SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 24, 1998
QUESTRON TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-13324 23-2257354
(State of incorporation (Commission File Number) (I.R.S. Employer
or organization) Identification No.)
6400 Congress Avenue, Suite 200A, Boca Raton, Florida 33487
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (561) 241-5251
785663.1
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant hereby amends the following items, financial statements, exhibits or
other portions of its Current Report on Form 8-K, dated October 8, 1998, as set
forth in the pages attached hereto.
Item 7. Financial Statements and Exhibits
(a) and (b) The financial statements and pro forma financial information
required as part of this item are being filed in this amendment to the Current
Report on Form 8-K, dated October 8, 1998 (the "Form 8-K"). This amendment is
being filed within 60 days of the Form 8-K. The financial statements being filed
with this amendment are as follows:
785663.1
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
I. Pro Forma Financial Statements (Unaudited)
Pro Forma Combined Financial Statements - Introduction..................... F-1
Pro Forma Combined Statement of Operations for the nine months
ended September 30, 1998................................................... F-2
Pro Forma Combined Statement of Operations for the year ended
December 31, 1997.......................................................... F-3
Notes to Pro Forma Combined Financial Statements........................... F-4
II. Fortune Industries, Inc.
Report of Independent Auditors ............................................ F-5
Balance Sheet as of December 31, 1997...................................... F-6 - F-7
Statements of Operations for the years ended December 31, 1997 and 1996.... F-8
Statement of Stockholders' Equity.......................................... F-9
Statements of Cash Flows for the years ended December 31, 1997 and 1996.... F-10 - F-11
Notes to Financial Statements.............................................. F-12 - F-16
III. Fas-tronics, Inc.
Report of Independent Auditors ............................................ F-17
Balance Sheet as of December 31, 1997...................................... F-18
Statements of Operations for the years ended December 31, 1997 and 1996.... F-19
Statement of Stockholders' Equity.......................................... F-20
Statements of Cash Flows for the years ended December 31, 1997 and 1996.... F-21
Notes to Financial Statements.............................................. F-22 - F-26
</TABLE>
(c) Exhibits required by Item 601 of Regulation S-B
The exhibits required by Item 601 of Regulation S-B are hereby incorporated
by reference to the Current Report on Form 8-K, filed with the Securities and
Exchange Commission on October 8, 1998 (file no. 0-13324).
785663.1
3
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED FINANCIAL STATEMENTS
[UNAUDITED]
The following pro forma combined statement of operations for the nine months
ended September 30, 1998 and the year ended December 31, 1997, give effect to
the acquisition of Fortune Industries, Inc. ("Fortune"), and Fas-Tronics, Inc.
("Fas-Tronics") as described in the following paragraphs.
In September 1998, the Company completed the acquisition of 100% of the issued
and outstanding capital stock of Fortune, a privately owned company, effective
as of July 1, 1998. The purchase price for Fortune consisted of:
(i) $9,830,660 in cash;
(ii) 518,102 shares of the Company's common stock, valued at
$2,370,317; and
(iii) up to $2,000,000 (81% in cash and 19% in shares of the Company's
common stock) if Fortune attains certain earnings targets for the
year ending December 31, 1998.
The acquisition of Fortune was effected pursuant to a Stock Purchase Agreement
dated as of June 12, 1998, as amended, with an effective date of July 1, 1998.
The Company has accounted for such acquisition using the purchase method of
accounting. In connection with this acquisition, the Company recorded $9,491,148
of cost in excess of net assets of the business acquired, which will be
amortized over 40 years under the straight-line method.
In September 1998, the Company completed the acquisition of 100% of the issued
and outstanding capital stock of Fas-Tronics, Inc., a privately owned company,
effective as of July 1, 1998. The purchase price for Fas-Tronics consisted of:
(i) $7,422,803 in cash;
(ii) 421,941 shares of the Company's common stock, valued at
$1,930,380; and
(iii) up to $4,000,000 (80% in cash and 20% in shares of the Company's
common stock) if Fas- Tronics attains certain earnings targets for
the twelve months ending June 30, 1999.
The acquisition of Fas-Tronics was effected pursuant to a Stock Purchase
Agreement dated as of June 12, 1998, as amended, with an effective date of July
1, 1998. The Company has accounted for such acquisition using the purchase
method of accounting. In connection with this acquisition, the Company recorded
$6,713,103 of cost in excess of net assets of the business acquired, which will
be amortized over 40 years under the straight-line method.
The historical balance sheets of Fortune and Fas-Tronics as of September 30,
1998 are included in the historical balance sheet of the Company as of September
30, 1998 as filed under Form 10-QSB, giving effect to the transactions under the
purchase method of accounting
Questron's nine months ended September 30, 1998 historical statement of
operations includes operations of Fortune and Fas-Tronics for the three months
then ended including three months' amortization of goodwill on the acquisition
of Fortune and Fas-Tronics, and three months of interest expense on the
incremental debt used to finance the acquisitions.
