<PAGE>
Registration No. 333-18243
AMENDMENT NO. 1
TO
FORM SB-2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
QUESTRON TECHNOLOGY, INC.
(Name of small business issuer in its charter)
6400 CONGRESS AVENUE
SUITE 200
BOCA RATON, FLORIDA 33487
(407) 241-5251
(Address and telephone number of principal executive offices)
6400 CONGRESS AVENUE
SUITE 200
BOCA RATON, FLORIDA 33487
(407) 241-5251
(Address of principal place of business or intended principal place of business)
DOMINIC A. POLIMENI
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
6400 CONGRESS AVENUE
SUITE 200
BOCA RATON, FLORIDA 33487
(407) 241-5251
(Name, address and telephone number of agent for service)
WITH COPIES TO:
FREDERICK W. LONDON, ESQ. STEVEN F. WASSERMAN, ESQ.
GOULD & WILKIE BERNSTEIN & WASSERMAN, LLP
ONE CHASE MANHATTAN PLAZA 950 THIRD AVENUE
NEW YORK, NEW YORK 10005-1401 NEW YORK, NEW YORK 10022-2705
(212) 344-5680 (212) 826-0730
(212) 809-6890 (FAX) (212) 371-4730 (FAX)
Approximate Date of Proposed Sale to the Public: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering |_|.
(facing page continues)
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
============================================================================================================================
Proposed Proposed
Title of Each Maximum Maximum
Class of Securities Amount to be Offering Price Aggregate Offering Amount of
to be Registered Registered Per Security Price Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units, each consisting of one
share of Series B Convertible
Preferred Stock, par value $.01
per share ("Preferred Stock"),
and one Series IV Warrant to
purchase one share of Common Stock
("Series IV Warrant") 1,150,000 $6.00(1) $6,900,000 $2,091
- ---------------------------------------------------------------------------------------------------------------------------
Preferred Stock included in
the Units 1,150,000 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Series IV Warrants included
in the Units 1,150,000 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon
exercise of the Series IV
Warrants included in the
Units 1,150,000(2) $4.31(1)(3) $4,956,500 $1,502
- ---------------------------------------------------------------------------------------------------------------------------
Underwriter's Unit Purchase
Option 100,000(2) $7.20(1) $720,000 $219
- ---------------------------------------------------------------------------------------------------------------------------
Preferred Stock included in
Unit Purchase Option 100,000 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Series IV Warrants included
in Unit Purchase Option 100,000 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon
exercise of Series IV
Warrants in Unit Purchase
Option 100,000(2) $4.31(1)(3) $431,000 $131
- ---------------------------------------------------------------------------------------------------------------------------
Series IV Warrants offered
by Selling Securityholders 2,750,000 $0.25(1) $687,500 $209
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon
exercise of Series IV
Warrants offered by Selling
Securityholders 2,750,000(2) $4.31(1)(3) $11,852,500 $3,592
- ---------------------------------------------------------------------------------------------------------------------------
Total Registration Fee $7,744(4)
===========================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(a).
(2) Pursuant to Rule 416, there are also being registered such additional
shares of Common Stock as may be issuable pursuant to the
anti-dilution provisions of the Preferred Stock and the Series IV
Warrants.
(3) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c) based upon 115% of the closing price for
shares of Common Stock on December 16, 1996 (as adjusted for the
proposed one-for-ten reverse split of the outstanding Common Stock).
(4) Fee previously paid.
(facing page continues)
<PAGE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
<PAGE>
EXPLANATORY NOTE
This registration statement covers the primary offering of Units by
Questron Technology, Inc. (the "Company") and the offering of securities by
certain selling securityholders (the "Selling Securityholders"). The Company
is registering, under the primary prospectus ("Primary Prospectus"), certain
securities including 1,000,000 Units (excluding Units issuable upon exercise
of the Underwriter's over-allotment option and Units issuable upon exercise of
the Underwriter's Unit Purchase Option), each Unit consisting of one share of
Series B Convertible Preferred Stock ("Series B Preferred Stock") and one
Series IV Common Stock Purchase Warrant ("Series IV Warrant") and the shares
of Common Stock of the Company issuable upon conversion of the Series B
Preferred Stock and exercise of the Series IV Warrants included in the Units.
The Company is registering, on behalf of the Selling Securityholders, under an
alternate prospectus ("Alternate Prospectus"), 2,750,000 Series IV Warrants
and the shares of Common Stock of the Company issuable upon exercise of such
Series IV Warrants. The Alternate Prospectus pages, which follow the Primary
Prospectus, contain certain sections which are to be combined with all of the
sections contained in the Primary Prospectus, with the following exceptions:
the front and back cover pages, and the sections entitled "The Offering" and
"Selling Securityholders." In addition, the sections entitled "Concurrent
Sales" and "Plan of Distribution" will be added to the Alternate Prospectus.
Furthermore, all references contained in the Alternate Prospectus to the
"offering" shall refer to the Company's offering under the Primary Prospectus.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
Subject to Completion, dated February 25, 1997
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 are detachable and may trade separately immediately upon
issuance. 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
___________ shares of Common Stock, par value $.001 per share, of the Company
("Common Stock") on the second anniversary of the date of this Prospectus
("Effective Date"). This conversion ratio is equal to 80% of the closing price
per share as reported by the Nasdaq SmallCap Market for the Common Stock on
the day immediately preceding the Effective Date compared with an offering
price of $5.75 per 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 $____
per share (which is 115% of the closing market 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 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 the Nasdaq SmallCap Market,
exceeds $ ____ 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
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."
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."
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 Units,
Series B Preferred Stock or Series IV Warrants. The Company has applied for
inclusion of the Units, Series B Preferred Stock and Series IV Warrants on the
Nasdaq SmallCap Market, under the symbols QUSTU, QUSTP and QUSTW,
respectively, although there can be no assurances that such securities will be
accepted for quotation or, if accepted, that an active trading market will
develop. In addition, if the Company's securities are accepted for quotation
and active trading develops, the Company is required to maintain certain
minimum criteria established by Nasdaq and there can be no assurance that the
Company will be able to continue to fulfill such criteria. See "Risk Factors."
The Common Stock of the Company is listed on the Nasdaq SmallCap Market under
the symbol "QUST". On February 24, 1997, the closing price per share of the
Common Stock as reported by the Nasdaq SmallCap Market was $4.50. 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 10 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.
==============================================================================
UNDERWRITING DISCOUNTS PROCEEDS TO THE
PRICE TO PUBLIC AND COMMISSIONS (1) COMPANY (2)
- ------------------------------------------------------------------------------
Per Unit....... $6.00 $0.60 $5.40
- ------------------------------------------------------------------------------
Total (3)...... $6,000,000 $600,000 $5,400,000
==============================================================================
(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 , 1997.
------------------------------------
BILTMORE SECURITIES, INC.
The date of this Prospectus is [ ], 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
PROPOSED 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. 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
-4-
<PAGE>
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.
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,
-5-
<PAGE>
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.
<TABLE>
<CAPTION>
THE OFFERING*
<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 ____ 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
-6-
<PAGE>
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).............................. 1,547,774
OUTSTANDING EQUITY SECURITIES IMMEDIATELY
SUBSEQUENT TO THE OFFERING:
Shares of Common Stock (3).............................. 1,547,774
Shares of Series B Preferred Stock(4)................... 1,000,000
Comparative Share Ownership After Offering:
Present Stockholders........................... 1,547,774
New Investors(5)............................... _____
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 ______ 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 market 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 be exercised, of
which there is no assurance, the Company will receive the proceeds
therefrom aggregating up to an additional $ . 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) These shares of Series B Preferred Stock are convertible into_______
shares of Common Stock.
(5) Assumes conversion of the Series B Preferred Stock into ________ shares
of Common Stock.
-7-
<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:
December 31, 1995 September 30, 1996 (unaudited)
-------------------------------
Actual Actual Pro Forma (1)
---------- ---------- -------------
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
- ------------
(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.
-8-
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
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 $0.27
Weighted average number of
common shares and common
share equivalents outstanding 13,707,612 15,399,846 3,456,652(2)
Ratio of earnings to fixed charges 3.1 to 1.0 2.9 to 1.0 5.5 to 1.0
For the Years Ended December 31,
---------------------------------------------------------
1994 1995 1995
Actual Actual Pro Forma (1)
------ ------ -------------
(unaudited)
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 $.27
Weighted average number of
common shares and common
share equivalents outstanding 2,793,402 13,795,632 3,296,230(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 proposed 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.
-9-
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. ONLY THOSE PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE
INVESTMENT SHOULD PURCHASE THESE SECURITIES. PROSPECTIVE INVESTORS, PRIOR TO
MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY READ THIS PROSPECTUS AND
CONSIDER, ALONG WITH OTHER MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK
FACTORS:
FORWARD LOOKING STATEMENTS
When used in this Prospectus and the documents incorporated herein by
reference, the words "believes", "anticipates", "expects" and similar
expressions are intended to identify in certain circumstances, forward-looking
statements. Such statements are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those projected,
including the risks described in the "Risk Factors" section. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such statements. The Company also undertakes no obligation to update these
forward-looking statements.
COMBINED OPERATIONS SUBSEQUENT TO THE ACQUISITION; OFFERING PROCEEDS MAY BE
RETURNED WITHOUT INTEREST
The Company has entered into the Stock Purchase Agreement, pursuant
to which the Company has agreed to purchase all issued and outstanding stock
of Webb. The consummation of the Offering is conditioned upon and is to occur
simultaneously with the acquisition of Webb. If the acquisition of Webb is not
so completed, the closing of this Offering will not occur and all proceeds of
this Offering will be returned to investors without interest. If the
acquisition does occur, upon consummation of the transactions contemplated
hereby, the Company's revenues will be derived from the businesses of both
its existing business and Webb. Management of the Company, after the
acquisition, will be composed of the current management of the Company. The
Company can make no assurances that this combination of businesses will prove
as successful as each business was independently. See "Dependence on
Management and Limitations on Certain Experience."
NO ASSURANCE OF FUTURE PROFITABILITY OR PAYMENT OF DIVIDENDS
No assurance can be given that the future operations of the Company
or its subsidiaries will be profitable. Should the operations of the Company
or its subsidiaries remain profitable, it is likely that the Company or its
subsidiaries would retain much or all of the earnings in order to finance
future growth and expansion. Therefore, the Company does not presently intend
to pay dividends on its Common Stock. See "Dividend Policy."
DIVIDENDS ON PREFERRED STOCK PAYABLE IN CASH OR SHARES,
AT OPTION OF THE COMPANY
The Company will be obligated to pay dividends at the rate of $0.115 or 2% per
share of Series B Preferred Stock in respect of the two year period prior to
its conversion. Such dividends may be paid in cash or shares of Common Stock,
at the Company's option, and, if paid in shares, there can be no assurance that
the holder will be able to sell the shares so received for the value of
such dividend. See "Description of Securities--Preferred Stock."
10
<PAGE>
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 $ per share. As of September 30, 1996, the Company had a net
tangible book value of $5,776,893 or $3.76 per share, 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, net tangible
book value would have been $ or $ per share (based upon each share of
Series B Preferred Stock being convertible into shares of Common Stock).
The result will be an immediate increase in net tangible book value per share
of $ to existing shareholders and an immediate dilution to new investors of
$ per share.
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 requires Mr. Polimeni to devote
such portion of his business time and energies to the business and affairs
11
<PAGE>
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. Situtations may arise by reason of these relationships which
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").
12
<PAGE>
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;
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.
13
<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 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."
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 % of the Company's Common Stock and will
have the right to acquire up to an additional % of the Common Stock
pursuant to outstanding options and warrants. See "Securities Ownership."
Accordingly, such persons may, with the votes of the holders of an additional
% 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
14
<PAGE>
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 post-effective
amendment. A post-effective amendment is required under the 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 , 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
proposed 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 1,547,774 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: _________ 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
15
<PAGE>
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 _________ 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 ____ 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 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 exercise of all such warrants and options the Company
will have shares of Common Stock outstanding and 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."
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
16
<PAGE>
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 market 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 $ _____ 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, 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
17
<PAGE>
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, 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
18
<PAGE>
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 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 the 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."
19
<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 Representative'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:
APPROXIMATE AMOUNT
OF NET PROCEEDS PERCENT
--------------- -------
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%
=========== =======
- ---------------
(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 $ . 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.
20
<PAGE>
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 Representative 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.
DILUTION
As of September 30, 1996, the Company had a net tangible book value of
$5,776,893 or $3.76 per share. 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 oustanding. 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, net tangible book value would have
been $ , or $ per share (based on each share of Series B Preferred
Stock being convertible into shares of Common Stock). The result will be an
immediate increase in net tangible book value per share of $ to existing
shareholders and an immediate dilution to new investors of $ per share.
"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
Net tangible book value per share, before the offering ........ $3.76
Increase per share attributable to the sale by the Company
of the Units offered hereby ................................. $
Net tangible book value per share, after the offering(2)............ $
Dilution per share to new investors ................................ $
========
</TABLE>
- --------
(1) If the over-allotment option is exercised in full, dilution to new investors
will be $ .
