presented.
2. ACQUISITION OF ELECTRONIC HARDWARE DISTRIBUTION BUSINESS
As of the close of business on March 31, 1995, the Company acquired 100% of
the stock of Quest, a privately owned company, in exchange for a 25% interest
in the Company on a fully diluted basis. Such acquisition was effected pursuant
to a share acquisition agreement, under which the Company issued 3,962,574
newly issued, fully-paid and non-assessable shares of common stock of the
Company, in exchange for all of the issued and outstanding shares of common
stock of Quest. Simultaneously with the foregoing events, Quest purchased the
fasteners distribution business of Arrow for $4,850,000 in cash, pursuant to a
Purchase of Assets Agreement, dated as of November 29, 1994, by and between
Quest and Arrow (the "Purchase Agreement"). The purchase was funded by a
capital contribution from Questron of $2,850,000 (see Note 5 of Notes to
Consolidated Financial Statements) and borrowings by Quest under a loan and
security agreement with a bank (see Note 3 of Notes to Consolidated Financial
Statements).
F-11
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE
NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
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:
<TABLE>
<CAPTION>
<S> <C>
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
===========
</TABLE>
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.
3. LONG-TERM DEBT
Long-term debt at September 30, 1996 and December 31, 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Term loan, due in equal quarterly installments through March
31, 1999, with interest payable monthly at the prime rate plus
2.0% for 1995 and the prime rate plus 1.5% for 1996 .......... $1,375,500 $1,787,500
Revolving facility, due on March 31, 1998, with interest
payable monthly at the prime rate plus 1.5% for 1995 and the
prime rate plus 1.0% for 1996 ................................. 1,385,000 947,500
------------ ------------
2,760,000 2,735,000
Less installments due within one year .......................... 550,000 550,000
============ ============
$2,210,000 $2,185,000
============ ============
</TABLE>
Pursuant to a Loan and Security Agreement, as amended (the "Loan
Agreement"), dated March 31, 1995, with a bank, Quest borrowed $2.2 million
under a term loan facility to partially fund the acquisition of the fasteners
distribution business. The Loan Agreement also provides for Quest to be able to
borrow for working capital purposes under an annually renewable two-year
revolving facility, which provides for loans of up to $1,500,000. The Loan
Agreement contains a provision for the calculation of a borrowing
F-12
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE
NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
base, which determines the amount of borrowings available under the revolving
facility. At September 30, 1996 and December 31, 1995, Quest had unused
borrowing capacity of $115,000 and $527,500, respectively under the Loan
Agreement.
In order to secure the obligations of Quest under the Loan Agreement,
Questron entered into a Stock Pledge Agreement, dated as of March 31, 1995,
with the bank, under which the Company pledged to the bank the shares of
capital stock of Quest which the Company held at such date and in which the
Company may thereafter acquire an interest. In addition, Quest granted a
security interest in substantially all of its assets to the bank and a major
shareholder of Questron (see Note 11 of Notes to Consolidated Financial
Statements) guaranteed the obligations of Quest under the Loan agreement. The
Loan Agreement restricts the payment of cash dividends by Quest to the Company
and certain other payments, limits long-term and short-term borrowings of
Quest, and requires that debt service coverage, net worth, tangible net worth,
the ratio of debt to net worth, and the ratio of quick assets (cash and
accounts receivable) to current liabilities be maintained at certain designated
levels by Quest. Quest is in compliance with all such requirements of the Loan
Agreement.
The aggregate annual maturities of long-term debt under the Loan Agreement
for each of the five years in the period ending December 31, 2000 are:
1996-$550,000; 1997-$1,497,500; 1998-$550,000; 1999-$137,500; and 2000-$-0-.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Office equipment .............................. $ 55,933
Computer equipment ............................ 389,730
Furniture and fixtures ........................ 12,583
Leasehold improvements ........................ 19,947
---------
478,193
Less accumulated depreciation and amortization 59,213
---------
$418,980
=========
</TABLE>
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1995 and 1994 was $68,729 and $58,412,
respectively. At December 31, 1995, all property and equipment represent assets
used in the business of Quest. All property and equipment of the ADR business
have been written off in connection with the downsizing and restructuring of
that business.
5. SHAREHOLDERS' EQUITY
As of December 31, 1995, the Company was authorized to issue 20,000,000
shares of common stock and 1,000,000 of preferred stock. On April 2, 1996, the
shareholders of the Company approved an increase in the number of authorized
shares of common stock to 50,000,000 shares and an increase in the number of
authorized shares of preferred stock to 10,000,000 shares. The outstanding
shares of common stock are fully paid and non-assessable. In 1994, there were
outstanding 140,000 shares of Series A Preferred Stock. Each share of Series A
Preferred Stock, which was convertible, without further consideration, into two
(2) shares of common stock, has been converted.
In November 1994, the Company issued 2,515,200 shares of its common stock
in a private offering conducted through a placement agent. Net proceeds from
the offering amounted to $957,600. As
F-13
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE
NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
additional consideration for common shares issued, one of the purchasers
tendered 103,040 Series I Warrants to the Company for cancellation.
Additionally, 200,000 shares of Company common stock were issued to the
placement agent in lieu of fees in connection with this transaction.
In March and April 1995, the Company, through a placement agent, consummated
the sale of fifty-eight units of its securities at a gross sales price of
$30,000 per unit. Each unit consisted of 20,000 shares of Company common stock.
