<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration File No.: 333-18243
PROSPECTUS
1,000,000 UNITS
QUESTRON TECHNOLOGY, INC.
Questron Technology, Inc., a Delaware corporation ("the Company"), is
offering 1,000,000 units ("Units") at a price of $6.00 per Unit. Each Unit
consists of one share of the Company's Series B Convertible Preferred Stock,
par value $.01 per share ("Series B Preferred Stock"), and one redeemable
Series IV Common Stock Purchase Warrant of the Company ("Series IV Warrant").
The Units, the Series B Preferred Stock and the Series IV Warrants are
sometimes referred to as the "Securities." 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. See "Risk Factors" and
"Description of Securities."
Each share of Series B Preferred Stock shall automatically convert,
without any action on the part of the holder thereof or the Company, into
1.4375 shares of Common Stock, par value $.001 per share, of the Company
("Common Stock") on the second anniversary of the date of this Prospectus.
This conversion ratio is equal to 80% of the closing bid price per share as
reported by the Nasdaq SmallCap Market ("Nasdaq") for the Common Stock on the
day immediately preceding the date of this Prospective ("Effective Date")
compared with an offering price of $5.75 per share of Series B Preferred
Stock (based upon a valuation of $0.25 for a Series IV Warrant included in a
Unit). Holders of the Series B Preferred Stock will be entitled to receive,
in respect of the two years before the Series B Preferred Stock converts, an
annual dividend per share equal to 2% of the $5.75 offering price of the
Series B Preferred Stock or $0.115 per share. Such dividends will be payable
on each of the two anniversaries following the Effective Date, in cash or
shares of Common Stock at the option of the Company. The Series IV Warrants
shall be exercisable commencing one year after the Effective Date. Each
Series IV Warrant entitles the holder to purchase one share of Common Stock
at an exercise price of $5.75 per share during the four year period
commencing one year from the Effective Date. The Series IV Warrants are
redeemable by the Company for $.05 per Warrant, at any time after one year
from the Effective Date, upon 30 days' prior written notice, if the closing
bid price of the Common Stock, as reported by Nasdaq, exceeds $8.50 per share
for any 20 consecutive trading days ending within ten days prior to the date
of the notice 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
"Description of Securities."
The registration statement of which this Prospectus is a part also relates
to the offering of 2,750,000 Series IV Warrants which may be sold by the
holders of such securities (the "Selling Securityholders"). Of these Series
IV Warrants, 1,500,000 were issued to a Selling Securityholder by the Company
in connection with the proposed acquisition by the Company of all of the
issued and outstanding shares of Comp Ware, Inc., a Delaware corporation
which does business as Webb Distribution ("Webb"). Such warrants are being
held in escrow subject to the completion of the acquisition of Webb. The
closing of this offering is conditioned upon and is to occur simultaneously
with the closing of the Company's acquisition of Webb. See
"Business--Proposed Acquisition of Webb" and "Underwriting." The remaining
1,250,000 Series IV Warrants were issued to certain Selling Securityholders
pursuant to an exchange agreement upon cancellation of rights under prior
agreements. The securities held by the Selling Securityholders may be sold
commencing 18 months from the Effective Date of this Prospectus subject to
earlier release at the sole discretion of the Underwriter. 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 Underwriter's
Over-Allotment Option (as hereinafter defined) have been sold or such option
has expired. The Underwriter's Over-Allotment Option period will expire 30
days following the Effective Date. In other offerings where Biltmore
Securities, Inc. 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. The resale of the securities held by the Selling
Securityholders is subject to prospectus delivery and other requirements of
the Securities Act of 1933, as amended. 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."