(2) Based on each share of Series B Preferred Stock being converted into
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."
21
<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 -- 10,000
value
Common stock, $.001 1,547 1,547
par value, 20,000,000
shares authorized,
1,535,484 outstanding
September 30, 1996;
proforma combined; [ ]
shares outstanding, as
adjusted
Additional paid-in capital 23,887,894 29,072,894
Retained earnings (deficit) (14,966,558) (14,966,558)
Less: treasury stock (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.
22
<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.
Common Stock
------------
High Low
---- ---
1995:
-----
First Quarter $27.50 $18.13
Second Quarter $33.75 $20.00
Third Quarter $25.00 $16.25
Fourth Quarter $39.38 $13.75
1996:
-----
First Quarter $31.25 $15.00
Second Quarter $18.75 $ 7.50
Third Quarter $10.63 $ 6.88
Fourth Quarter $ 4.38 $ 2.50
1997:
-----
First Quarter $ 4.50 $ 3.25
(through February 24, 1997)
On February 24, 1997, the closing price for the Company's Common
Stock as reported on the NASDAQ SmallCap Market system was $4.50. 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
23
<PAGE>
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.
24
<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:
Webb debt retirement................................... $1,088,000
Quest debt retirement.................................. 482,000
----------
Total debt retired............................ $1,570,000
==========
25
<PAGE>
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.
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
========== =========== ========= =========
<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.
26
<PAGE>
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.
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.
27
<PAGE>
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.
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
28
<PAGE>
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.
29
<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
30
<PAGE>
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.
31
<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.
32
<PAGE>
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>
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.
33
<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.
34
<PAGE>
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.
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
35
<PAGE>
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.
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.
36
<PAGE>
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 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.
37
<PAGE>
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
38
<PAGE>
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.
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;
39
<PAGE>
(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.
40
<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:
Name Age Position
- ---- --- --------
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
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 &
41
<PAGE>
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.
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.
42
<PAGE>
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 $100,000.
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------------------------
Annual Compensation Awards Payouts
-------------------------------------------- ---------------------------- ------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted Securities
Name and Other Annual Stock Underlying LTIP All other
Principal Position Year Salary Bonus Compensation Awards ($) Options/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 Chief 1994 $52,000 -- -- -- 25,000(2) -- --
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 $100,000 per annum and requires Mr.
Polimeni to devote such portion of his business time and energies to the
business and affairs of the Company as is needed to perform his duties under
the agreement. See also "Certain Transactions" with respect to a Management
Advisory and Consulting Agreement between the Company and Gulfstream Financial
Group, Inc., a company owned by Mr. Polimeni and Joan R. Gubitosi.
OPTION/SAR GRANTS
There were no grants during 1995 of stock options or stock
appreciation rights to any person named in the Summary Compensation Table. For
information relating to warrants and rights granted to Gulfstream, a company
owned by Dominic A. Polimeni and Joan R. Gubitosi, and to Phillip D.
Schwiebert, see "Securities Ownership--Exchange Agreements."
43
<PAGE>
OPTION/SAR EXERCISES
Set forth below is information concerning exercises of options during
1995 and the year-end value of unexercised options for the persons named in
the Summary Compensation Table:
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities
Underlying Unexercised Value of Unexercised-In-
Shares Options/SAR's at Fiscal the-Money Options/SARs
Acquired Value Year End (#) at Fiscal Year End ($)
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.
44
<PAGE>
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.
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
45
<PAGE>
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.
46
<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 1,547,774
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*
- -------------- ----------- --------- -------- --------
<S> <C> <C> <C> <C>
Dominic A. Polimeni(1) Chairman, President 380,273(2) 22.68%
and Chief Executive
Officer
Milton M. Adler (1) Director, Secretary, 767(3) **
Treasurer and
Controller
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) 22.68%
c/o Gulfstream Financial
Group, Inc.
6400 Congress Ave., Suite 200
Boca Raton, FL 33487
Phillip D. Schwiebert President and Chief 166,136(7) 10.47%
c/o Quest Electronic Operating Officer of
Hardware, Inc. Quest Electronic
1180 Murphy Avenue Hardware, Inc., a
San Jose, CA 95131 subsidiary of the
Company
47
<PAGE>
Percentage of Shares
--------------------
Position with Number Before After
Name & Address the Company of Shares Offering Offering*
- -------------- ----------- --------- -------- --------
The Miami Project to Cure Paralysis 100,000 6.46%
The University of Miami
School of Medicine
1600 NW Tenth Avenue
Miami, FL 33136
All officers and directors as a group 392,040 23.38%
(five persons)
</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 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."
48
<PAGE>
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 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.
49
<PAGE>
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 proposed 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.
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
50
<PAGE>
date of grant if the pre-tax income targets set forth below are met or
exceeded in any fiscal year up to and including fiscal year 2001:
No. of Additional No. of Additional
Gulfstream Shares Schwiebert Shares Pre-tax Income at Least
----------------- ----------------- -----------------------
333,333 166,667 $2,500,000
333,333 166,667 $3,500,000
333,334 166,666 $4,500,000
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.
51
<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 are detachable and may trade separately
immediately upon issuance. Should the Series IV Warrants be exercised, of
which there is no assurance, the Company will receive the proceeds therefrom,
aggregating up to an additional $ .
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. There are presently 1,547,774 issued and
outstanding shares of Common Stock (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 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.
52
<PAGE>
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 ____ shares of Common
Stock on the second anniversary of the Effective Date. This conversion ratio
is equal to 80% of the closing price per share as represented on the Nasdaq
SmallCap Market for the Common stock on the day immediately preceding the
Effective Date compared with an offering price of $5.75 per 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 after
the date of this Prospectus ("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
115% of the closing market 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 $
_____ 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
53
<PAGE>
a market will develop or continue as to such Series IV Warrants. If the
Company is unable to qualify its Common Stock underlying such Series IV
Warrants for sale in certain states, holders of the Company's Series IV
Warrants in those states will have no choice but to either sell such Series IV
Warrants or allow them to expire.
Each Series IV Warrant may be exercised by surrendering the Series IV
Warrant certificate, with the form of election to purchase on the reverse side
of the Series IV Warrant certificate properly completed and executed, together
with payment of the exercise price to the Series IV Warrant Agent. The Series
IV Warrants may be exercised in whole or from time to time in part. If less
than all of the Series IV Warrants evidenced by a Series IV Warrant
certificate are exercised, a new Series IV Warrant certificate will be issued
for the remaining number of Series IV Warrants.
Holders of the Series IV Warrants are protected against dilution of
the equity interest represented by the underlying shares of Common Stock upon
the occurrence of certain events, including, but not limited to, issuance of
stock dividends other than dividends paid in respect of the Series B Preferred
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
54
<PAGE>
have been effected, exercise the Series IV Warrants and pay the exercise price
at a time when, in the event of a decrease in market price from the period
preceding the issuance of the call for redemption, it may be less than
advantageous economically to do so, or (ii) accept the redemption price,
which, in the event of an increase in the price of the stock, could be
substantially less than the market value thereof at the time of redemption.
RESTRICTED SHARES ELIGIBLE FOR FUTURE SALE
There are currently 384,409 shares of the Company's outstanding
Common Stock that are "restricted securities" which were acquired on March 31,
1995 which in the future, may be sold upon compliance with Rule 144 adopted
under the Securities Act. Rule 144, as amended, provides, in essence, that a
person holding "restricted securities" for a period of one year may sell every
three months a number of shares equal to the greater of (a) one percent of the
Company's issued and outstanding shares, or (b) the average weekly volume of
sales during the four calendar weeks preceding the sale. The amount of
"restricted securities" which a person who is not an affiliate of the Company
may sell is not so limited, since non-affiliates may sell without volume
limitation their shares held for two years. Therefore, during each three month
period, a holder of restricted securities who has held them for at least the
one year period may sell under Rule 144 up to 15,477 shares. Non-affiliated
persons who hold for the two-year period described above may sell unlimited
shares once their holding period is met. The Company has also agreed not to
issue any additional securities other than as contemplated by this Prospectus
for a period of twenty-four (24) months following the Effective Date without
the consent of the Underwriter.
The registration statement of which this Prospectus is a part also
covers the offering of 2,750,000 Series IV Warrants which are being offered by
the Selling Securityholders. The securities held by the 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.
55
<PAGE>
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.
<TABLE>
<CAPTION>
Shares of Shares that may Series IV Warrants Shares of Percent of
Common Stock be offered that may be Common Class
owned prior to pursuant to this offered pursuant to Stock owned owned after
Selling Securityholders this offering Prospectus this Prospectus after offering offering*
----------------------- ------------- ---------- --------------- -------------- --------
<S> <C> <C> <C> <C> <C>
Gulfstream Financial Group, Inc. 380,273 -- 1,000,000 380,273
6400 Congress Ave.
Suite 200
Boca Raton, FL 33487
Phillip D. Schwiebert 166,136 -- 250,000 166,136
c/o Quest Electronic Hardware,
Inc.
1180 Murphy Ave.
San Jose, CA 95131
A.J. Dinicola -- -- 1,500,000 -- --
c/o Webb Distribution
Two Lowell Ave.
Winchester, MA 08190
</TABLE>
- ----------
* For 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.
The Series IV Warrants are being offered by the Selling
Securityholders, in the corresponding amounts above, under this alternate
Prospectus. Gulfstream owns in excess of 5% of the Company's Common Stock and
Mr. Polimeni, the Chairman, Chief Executive Officer and President of the
Company, is an officer, director and 50% stockholder of Gulfstream. Mr.
Schwiebert also owns in excess of 5%
56
<PAGE>
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 Act
with respect to the securities offered, and any profits realized or
commissions received may be deemed underwriting compensation.
At the time a particular offer of securities is made by or on behalf
of a Selling Securityholder, to the extent required, a Prospectus will be
distributed which will set forth the numbers of securities being offered and
the terms of the offering, including the name or names of any underwriters,
dealers or agents, if any, the purchase price paid by any underwriter for
shares purchased from the Selling Securityholders and any discounts,
commissions or concessions allowed or reallowed or paid to dealers, and the
proposed selling price to the public.
Under the 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.
57
<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 $
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
58
<PAGE>
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 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.
59
<PAGE>
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 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
60
<PAGE>
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 practice 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.
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.
61
<PAGE>
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 market
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.
62
<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 - P-3
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 - P-7
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 - F-3
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-4
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-5 - F-6
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-7 - F-10
P-1
<PAGE>
Notes to Consolidated Financial Statements...........................................................F-11 - F-24
HISTORICAL FINANCIAL STATEMENTS OF COMP WARE, INC., D/B/A WEBB DISTRIBUTION, INC.:
Report of Independent Auditors..............................................................................F-25
Balance Sheet as of September 30, 1996 (unaudited) and
December 31, 1995..................................................................................F-26 - F-27
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-28
Statement of Stockholders' Equity...........................................................................F-29
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-30 - F-33
Notes to Financial Statements........................................................................F-34 - F-41
</TABLE>
P-2
<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-3
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
H I S T O R I C A L S
---------------------- PROFORMA 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 & 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
============ ============ ============ ============
</TABLE>
P-4
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
H I S T O R I C A L S
---------------------- PROFORMA PRO FORMA
QUESTRON WEBB ADJUSTMENTS COMBINED
-------- ---- ----------- --------
<S> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' 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-5
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
H I S T O R I C A L S
--------------------------- PRO FORMA PRO FORMA
QUESTRON WEBB ADJUSTMENTS COMBINED
-------- ---- ----------- --------
<S> <C> <C> <C> <C>
Total revenue $ 8,264,940 $ 6,088,946 $ -- $14,353,886
Total operating costs and (A) 66,760
expenses 7,591,425 5,598,862 (B) (150,000) 13,107,047
--------- --------- ------------- ----------
Operating income (loss) 673,515 490,084 83,240 1,246,839
Total other income (expense) (234,631) (109,537) (C) 117,750 (226,418)
--------- -------- ----------- ---------
Income before income taxes 438,884 380,547 200,990 1,020,421
Provision for income taxes 49,383 171,300 (D) (129,300) 91,383
------------- ------------ ------------ ------------
Net income $ 389,501 $ 209,247 $ 330,290 $ 929,038
============= ============ ============ ===========
Net income per common share $ 0.03 $ .27
============= ============
Average number of common
shares and common share
equivalents outstanding 15,399,846 3,456,652
============= ===========
</TABLE>
P-6
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
H I S T O R I C A L S
---------------------- PRO FORMA PRO FORMA
QUESTRON WEBB ADJUSTMENTS COMBINED
-------- ---- ----------- --------
<S> <C> <C> <C> <C>
Total revenue $ 7,259,155 $ 7,793,179 $ -- $ 15,052,334
Total operating costs and (A) 89,010
expenses 6,674,249 7,315,920 (B) (200,000) 13,879,179
------------ ------------ ------------ ------------
Operating income (loss) 584,906 477,259 110,990 1,173,155
Total other income (expense) (205,555) (161,545) (C) 157,000 (210,100)
------------ ------------ ------------ ------------
Income before income taxes 379,351 315,714 267,990 963,055
Provision for income taxes 27,164 113,681 (D) (80,716) 60,129
------------ ------------ ------------ ------------
Net income $ 352,187 $ 202,033 $ 348,706 $ 902,926
============ ============ ============ ============
Net income per common share $ 0.03 $ .27
============ ============
Average number of common
shares and common share
equivalents outstanding 13,795,632 3,296,230
============ ============
</TABLE>
P-7
<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:
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
=========
P-8
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS TO STATEMENTS OF OPERATIONS:
Nine
Months Annual
------ ------
<S> <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 $.28 for the nine months ended September
30, 1996 and $.30 for the year ended December 31, 1995.