The net proceeds to the Company, after expenses associated with the placement
of $271,098, were $1,468,902. Such net proceeds, together with available cash,
were used to make a capital contribution to Quest at March 31, 1995, in order
to provide Quest with the balance of the funds necessary to complete the
acquisition of the fasteners distribution business from Arrow. In connection
with this sale of securities, the placement agent also received a portion of
its fee in the form of 116,000 options to purchase Company common stock at an
exercise price of $3.50 per share. These options expire March 31, 2000.
The Company has issued various series of warrants to purchase shares of its
common stock. Each Series I Warrant entities the registered holder to purchase
1.629 shares of common stock at a price of $1.80 per share on or before June
30, 1996. Any warrant not exercised by that date will be null and void. At
December 31, 1995, there were 64,657 Series I Warrants outstanding.
In March 1994, as an inducement to raise capital, the Company offered
holders of the Series I Warrants the right to exchange each warrant for three
Series II Warrants which were exercisable at $ .625 per share. The exchange
offer expired on April 30, 1994. Pursuant to the exchange offer, the Company
received net proceeds of $413,482 upon the issuance of 718,704 shares of its
common stock. Additionally, the Company issued 61,824 shares of its common
stock to a placement agent in lieu of fees in connection with this transaction.
At December 31, 1994, all Series II Warrants had been exercised.
In connection with the November 1994 private placement, 2,200,000 Series III
Warrants were issued. Each Series III Warrant entitles the registered holder to
purchase one share of common stock at an exercise price of $.35 per share. The
warrants expire November 14, 2004, and any warrant not exercised by that date
will be null and void. At December 31, 1995, there were 40,000 Series III
Warrants outstanding.
In December 1995, in connection with certain obligations amounting to
$355,478 owed to the Company by two of its former officers and directors, the
Company received 118,493 shares of its common stock in full satisfaction of
such amounts owed.
6. STOCK OPTIONS
Under the terms of various stock option plans, the Company may grant options
to purchase shares of the Company's common stock to key executives and
management of the Company. Transactions under the various stock option and
incentive plans during the years ended December 31, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1995 1994
---------------------------- ----------------------------
INCENTIVE NON-INCENTIVE INCENTIVE NON-INCENTIVE
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Outstanding--beginning of year 554,469 513,593 17,829 46,835
Options granted ................ 46,835 229,363 550,000 466,758
Options exercised .............. (550,000) (626,956) -- --
Options canceled and terminated -- -- (13,360) --
----------- --------------- ----------- ---------------
Outstanding--end of year (1) .. 51,304 116,000 554,469 513,593
=========== =============== =========== ===============
</TABLE>
- ------------
(1) With exercise prices ranging from $7.95 to $33.75 per share, giving
effect to the one-for-fifteen reverse stock split, which occurred on
December 22, 1993.
F-14
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE
NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
In addition to the above, on April 2, 1996, the shareholders approved the
adoption of the 1994 Director Non-qualified Stock Option Plan (the "Plan"),
under which options to purchase shares of the Company's common stock may be
granted to non-executive directors of the Company. Under the Plan options are
to be granted to each eligible director at the rate of 15,000 per year. Awards
under the Plan had been made previously, subject to shareholder approval.
Transactions under the Plan during the years ended December 31, 1995 and 1994
were as follows:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Outstanding--beginning of year 60,000 --
Options granted ................ 45,000 60,000
Options exercised .............. -- --
Options canceled and terminated -- --
--------- --------
Outstanding--end of year ...... 105,000 60,000
========= ========
</TABLE>
In February 1996, in accordance with the provisions of the Plan, 30,000
options to purchase shares of the Company's common stock were granted to
qualified directors.
7. RETIREMENT PLAN
Quest has a defined contribution plan for eligible employees, which
qualifies under Section 401(k) of the Internal Revenue Code. Quest's
contribution to the plan, which is based on a specified percentage of employee
contributions, amounted to $24,820 in 1995.
8. LEASE COMMITMENTS
The Company leases certain office and warehouse space under non-cancelable
operating leases expiring at various dates through 2000. Rental expenses of all
non-cancelable operating leases amounting to $112,249 and $65,070 was charged
to operations for the years ended December 31, 1995 and 1994, respectively.
Aggregate minimum rental commitments under all non-cancelable operating leases
approximate $535,000 as of December 31, 1995. Such commitments on annual basis
are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
- --------------
<S> <C>
1996 ......... $184,712
1997 ......... 184,812
1998 ......... 83,198
1999 ......... 42,120
2000 ......... 40,365
----------
$535,207
==========
</TABLE>
9. INCOME TAXES
The provision for income taxes included in the consolidated statement of
income is for state income taxes to which the Company and its subsidiaries are
subject. No provision for federal income taxes is required, as the Company has
no federal tax liability for 1995 as a result of the availability of net
operating loss income tax carryforwards of approximately $13.1 million as of
December 31, 1995, expiring in the years 2000 through 2009.
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," which was adopted by the Company on January 1, 1993,
requires the establishment of a deferred tax asset for all deductible
temporary differences and operating loss carryforwards. Because the
generation of
F-15
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE
NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
future taxable income is not assured, however, any deferred tax asset
established for utilization of the Company's tax loss carryforwards would
correspondingly require a valuation allowance of the same amount pursuant to
SFAS No. 109. Accordingly, no deferred tax asset is reflected in the
consolidated financial statements.