It is anticipated that the Units will be sold at a price of $6.00 per
Unit. Prior to this offering, there has been no public market for the
Securities. The Company has applied for inclusion of the Units, Series B
Preferred Stock and Series IV Warrants on Nasdaq, under the symbols QUSTU,
QUSTP and QUSTW, respectively, although there can be no assurances that the
Securities will be accepted for quotation or, if accepted, that an active
trading market will develop. In addition, if the 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 Nasdaq under the
symbol "QUST". On March 3, 1997, the closing bid price per share of the
Common Stock as reported by Nasdaq was $5.00. See "Price Range for Common
Stock and Dividends." For additional information regarding the factors
considered in determining the 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 PREFERRED STOCK
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
9, AND "DILUTION".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
=============================================================================
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO THE
PRICE TO PUBLIC AND COMMISSIONS (1) COMPANY (2)
- ------------ --------------- ---------------------- ----------------
<S> <C> <C> <C>
Per Unit $6.00 $0.60 $5.40
- ------------ --------------- ---------------------- ----------------
Total (3) $6,000,000 $600,000 $5,400,000
- ------------ --------------- ---------------------- ----------------
</TABLE>
=============================================================================
(See Notes, next page)
The securities are offered by the Underwriter subject to prior sale when,
as and if delivered to and accepted by the Underwriter, and subject to the
Underwriter's right to reject orders in whole or in part and to certain other
conditions. It is expected that delivery of certificates representing the
Series B Preferred Stock and Series IV Warrants will be made on or about
March 10, 1997.
BILTMORE SECURITIES, INC.
The date of this Prospectus is March 4, 1997.
<PAGE>
NOTES
(1) Does not include additional compensation to be received by the
Underwriter in the form of (i) a nonaccountable expense allowance of
$180,000 (or $207,000 if the Underwriter's Over-Allotment Option (as
defined below) is fully exercised); (ii) an option to purchase Units
equal to 10% of those being offered to the public (excluding the
Underwriter's Over-Allotment Option Units, if any) at an exercise price
of $9.90 per Unit ("Underwriter's Unit Purchase Option"); (iii) a
payment of $50,000 in respect of advisory services to be provided by
the Underwriter over a two year period; and (iv) a fee payable (subject
to certain exclusions) upon the exercise of Series IV Warrants equal to
4% of the exercise price. In addition, the Company and the Underwriter
have agreed to indemnity and contribution provisions regarding certain
civil liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company,
estimated at $580,000 (or $607,000 if the Underwriter's Over-Allotment
Option, as defined below, is fully exercised), including the
Underwriter's nonaccountable expense allowance. See "Underwriting."
(3) The Company has granted the Underwriter a 30 day option to purchase an
additional 15% of the total Units offered to the public upon the same
terms and conditions as set forth above solely to cover
over-allotments, if any ("Underwriter's Over-Allotment Option"). If the
Underwriter's Over-Allotment Option is exercised in full, the total
Price to the Public, Underwriting Discounts and Commissions, and
Proceeds to the Company will be $6,900,000, $690,000 and $6,210,000,
respectively. See "Underwriting."
-----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS,
SERIES B PREFERRED STOCK, AND SERIES IV WARRANTS AT A LEVEL ABOVE THAT WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED
IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
ALTHOUGH OTHER BROKER-DEALERS HAVE EXPRESSED AN INTENTION TO PARTICIPATE
IN THE OFFERING, ALL OR A SIGNIFICANT NUMBER OF THE UNITS TO BE SOLD IN THIS
OFFERING MAY BE SOLD, IN THE ORDINARY COURSE OF BUSINESS, TO CUSTOMERS OF THE
UNDERWRITER, WHICH MAY AFFECT THE MARKET FOR AND LIQUIDITY OF THE COMPANY'S
SECURITIES IN THE EVENT THAT ADDITIONAL BROKER-DEALERS DO NOT MAKE A MARKET
IN THE COMPANY'S SECURITIES. ALTHOUGH OTHER BROKER-DEALERS HAVE EXPRESSED AN
INTENTION TO MAKE A MARKET IN THE COMPANY'S SECURITIES FOLLOWING THE
OFFERING, THERE CAN BE NO ASSURANCE THAT ANY OF SUCH BROKER-DEALERS WILL
ACTUALLY COMMENCE SUCH MARKET-MAKING ACTIVITIES OR, IF COMMENCED, THAT SUCH
ACTIVITIES WILL BE MAINTAINED. BASED UPON THE UNDERWRITER'S EXPERIENCE IN
PAST OFFERINGS, IT IS EXPECTED THAT SUCH CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN
TRANSACTIONS FOR THE SALE OR PURCHASE OF THE UNITS, SERIES B PREFERRED STOCK
AND SERIES IV WARRANTS CONTAINED THEREIN THROUGH AND/OR WITH THE UNDERWRITER.