P-9
<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,
1 9 9 6 1 9 9 5
------------- ------------
(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
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1 9 9 6 1 9 9 5
------------- ------------
(UNAUDITED)
<S> <C> <C>
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-3
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- ----------------------------
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
------- ------- ------- -------
(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-4
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNTS SHARES AMOUNTS CAPITAL
------ ----------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1994 880,000 $ 8,800 1,758,077 $ 177 $ 15,882,537
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
To placement agent in lieu of fees in
connection with exercise of warrants -- -- 61,824 6 --
Private placement -- -- 2,515,200 251 957,349
To Placement Agent in Lieu of Fees in
connection with Private Placement -- -- 200,000 20 --
Net Loss for the Year -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1994 - FORWARD 140,000 $ 1,400 6,733,805 $ 673 $ 17,260,549
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE).
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED TREASURY SHAREHOLDERS'
DEFICIT STOCK EQUITY
----------- --------- ----------
<S> <C> <C> <C>
BALANCE - JANUARY 1, 1994 $(15,067,213) $ -- $ 824,301
Issuance of shares:
Conversion of preferred stock into
common stock -- -- --
Exercise of warrants -- -- 413,482
To placement agent in lieu of fees in
connection with exercise of warrants -- -- 6
Private placement -- -- 957,600
To Placement Agent in Lieu of Fees in
connection with Private Placement -- -- 20
Net Loss for the Year (641,033) -- (641,033)
------------ ------------ ------------
BALANCE - DECEMBER 31, 1994 - FORWARD $(15,708,246) $ -- $ 1,554,376
</TABLE>
F-5
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNTS SHARES AMOUNTS CAPITAL
-------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 140,000 $ 1,400 6,733,805 $ 673 $ 17,260,549
- FORWARDED
Issuance of Shares:
Conversion of Preferred Stock
into Common Stock (140,000) (1,400) 280,000 28 1,372
Private Placement -- -- 1,160,000 116 1,468,786
Exercise of Warrants -- -- 2,786,956 279 851,314
Exercise of Options -- -- 550,000 55 343,695
In connection with the acquisition of
Quest Electronic Hardware, Inc. -- -- 3,962,574 396 3,962,178
Shares received by the Company in
satisfaction of certain obligations of
former officers and directors -- -- -- -- --
Net Income for the Year -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1995 -- -- 15,473,335 1,547 23,887,894
Net Income for the nine months ended -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - SEPTEMBER 30, 1996
(UNAUDITED) -- $ -- 15,473,335 $ 1,547 $ 23,887,894
============ ============ ============ ============ ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED TREASURY SHAREHOLDERS'
DEFICIT STOCK EQUITY
---------- --------- ----------
<S> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 $(15,708,246) $ -- $ 1,554,376
- FORWARDED
Issuance of Shares:
Conversion of Preferred Stock
into Common Stock -- -- --
Private Placement -- -- 1,468,902
Exercise of Warrants -- -- 851,593
Exercise of Options -- -- 343,750
In connection with the acquisition of
Quest Electronic Hardware, Inc. -- -- 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 (15,356,059) (355,478) 8,177,904
Net Income for the nine months ended 389,501 -- 389,501
------------ ------------ ------------
BALANCE - SEPTEMBER 30, 1996
(UNAUDITED) $(14,966,558) $ (355,478) $ 8,567,405
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------- ------------------------
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
----------- ----------- ----------- ---------
(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-7
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------------- -------------------------
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
----------- ----------- ----------- ---------
(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-8
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------------------- ----------------------------
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4
----------- ----------- ---------- ---------
(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-9
<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:
1 9 9 5 1 9 9 4
------- -------
Cost of Property Written Down $ 668,176 $ 340,153
Accumulated Depreciation (627,623) (178,818)
--------- ---------
Net Book Value 40,553 161,335
Estimated Fair Value -- 25,000
--------- ---------
Adjustment for Write-Down $ 40,553 $ 136,335
========= =========
During 1995, the Company issued 3,962,574 shares of common stock in
connection the acquisition of a subsidiary and issued 280,000 shares of common
stock upon the conversion of 140,000 preferred shares.
During 1994, 200,000 shares of common stock were issued to a placement
agent in lieu of fees in connection with a private placement. Additionally,
250,000 shares of common stock for consulting services and 61,824 shares of
common stock in lieu of fees in connection with the exercise of warrants were
issued to the same placement agent. The Company also issued 1,480,000 shares
of common stock upon conversion of 740,000 preferred shares during 1994.
See Notes to Consolidated Financial Statements.
F-10
<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.
F-11
<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)
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.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for normal
repairs and maintenance are charged to earnings as incurred. When assets are
retired or otherwise disposed, their costs and related accumulated
depreciation are removed from the accounts and the resulting gains or losses
are included in operations. Depreciation and amortization are recorded using
the straight-line method over the shorter of the estimated lives of the
related asset or the remaining lease term. Estimated useful lives are as
follows:
Office Equipment 5 Years
Computer Equipment 5 Years
Furniture and Fixtures 7 Years
Leasehold Improvements 5 Years
F-12
<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)
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.
F-13
<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)
2. ACQUISITION OF ELECTRONIC HARDWARE DISTRIBUTION BUSINESS
As of the close of business on March 31, 1995, the Company acquired 100%
of the stock of Quest, a privately owned company, in exchange for a 25%
interest in the Company on a fully diluted basis. Such acquisition was
effected pursuant to a share acquisition agreement, under which the Company
issued 3,962,574 newly issued, fully-paid and non-assessable shares of common
stock of the Company, in exchange for all of the issued and outstanding shares
of common stock of Quest. Simultaneously with the foregoing events, Quest
purchased the fasteners distribution business of Arrow for $4,850,000 in cash,
pursuant to a Purchase of Assets Agreement, dated as of November 29, 1994, by
and between Quest and Arrow (the "Purchase Agreement"). The purchase was
funded by a capital contribution from Questron of $2,850,000 (see Note 5 of
Notes to Consolidated Financial Statements) and borrowings by Quest under a
loan and security agreement with a bank (see Note 3 of Notes to Consolidated
Financial Statements). Under the Purchase Agreement, Quest acquired the net
assets of Arrow used exclusively in connection with Arrow's operations of the
fasteners distribution business and assumed all stated liabilities associated
with the business. Such assets included all accounts receivable of the
business, inventories, and certain furniture and equipment. The stated
liabilities assumed were principally trade payables to suppliers of the
business. The acquisition has been accounted for as a purchase, effective
March 31, 1995. The following summarizes the fair value of the net assets
acquired and the related cost thereof:
Cash $ 4,500
Accounts receivable 832,913
Inventories 1,970,756
Property and equipment 57,427
----------
Total assets 2,865,596
Accounts payable 634,762
Net assets acquired 2,230,834
Cost:
Purchase price paid to Arrow 4,850,000
Net value of shares issued 3,961,574
Acquisition and integration expenses 416,768
----------
Total cost 9,228,342
Cost in excess of net assets acquired $6,997,508
==========
The acquisition and integration expenses noted above are principally
professional fees associated with the transactions, consulting fees and other
expenses associated with the conversion of the business to a new operating
system, and other expenses associated with completing the transaction and
integrating the business with Quest.
F-14
<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)
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 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.
F-15
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS
THEN ENDED IS UNAUDITED)
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:
1 9 9 5
--------
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
========
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.
F-16
<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)
5. SHAREHOLDERS' EQUITY
As of December 31, 1995, the Company was authorized to issue
20,000,000 shares of common stock and 1,000,000 of preferred stock. On April
2, 1996, the shareholders of the Company approved an increase in the number of
authorized shares of common stock to 50,000,000 shares and an increase in the
number of authorized shares of preferred stock to 10,000,000 shares. The
outstanding shares of common stock are fully paid and non-assessable. In 1994,
there were outstanding 140,000 shares of Series A Preferred Stock. Each share
of Series A Preferred Stock, which was convertible, without further
consideration, into two (2) shares of common stock, has been converted.
In November 1994, the Company issued 2,515,200 shares of its common
stock in a private offering conducted through a placement agent. Net proceeds
from the offering amounted to $957,600. As additional consideration for common
shares issued, one of the purchasers tendered 103,040 Series I Warrants to the
Company for cancellation. Additionally, 200,000 shares of Company common stock
were issued to the placement agent in lieu of fees in connection with this
transaction.
In March and April 1995, the Company, through a placement agent,
consummated the sale of fifty-eight units of its securities at a gross sales
price of $30,000 per unit. Each unit consisted of 20,000 shares of Company
common stock. The net proceeds to the Company, after expenses associated with
the placement of $271,098, were $1,468,902. Such net proceeds, together with
available cash, were used to make a capital contribution to Quest at March 31,
1995, in order to provide Quest with the balance of the funds necessary to
complete the acquisition of the fasteners distribution business from Arrow. In
connection with this sale of securities, the placement agent also received a
portion of its fee in the form of 116,000 options to purchase Company common
stock at an exercise price of $3.50 per share. These options expire March 31,
2000.
The Company has issued various series of warrants to purchase shares
of its common stock. Each Series I Warrant entities the registered holder to
purchase 1.629 shares of common stock at a price of $1.80 per share on or
before June 30, 1996. Any warrant not exercised by that date will be null and
void. At December 31, 1995, there were 64,657 Series I Warrants outstanding.
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.
F-17
<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)
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>
1 9 9 5 1 9 9 4
-------------------------- --------------------------
Incentive Non-Incentive Incentive Non-Incentive
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 554,469 513,593 17,829 46,835
Options granted 46,835 229,363 550,000 466,758
Options exercised (550,000) (626,956) -- --
Options canceled and terminated -- -- (13,360) --
-------- -------- -------- --------
Outstanding - end of year (1) 51,304 116,000 554,469 513,593
======== ======== ======== ========
</TABLE>
(1) With exercise prices ranging from $7.95 to $33.75 per share, giving effect
to the one-for-fifteen reverse stock split, which occurred on December 22,
1993.
In addition to the above, on April 2, 1996, the shareholders
approved the adoption of the 1994 Director Non-qualified Stock Option Plan
(the "Plan"), under which options to purchase shares of the Company's common
stock may be granted to non-executive directors of the Company. Under the Plan
options are to be granted to each eligible director at the rate of 15,000 per
year. Awards under the Plan had been made previously, subject to shareholder
approval. Transactions under the Plan during the years ended December 31, 1995
and 1994 were as follows:
<TABLE>
<CAPTION>
1 9 9 5 1 9 9 4
------- -------
<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.
F-18
<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)
7. RETIREMENT PLAN
Quest has a defined contribution plan for eligible employees, which
qualifies under Section 401(k) of the Internal Revenue Code. Quest's
contribution to the plan, which is based on a specified percentage of employee
contributions, amounted to $24,820 in 1995.
8. LEASE COMMITMENTS
The Company leases certain office and warehouse space under
non-cancelable operating leases expiring at various dates through 2000. Rental
expenses of all non-cancelable operating leases amounting to $112,249 and
$65,070 was charged to operations for the years ended December 31, 1995 and
1994, respectively. Aggregate minimum rental commitments under all
non-cancelable operating leases approximate $535,000 as of December 31, 1995.
Such commitments on annual basis are as follows:
Years ending
December 31,
1996 $ 184,712
1997 184,812
1998 83,198
1999 42,120
2000 40,365
-------------
$ 535,207
=============
9. INCOME TAXES
The provision for income taxes included in the consolidated
statement of income is for state income taxes to which the Company and its
subsidiaries are subject. No provision for federal income taxes is required,
as the Company has no federal tax liability for 1995 as a result of the
availability of net operating loss income tax carryforwards of approximately
$13.1 million as of December 31, 1995, expiring in the years 2000 through
2009.
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," which was adopted by the Company on January 1,
1993, requires the establishment of a deferred tax asset for all deductible
temporary differences and operating loss carryforwards. Because the generation
of future taxable income is not assured, however, any deferred tax asset
established for utilization of the Company's tax loss carryforwards would
correspondingly require a valuation allowance of the same amount pursuant to
SFAS No. 109. Accordingly, no deferred tax asset is reflected in the
consolidated financial statements.