As of December 31, 1995, the approximate amount of the net operating loss
income tax carryforwards and their expiration dates are as follows:
<TABLE>
<CAPTION>
EXPIRING IN
YEARS ENDING NET OPERATING LOSS
DECEMBER 31, CARRYFORWARDS
- -------------- ------------------
<S> <C>
2000 ....... $ 460,000
2001 ....... 1,243,000
2002 ....... 1,414,000
2003 ....... 1,574,000
2004 ....... 1,100,000
2005 ....... 579,000
2006 ....... 782,000
2007 ....... 2,945,000
2008 ....... 2,336,000
2009 ....... 670,000
------------------
$ 13,103,000
==================
</TABLE>
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosing fair value, to the extent
practicable, for financial instruments which are recognized or unrecognized in
the balance sheet. Fair value of the financial instruments disclosed in the
balance sheet is not necessarily representative of the amount that could be
realized or settled, nor does the fair value amount consider the tax
consequences of realization or settlement. The following table summarizes
financial instruments by individual balance sheet accounts as of December 31,
1995:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------- ------------
<S> <C> <C>
Cash and cash equivalents ............ $ 39,358 $ 39,358
Accounts receivable .................. 1,399,936 1,399,936
Accounts payable and accrued expenses 1,520,094 1,520,094
Current portion of long-term debt ... 550,000 550,000
Long-term debt ....................... 2,185,000 2,185,000
</TABLE>
For certain financial instruments, including cash and cash equivalents,
trade receivables and payables, and short-term debt, it was assumed that the
carrying amount approximated fair value because of the near term maturities of
such obligations. The fair value of long-term debt was determined based on
current rates at which the Company could borrow funds with similar remaining
maturities, which amount approximates its carrying value.
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%
F-16
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE
NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
owner. Under the terms of such agreement, Gulfstream acts as an advisor and
consultant to the Company and Quest, and also provides certain administrative
services to the companies. Such advisory and consulting services are directed
principally at the expansion of Quest's business through the identification of
new marketing opportunities and potential acquisitions, the procurement of
financing as needed by the Company and Quest, and maximizing the Company's and
Quest's profitability. For such services Gulfstream is paid a fee of $150,000
per year. In addition, upon the attainment of certain earnings targets for
Quest, Gulfstream may be entitled to be awarded as incentive compensation,
warrants, subject to certain conditions and restrictions, to purchase at a
price of $.10 per share, a number of shares of common stock of the Company,
such that the number of shares so purchased represents up to 10% of the
outstanding common stock of the Company at March 31, 1995. For these purposes,
the calculation of the shares of the common stock of the Company outstanding at
March 31, 1995 assumes that all warrants, options and preferred stock are
converted to common stock of the Company. Gulfstream presently owns 16.9% of
the Company's common stock outstanding and has guaranteed the obligations of
Quest under its Loan Agreement.
12. LONG-TERM EMPLOYMENT AGREEMENTS WITH EXECUTIVES
Quest has entered into a five-year employment agreement with its Chairman
and Chief Executive Officer. Under the terms of such employment agreement,
Quest has agreed to compensate this individual with regular salary at the rate
of $100,000 per year. There are no other bonus compensation arrangements
currently in effect for this individual.
Quest has also entered into a five-year employment agreement with its
President and Chief Operating Officer. Under the terms of such employment
agreement, Quest has agreed to compensate this individual with regular salary
at the rate of $100,000 per year, plus bonus compensation based on the
attainment of certain operating goals at the rate of $15,000 per quarter. In
addition, upon the attainment of certain earnings targets for Quest, this
individual may be entitled to be awarded as incentive compensation, warrants,
subject to certain conditions and restrictions, to purchase at a price of $.10
per share, a number of shares of common stock of the Company, such that the
number of shares so purchased represents up to 5% of the outstanding common
stock of the Company at March 31, 1995. For these purposes, the calculation of
the shares of the common stock of the Company outstanding at March 31, 1995
assumes that all warrants, options and preferred stock are converted to common
stock of the Company. This individual presently owns 8.8% of the Company's
common stock outstanding and has agreed with Gulfstream to participate in its
guarantee of the obligations of Quest under its Loan Agreement, however, only
to the extent of his stock holdings in the Company.
13. NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed of," in March of 1995. SFAS
No. 121 established accounting standards for the impairment of long-lived
assets and certain identifiable intangibles to be disposed of. SFAS No. 121
is effective for financial statements issued for fiscal years beginning after
December 15, 1995. Adoption of SFAS No. 121 is not expected to have a
material impact on the Company's financial statements.
The FASB has also issued SFAS No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method
of accounting for stock options and similar equity instruments as contrasted
to the intrinsic value based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has not decided if it will adopt SFAS No. 123 or
continue to apply APB Opinion No. 25 for financial reporting purposes. SFAS
No. 123 will have to be adopted for financial note disclosure purposes in any
event. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal
F-17
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE
NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
years beginning after December 15, 1995; the disclosure requirements of SFAS
No. 123 are effective for financial statements for fiscal years beginning after
December 31, 1995.
14. LITIGATION
In July 1994, the Company was served with a complaint that charges the
Company with breach of contract by exceeding its ADR authority in granting an
arbitration award and seeks compensatory, consequential and punitive damages of
an amount in excess of $100,000. The Company answered the complaint, denying
the plaintiff's allegations. The Company believes that there is no basis for
such action and that any consequences of such complaint will not have a
material adverse effect on the Company's consolidated financial statements.
15. SEGMENT INFORMATION
As of March 31, 1995, the Company is engaged in two business segments.