NO AGREEMENTS OR UNDERSTANDINGS, WRITTEN OR ORAL, EXIST WITH RESPECT TO THE
PURCHASE OR RESALE OF THE SECURITIES TO BE SOLD IN THIS OFFERING THROUGH OR
WITH THE UNDERWRITER AND/OR ITS AFFILIATES.
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM TIME TO
TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S
SECURITIES. THE UNDERWRITER, IF IT PARTICIPATES IN THE MARKET, MAY BECOME A
DOMINATING INFLUENCE IN THE MARKET FOR THE UNITS, SERIES B PREFERRED STOCK
AND SERIES IV WARRANTS. HOWEVER, THERE IS NO ASSURANCE THAT THE UNDERWRITER
WILL OR WILL NOT CONTINUE TO BE A DOMINATING INFLUENCE. THE PRICES AND
LIQUIDITY OF THE SECURITIES OFFERED HEREUNDER MAY BE SIGNIFICANTLY AFFECTED
BY THE DEGREE OF THE UNDERWRITER'S PARTICIPATION IN SUCH MARKET. THE
UNDERWRITER MAY DISCONTINUE SUCH ACTIVITIES AT ANY TIME OR FROM TIME TO TIME.
SEE "RISK FACTORS--LACK OF PRIOR MARKET FOR UNITS, SERIES B PREFERRED STOCK
AND SERIES IV WARRANTS" AND "UNDERWRITER'S INFLUENCE ON THE MARKET MAY HAVE
ADVERSE CONSEQUENCES."
2
<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.
3
<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.
4
<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.
5
<PAGE>
THE OFFERING*
<TABLE>
<CAPTION>
<S> <C>
Units Offered by the Company (1) ............... 1,000,000 Units
Terms of Conversion of Series B Preferred Stock Each share of Series B Preferred Stock will be
automatically converted on the second anniversary of
the Effective Date into 1.4375 shares of Common
Stock. See "Description of Securities."
Series B Preferred Stock Dividend .............. 2% per annum until converted, payable in cash or
Common Stock at the Company's option.
Series IV Warrants Offered by the Selling
Securityholders ............................... 2,750,000 Warrants
Use of Net Proceeds ............................ To fund the acquisition of Webb and to repay
certain indebtedness. See "Use of Proceeds."
OUTSTANDING EQUITY SECURITIES IMMEDIATELY PRIOR
TO THE OFFERING:
Shares of Common Stock (2) ..................... 1,535,925
OUTSTANDING EQUITY SECURITIES IMMEDIATELY
SUBSEQUENT TO THE OFFERING:
Shares of Common Stock (3) ..................... 1,535,925
Shares of Series B Preferred Stock(4) ......... 1,000,000
Comparative Share Ownership After Offering:
Present Stockholders .......................... 1,535,925
New Investors(5) .............................. 1,437,500
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 THE 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 HELD ON DECEMBER 27, 1996.
(1) The Company is offering 1,000,000 Units at a price of $6.00 per Unit.
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) Does not include shares of Common Stock issuable upon the exercise of
the Series IV Warrants offered by the Selling Securityholders.
(3) Does not include shares of Common Stock issuable (i) upon conversion of
the Series B Preferred Stock; (ii) upon the exercise of the Series IV
Warrants included in the Units or offered by the Selling
Securityholders; (iii) upon the exercise of the Underwriter's
Over-Allotment Option to purchase up to 150,000 Units; or (iv) upon
exercise of the Underwriter's Unit Purchase Option.
(4) Each share of Series B Preferred Stock is convertible into 1.4375
shares of Common Stock.
(5) Assumes conversion of each share of Series B Preferred Stock into
1.4375 shares of Common Stock.
6
<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>
- ------------
(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.
7
<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.
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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
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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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<PAGE>
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 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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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,
16
<PAGE>
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
17
<PAGE>
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."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 Units
offered hereby, 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 this 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 this 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 this 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 this 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 this 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.
19
<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 offered
hereby .......................................................... $ 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."
20
<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 offered hereby 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.
21
<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.
22
<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.
23
<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.