F-19
<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)
9. INCOME TAXES (CONTINUED)
As of December 31, 1995, the approximate amount of the net operating
loss income tax carryforwards and their expiration dates are as follows:
Expiring in Years Ending Net Operating Loss
December 31, Carryforwards
------------------
2000 $ 460,000
2001 1,243,000
2002 1,414,000
2003 1,574,000
2004 1,100,000
2005 579,000
2006 782,000
2007 2,945,000
2008 2,336,000
2009 670,000
------------
$ 13,103,000
============
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value
of Financial Instruments," which requires disclosing fair value, to the extent
practicable, for financial instruments which are recognized or unrecognized in
the balance sheet. Fair value of the financial instruments disclosed in the
balance sheet is not necessarily representative of the amount that could be
realized or settled, nor does the fair value amount consider the tax
consequences of realization or settlement. The following table summarizes
financial instruments by individual balance sheet accounts as of December 31,
1995:
Carrying Amount Fair Value
--------------- ----------
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
F-20
<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)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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% 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.
F-21
<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)
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 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.
F-22
<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)
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.
F-23
<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)
16. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF THE INDEPENDENT
AUDITORS (UNAUDITED) (CONTINUED)
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
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-24
<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
February 5, 1996
F-25
<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
========== ==========
</TABLE>
See Notes to Financial Statements.
F-26
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
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-27
<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>
See Notes to Financial Statements.
F-28
<PAGE>
COMP WARE, INC. D/B/A WEBB DISTRIBUTION
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------------- PAID-IN RETAINED STOCKHOLDERS'
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-29
<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-30
<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-31
<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-32
<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-33
<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:
Furniture, Fixtures and Computer Equipment 3-5 Years
Machinery and Equipment 5 Years
Leasehold Improvements Lease Term
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.
F-34
<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)
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. 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:
1995
----
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
===========
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.
F-35
<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)
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.
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 $500,000 $500,000
Company has executed a limited guaranty of $500,000.
Notes payable to certain former stockholders of the Company in connection with
the repurchase of their stock. Payable in semi-annual installments of
$50,000 together with interest at US Trust's base lending rate (8.50% at
December 31, 1995) commencing on July 1, 1994. These notes are subordinate
to existing borrowings from US Trust. Further, the Company is only
permitted to make payments of principal and interest if they comply with
certain financial covenants that involve minimum cash flow and the ratio of
senior debt to capital base. Certain stockholders of the Company have
guaranteed the payments under the note and a life insurance policy (face
amount of $250,000) on the life of one stockholder has been assigned to the
former stockholders. -- 150,000
-------- -------
Total 500,000 650,000
Less current maturities of long-term debt -- 150,000
-------- -------
Long-term debt, less current maturities $500,000 $500,000
======== ========
</TABLE>
F-36
<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)
Long-Term debt matures as follows:
1996 $150,000
1997 500,000
---------
$650,000
The loan agreement and commercial installment note with the bank require
conformance to certain covenants, restrict the payment of dividends and the
merging or consolidating with any other corporation, and limit the amount of
expenditures for property and equipment, annual increases to certain officers'
salaries and the making of certain loans and investments.
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.
F-37
<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)
8. STOCKHOLDERS' EQUITY (CONTINUED)
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.
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.
F-38
<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)
9. PROVISION FOR INCOME TAXES (CONTINUED)
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>
10. RELATED PARTY TRANSACTIONS
<TABLE>
<S> <C>
Notes Receivable
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.
F-39
<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)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
The capital leases are included in furniture, fixtures and computer
equipment as follows:
<TABLE>
<S> <C>
Cost $131,369
Accumulated depreciation 53,847
--------
$ 77,522
========
</TABLE>
F-40
<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)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Insurance
The Company maintains $1,520,000 of insurance on inventories whose value at
December 31, 1995 is $1,726,497. The possible loss, which has not been
provided for in the accompanying financial statements, is $206,497.
12. MAJOR CUSTOMERS
During 1995 and 1994, the Company had a major customer each year whose
purchases exceeded 10% of net sales. Sales to this major customer were as
follows:
1995 $ 825,000
1994 $2,718,750
13. BENEFIT PLAN
The Company maintains an employee savings plan under section 401(k) of
the Internal Revenue Code in which substantially all employees are eligible to
participate. Employees may make contributions to the plan subject to
limitations as provided in current federal income tax law. The Company may
make matching contributions in whole or in part, subject to certain
limitations, at the Company's discretion. Company contribution expense charged
to operations was $10,953 and $8,063 in 1995 and 1994, respectively.
14. FINANCIAL INSTRUMENTS AND SIGNIFICANT CONCENTRATION OF GROUP CREDIT RISK
Financial instruments that potentially subject the Company to
concentration of credit risk consists principally of trade receivables. Trade
receivables are derived from sales to various customers spread across various
industries, principally in Massachusetts. Management believes that any risk of
accounting loss is significantly reduced due to the diversity of its end
customers. The Company performs credit evaluations of its customers' financial
condition prior to extending credit whenever deemed necessary, but does not
require collateral.
15. UNAUDITED INTERIM STATEMENTS
The financial statements for the nine months ended September 30, 1996 and
1995 are unaudited; however, in the opinion of management all adjustments
which are necessary in order to make the interim financial statements not
misleading have been made. The results for interim periods are not necessarily
indicative of the results to be obtained for a full fiscal year.
F-41
<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................................................. 10
Use of Proceeds.............................................. 20
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>
---------------------------
1,000,000 UNITS
QUESTRON TECHNOLOGY,
INC.
----------
PROSPECTUS
----------
BILTMORE SECURITIES, INC.
( ), 1997
==============================================================================
<PAGE>
PROSPECTUS (ALTERNATE) Subject to Completion, dated February 25, 1997
2,750,000 SERIES IV WARRANTS
2,750,000 SHARES OF COMMON STOCK UNDERLYING SERIES IV WARRANTS
QUESTRON TECHNOLOGY, INC.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
This Prospectus relates to the offering of 2,750,000 Series IV Common
Stock Purchase Warrants ("Series IV Warrants") of Questron Technology, Inc., a
Delaware corporation (the "Company"), and 2,750,000 shares of Common Stock,
par value $.001 per share ("Common Stock") underlying the Series IV Warrants
(collectively, the "Securities"). The Securities are being offered by the
security holders identified in this Prospectus (the "Selling
Securityholders"). The Securities offered hereby may not be transferred for
eighteen (18) months from the date hereof, subject to earlier release at the
sole discretion of Biltmore Securities, Inc. (the "Underwriter"). The
certificates evidencing such securities include 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. 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 period. Each
Series IV Warrant entitles the holder thereof to purchase one share of Common
Stock at a price of $____ per share for a period of four years commencing one
year from the date hereof at which time the Series IV Warrants will expire.
The Series IV Warrants are redeemable by the Company for $.05 per Warrant, at
any time after , 1998, upon thirty (30) days' prior written notice, if the
closing bid price of the Common Stock, as reported by the Nasdaq SmallCap
Market ("Nasdaq") exceeds $_______ per share, for any twenty (20) trading days
ending within ten (10) days of the notice of redemption. Upon thirty (30) days'
written notice to all holders of the Series IV Warrants, the Company shall
have the right to reduce the exercise price and/or extend the term of the
Series IV Warrants in compliance with the requirements of Rule 13e-4 to the
extent applicable. See "Description of Securities" and "Selling
Securityholders."
The distribution of the Shares offered hereby by the Selling
Securityholders may be effected on one or more transactions that may take
place on the over-the-counter market, including ordinary broker's
transactions, privately-negotiated transactions or through sales to one or
more dealers for resale of such securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or negotiated prices. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by the Selling Securityholders. See
"Plan of Distribution."
The Selling Securityholders and intermediaries through whom such
securities may be sold may be deemed "underwriters" within the meaning of the
Securities Act with respect to the securities offered, and any profits
realized or commissions received may be deemed underwriting compensation. The
Company has agreed to indemnify the Selling Securityholders against certain
liabilities, including liabilities under the Securities Act.
On the date of this Prospectus, a registration statement, filed under
the Securities Act with respect to an underwritten public offering by the
Company of 1,000,000 Units, each Unit consisting of one share of Common Stock
and one Series IV Warrant and up to 150,000 additional Units to cover
over-allotments, if any, was declared effective by the Securities and Exchange
Commission (the "Commission"). The Company will receive net proceeds of
approximately $4,820,000 from the sale of the Units in the underwritten public
offering, and will receive approximately $783,000 in additional net proceeds
if the over-allotment option is exercised in full after payment of
underwriting discounts and commissions and estimated expenses of the
underwritten public offering. Sales of securities by the Selling
Securityholders or even the potential of such sales, would likely have an
adverse affect on the market price of the Securities.
The Company will not receive any of the proceeds from the sale of the
securities by the Selling Securityholders. All costs incurred in the
registration of the securities of the Selling Securityholders are being borne
by the Company. See "Selling Securityholders."
Prior to this offering, there has been no public market for the
Units, Series B Preferred Stock or Series IV Warrants. The Company has applied
for inclusion of the Units, Series B Preferred Stock and Series IV Warrants on
the Nasdaq SmallCap Market, under the symbols QUSTU, QUSTP and QUSTW,
respectively, although there can be no assurances that such securities will be
accepted for quotation or, if accepted, that an active trading market will
develop. In addition, if the Company's securities are accepted for quotation
and active trading develops, the Company is required to maintain certain
minimum criteria established by Nasdaq and there can be no assurance that the
Company will be able to continue to fulfill such criteria. See "Risk Factors."
The Common Stock of the Company is listed on the Nasdaq SmallCap Market under
the symbol "QUST". On February 24, 1997, the closing price per share of the
Common Stock as reported by the Nasdaq SmallCap Market was $4.50. See "Price
Range for Common Stock and Dividends." For additional information regarding
the factors considered in determining the initial public offering price of
the Units and the exercise price of the Series IV Warrants, see "Description
of Securities" and "Underwriting."
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE
LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS,"
WHICH BEGINS ON PAGE .
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------
The date of this Prospectus is _______, 1997.
<PAGE>
THE OFFERING*
<TABLE>
<S> <C>
Securities Offered by the Selling
Securityholders (1)..................................... 2,750,000 Warrants
Use of Net Proceeds..................................... None of the proceeds from the sale of the Series
IV Warrants hereunder will go to the Company (2).
OUTSTANDING EQUITY SECURITIES IMMEDIATELY
PRIOR TO THE OFFERING
Shares of Common Stock (2).............................. 1,547,774
OUTSTANDING EQUITY SECURITIES IMMEDIATELY
SUBSEQUENT TO THE OFFERING (3)
Shares of Common Stock (4).............................. 1,547,774
Shares of Series B Preferred Stock (5).................. 1,000,000
Comparative Shares Ownership After Offering:
Present Stockholders........................... 1,535,484 Shares
New Investors (4).............................. (__) Shares
NASDAQ SYMBOLS
Common Stock............................................ QUST
Units (Proposed)........................................ QUSTU
Series B Preferred Stock (Proposed)..................... QUSTP
Series IV Warrants (Proposed)........................... QUSTW
</TABLE>
- ----------
* ALL FIGURES CONTAINED HEREIN REFLECT A ONE-FOR-TEN REVERSE SPLIT OF THE
ISSUED AND OUTSTANDING COMMON STOCK WHICH BECAME EFFECTIVE ON JANUARY 2,
1997 AS WELL AS A REDUCTION IN THE NUMBER OF AUTHORIZED SHARES OF COMMON
STOCK, BOTH OF WHICH WERE APPROVED AT THE 1996 ANNUAL MEETING WHICH WAS
HELD ON DECEMBER 27, 1996.
(1) The Company is concurrently offering 1,000,000 Units at a price of $6.00
per Unit (the "Concurrent Offering"). Each Unit consists of one share of
Series B Preferred Stock and one Series IV Warrant. Each share of Series
B Preferred Stock will automatically convert, without any action on the
part of the holder thereof or the Company, into ______ 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 market 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 be exercised, of which there is no assurance, the Company will
receive the proceeds therefrom aggregating up to an additional $( ). See
"Description of Securities."
(2) The proceeds from the sale of Series IV Warrants held by the majority
stockholder of Comp Ware, Inc. d/b/a Webb Distribution ("Webb") may
reduce the obligations under promissory notes to be issued by the
Company in connection with the acquisition of Webb.
(3) Assumes securities offered under the Concurrent Offering have been sold.
(4) 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.
(5) These shares of Series B Preferred Stock are convertible into
________ shares of Common Stock.
-2-
<PAGE>
CONCURRENT SALES
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering ("Offering") of
1,000,000 Units ("Units") by the Company was declared effective by the
Securities and Exchange Commission ("Commission"), Washington, D.C. 20549, and
the Company commenced the sale of Units offered thereby. The Units are
comprised of one share of Series B Preferred Stock and one Series IV Warrant
to purchase a share of Common Stock. Sales of securities under this Prospectus
by the Selling Securityholders or even the potential of such sales may have an
adverse effect on the market price of the Company's securities.