Through its subsidiary, Quest, it is a specialized distributor of fasteners and
electronic hardware sold to electronic equipment manufacturers and, through its
subsidiary, Judicate, it is a supplier of alternate dispute resolution ("ADR")
services. The operating results and identifiable assets of each of these
business segments, and corporate, at December 31, 1995 and for the year then
ended is as follows:
<TABLE>
<CAPTION>
QUEST (1) JUDICATE CORPORATE (2) CONSOLIDATED
------------ ----------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue ...................... $6,982,902 $276,253 $ -- $ 7,259,155
------------ ----------- ------------- --------------
Operating income (loss) ..... 962,102 (25,255) (351,941) 584,906
Interest expense ............. 201,096 -- 4,459 205,555
Provision for income taxes .. 27,164 -- -- 27,164
------------ ----------- ------------- --------------
Net income (loss) ............ $ 733,842 $(25,255) $ (356,400) $ 352,187
============ =========== ============= ==============
Depreciation and amortization $ 112,871 $ 9,516 $ 77,545 $ 199,932
============ =========== ============= ==============
Capital expenditures ......... $ 420,766 $ (1,000) $ -- $ 419,766
============ =========== ============= ==============
Identifiable Assets .......... $8,306,721 $ 79,034 $4,047,243 $12,432,998
============ =========== ============= ==============
</TABLE>
- ------------
(1) The operating results for Quest are for the nine months ended December
31, 1995.
(2) Corporate expenses include non-recurring charges $146,867, principally
associated with the downsizing and restructuring of the Company's ADR
business.
16. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF THE INDEPENDENT AUDITORS
(UNAUDITED)
PROPOSED PUBLIC OFFERING
The Company is pursuing a public offering of 1,000,000 Units of its
securities at a price of $6.00 per unit ("Unit"). Each Unit will consist of one
share of the Company's Series B Convertible Preferred Stock, par value $.01 per
share, and one redeemable Series IV Common Stock Purchase Warrant. The Company
anticipates net proceeds of $4,820,000 from the Offering.
BUSINESS COMBINATION
The Company has entered into a Stock Purchase Agreement (the "Stock
Purchase Agreement") dated as of December 16, 1996 with the stockholders of
Webb to acquire all of the issued and outstanding stock of Webb, in a
business combination to be accounted for as a purchase. Under the Stock
Purchase
F-18
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE
NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
Agreement, the stockholders of Webb have agreed to exchange their shares of
Webb for $3,250,000 in cash, 1,500,000 Series IV Common Stock Purchase Warrants
and two notes (the "Notes") in the aggregate amount of $750,000 (each for
$375,000). Note A shall mature eighteen months from the effective date of the
proposed public offering and bear interest at 10% per annum. Note B shall
mature in equal monthly installments over a five year period from the same date
and bear interest at 10% per annum. At the time of the signing of the Stock
Purchase Agreement, the Company delivered to the Webb stockholders the
1,500,000 Series IV Warrants as a deposit on account of the purchase price
under said agreement. The Company has valued these Series IV Warrants at $.25
per Warrant. These Series IV Warrants will be cancelled if the Webb acquisition
does not close. Any proceeds received by the Webb stockholders from a sale of
their Series IV Warrants in excess of 375,000 shall reduce the Company's
obligations under the Notes. The amount of the purchase price ($4,375,000) in
excess of the estimated fair value of the net assets acquired will be recorded
as "cost in excess of net assets acquired" and amortized over forty years.
PROPOSED STOCK SPLIT
The Board of Directors has proposed a one-for-ten reverse split of the
issued and outstanding Common Stock of the Company. The proposal is subject to
the approval of the Company's stockholders at the annual meeting of
stockholders scheduled for December 27, 1996.
17. UNAUDITED INTERIM STATEMENTS
The financial statements for the nine months ended September 30, 1996 and
1995 are unaudited; however, in the opinion of management all adjustments which
are necessary in order to make the interim financial statements not misleading
have been made. The results for interim periods are not necessarily indicative
of the results to be obtained for a full fiscal year.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Comp Ware, Inc. d/b/a Webb Distribution
We have audited the accompanying balance sheets of Comp Ware, Inc. d/b/a
Webb Distribution as of December 31, 1995 and 1994, and the related statements
of operations and retained earnings, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Comp Ware, Inc. d/b/a Webb
Distribution as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ESTABROOK & CO., INC.