24
<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.
25
<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.
26
<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.
27
<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>
28
<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.
29
<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.
30
<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.
31
<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
32
<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.
33
<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 and are the subject of an alternative prospectus.
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.
34
<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.
35
<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 $100,000 per annum and requires Mr.
Polimeni to devote such portion of his business time and energies to the
business and affairs of the Company as is needed to perform his duties under
the agreement. See also "Certain Transactions" with respect to a Management
Advisory and Consulting Agreement between the Company and Gulfstream
Financial Group, Inc., a company owned by Mr. Polimeni and Joan R. Gubitosi.
OPTION/SAR GRANTS
There were no grants during 1995 of stock options or stock appreciation
rights to any person named in the Summary Compensation Table. For information
relating to warrants and rights granted to Gulfstream, a company owned by
Dominic A. Polimeni and Joan R. Gubitosi, and to Phillip D. Schwiebert, see
"Securities Ownership--Exchange Agreements."
36
<PAGE>
OPTION/SAR EXERCISES
Set forth below is information concerning exercises of options during 1995
and the year-end value of unexercised options for the persons named in the
Summary Compensation Table:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED-IN-
OPTIONS/SAR'S AT THE-MONEY OPTIONS/SARS
SHARES ACQUIRED VALUE FISCAL YEAR END (#) AT FISCAL YEAR END ($)
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.
37
<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.
38
<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 166,136(7) 10.61% 5.53%
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
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 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
39
<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
40
<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 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.
41
<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 Offering or the Webb acquisition.
42
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
Each of the Units offered hereby at $6.00 per Unit 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
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stock on the day immediately preceding the Effective Date compared with an
offering price of $5.75 per 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
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<PAGE>
limited to, issuance of stock dividends other than dividends paid in respect
of the Series B Preferred 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.
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<PAGE>
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 (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.
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 under the
Alternate Prospectus 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.
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.
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<PAGE>
<TABLE>
<CAPTION>
SERIES IV
WARRANTS
SHARES OF THAT MAY BE SHARES OF PERCENT OF
COMMON STOCK OFFERED PURSUANT COMMON STOCK CLASS
OWNED PRIOR TO TO ALTERNATE OWNED AFTER OWNED AFTER
SELLING SECURITYHOLDERS THIS OFFERING 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
- ------------
* The Alternate 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
included in the Units. Assumes no exercise of the Series IV Warrants.
The Series IV Warrants are being offered by the Selling Securityholders,
in the corresponding amounts above, under the 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. 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 the Underwriter. 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 to
participate. The Selling Securityholders and intermediaries through whom such
securities are 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.
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<PAGE>
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 Exchange Act, and the regulations thereto, 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.
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Underwriter has agreed to purchase from the Company
1,000,000 Units offered hereby from the Company on a "firm commitment" basis,
if any are purchased. The Underwriter has advised the Company that it
proposes to offer the Units to the public at $6.00 per Unit as set forth on
the cover page of this Prospectus and that it may allow to certain dealers
who are NASD members, and such dealers may reallow, concessions not to exceed
$0.20 per Unit. After the initial public offering, the public offering price,
concession and reallowance may be changed by the Underwriter.
The Company has granted an option to the Underwriter, exercisable during
the 30-day period from the date of this Prospectus, to purchase an additional
15% of the total Units offered to the public at the offering price, less the
underwriting discount, to cover over-allotments, if any.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection
with the Registration Statement, including liabilities under the Securities
Act. Insofar as indemnification for liabilities arising under the Securities
Act may be provided to officers, directors or persons controlling the
Company, the Company has been informed that in the opinion of the Commission,
such indemnification is against public policy and is therefore unenforceable.
The registration statement, of which this Prospectus forms a part, also
relates to the registration of 2,750,000 Series IV Warrants offered under the
Alternate Prospectus by the Selling Securityholders. The securities held by
the Selling Securityholders may be sold commencing 18 months from the
Effective Date of this Prospectus subject to earlier release at the sole
discretion of the Underwriter. 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 Underwriter's Over-Allotment Option have been sold
or such option has expired. The Underwriter's Over-Allotment Option period
will expire 30 days following the Effective Date. In other offerings where
Biltmore Securities, Inc. 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. See "Selling Securityholders."