SELLING SECURITYHOLDERS
The registration statement, of which this Prospectus forms a part, also
relates to the registration of 2,750,000 Series IV Warrants offered by the
selling securityholders identified in the table below (the "Selling
Securityholders"). The securities held by the Selling Securityholders may be
sold commencing 18 months from the date of this Prospectus, subject to
earlier release at the sole discretion of the Underwriter. The certificates
evidencing the foregoing securities will bear a legend with such
restrictions. The Underwriter may release the securities held by the Selling
Securityholders at any time after all securities subject to the
Over-Allotment Option have been sold or such option has expired. The
Over-Allotment Option will expire 30 days from the date of this Prospectus.
In other offerings where the Underwriter has acted as the managing
underwriter, it has released similar restrictions applicable to selling
stockholders prior to the expiration of the lock-up period and in some cases
immediately after the exercise of the Over-Allotment Option or the expiration
of the Over-Allotment Option period. The resale of the securities of the
Selling Securityholders is subject to prospectus delivery and other
requirements of the Securities Act. Sales of such securities or the potential
of such sales at any time may have an adverse effect on the market prices of
the securities offered hereby.
The following table sets forth certain information with respect to the
Selling Securityholders. The Securities to which this Prospectus relates may
be sold from time to time in whole or in part by the Selling Securityholders
as described herein.
<TABLE>
<CAPTION>
SHARES SERIES IV
SHARES OF THAT MAY WARRANTS THAT PERCENT
COMMON STOCK BE OFFERED MAY BE OFFERED SHARES OF OF CLASS
OWNED PRIOR PURSUANT PURSUANT COMMON STOCK OWNED
TO THIS TO THIS TO THIS OWNED AFTER AFTER
SELLING SECURITYHOLDERS OFFERING PROSPECTUS PROSPECTUS OFFERING OFFERING*
- --------------------------------- -------------- ------------ -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Gulfstream Financial Group, Inc. 380,273 -- 1,000,000 380,273
6400 Congress Ave.
Suite 200
Boca Raton, FL 33487
Phillip D. Schwiebert ............ 166,136 -- 250,000 166,136
c/o Quest Electronic
Hardware, Inc.
1180 Murphy Ave.
San Jose, CA 95131
A.J. Dinicola .................... -- -- 1,500,000 -- --
c/o Webb Distribution
Two Lowell Ave.
Winchester, MA 08190
</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 the
subject of the Offering.
<PAGE>
The Series IV Warrants are being offered by the Selling Securityholders,
in the corresponding amounts above, under this alternatve 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
Act with respect to the securities offered, and any profits realized or
commissions received may be deemed underwriting compensation.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be
distributed which will set forth the numbers of securities being offered and
the terms of the offering, including the name or names of any underwriters,
dealers or agents, if any, the purchase price paid by any underwriter for
shares purchased from the Selling Securityholders and any discounts,
commissions or concessions allowed or reallowed or paid to dealers, and the
proposed selling price to the public.
Under the 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.
PLAN OF DISTRIBUTION
The Securities offered hereby may be sold from time to time directly
by the Selling Securityholders. Alternatively, the Selling Securityholders may
from time to time offer such securities through underwriters, dealers or
agents. The distribution of Securities by the Selling Securityholders may be
effected in one or more transactions that may take place on the
over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more
broker-dealers for resale of such Securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by the Selling Securityholders in
connection with such sales of Securities. The Securities offered by the
Selling Securityholders may be sold by one or more of the following methods,
without limitations: (a) a block trade in which a broker or dealer so engaged
will attempt to sell the Securities as agent but may position and resell a
portion of the block as principal to facilitate the transaction; and resell a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers, and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Securityholders may
arrange for other brokers or dealers to participate. The Selling
Securityholders and intermediaries through whom such Securities are sold may
be deemed "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act") with respect to the securities offered, and any
profits realized or commissions received may be deemed underwriting
compensation.
In order to comply with the securities laws of certain states, if
applicable, the Securities will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
securities may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with by the Company and
the Selling Securityholders.
The Selling Securityholders and any broker-dealers, agents or
underwriters that participate with the Selling Securityholders in the
distribution of the shares may be deemed to the "underwriters" within the
meaning of the Section 2(11) of the Securities Act and any securities
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
Under applicable rules and regulations under the Securities Exchange
Act of 1934, as amended ("the Exchange Act"), any person engaged in the
distribution of the securities may not simultaneously engage in
market-making-activities with respect to the securities for a period of two to
nine business days prior to the commencement of such distribution. In addition
and without limiting the foregoing, each Selling Securityholder will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation, Rules 10b-6, 10b-6A and
10b-7, which provisions may limit the timing of the purchases and sales of
securities by the Selling Securityholders.
-3-
<PAGE>
The Company has agreed to pay all fees and expenses incident to the
registration of the Shares, except selling commissions and fees and expenses
of counsel or any other professionals or other advisors, if any, to the
Selling Securityholders.
-4-
<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...............
Available Information............................
Prospectus Summary...............................
Risk Factors.....................................
Use of Proceeds..................................
Dilution ........................................
Capitalization..................................
Price Range of Common Stock
and Dividend Policy............................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.....................................
Business.........................................
Management.......................................
Certain Transactions.............................
Securities Ownership.............................
Description of Securities........................
Concurrent Sales.................................
Selling Securityholders..........................
Plan of Distribution.............................
Legal Proceedings................................
Legal Matters....................................
Experts..........................................
Index to Financial Statements....................
Pro Forma Combined Financial
Statements..................................... P-1
Report of Independent Auditors................... F-1
</TABLE>
2,750,000 SERIES IV WARRANTS
2,750,000 SHARES UNDERLYING SERIES IV
WARRANTS
QUESTRON
TECHNOLOGY, INC.
----------
PROSPECTUS
----------
________, 1997
==============================================================================
<PAGE>
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation and By-laws
contain provisions which reduce the potential personal liability of directors
for certain monetary damages and provide for indemnity of directors and other
persons. The Company is unaware of any pending or threatened litigation
against the Company or its directors that would result in any liability for
which such director would seek indemnification or similar protection.
The provisions affecting personal liability do not abrogate
a director's fiduciary duty to the Company and its shareholders, but eliminate
personal liability for monetary damages for breach of that duty. The
provisions do not, however, eliminate or limit the liability of a director for
failing to act in good faith, for engaging in intentional misconduct or
knowingly violating a law, for authorizing the illegal payment of a dividend
or repurchase of stock, for obtaining an improper personal benefit, for
breaching a director's duty of loyalty (which is generally described as the
duty not to engage in any transaction which involves a conflict between the
interests of the Company and those of the director) or for violations of the
federal securities laws. The provisions also limit liability resulting from
grossly negligent decisions including grossly negligent business decisions
relating to attempts to change control of the Company.
The provisions regarding indemnification provide, in
essence, that the Company will indemnify its directors against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any action, suit or
proceeding arising out of the director's status as a director of the Company,
including actions brought by or on behalf of the Company (shareholder
derivative actions). In the opinion of the Securities and Exchange Commission,
indemnification for liabilities arising under the Securities Act of 1933 is
contrary to public policy and, therefore, is unenforceable.
The Company also maintains directors and officers liability
insurance for the benefit of its officers and directors.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of fees and expenses,
payable from the net proceeds of the offering, incurred by the Company in
connection with the issuance and distribution of the securities of the Company
being offered hereby. All fees and expenses are estimated except the SEC, NASD
and Nasdaq Registration and Filing Fees.
<TABLE>
<S> <C>
SEC Registration and Filing Fee..................................$7,744
NASD Registration and Filing Fee..................................1,685
Nasdaq Listing and Filing Fee....................................17,000
Financial Printing...............................................60,000
Transfer Agent Fees...............................................3,500
Accounting Fees and Expenses.....................................15,000
Legal Fees and Expenses..........................................60,000
Blue Sky Fees and Expenses.......................................70,000
Underwriter's Nonaccountable Expense Allowance..................180,000
Underwriter's Consulting Fee ...................................100,000
Miscellaneous................................................. 65,071
--------
TOTAL..................................................$580,000
========
</TABLE>
II-1
<PAGE>
None of the foregoing expenses are being paid by the Selling
Securityholders.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following information sets forth all securities of the
Company sold by it within the past three (3) years (as adjusted for the
proposed one-for-ten reverse split), which securities were not registered
under the Securities Act of 1933, as amended:
On March 31, 1995, the Company issued 384,409 shares of its
Common Stock as consideration for the acquisition of Quest Electronic
Hardware, Inc. ("Quest"). The securities were issued to the shareholders of
Quest.
On March 31, 1995, the Company issued 116,000 shares of its
Common Stock pursuant to a private placement financing ("1995 Private
Placement"), the proceeds of which were used to partially fund the acquisition
of Quest. The securities were issued to: Phillip D. Schwiebert, Lyons
Community Property Trust, James F. Kenefick, Ronald Messinger, Dr. Irving
Kraut, Irving Kraut Pension, Martin Rothstein, Graco Holdings, Inc., Matthew
T. Halton, Steven & Carol Reiss, Shih-Hsiang Lee, Achyut Sahasra, William J.
McSherry, Jr., Melvin E. Liston, Gulfstream Financial Group and Robert P.
Schmick.
On March 31, 1995, the Underwriter, Biltmore Securities,
Inc., in partial consideration of its serving as placement agent in connection
with the 1995 Private Placement, was granted options to purchase 11,600 shares
of Common Stock at $35.00 per share.
In November 1994, the Company issued 200,000 units in a
private placement financing ("1994 Private Placement"). Each unit consisted of
a share of common stock and a Series III common stock purchase warrant
("Series III Warrant") to purchase one share of common stock at $3.50 per
share. The securities were issued to: J2 Holdings, Inc., Irving Stitsky, David
Beall, Howard Gelfand, Robert Koch, Richard Miller, Daniel J. Porush, Steve
Sanders, Jordan Shamah, Matt Bloom, Eric Blumen, Ira Boshnack, Neil Kipperman,
and Joe Teseo. The Underwriter also was issued 20,000 units as compensation for
acting as placement agent for the company in connection with the 1994 Private
Placements. Also in November 1994 the Company issued 51,520 shares of common
stock in a private placement financing to Stephanie Holdings, Inc.
Consideration consisted of $5.00 per share and the surrender of 103,040
Series I Warrants.
In March 1994, the Company issued 34,261 Series II Warrants
in exchange for previously issued Series I Warrants pursuant to an exchange
offer ("1994 Exchange Offer") conducted on a private placement basis. The
securities were issued to: Phillip Barretti, David Beall, James Beckner,
Andrew Berg, Harvey Bibicoff, Marc Burg, Robert Denton, Bobby Dillon, Jim
Dritz, Howard Goldrich, Jean Goldrich, Robert Goldrich, Steve Goldrich, Bill
Holmquist, Ken Iulo, Neil Kipperman, Ken Koock, Steve Krause, Jon Kraut,
Dr. Irving Kraut, Irving Kraut Pension, Jeff Leach, Susan and Howard
Lowenstern, Jeffrey Morrison, Alex Moscowicz, Stelio Motti, Sergio Motti,
Allen Notowitz, Martin Rinehart, Martin Rothstein, Lee Rough, Matthew
Schilowitz, Harvey Schilowitz, Marc Siden and Ken Tripoli. The Underwriter
also was issued 6,182 shares as compensation for acting as placement agent for
the Company in connection with the 1994 Exchange Offer.
Pursuant to a Consulting Agreement dated as of January 1,
1994, the Company issued to the Underwriter 25,000 shares of Common Stock and
options which, after the application of anti-dilution provisions, represented
the right to purchase 62,696 shares at $2.49 per share.
During 1995 and 1996, a total of 25,870 shares of Common
Stock were issued upon the exercise of certain of the above warrants and
options. These shares were registered for resale by the selling
securityholders under Registration Statements on Form S-3 (Nos. 33-63555 and
33-84222).
II-2
<PAGE>
Except as otherwise noted, the Company has relied on Section
4(2) of the Securities Act of 1933, as amended, for its private placement
exemption, such that the sales of the securities were transactions by an
issuer not involving any public offering.
Reference is also made hereby to "Securities Ownership,"
"Certain Transactions," "Selling Securityholders" and "Description of
Securities" in the Prospectus for more information with respect to the
previous issuance and sale of the Company's securities.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is a list of Exhibits marked with an asterisk
(*) filed herewith by the Company as part of the SB-2 Registration Statement
and related Prospectus:
1.0 Form of Underwriting Agreement (a).
1.1 Form of Selected Dealers Agreement (a).
2.0 Stock Purchase Agreement dated as of December 16, 1996 relating to Webb
Distribution, Inc. (a).
3.0 Certificate of Incorporation of the Registrant, incorporated by
reference to Exhibit 3(i) to the Registrant's Form 10-KSB filed with the
Securities and Exchange Commission for the fiscal year ended December
31, 1987 (File No. 0-13324).