Certified Public Accountants
Winchester, Massachusetts
Feruary 5, 1996
F-20
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash .......................................................... $ 1,716 $ 500
Accounts Receivable--Trade, Less Allowance for Doubtful
Accounts of $70,000 and $67,000, Respectively ................ 1,094,890 1,048,278
Inventory ..................................................... 1,715,137 1,726,497
Deferred Income Taxes ......................................... 115,839 115,839
Other Current Assets .......................................... 20,445 36,493
--------------- --------------
TOTAL CURRENT ASSETS .......................................... 2,948,027 2,927,607
Property and Equipment, at Cost, Less Accumulated Depreciation
and Amortization (Note 3) ..................................... 109,931 126,898
OTHER ASSETS ................................................... 135,855 204,011
--------------- --------------
TOTAL ASSETS .................................................. $3,193,813 $3,258,516
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Cash Overdraft ................................................ $ -- $ 37,848
Notes Payable ................................................. 588,218 796,685
Current Maturities of Obligations Under Capital Leases (Note
11) .......................................................... 22,448 22,157
Current Maturities of Long-Term Debt (Note 7) ................. -- 150,000
Current Maturities of Note Payable-Stockholder ................ 61,904 --
Accounts Payable and Accrued Expenses ......................... 1,095,941 1,051,210
--------------- --------------
TOTAL CURRENT LIABILITIES ..................................... 1,768,511 2,057,900
--------------- --------------
LONG-TERM LIABILITIES:
Obligations Under Capital Leases, Less Current Maturities
(Note 11) .................................................... 57,567 73,082
Long-Term Debt, Less Current Maturities (Note 7) .............. 500,000 500,000
Notes Payable-Stockholder-Net of Current Portion .............. 30,954 --
Deferred Income Taxes (Note 9) ................................ 22,216 22,216
--------------- --------------
TOTAL LONG-TERM LIABILITIES: 610,737 595,298
--------------- --------------
Stockholders' Equity (Note 8):
Common Stock, $.01 Par Value Authorized 1,000,000 Issued and
Outstanding 651,162 Shares ................................... 6,512 6,512
Additional Paid-in Capital .................................... 340,857 340,857
Retained Earnings ............................................. 467,196 257,949
--------------- --------------
TOTAL STOCKHOLDERS' EQUITY .................................... 814,565 605,318
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................... $3,193,813 $3,258,516
=============== ==============
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------------- --------------------------
1996 1995 1995 1994
------------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES .................. $ 6,088,946 $5,673,325 $7,793,179 $8,880,742
------------- ------------ ------------ ------------
OPERATING EXPENSES:
Cost of Sales ............. 4,122,619 3,907,641 5,557,984 6,980,213
Selling Expenses .......... 1,003,091 927,439 1,085,445 952,645
General and Administrative
Expenses ................. 473,152 460,106 672,491 592,467
------------- ------------ ------------ ------------
Total Operating Costs and
Expenses ................. 5,598,862 5,295,186 7,315,920 8,525,325
------------- ------------ ------------ ------------
Operating Income ........... 490,084 378,139 477,259 355,417
------------- ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest Income ........... -- -- 2,601 1,875
Interest Expense .......... (109,537) (122,544) (164,146) (127,113)
Other (Note 10) ........... -- -- -- 7,506
------------- ------------ ------------ ------------
Total Other Income
(Expense) ................ (109,537) (122,544) (161,545) (117,732)
------------- ------------ ------------ ------------
INCOME BEFORE PROVISION FOR
INCOME TAXES .............. 380,547 255,595 315,714 237,685
PROVISION FOR INCOME TAXES
(NOTE 9) .................. 171,300 115,040 113,681 63,129
------------- ------------ ------------ ------------
NET INCOME ................ $ 209,247 $ 140,555 $ 202,033 $ 174,556
============= ============ ============ ============
</TABLE>
F-22
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNTS CAPITAL EARNINGS EQUITY
--------- ---------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE--DECEMBER 31, 1993 ............. -- $ -- $289,026 $(118,640) $170,386
Net Income for The Year ............... -- -- -- 174,556 174,556
--------- --------- ------------ ------------ ---------------
BALANCE--DECEMBER 31, 1994 ............. -- -- 289,026 55,916 344,942
Exchange of Stock ..................... 560,000 5,600 (5,600) -- --
Issuance of Stock ..................... 91,162 912 57,431 -- 58,343
Net Income for the Year ............... -- -- -- 202,033 202,033
--------- --------- ------------ ------------ ---------------
BALANCE--DECEMBER 31, 1995 ............. 651,162 6,512 340,857 257,949 605,318
Net Income for the Nine Months ....... -- -- -- 209,247 209,247
--------- --------- ------------ ------------ ---------------
BALANCE--SEPTEMBER 30, 1996 (UNAUDITED)
651,162 $6,512 $340,857 $ 467,196 $814,565
========= ========= ============ ============ ===============
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------ ------------------------
1996 1995 1995 1994
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income .................................... $209,247 $ 140,555 $ 202,033 $ 174,556
----------- ----------- ----------- -----------
Adjustments to Reconcile Net Income to Net
Cash Provided by (Used in)
Operating Activities:
Depreciation and Amortization ................ 38,989 36,716 50,424 44,184
Deferred Income Taxes ........................ -- (25,914) (41,672) (51,951)
Stock Issued for Services .................... -- -- 58,343 --
Changes in Assets and Liabilities:
Decrease (Increase) in:
Accounts Receivable--Trade .................. 46,592 (172,869) (242,284) (124,993)
Inventory ................................... 11,360 (123,119) (78,704) 47,372
Other Current Assets ......................... 6,780 (6,381) 17,539 (15,176)
Increase (Decrease) in Accounts Payable and
Accrued Expenses ............................ 44,781 4,457 (90,985) (59,882)
----------- ----------- ----------- -----------
Total Adjustments ............................ 148,502 (287,110) (327,339) (160,446)
----------- ----------- ----------- -----------
NET CASH--OPERATING ACTIVITIES--FORWARD 357,749 (146,555) (125,306) 14,110
----------- ----------- ----------- -----------
</TABLE>
F-24
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------ ----------------------
1996 1995 1995 1994
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INVESTING ACTIVITIES:
Interest Earned on Certificate of
Deposit ................................ $ -- $ -- $ -- $ (338)
Certificate of Deposit Returned ........ -- 9,225 9,225 --
Deposits ................................ (27) -- (654) 2,219
Capital Expenditures .................... (15,345) (25,109) (30,189) (13,293)
Loans to Stockholders ................... -- (11,407) (14,047) (8,140)
Collections on Stockholder Loans ....... -- -- 2,640 --
Loans to Employees ...................... (31,452) (11,558) (11,558) --
Collections on Loans to Employees ...... 8,972 3,650 4,600 --
Proceeds on Sale of Investments ........ -- -- -- 70,000
----------- ----------- ---------- ----------
NET CASH--INVESTING ACTIVITIES--FORWARD (37,852) (35,199) (39,983) 50,448
----------- ----------- ---------- ----------
</TABLE>
F-25
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------- ------------------------
1996 1995 1995 1994
----------- ------------ ------------ ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET CASH--OPERATING ACTIVITIES--FORWARDED ... $ 357,749 $(146,555) $(125,306) $ 14,110
----------- ------------ ------------ ----------
NET CASH--INVESTING ACTIVITIES--FORWARDED ... (37,852) (35,199) (39,983) 50,448
----------- ------------ ------------ ----------
FINANCING ACTIVITIES:
Cash Overdraft ............................... (37,848) -- 37,848 (4,167)
Net Borrowings (Repayments) Under Loan
Agreement with Bank ......................... (207,261) 253,609 199,461 8,335
Repayments of Long-term Debt ................. (57,142) (50,000) (50,000) (50,000)
Repayments of Obligations Under Capital
Leases ...................................... (16,430) (19,359) (23,638) (17,108)
----------- ------------ ------------ ----------
NET CASH--FINANCING ACTIVITIES ............... (318,681) 184,250 163,671 (62,940)
----------- ------------ ------------ ----------
NET (DECREASE) INCREASE IN CASH .............. 1,216 2,496 (1,618) 1,618
CASH--BEGINNING OF PERIODS .................... 500 2,118 2,118 500
----------- ------------ ------------ ----------
CASH--END OF PERIODS ......................... $ 1,716 $ 4,614 $ 500 $ 2,118
=========== ============ ============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest .................................... $ 109,536 $ 122,545 $ 165,291 $127,113
Income taxes ................................ $ 162,954 $ 123,536 $ 126,736 $103,550
</TABLE>
F-26
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
STATEMENT OF CASH FLOWS
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
1995
The Company incurred debt obligations of $28,015 in connection with the
acquisition of certain equipment.