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance of three percent (3%) of the aggregate offering price of the Units
offered hereby, including any Units purchased pursuant to the Over-Allotment
Option. The Underwriter's Expenses in excess of the stated expense allowance
will be borne by the Underwriter. To the extent that the expenses of the
Underwriter are less than the stated expense allowance, the difference may be
deemed compensation to the Underwriter in addition to the sales commission
payable to the Underwriter. The Company has agreed to pay to the Underwriter,
upon the closing of this Offering, a fee in the amount of $50,000 in respect
of advisory services to be provided by the Underwriter to the Company over a
two-year period.
The Company has agreed to grant to the Underwriter, or its designees an
option ("Underwriter's Purchase Option") to purchase up to an aggregate of
100,000 Units. The Underwriter's Purchase Option shall be exercisable during
the four-year period commencing one (1) year after the Effective Date and
will provide for a demand registration right in favor of the Underwriter. The
Underwriter's Purchase Option may not be assigned, transferred, sold or
hypothecated by the Underwriter after the Effective Date of this Prospectus,
except to officers or partners of the Underwriter or of selling group members
in this offering. Any profits realized by the Underwriter upon the sale of
the Securities issuable upon exercise of the Underwriter's Unit Purchase
Option may be deemed to be additional underwriting compensation. The exercise
price of the Units issuable upon exercise of the Underwriter's Unit Purchase
Option during the period of excercisability shall be not less than 165% of
the initial public offering prices of such Units. The exercise price of the
Underwriter's Purchase Option and the number of Units covered thereby are
subject to adjustment in certain events to prevent dilution. For the life of
the Underwriter's Purchase Option, the holders thereof are given, at a
nominal cost, the opportunity to profit from a rise in the market price of
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<PAGE>
the Company's shares and warrants with a resulting dilution in the interest
of other shareholders. The Company may find it more difficult to raise
capital for its business if the need should arise while the Underwriter's
Unit Purchase Option is outstanding. At any time when the holders of the
Underwriter's Purchase Option might be expected to exercise it, the Company
would probably be able to obtain additional capital on more favorable terms.
The Company will also pay a warrant solicitation fee to the Underwriter
equal to four percent (4%) of the exercise price of the Series IV Warrants on
all Warrants exercised (excluding Warrants exercised by the Underwriter or
certain affiliates of the Company), subject to the Underwriter's compliance
with the rules and regulations of the National Association of Securities
Dealers ("NASD"). In accordance with NASD Notice to Members 81-38, no warrant
solicitation fee shall be paid (i) upon exercise where the market price of
the underlying Common Stock is lower than the exercise price; (ii) for the
exercise of warrants held in any discretionary account; (iii) upon the
exercise of warrants where disclosure of compensation arrangements has not
been made in documents provided to customers both as part of the original
offering and at the time of exercise; and (iv) upon the exercise of warrants
in unsolicited transactions. The broker-dealer to receive the warrant
solicitation fee must be designated, in writing, as the soliciting broker.
See "Risk Factors--Exercise of Series IV Warrants May Have Dilutive Effect on
Market and Underwriter's Influence on the Market May Have Adverse
Consequences."
If the Company enters into a merger, acquisition, joint venture and/or
other capital business transaction for the Company with another party
introduced to the Company by the Underwriter within a five year period
following the Effective Date, the Company has agreed to pay the Underwriter a
fee equal to five percent of the first $3 million of consideration involved
in the transaction, four percent of the next $3 million, three percent of the
next $2 million, two percent of the next $2 million and one percent of the
excess, if any, over $10 million.
The Underwriter has historically made a market in the Company's securities
and has acted as a placement agent in connection with a number of private
placements by the Company. The Underwriter also acted as placement agent for
the Company in a November 1994 private placement of 200,000 units consisting
of Common Stock and Warrants to purchase Common Stock. As compensation, the
Underwriter received 20,000 shares of the Company's Common Stock and Warrants
to purchase 20,000 shares of Common Stock of the Company at $3.50 per share.