3.1 Certificate of Amendment, dated March 20, 1985, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit 4.1
to Amendment No. 1 to the Registrant's Registration Statement on Form S-3
filed with the Securities and Exchange Commission on March 9, 1995
(File No. 33-44331).
3.2 Certificate of Amendment, dated June 9, 1989, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit 4.1
to the Registrant's Amendment No. 1 to Registration Statement on Form S-3
filed with the Securities and Exchange Commission dated March 9, 1995
(File No. 33-44331).
3.3 Certificate of Correction, dated May 17, 1991, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit 4.1
to the Registrant's Amendment No. 1 to Registration Statement on Form S-3
filed with the Securities and Exchange Commission dated March 9, 1995
(File No. 33-44331).
3.4 Certificate of Amendment dated December 20, 1993, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
3(i) to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1993 (File No.
0-13324).
3.5 Certificate of Amendment, dated December 22, 1993, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
3.3 to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1993 (File
No. 0-13324).
3.6 Certificate of Correction, dated July 19, 1994, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit 4.1
to the Registrant's Amendment No. 1 to Registration Statement on Form S-3
filed with the Securities and Exchange Commission dated March 9, 1995
(File No. 33-44331).
3.7 Certificate of Amendment, dated April 2, 1996, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
3.5 to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1995 (File
No. 0-13324).
3.8 By-Laws of the Registrant, incorporated by reference to Exhibit 3b(ii)
to the Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1987 (File No.
0-13324).
3.9 Amendment to By-Laws of the Registrant, incorporated by reference to
Exhibit 3.4 of the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1992 (File No.
0-13324).
3.10 Certificate of Amendment, filed December 31, 1996, to Certificate of
Incorporation of the Registrant.
4.0 Specimen Common Stock Certificate.
4.1 Specimen Preferred Stock Certificate.
4.2 Certificate of Designations, Preferences and Rights of the Registrant's
Series B Convertible Preferred Stock.
4.3 Form of Series IV Warrant Agreement (a).
4.4 Form of Series III Warrant Agreement, dated as of November 7, 1994,
incorporated by reference to Exhibit 10.22 to the Registrant's Form
10-KSB filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1994 (File No. 0-13324).
4.5 Form of Underwriters' Purchase Option (a).
4.6 Stock Purchase Warrant Certificate for Purchase of Common Stock of
Questron Technology, Inc. (a).
4.7 Certificate of Designation, Preferences and Rights of the Registrant's
Series A Cumulative Convertible Preferred Stock, dated August 20, 1990,
incorporated by reference to Exhibit 4(c) to the Registrant's Report on
Form 10-KSB filed with the Securities and Exchange Commission for the
fiscal year ended December 31, 1989 (File No. 0-13324).
4.8 Certificate of Increase relating to Series A Cumulative Convertible
Preferred Stock, dated February 20, 1991, incorporated by reference to
Exhibit 4(d) to the Registrant's Form 10-KSB filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1990 (File
No. 0-13324).
4.9 Certificate of Designation establishing a series of shares of preferred
stock, dated December 22, 1993, incorporated by reference to Exhibit 3.2
to the Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1993 (File No.
0-13324).
5.0 Opinion of Gould & Wilkie.
10.0 Judicate, Inc. 1994 Director Non-Qualified Stock Option Plan,
incorporated by reference to Exhibit 10.28 of the Registrant's Form
10-KSB filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1993 (File No. 0-13324).
10.1 Consulting Agreement, dated as of January 1, 1994, by and between
Biltmore Securities, Inc. and the Registrant, incorporated by reference
to Exhibit 10.23 of the Registrant's Form 10-KSB filed with the
Securities and Exchange Commission for the fiscal year ended December
31, 1993 (File No. 0-13324) and related stock option certificate and
agreement by and between the Registrant and Biltmore Securities, Inc.,
dated January 1, 1994, incorporated by reference to Exhibit 10.10 to the
Registrant's Form 10-KSB filed
II-3
<PAGE>
with the Securities and Exchange Commission for the fiscal year ended
December 31, 1994 (File No. 0-13324).
10.2 Employment Agreement, dated November 29, 1994, between Quest Electronic
Hardware, Inc. and Dominic A. Polimeni, incorporated by reference to
Exhibit 10.24 to the Registrant's Form 10-KSB filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1994
(File No. 0-13324).
10.3 Employment Agreement, dated November 29, 1994, between Quest Electronic
Hardware, Inc. and Phillip D. Schwiebert, incorporated by reference to
Exhibit 10.25 to the Registrant's Form 10-KSB filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1994
(File No. 0-13324).
10.4 Management Advisory and Consulting Agreement, dated as of November 29,
1994, between Gulfstream Financial Group, Inc. and the Registrant,
incorporated by reference to Exhibit 10.26 to the Registrant's Form
10-KSB filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1994 (File No. 0-13324).
10.5 Waiver, dated as of March 31, 1995, by Gulfstream Financial Group, Inc.
and Philip D. Schwiebert, incorporated by reference to Exhibit 10.27 to
the Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1994 (File No.
0-13324).
10.6 Share Acquisition Agreement, dated as of November 29, 1994, by and among
Gulfstream Financial Group, Inc., Philip D. Schwiebert, Quest Electronic
Hardware, Inc. and the Registrant, incorporated by reference to Exhibit
10.28 to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1994 (File
No. 0-13324).
10.7 Purchase of Assets Agreement, dated as of November 29, 1994, between
Quest Electronic Hardware, Inc. and Arrow Electronics, Inc.,
incorporated by reference to Exhibit 10.29 to the Registrant's Form
10-KSB filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1994 (File No. 0-13324).
10.8 Loan and Security Agreement, dated as of March 31, 1995, between Silicon
Valley Bank and Quest Electronics Hardware, Inc., incorporated by
reference to Exhibit 10.30 to the Registrant's Form 10-KSB filed with
the Securities and Exchange Commission for the fiscal year ended
December 31, 1994 (File No. 0-13324).
10.9 Sublease Agreement, dated as of March 31, 1995, between Arrow
Electronics, Inc. and Quest Electronic Hardware, Inc. with respect to
Dallas, Texas property, incorporated by reference to Exhibit 10.31 to
the Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1994 (File No.
0-13324).
10.10 Sublease Agreement, dated as of March 31, 1995, between Arrow
Electronics, Inc. and Quest Electronic Hardware, Inc. with respect to
Colorado Springs, Colorado property, incorporated by reference to
Exhibit 10.32 to the Registrant's Form 10-KSB filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1994
(File No. 0-13324).
10.11 Sublease Agreement, dated as of March 31, 1995, between Arrow
Electronics, Inc. and Quest Electronic Hardware, Inc. with respect to
San Jose, California property, incorporated by reference to Exhibit
10.33 to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1994 (File
No. 0-13324).
10.12 Third Party Stock Pledge Agreement, dated as of March 31, 1995, between
Silicon Valley Bank and the Registrant, incorporated by reference to
Exhibit 10.34 to the Registrant's Form 10-KSB filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1994
(File No. 0-13324).
10.13 Common Stock Purchase Option, dated as of March 31, 1995, for Biltmore
Securities, Inc. incorporated by reference to Exhibit 10.35 to the
Registrant's Form 10-KSB filed
II-4
<PAGE>
with the Securities and Exchange Commission for the fiscal year ended
December 31, 1994 (File No. 0-13324).
10.14 Amendment No. 1, dated as of May 31, 1995, to the Loan and Security
Agreement, dated as of March 31, 1995, between Silicon Valley Bank and
Quest Electronics Hardware, Inc. incorporated by reference to Exhibit
10.25 to the Registrant's Form 10- KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1995 (File
No. 0-13324).
10.15 Amendment No. 2, dated as of November 16, 1995, to the Loan and Security
Agreement, dated as of March 31, 1995 between Silicon Valley Bank and
Quest Electronics Hardware, Inc. incorporated by reference to Exhibit
10.26 to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1995 (File
No. 0-13324).
10.16 Amendment No. 3, dated as of February 23, 1995, to the Loan and Security
Agreement, dated as of March 31, 1995, Between Silicon Valley Bank and
Quest Electronics Hardware, Inc. incorporated by reference to Exhibit
10.27 to the Registrant's Form 10- KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1995 (File
No. 0-13324).
10.17 Letter agreement, dated December 29, 1995, between the Registrant and
Stephen J. Drescher incorporated by reference to Exhibit 10.28 to the
Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1995 (File No.
0-13324).
10.18 Letter agreement, dated December 29, 1995, between the Registrant and
Paul L. Burton incorporated by reference to Exhibit 10.29 to the
Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1995 (File No.
0-13324).
10.19 1996 Stock Option Plan (a).
10.20 Intentionally omitted.
10.21 Exchange Agreement, dated November 8, 1996 by and among the Registrant,
Gulfstream Financial Group, Inc. and Phillip D. Schwiebert (a).
11.0 Statement Re: Computation of per share earnings for years ended December
31, 1995 and 1994 (a).
22.0 Subsidiaries of the Registrant (a).
24.0 Consent of Gould & Wilkie (See Exhibit 5.0).
24.1 Consent of Estabrook & Co., Inc., P.C.
24.2 Consent of Moore Stephens, P.C.
- ------------
(a) Previously filed.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to
participating broker-dealers, at the closing, certificates in such
denominations and registered in such names as required by the participating
broker-dealers, to permit prompt delivery to each purchaser.
The undersigned Registrant also undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which,
II-5
<PAGE>
individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration statement
is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports
filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
preceding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned Registrant also undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as a part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the small business issuer under Rule 424(b)(1), or
(4) or 497(h) under the Securities Act as part of this registration statement
as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each post-
effective amendment that contains a form of prospectus as a new registration
statement for the securities offered in the registration statement, and that
offering of the securities at that time as the initial bona fide offering of
those securities.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form SB-2 and authorized
this amendment to the registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in Boca Raton, Florida, on
February 25, 1997.
QUESTRON TECHNOLOGY, INC.
By: /s/ DOMINIC A. POLIMENI
------------------------------
Dominic A. Polimeni
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DOMINIC A. POLIMENI Chairman, President, Chief February 25, 1997
- --------------------------- Executive Officer and Director
Dominic A. Polimeni (Principal Executive Officer)
/s/ MILTON M. ADLER Treasurer, Secretary, Controller and February 25, 1997
- ---------------------------- Director (Principal Financial and
Milton M. Adler Accounting Officer)
/s/ ROBERT V. GUBITOSI Director February 25, 1997
- ----------------------------
Robert V. Gubitosi
/s/ MITCHELL HYMOWITZ Director February 25, 1997
- ----------------------------
Mitchell Hymowitz
/s/ WILLIAM J. MCSHERRY, JR. Director February 24, 1997
- ----------------------------
William J. McSherry, Jr.
</TABLE>
<PAGE>
INDEX TO EXHIBITS
1.0 Form of Underwriting Agreement (a).
1.1 Form of Selected Dealers Agreement (a).
2.0 Stock Purchase Agreement dated as of December 16, 1996 relating to Webb
Distribution, Inc. (a).
3.0 Certificate of Incorporation of the Registrant, incorporated by
reference to Exhibit 3(i) to the Registrant's Form 10-KSB filed with the
Securities and Exchange Commission for the fiscal year ended December
31, 1987 (File No. 0-13324).
3.1 Certificate of Amendment, dated March 20, 1985, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit 4.1
to Amendment No. 1 to the Registrant's Registration Statement on Form S-3
filed with the Securities and Exchange Commission on March 9, 1995
(File No. 33-44331).
3.2 Certificate of Amendment, dated June 9, 1989, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit 4.1
to the Registrant's Amendment No. 1 to Registration Statement on Form S-3
filed with the Securities and Exchange Commission dated March 9, 1995
(File No. 33-44331).
3.3 Certificate of Correction, dated May 17, 1991, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit 4.1
to the Registrant's Amendment No. 1 to Registration Statement on Form S-3
filed with the Securities and Exchange Commission dated March 9, 1995
(File No. 33-44331).
3.4 Certificate of Amendment dated December 20, 1993, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
3(i) to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1993 (File No.
0-13324).
3.5 Certificate of Amendment, dated December 22, 1993, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
3.3 to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1993 (File
No. 0-13324).
3.6 Certificate of Correction, dated July 19, 1994, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit 4.1
to the Registrant's Amendment No. 1 to Registration Statement on Form S-3
filed with the Securities and Exchange Commission dated March 9, 1995
(File No. 33-44331).
3.7 Certificate of Amendment, dated April 2, 1996, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
3.5 to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1995 (File
No. 0-13324).
3.8 By-Laws of the Registrant, incorporated by reference to Exhibit 3b(ii)
to the Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1987 (File No.
0-13324).
3.9 Amendment to By-Laws of the Registrant, incorporated by reference to
Exhibit 3.4 of the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1992 (File No.
0-13324).
3.10 Certificate of Amendment, filed December 31, 1996, to Certificate of
Incorporation of the Registrant.