The Company issued 91,162 shares of common stock for services. The shares
were valued at $58,343.
1994
The Company incurred debt obligations of $63,469 in connection with the
acquisition of certain equipment ($50,378) and the amendment of a certain lease
agreement ($13,091).
See Notes to Financial Statements.
F-27
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995
AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Comp Ware, Inc. d/b/a Webb Distribution (the "Company") is a distributor
of electronic hardware, fasteners and components.
SIGNIFICANT ACCOUNTING POLICIES
Inventory
Inventories consist of electronic hardware, fasteners and components
purchased for resale and are stated at the lower of FIFO cost or market.
Market is defined as replacement cost.
Property and Equipment
Depreciation and amortization is provided on a straight-line basis over the
estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Furniture, Fixtures and Computer Equipment .... 3-5 Years
Machinery and Equipment ........................ 5 Years
Leasehold Improvements ......................... Lease Term
</TABLE>
Goodwill
The excess of the purchase price over the original valuation of the net
assets acquired is being amortized on a straight-line basis over 10 years.
Customer Lists
Customer lists are being amortized on a straight-line basis over 7 years.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of accounts receivable,
inventory, property and equipment, and goodwill for financial and income tax
reporting. The deferred tax assets and liabilities represent the future tax
return consequences of these differences, which will be either taxable or
deductible when the assets and liabilities are recovered or settled. Deferred
taxes are also recognized for operating losses that are available to offset
future taxable income and tax credits that are available to offset future
income taxes.
Statement of Cash Flows
For purposes of this statement the Company does not consider any of its
assets to meet the definition of cash equivalent.
Reclassification
Certain reclassifications have been made to the 1994 financial statements to
conform to the 1995 presentation.
2. INVESTMENTS
Investments consist of 46,832 shares of common stock of Alliance
Electronics, Inc. at cost. The fair value of these securities is not readily
determinable as there is no public market for these securities.
F-28
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND
FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
During 1996, the Company expects to convert the investment in Alliance
Electronics, Inc. $(70,248) together with commissions receivable from this same
company $(61,506) into a note receivable with repayment terms of twenty-four to
thirty-six months.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1995:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Furniture, Fixtures and Computer Equipment .... $303,912
Machinery and Equipment ........................ 23,470
Leasehold Improvements ......................... 14,523
----------
341,905
Less: Accumulated Depreciation and Amortization 215,007
----------
$126,898
==========
</TABLE>
Depreciation and amortization expense charged to operations was $41,522 and
$32,102 in 1995 and 1994, respectively.
4. CERTIFICATE OF DEPOSIT
Under the terms of a lease agreement with IBM Credit Corporation, the
Company was required to purchase a Certificate of Deposit for $7,977 as a
security deposit. The deposit will be returned, together with interest earned
thereon, if certain criteria are met (principally satisfactory payments under
the lease). The deposit $(9,225) was returned during 1995.
5. GOODWILL
Goodwill of $50,000 is included in the accompanying balance sheet net of
accumulated amortization of $30,000 in 1995. Amortization expense charged to
operations was $5,000 in 1995 and 1994.
6. CUSTOMER LISTS
Customer lists costs of $27,314 are included in the accompanying balance
sheet net of accumulated amortization of $23,737 in 1995. Amortization expense
charged to operations was $3,902 in 1995 and 1994.