These Warrants were exercised in December 1995. A company affiliated with the
Underwriter also participated in such private placement as an investor. The
Underwriter also acted as placement agent in connection with a 1994 exchange
offer by the Company in consideration of which the Underwriter was issued
6,183 shares. On March 31, 1995, the Underwriter, in consideration of its
serving as Placement Agent, was granted options to purchase 11,600 shares of
the Common Stock of the Company at $35.00 per share. Such options expire
March 31, 2000. The Company also agreed to pay the Underwriter a cash payment
of $217,500 which represents a 10% placement fee and a 2.5% non-accountable
expense allowance based on total proceeds of $1,740,000.
The Underwriter received 25,000 shares of Common Stock of the Company as
compensation under a consulting agreement dated as of January 1, 1994, and
options which, after the application of anti-dilution provisions, represented
the right to purchase 62,696 shares of Common Stock at an exercise price of
$2.49 per share. These options were exercised in December 1995.
LITIGATION INVOLVING UNDERWRITER MAY AFFECT SECURITIES
The Company has been advised by 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, Sections 10(b) and 15(c) of the Securities Exchange
Act of 1934, 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) IPOs in 1992 and 1993, the Underwriter engaged in fraudulent sales
practices. The proposed Offer of Settlement was consented
50
<PAGE>
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 before November 1, 1996 (or at such
later date as may be extended by the Consultant without 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;
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 on-going 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 (4) 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 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 securityholders 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.
FOR ADDITIONAL INFORMATION REGARDING THE UNDERWRITER, INVESTORS MAY CALL THE
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. AT (800) 289-9999.
51
<PAGE>
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
securityholders may not have anyone to purchase their securities when offered
for a 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.
DETERMINATION OF PUBLIC OFFERING PRICE
Prior to this offering, there has been no public market for the Units,
Series B Preferred Stock and Series IV Warrants. The Common Stock is listed
on the Nasdaq SmallCap Market. The rate at which the Series B Preferred Stock
is convertible into Common Stock is based upon 80% of the closing bid price
per share of the Common Stock on the date preceding the Effective Date
("Closing Price"). The exercise price of the Series IV Warrants equals 115%
of the Closing Price. The method for setting both the conversion rate of the
Series B Preferred Stock and the exercise price of the Series IV Warrants was
the product of negotiations between the Company and the Underwriter. Among
the factors considered in the negotiations were the market price of the
Company's Common Stock, an analysis of the areas of activity in which the
Company is engaged, the present state of the Company's business, the
Company's financial condition, the Company's prospects, an assessment of
management, the general condition of the securities market at the time of
this offering and the demand for similar securities of comparable companies.
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. Certain legal matters will be passed upon for the Underwriter by
Bernstein & Wasserman, LLP, 950 Third Avenue, New York, New York 10022.
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.
52
<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 -- $981,782) $1,570,000
============
</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 forty
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 .......... 5 Years
Computer Equipment ........ 5 Years
Furniture and Fixtures ... 7 Years
Leasehold Improvements ... 5 Years
</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>
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
========== ==========
Long-Term debt matures as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
1996 . $150,000
1997 . 500,000
----------
$650,000
==========
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
1995 $ 825,000
1994 $2,718,750
</TABLE>
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 ..... 3
Available Information ................... 3
Prospectus Summary ...................... 4
Risk Factors ............................ 9
Use of Proceeds ......................... 19
Dilution ................................ 20
Capitalization .......................... 21
Price Range of Common Stock and Dividend
Policy ................................. 22
Management's Discussion and Analysis of
Financial Condition and Plan of
Operations ............................. 23
Business ................................ 30
Management .............................. 35
Certain Transactions .................... 38
Securities Ownership .................... 39
Description of Securities ............... 43
Selling Securityholders ................. 46
Underwriting ............................ 49
Legal Proceedings ....................... 52
Legal Matters ........................... 52
Experts ................................. 52
Index to Financial Statements ........... P-1
Pro Forma Combined Financial Statements P-2
Report of Independent Auditors .......... F-1
</TABLE>
1
<PAGE>
1,000,000 UNITS
QUESTRON TECHNOLOGY,
INC.
- -----------------------------------------------------------------------------
PROSPECTUS
- -----------------------------------------------------------------------------
BILTMORE SECURITIES, INC.
MARCH 4, 1997