4.0 Specimen Common Stock Certificate.
4.1 Specimen Preferred Stock Certificate.
4.2 Certificate of Designations, Preferences and Rights of the Registrant's
Series B Convertible Preferred Stock.
4.3 Form of Series IV Warrant Agreement (a).
4.4 Form of Series III Warrant Agreement, dated as of November 7, 1994,
incorporated by reference to Exhibit 10.22 to the Registrant's Form
10-KSB filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1994 (File No. 0-13324).
4.5 Form of Underwriters' Purchase Option (a).
4.6 Stock Purchase Warrant Certificate for Purchase of Common Stock of
Questron Technology, Inc. (a).
4.7 Certificate of Designation, Preferences and Rights of the Registrant's
Series A Cumulative Convertible Preferred Stock, dated August 20, 1990,
incorporated by reference to Exhibit 4(c) to the Registrant's Report on
Form 10-KSB filed with the Securities and Exchange Commission for the
fiscal year ended December 31, 1989 (File No. 0-13324).
4.8 Certificate of Increase relating to Series A Cumulative Convertible
Preferred Stock, dated February 20, 1991, incorporated by reference to
Exhibit 4(d) to the Registrant's Form 10-KSB filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1990 (File
No. 0-13324).
4.9 Certificate of Designation establishing a series of shares of preferred
stock, dated December 22, 1993, incorporated by reference to Exhibit 3.2
to the Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1993 (File No.
0-13324).
5.0 Opinion of Gould & Wilkie.
10.0 Judicate, Inc. 1994 Director Non-Qualified Stock Option Plan,
incorporated by reference to Exhibit 10.28 of the Registrant's Form
10-KSB filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1993 (File No. 0-13324).
10.1 Consulting Agreement, dated as of January 1, 1994, by and between
Biltmore Securities, Inc. and the Registrant, incorporated by reference
to Exhibit 10.23 of the Registrant's Form 10-KSB filed with the
Securities and Exchange Commission for the fiscal year ended December 31,
1993 (File No. 0-13324) and related stock option certificate and
agreement by and between the Registrant and Biltmore Securities, Inc.,
dated January 1, 1994, incorporated by reference to Exhibit 10.10 to the
Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1994 (File No.
0-13324).
10.2 Employment Agreement, dated November 29, 1994, between Quest Electronic
Hardware, Inc. and Dominic A. Polimeni, incorporated by reference to
Exhibit 10.24 to the Registrant's Form 10-KSB filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1994
(File No. 0-13324).
10.3 Employment Agreement, dated November 29, 1994, between Quest Electronic
Hardware, Inc. and Phillip D. Schwiebert, incorporated by reference to
Exhibit 10.25 to the Registrant's Form 10-KSB filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1994
(File No. 0-13324).
10.4 Management Advisory and Consulting Agreement, dated as of November 29,
1994, between Gulfstream Financial Group, Inc. and the Registrant,
incorporated by reference to Exhibit 10.26 to the Registrant's Form
10-KSB filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1994 (File No. 0-13324).
10.5 Waiver, dated as of March 31, 1995, by Gulfstream Financial Group, Inc.
and Philip D. Schwiebert, incorporated by reference to Exhibit 10.27 to
the Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1994 (File No.
0-13324).
10.6 Share Acquisition Agreement, dated as of November 29, 1994, by and among
Gulfstream Financial Group, Inc., Philip D. Schwiebert, Quest Electronic
Hardware, Inc. and the Registrant, incorporated by reference to Exhibit
10.28 to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1994 (File
No. 0-13324).
10.7 Purchase of Assets Agreement, dated as of November 29, 1994, between
Quest Electronic Hardware, Inc. and Arrow Electronics, Inc.,
incorporated by reference to Exhibit 10.29 to the Registrant's Form
10-KSB filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1994 (File No. 0-13324).
10.8 Loan and Security Agreement, dated as of March 31, 1995, between Silicon
Valley Bank and Quest Electronics Hardware, Inc., incorporated by
reference to Exhibit 10.30 to the Registrant's Form 10-KSB filed with
the Securities and Exchange Commission for the fiscal year ended
December 31, 1994 (File No. 0-13324).
10.9 Sublease Agreement, dated as of March 31, 1995, between Arrow
Electronics, Inc. and Quest Electronic Hardware, Inc. with respect to
Dallas, Texas property, incorporated by reference to Exhibit 10.31 to
the Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1994 (File No.
0-13324).
10.10 Sublease Agreement, dated as of March 31, 1995, between Arrow
Electronics, Inc. and Quest Electronic Hardware, Inc. with respect to
Colorado Springs, Colorado property, incorporated by reference to
Exhibit 10.32 to the Registrant's Form 10-KSB filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1994
(File No. 0-13324).
10.11 Sublease Agreement, dated as of March 31, 1995, between Arrow
Electronics, Inc. and Quest Electronic Hardware, Inc. with respect to
San Jose, California property, incorporated by reference to Exhibit
10.33 to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1994 (File
No. 0-13324).
10.12 Third Party Stock Pledge Agreement, dated as of March 31, 1995, between
Silicon Valley Bank and the Registrant, incorporated by reference to
Exhibit 10.34 to the Registrant's Form 10-KSB filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1994
(File No. 0-13324).
10.13 Common Stock Purchase Option, dated as of March 31, 1995, for Biltmore
Securities, Inc. incorporated by reference to Exhibit 10.35 to the
Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1994 (File No.
0-13324).
10.14 Amendment No. 1, dated as of May 31, 1995, to the Loan and Security
Agreement, dated as of March 31, 1995, between Silicon Valley Bank and
Quest Electronics Hardware, Inc. incorporated by reference to Exhibit
10.25 to the Registrant's Form 10- KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1995 (File
No. 0-13324).
10.15 Amendment No. 2, dated as of November 16, 1995, to the Loan and Security
Agreement, dated as of March 31, 1995 between Silicon Valley Bank and
Quest Electronics Hardware, Inc. incorporated by reference to Exhibit
10.26 to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1995 (File
No. 0-13324).
10.16 Amendment No. 3, dated as of February 23, 1995, to the Loan and Security
Agreement, dated as of March 31, 1995, Between Silicon Valley Bank and
Quest Electronics Hardware, Inc. incorporated by reference to Exhibit
10.27 to the Registrant's Form 10- KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1995 (File
No. 0-13324).
10.17 Letter agreement, dated December 29, 1995, between the Registrant and
Stephen J. Drescher incorporated by reference to Exhibit 10.28 to the
Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1995 (File No.
0-13324).
10.18 Letter agreement, dated December 29, 1995, between the Registrant and
Paul L. Burton incorporated by reference to Exhibit 10.29 to the
Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1995 (File No.
0-13324).
10.19 1996 Stock Option Plan (a).
10.20 Intentionally omitted.
10.21 Exchange Agreement, dated November 8, 1996 by and among the Registrant,
Gulfstream Financial Group, Inc. and Phillip D. Schwiebert (a).
11.0 Statement Re: Computation of per share earnings for years ended December
31, 1995 and 1994 (a).
22.0 Subsidiaries of the Registrant (a).
24.0 Consent of Gould & Wilkie (See Exhibit 5.0).
24.1 Consent of Estabrook & Co., Inc., P.C.
24.2 Consent of Moore Stephens, P.C.
- ------------
(a) Previously filed.
<PAGE>
EXHIBIT 3.10
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
QUESTRON TECHNOLOGY, INC.
IT IS HEREBY CERTIFIED THAT:
1. The Certificate of Incorporation of Questron Technology, Inc. (the
"Corporation") hereby be amended by deleting ARTICLE FOURTH in its
entirety and substituting in lieu of said ARTICLE the following new
ARTICLE:
"FOURTH: The total number of shares of all classes of
capital stock which the Corporation shall have authority to
issue is thirty million (30,000,000) shares, of which twenty
million (20,000,000) shares shall be Common Stock, par value
$.001 per share ("Common Stock"), and ten million
(10,000,000) shares shall be preferred stock, par value $.01
per share ("Preferred Stock"). The Preferred Stock may be
issued with full, multiple or fractional voting rights with
such designations, preferences, qualifications, privileges,
limitations, options, conversion rights and other special
relative rights that shall be fixed from time to time by
resolution of the Board of Directors.
Upon filing with the Secretary of State of the State of
Delaware of a Certificate of Amendment to the Corporation's
Certificate of Incorporation whereby ARTICLE FOURTH is
amended to include the within paragraph, each ten (10)
issued and outstanding shares of Common Stock of this
Corporation shall thereby be combined into one (1) validly
issued, fully paid and non-assessable share of Common Stock,
par value $.001 per share. Each person at that time holding
of record any issued and outstanding shares of Common Stock
shall receive upon surrender to the Corporation's transfer
agent a stock certificate or certificates to evidence and
represent the number of shares of post-reverse split Common
Stock to which such stockholder is entitled after giving
effect to the reverse split, rounded, if necessary, to the
next highest whole share."
2. That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State
of Delaware by the affirmative vote of the holders of a majority of
the stock entitled to vote thereon at the 1996 Annual Meeting of the
Stockholders of the Corporation held on December 27, 1996.
3. The effective time of said amendment shall be 5:00 p.m., Eastern
Standard Time, on January 2, 1997.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed
by Dominic A. Polimeni, its President, and Milton M. Adler, its Secretary,
this 31st day of December, 1996.
/s/ DOMINIC A. POLIMENI
--------------------------
Dominic A. Polimeni
President
Attest:
/s/ MILTON M. ADLER
- -----------------------
Milton M. Adler
Secretary
<PAGE>
EXHIBIT 4.0
NUMBER SHARES
QUESTRON TECHNOLOGY, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 748372 20 8
COMMON STOCK
THIS CERTIFIES THAT:
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF $.001 PAR VALUE EACH OF THE COMMON
STOCK OF
QUESTRON TECHNOLOGY, INC.
transferable only on the books of the Corporation in person or by attorney
upon surrender of this certificate properly endorsed. The Corporation will
furnish to any stockholder, upon request and without charge, a statement of
the powers, designations, preferences and relative, participating, optional
or other special rights of each class of stock or series thereof authorized
to be issued and qualifications, limitations or restrictions of such
preferences and/or rights.
This certificate is not valid unless countersigned by the Transfer Agent.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
Questron Technology, Inc.
Corporate Seal
SEAL
1983
DELAWARE
/s/ DOMINIC A. POLIMENI
-------------------
Dominic A. Polimeni
President
/s/ MILTON M. ADLER
-----------------
Milton M. Adler
Secretary
COUNTERSIGNED AND REGISTERED
AMERICAN STOCK TRANSFER & TRUST COMPANY
NEW YORK, NEW YORK TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TENCOM - as tenants in common UNIF GIFT MIN ACT -- Custodian
TENENT - as tenants by the entireties -----------------
JTTEN - as joint tenants with right (Cust) (Minor)
of survivorship and not as under Uniform Gifts
tenants in common to Minors Act -----
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
| |
--------------------------------------
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- ----------------------------------------------------------------------- Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
- -----------------------------------------------------------------------------
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE>
Item 1(f)
EXHIBIT 4.1
NUMBER SHARES
QUESTRON TECHNOLOGY, INC.
SHARES SERIES B 2% CUMULATIVE CONVERTIBLE PREFERRED STOCK
PAR VALUE ONE ($.01) CENTS EACH
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 748372 30 7
PREFERRED STOCK
THIS CERTIFIES THAT:
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE SERIES B 2% CUMULATIVE
CONVERTIBLE PREFERRED STOCK OF
QUESTRON TECHNOLOGY, INC.
transferable only on the books of the Corporation in person or by attorney
upon surrender of this certificate properly endorsed. The Corporation will
furnish to any stockholder, upon request and without charge, a statement of
the powers, designations, preferences and relative, participating, optional
or other special rights of each class of stock or series thereof authorized
to be issued and qualifications, limitations or restrictions of
such preferences and/or rights.
This certificate is not valid unless countersigned by the Transfer Agent.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
Questron Technology, Inc.
Corporate Seal
SEAL
1983
DELAWARE
/s/ DOMINIC A. POLIMENI
-------------------
Dominic A. Polimeni
President
/s/ MILTON M. ADLER
------------------
Milton M. Adler
Secretary
COUNTERSIGNED AND REGISTERED
AMERICAN STOCK TRANSFER & TRUST COMPANY
NEW YORK, NEW YORK TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TENCOM - as tenants in common UNIF GIFT MIN ACT -- Custodian
TENENT - as tenants by the entireties -----------------
JTTEN - as joint tenants with right (Cust) (Minor)
of survivorship and not as under Uniform Gifts
tenants in common to Minors Act -----
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
| |
--------------------------------------
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- ----------------------------------------------------------------------- Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
- -----------------------------------------------------------------------------
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE>
EXHIBIT 4.2
CERTIFICATE OF DESIGNATION
ESTABLISHING A SERIES OF PREFERRED STOCK
of
QUESTRON TECHNOLOGY, INC.