F-29
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND
FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
7. INDEBTEDNESS
At September 30 1996 and December 31, 1995, indebtedness consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Note Payable--Borrowings under a loan agreement with US Trust
that provides for a maximum loan limit of $900,000, payable on demand, secured
by all accounts receivable, inventory and equipment with interest at the
bank's base lending rate plus
1.50% (10.00% at December 31, 1995 and September 30, 1996). .... $588,218 $796,685
========== ==========
Long-Term Debt--$500,000 commercial installment note payable to US Trust;
interest only at the bank's base lending rate plus 1.50% (10.00% at December
31, 1995 and September 30, 1996), through January 1, 1997 at which time the
entire principal balance is due, secured by accounts receivable, inventory and
equipment. The majority stockholder of the Company has executed
a limited guaranty of $500,000. ................................. $500,000 $500,000
Notes payable to certain former stockholders of the Company in
connection with the repurchase of their stock. Payable in semi-annual
installments of $50,000 together with interest at US Trust's base lending rate
(8.50% at December 31, 1995) commencing on July 1, 1994. These notes are
subordinate to existing borrowings from US Trust. Further, the Company is only
permitted to make payments of principal and interest if they comply with
certain financial covenants that involve minimum cash flow and the ratio of
senior debt to capital base. Certain stockholders of the Company have
guaranteed the payments under the note and a life insurance policy (face
amount of $250,000) on the life of one stockholder has been assigned to the
former
stockholders. ................................................... -- 150,000
---------- ----------
Total ............................................................ 500,000 650,000
Less current maturities of long-term debt ........................ -- 150,000
---------- ----------
Long-term debt, less current maturities .......................... $500,000 $500,000
========== ==========
</TABLE>
Long-Term debt matures as follows:
1996 . $150,000
1997 . 500,000
----------
$650,000
==========
The loan agreement and commercial installment note with the bank require
conformance to certain covenants, restrict the payment of dividends and the
merging or consolidating with any other corporation, and limit the amount of
expenditures for property and equipment, annual increases to certain officers'
salaries and the making of certain loans and investments.
F-30
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND
FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
8. STOCKHOLDERS' EQUITY
On February 15, 1995 the Company was merged into Comp Ware, Inc., a
newly-created Delaware corporation, in a so-called migratory merger. As part of
the merger, each share of common stock of Webb Distribution outstanding prior
to the merger was exchanged for 35,000 shares of Comp Ware, Inc. Comp Ware,
Inc. has the authority to issue up to 1,000,000 shares of common stock, par
value $.01 per share.
On February 15, 1995 the Company issued 91,162 shares of common stock to
certain employees of the Company. After giving effect to the exchange referred
to above and the issuance of the 91,162 shares, the total number of shares
issued and outstanding is 651,162. The 91,162 shares were issued pursuant to a
certain stockholders' agreement that provides for restrictions on transfer, put
rights and purchase options. Shares held by certain other stockholders are not
subject to the stockholders' agreement referred to above. Those certain
employees whose shares are subject to the stockholders' agreement will
hereinafter be referred to as the "covered employees."
The covered employees may not transfer their stock without first offering it
to the Company for a price per share equal to, for offers prior to December 9,
2000, the per share book value, and for offers after December 9, 2000, the
greater of the per share book value and $1.91 per share. The purchase price is
payable 25% in cash and 75% in accordance with a subordinated note providing
for monthly payments of interest only at an annual rate of 8%, and three equal
annual payments of principal commencing one year after the closing.
The Company's purchase option, whose items are stated above, could be
exercised if a covered employee ceases for any reason to be employed by the
Company.
If the Company does not exercise the Company purchase option, a covered
employee may seek third party offers for this stock, and the employee must
provide notice of any third party offer to all remaining Company stockholders
who shall have a right of first refusal to purchase such covered employee's
stock on the same terms and conditions as the third party offer.
The stockholders' agreement further provides for a put right for the benefit
of the covered employees whereby the covered employee (1) after April 1, 1997,
(2) upon the employee ceasing for any reason to be employed by the Company and
(3) the Company not exercising the Company purchase option triggered by the end
of employment, may require that the Company purchase the stock at the price and
upon the identical terms set forth in the Company purchase option.
The Company is required to grant to the covered employees, if they remain
employed by the Company on April 1, 1997, non-qualified stock options to
acquire stock then representing 14% of the outstanding stock of the Company, at
an exercise price of $1.00 per share, but subject to vesting over 5 years at
the annual rate of 20% per year.
F-31
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND
FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
9. PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Federal:
Current ................................ $114,643 $ 83,126
Deferred ............................... (33,927) (10,738)
Adjustment due to change in tax status -- (29,867)
---------- ----------
Totals .................................. 80,716 42,521
---------- ----------
State:
Current ................................ 40,710 31,954
Deferred ............................... (7,745) (3,001)
Adjustment due to change in tax status -- (8,345)
---------- ----------
Totals .................................. 32,965 20,608
---------- ----------
$113,681 $ 63,129
========== ==========
</TABLE>
The provision for income taxes in 1995 and 1994 differs from the amounts
computed by applying the U.S. statutory federal income tax rate of 35%
principally because of state income taxes, the surtax exemption and
amortization of goodwill.
During 1994, the Company's tax status changed from an S Corporation to a C
Corporation; accordingly, the Company adopted Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS No. 109") which requires a change
from an income statement to a balance sheet approach for accounting for income
taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized
based upon temporary differences between financial statement and tax basis of
assets and liabilities using current statutory rates. SFAS No. 109 also
requires a valuation reserve against net deferred tax assets if, based upon
weighted available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
The following table shows the December 31, 1995 amounts of deferred tax
assets and liabilities:
<TABLE>
<CAPTION>
1995
-----------------------------
LONG-TERM
CURRENT ASSETS LIABILITIES
-------------- -------------
<S> <C> <C>
Inventory ............... $ 68,752 $ --
Accounts receivable .... 29,145 --
Charitable contributions 17,942 --
Goodwill ................ -- 6,800
Property and equipment . -- 15,416
-------------- -------------
$115,839 $22,216
============== =============
</TABLE>
F-32
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND
FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
10. RELATED PARTY TRANSACTIONS
Notes Receivable
<TABLE>
<CAPTION>
<S> <C>
Amounts receivable from majority stockholder. This note bears interest at
the
rate of 6%. ................................................................ $40,476
========
</TABLE>
Cost Reimbursement and Commission
The Company entered into an agreement with Alliance Electronics, Inc.
("Alliance") whereby Alliance would open and operate an office on the premises
currently leased by the Company. Employees of Alliance operate the office but
are included on the payroll of the Company. Alliance reimburses the Company for
personnel and other operating costs. In addition, the Company receives 25%-50%
of the gross profit on certain sales generated for Alliance in the form of
commissions. This agreement was terminated in September 1994.
The Company received $64,000 in the form of commissions during 1994. These
amounts are included in other income, net of related expenses $(58,944), in the
accompanying statements of operations and retained earnings (deficit). Related
expenses consist principally of salaries, commissions and fringe benefits. Also
included in other income is $2,450 received in connection with an insurance
claim.
11. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities under a noncancelable operating lease and
certain equipment under capital leases. Future minimum payments are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES CAPITAL LEASES
---------------- --------------
<S> <C> <C>
1996 .................................................... $ 91,875 $ 34,242
1997 .................................................... 94,375 34,242
1998 .................................................... 96,875 27,263
1999 .................................................... 99,375 19,218
2000 .................................................... 25,000 6,847
---------------- --------------
$407,500 121,812
================
Amount representing interest ............................ 26,573
--------------
Present value of net minimum lease payments ............. 95,239
Current maturities of obligations under capital lease .. 22,157
--------------
Obligations under capital leases, less current
maturities ............................................. $ 73,082
==============
</TABLE>
Rental expense charged to operations under operating leases was $86,200 and
$91,200 in 1995 and 1994, respectively. These amounts are net of sublease
rentals of $6,300 in 1995 and 1994.
F-33
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND
FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED)
The capital leases are included in furniture, fixtures and computer
equipment as follows:
<TABLE>
<CAPTION>
<S> <C>
Cost .................... $131,369
Accumulated depreciation 53,847
----------
$ 77,522
</TABLE>
Insurance
The Company maintains $1,520,000 of insurance on inventories whose value at
December 31, 1995 is $1,726,497. The possible loss, which has not been provided
for in the accompanying financial statements, is $206,497.
12. MAJOR CUSTOMERS
During 1995 and 1994, the Company had a major customer each year whose
purchases exceeded 10% of net sales. Sales to this major customer were as
follows:
1995 .............. $ 825,000
1994 .............. $2,718,750
13. BENEFIT PLAN
The Company maintains an employee savings plan under section 401(k) of the
Internal Revenue Code in which substantially all employees are eligible to
participate. Employees may make contributions to the plan subject to
limitations as provided in current federal income tax law. The Company may make
matching contributions in whole or in part, subject to certain limitations, at
the Company's discretion. Company contribution expense charged to operations
was $10,953 and $8,063 in 1995 and 1994, respectively.
14. FINANCIAL INSTRUMENTS AND SIGNIFICANT CONCENTRATION OF GROUP CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consists principally of trade receivables. Trade receivables are
derived from sales to various customers spread across various industries,
principally in Massachusetts. Management believes that any risk of accounting
loss is significantly reduced due to the diversity of its end customers. The
Company performs credit evaluations of its customers' financial condition prior
to extending credit whenever deemed necessary, but does not require collateral.
15. UNAUDITED INTERIM STATEMENTS
The financial statements for the nine months ended September 30, 1996 and
1995 are unaudited; however, in the opinion of management all adjustments which
are necessary in order to make the interim financial statements not misleading
have been made. The results for interim periods are not necessarily indicative
of the results to be obtained for a full fiscal year.
F-34
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH AN OFFER WOULD BE UNLAWFUL. ANY MATERIAL
MODIFICATION OF THE OFFERING WILL BE ACCOMPLISHED BY MEANS OF AN AMENDMENT TO
THE REGISTRATION STATEMENT. IN ADDITION, THE RIGHT IS RESERVED BY THE COMPANY
TO CANCEL ANY CONFIRMATION OF SALE PRIOR TO THE RELEASE OF FUNDS, IF, IN THE
OPINION OF THE COMPANY, COMPLETION OF SUCH SALE WOULD VIOLATE FEDERAL OR STATE
SECURITIES LAWS OR A RULE OR POLICY OF THE NATIONAL ASSOCIATION OF SECURITIES
DEALERS, INC., WASHINGTON, D.C. 20006.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Note on Forward-Looking Statements ..... 2
Available Information ................... 2
Prospectus Summary ...................... 3
Risk Factors ............................ 8
Use of Proceeds ......................... 18
Dilution ................................ 19
Capitalization .......................... 20
Price Range of Common Stock
and Dividend Policy .................... 21
Management's Discussion and Analysis of
Financial Condition and Plan of
Operations ............................. 22
Business ................................ 29
Management .............................. 34
Certain Transactions .................... 37
Securities Ownership .................... 38
Description of Securities ............... 42
Concurrent Sales ........................ 45
Selling Securityholders ................. 45
Plan of Distribution .................... 47
Legal Proceedings ....................... 48
Legal Matters ........................... 48
Experts ................................. 48
Index to Financial Statements ........... P-1
Pro Forma Combined Financial
Statements ............................. P-2
Report of Independent Auditors .......... F-1
</TABLE>
2,750,000 SERIES IV WARRANTS
2,750,000 SHARES UNDERLYING
SERIES IV WARRANTS
QUESTRON
TECHNOLOGY, INC.
PROSPECTUS
MARCH 4, 1997