To the Secretary of State of the State of Delaware:
QUESTRON TECHNOLOGY, INC. (the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of
the State of Delaware, does hereby certify that: pursuant to the provisions of
Sections 151(a) and 151(g) of the General Corporation Law of the State of
Delaware, the following resolution establishing and designating a series of
shares of preferred stock and fixing and determining the relative rights and
preferences thereof was duly adopted by the Board of Directors of the
Corporation on December 27, 1996.
"RESOLVED, that pursuant to the authority expressly granted
to and vested in the Board of Directors of this Corporation in accordance with
the provisions of its Certificate of Incorporation as amended, a series of
preferred stock, $.01 par value per share, of the Corporation be established
and given the distinctive designation of "Series B Convertible Preferred
Stock" the ("Series B Preferred Stock"). The number of shares of the Series B
Convertible Preferred Stock authorized to be issued by the Corporation shall
be 1,250,000 shares. The rights, preferences, privileges and restrictions
granted to and imposed upon the Series B Convertible Preferred Stock are as
set forth on the attached Exhibit I."
IN WITNESS WHEREOF, Questron Technology, Inc. has caused
this Certificate to be signed by its President and attested by its Secretary,
this 3rd day of February, 1997.
QUESTRON TECHNOLOGY, INC.
By: /s/ DOMINIC A. POLIMENI
-------------------------------
President
ATTEST:
/s/ MILTON M. ADLER
Secretary
<PAGE>
EXHIBIT I
1. Voting
(a) Except as provided in Sections 1(b) and 1(c) the holders
of the Series B Preferred Stock shall have no right to vote on matters
submitted to the stockholders of the Corporation.
(b) The holders of the Series B Preferred Stock shall be
entitled to that number of votes per share of Series B Preferred Stock equal
to the number of shares of Common Stock into which such share of Series B
Preferred Stock is convertible. Such holders shall be entitled to cast such
votes on any matter which is submitted to the holders of the Corporation's
Common Stock and, except as provided in Section 1(c), shall vote with the
holders of the Common Stock as a single class.
(c) The Corporation shall not, without the affirmative vote
or consent of the holders of shares representing at least a majority of the
shares of Series B Preferred Stock then outstanding, acting as a separate
class:
(i) in any manner authorize or create any class of
capital stock ranking, either as to payment of dividends or distribution of
assets, prior to or on a parity with the Series B Preferred Stock; or
(ii) in any manner alter or change the designa-
tions, powers, preferences or rights or the qualifications,
limitations or restrictions of the Series B Preferred Stock;
provided, however, that, except as otherwise provided by
law, any such vote or consent by the holders of the Series B Preferred Stock
shall be sufficient authorization, insofar as the need to obtain approval of
the Series B Preferred Stock is concerned, for any such action, and when such
action is effected upon such vote or consent of the Series B Preferred Stock,
holders of shares of the Series B Preferred Stock dissenting from such action
shall not have any rights to payment for their shares by reason of this
provision.
2. Rights on Liquidation, Dissolution or Winding Up
In the event of any liquidation, dissolution or winding
up of the Corporation, the holders of shares of the Series B
Preferred Stock then outstanding shall be entitled to be paid out
of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any
payment shall be made to the holders of shares of any other class
or series of the capital stock of the Corporation, $.01 per share
of Series B Preferred Stock together with any accrued but unpaid
dividends (whether or not declared) to the date of payment. If,
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<PAGE>
upon any liquidation, dissolution or winding up of the Corporation, the assets
of the Corporation available for distribution to its stockholders shall be
insufficient to pay the holders of shares of the Series B Preferred Stock, the
full amounts to which they respectively shall be entitled, the holders of
share of the Series B Preferred Stock shall share ratably in any distribution
of assets in proportion of their respective ownership of Series B Preferred
Stock. In the event of any liquidation, dissolution or winding up of the
Corporation, after payment shall have been made to the holders of shares of
the Series B Preferred Stock of the full amount to which they shall be
entitled as aforesaid, the holders of shares of all other classes and series
of the capital stock of the Corporation, to the exclusion of the holders of
shares of the Series B Preferred Stock, shall be entitled to share, according
to their respective rights and preferences, in all remaining assets of the
Corporation available for distribution to its stockholders. The consolidation
or merger of the Corporation with or into any other corporation or
corporations shall not be deemed to be a liquidation, dissolution or winding
up of the Corporation unless the effect thereof shall be to cause a
distribution of assets among its stockholders.
3. Conversion and Dividends
(a) Each share of the Series B Preferred Stock shall
automatically convert on the second anniversary of the effective date of the
registration statement filed by the Corporation under the Securities Act of
1933 relating to the Series B Preferred Stock (the "Effective Date"), without
any action on the part of the holder thereof or the Corporation, into that
number of shares of Common Stock, par value $.001 per share, of the
Corporation ("Common Stock") equal to the offering price attributable to the
Series B Preferred Stock ($5.75) divided by 80% of the closing price per share
of Common Stock as reported by the Nasdaq SmallCap Market on the trading day
immediately preceding the Effective Date. Holders of the Series B Preferred
Stock will be entitled, when and as declared by the Board of Directors, 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 sold as part of the Units, or $0.115 per
share. Such dividends shall accrue from the Effective Date and shall be
payable on each of the two anniversaries following the Effective Date, in cash
or shares of Common Stock at the option of the Corporation. The aforementioned
dividends shall be cumulative and no dividends shall be paid or set apart in
respect of the Common Stock or any other class of securities which ranks
junior to the Series B Preferred Stock unless and until all accrued and unpaid
dividends upon such Series B Preferred Stock have been paid or set apart in
full. No interest shall accrue with respect to dividends in arrears.
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<PAGE>
(b) The number of shares of Common Stock to be issued upon
the conversion of Series B Preferred Stock shall be subject to proportional
adjustment from time to time as follows:
(i) If the Corporation at any time shall consoli-
date or merge with or sell or convey all or substantially all of its assets to
any other corporation or partnership, the shares of the Series B Preferred
Stock then outstanding shall be convertible into such number and kind of
securities and property as would have been issuable or distributable on
account of such consolidation, merger, sale or conveyance upon or with respect
to the shares of Common Stock into which the Series B Preferred Stock is
convertible.
(ii) If the Corporation shall at any time re-
classify or change the outstanding Common Stock into a different type of
security or securities or other property ("Reclassified Securities"), then
each holder of Series B Preferred Stock, at such holder's sole option, shall
thereafter be entitled to convert any share of Series B Preferred Stock held
by such holder into such number of Reclassified Securities as would have been
issuable to such holder of Series B Preferred Stock, had such holder converted
such share of Series B Preferred Stock into Common Stock immediately prior to
the reclassification or change of Common Stock into such Reclassified
Securities.
(iii) If the Corporation at any time pays to the
holders of the Common Stock a dividend in Common Stock, the number of shares
of Common Stock issuable upon conversion of the then outstanding shares of the
Series B Preferred Stock shall be proportionately increased, effective as of
the close of business on the record date for determination of the holders of
the Common Stock entitled to such dividend.
(c) The Corporation shall undertake to have authorized and
thereafter reserve and keep available out of its authorized but unissued
shares of Common Stock or its treasury shares, solely for the purpose of
issuing upon the conversion of the shares of the Series B Preferred Stock,
such number of shares of Common Stock as shall then be issuable upon the
conversion of all of the then outstanding shares of the Series B Preferred
Stock.
4. No Reissuance of Series B Preferred Stock. No share or
shares of the Series B Preferred Stock acquired by the Corporation by reason
of purchase, conversion or otherwise shall be reissued, and all such shares
shall be cancelled, retired and eliminated from the shares which the
Corporation shall be authorized to issue.
5. Notices. Any notice or other communication under
the provisions of this Certificate shall be in writing, and shall
be given by postage prepaid, first class mail, receipt requested,
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<PAGE>
by hand delivery with an acknowledgement copy, or by any reputable service
which guarantees over night delivery ("Over Night Mail"), directed to the
Corporation at 6400 Congress Avenue, Suite 200, Boca Raton, Florida 33487, and
to the Holders at their respective addresses as set forth in the records of
the Corporation, or to any new address of which the Corporation or any Holder
shall have informed the others by the giving of notice in the manner provided
herein. Such notice or communication shall be effective, if sent by mail,
three (3) days after it is mailed within the continental United States; if
sent by Over Night Mail, one day after it is mailed; or by hand delivery, upon
receipt.
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<PAGE>
EXHIBIT 5.0
February 3, 1997
Questron Technology, Inc.
6400 Congress Avenue
Suite 200
Boca Raton, FL 33487
Re: QUESTRON TECHNOLOGY, INC.
REGISTRATION STATEMENT ON FORM SB-2
Gentlemen:
Questron Technology, Inc., a Delaware corporation (the "Company"), has filed
with the United States Securities and Exchange Commission (the "Commission") a
Registration Statement on Form SB-2 (Registration No. 333-18243), with respect
to which this opinion is to be an exhibit, relating to the proposed sale by
the Company of:
1. Up to 1,150,000 previously unissued Units ("Units")
consisting of: (a) up to 1,150,000 previously
unissued shares of its Series B Convertible
Preferred Stock, $.01 par value ("Series B
Preferred Stock"), which are convertible into
shares of Common Stock, par value $.001 per share
("Common Stock"), and (b) up to 1,150,000
previously unissued Series IV Warrants ("Series IV
Warrants");
2. Up to 1,150,000 shares of Common Stock underlying
the aforementioned Series IV Warrants;
3. A previously unissued underwriter's unit purchase
option ("Underwriter's Unit Purchase Option"),
representing the option to purchase 100,000
additional Units consisting of: (a) 100,000
previously unissued shares of Series B Preferred
Stock ("Underwriter's Series B Preferred Stock")
which are convertible into shares of Common Stock
and (b) 100,000 previously unissued Series IV
Warrants ("Underwriter's Series IV Warrants");
4. 100,000 previously unissued shares of Common Stock
underlying the Underwriter's Series IV Warrants;
and
5. 2,750,000 previously issued Series IV Warrants
which are to be offered by selling securityholders
("Selling Securityholders' Series IV Warrants") and
2,750,000 previously unissued shares of Common
Stock underlying the Selling Securityholders'
Series IV Warrants.
<PAGE>
Questron Technology, Inc. - 2 - February 3, 1997
The Registration Statement, as amended, is herein referred to as the
"Registration Statement".
We have acted as securities counsel for the Company in connection with the
transactions which are the subject matter of the Registration Statement and
are familiar with the various corporate proceedings related thereto. In
connection with the Registration Statement, we have examined such corporate
records of the Company and such other instrument, documents and certificates
as we have deemed necessary as a basis for our opinion. For purposes of this
opinion, we have assumed (i) the accuracy and completeness of all information
supplied by the Company, its officers, directors, or agents, (ii) that the
transactions set forth in the Registration Statement are consummated as set
forth therein, (iii) that the Commission shall have issued an order under the
Securities Act of 1933, as amended, declaring the Registration Statement
effective, and (iv) that all requisite authorizations, approvals, consents or
exemptions under the securities laws of the various states and other
jurisdictions of the United States of America shall have been obtained.
Based on the foregoing, we are of the opinion that the Units, the Series B
Preferred Stock, the Series IV Warrants, Units issuable upon exercise of the
Underwriter's Unit Purchase Option, the Underwriter's Series B Preferred
Stock, the Underwriter's Series IV Warrants, the Selling Securityholders'
Series IV Warrants, and the Common Stock issuable upon conversion of the
Series B Preferred Stock and upon exercise of the Series IV Warrants, the
Underwriter's Series IV Warrants and the Selling Securityholder's Series IV
Warrants to be sold in accordance with the Registration Statement, are duly
authorized and upon issuance, delivery and sale thereof, for the consideration
specified in the Registration Statement, will be legally issued, fully paid
and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and as a part of, or an exhibit to, any document which
may be filed with respect to the proposed transactions under the securities
laws of the various states and other jurisdictions of the United States of
America. We also consent to be named in the Registration Statement and in the
Prospectus which constitutes a legal part thereof as the counsel that will
pass upon certain legal matters for the Company in connection with the sale of
the Company's securities.
Very truly yours,
GOULD & WILKIE
Enclosures
<PAGE>
EXHIBIT 24.1
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form SB-2
(No. 333-18243) and in the Prospectus forming part of such Registration
Statement of our report dated February 5, 1996, on our audits of the financial
statements of Comp Ware, Inc. d/b/a/ Webb Distribution. We also consent to the
reference to our firm under the caption "Experts."
ESTABROOK & CO., INC., P.C.
Certified Public Accountants
February 24, 1997
Winchester, Massachusetts
<PAGE>
EXHIBIT 24.2
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this Registration Statement
on Form SB-2 (No. 333-18243) of our report dated April 2, 1996, on our audits
of the financial statements of Questron Technology, Inc. We also consent to
the referenced to our firm under the caption "Experts."
On July 1, 1996, the firm Mortenson and Associates, P.C.
changed its name to Moore Stephens, P.C.
MOORE STEPHENS, P.C.
Certified Public Accountants
February 24, 1997
Cranford, New Jersey