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, 1997) 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, Fortune and
Fas-Tronics. 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, Fortune and Fas- Tronics appearing elsewhere herein and as filed
under Forms 10-KSB and 10-QSB.
785663.1
F-1
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998.
(UNAUDITED)
<TABLE>
<CAPTION>
Historicals
------------------------------------------------
Questron Fortune Fas-Tronics
-------- ------- -----------
For the For the For the
Nine months Six months Six months
ended ended ended
September 30, June 30, June 30, Pro Forma Pro Forma
1 9 9 8 1 9 9 8 1 9 9 8 Adjustments Combined
------- ------- ------- ----------- --------
<S> <C> <C> <C> <C>
Total revenue $ 38,871,478 $ 6,212,295 $ 4,948,166 $ $50,031,939
Total operating costs
and expenses 32,994,241 5,164,226 3,977,618 202,554 [1] 42,158,641
(73,308)[2]
(13,080)[3]
(93,610)[4]
------------- ------------ ------------ -------------- ----------
Operating income 5,877,237 1,048,069 970,548 (22,556) 7,873,298
Interest expense 1,621,558 10,777 69,877 1,177,186 [5] 2,798,744
(10,777)[6]
(69,877)[7]
------------- ------------ ----------- --------------- -----------
Income before income
taxes 4,255,679 1,037,292 900,671 (1,119,088) 5,074,554
Provision for income
taxes 1,744,828 425,290 369,275 (458,826)[8] 2,080,567
------------ ------------- ----------- -------------- -----------
Net income $ 2,510,851 $ 612,002 $ 531,396 $ (660,262) $ 2,993,987
============ ============= =========== ============== ============
Net income used in per
common share
calculation (reflecting
deduction for preferred
stock dividends) $ 1,269,552 $ 1,752,688
============== ============
Net income per common
share $ .31(a) $ .37(b)
=============== ============
Net income per diluted
common share $ .31(a) $ .37(b)
=============== ============
Average number of
common shares
outstanding 4,099,800 $ 4,723,052
============ ============
Average number of
diluted common
shares outstanding 4,807,796 $ 5,431,048
============ ============
</TABLE>
(a) Net income per common share and net income per diluted common share for the
historical nine months ended September 30, 1998 reflect deductions for preferred
stock dividends, including one-time, non-cash dividends associated with the
conversion of preferred stock into common stock. Before such deductions, net
income per common share was $.61 for the historical nine months ended September
30, 1998 and net income per diluted common share was $.52 for the historical
nine months ended September 30, 1998.
(b) Net income per common share and net income per diluted common share for the
pro forma nine months ended September 30, 1998 reflect deductions for preferred
stock dividends, including one-time, non-cash dividends associated with the
conversion of preferred stock into common stock. Before such deductions, net
income per common share was $.63 for the pro forma nine months ended September
30, 1998 and net income per diluted common share was $.55 for the pro forma nine
months ended September 30, 1998.
See Notes to the Unaudited Pro Forma Combined Financial Statements.
785663.1
F-2
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997.
(UNAUDITED)
<TABLE>
<CAPTION>
Historicals
------------------------------------------------
Questron Fortune Fas-Tronics
For the For the For the
Year ended Year ended Year ended
December 31, December 31, December 31, Pro Forma Pro Forma
1 9 9 7 1 9 9 7 1 9 9 7 Adjustments Combined
------------ ------------ ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Total revenue $ 25,710,194 $ 12,748,815 $ 8,651,774 $ $47,110,783
Total operating costs
and expenses 22,407,791 11,538,517 7,538,317 405,108 [1] 40,792,104
(306,880)[2]
(405,885)[3]
(113,759)[4]
(271,105)[5]
------------- ------------ ------------ -------------- ----------
Operating income 3,302,403 1,210,298 1,113,457 692,521 6,318,679
Total other expense 513,406 28,541 191,576 2,354,372 [6] 2,867,778
(28,541)[7]
(191,576)[8]
------------ ------------- ------------ ---------------- -----------
Income before income
taxes 2,788,997 1,181,757 921,881 (1,441,734) 3,450,901
Provision for income
taxes 1,151,856 485,000 378,000 (589,634)[9] 1,425,222
------------ ------------- ------------ ---------------- ------------
Net income $ 1,637,141 $ 696,757 $ 543,881 $ 852,100 $2,025,679
============ ============= ============ =============== ============
Net income per common
share $ .56 $ .51
============ ==========
Net income per diluted
share $ .47 $ .47
============ ==========
Average number of
common shares
outstanding 1,718,062 $2,658,105
============ ==========
Average number of diluted
common shares
outstanding 3,456,555 4,336,212
============= ==========
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
785663.1
F-3
<PAGE>
QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
[UNAUDITED]
Adjustments to Statements of Operations:
For the Nine Months ended September 30, 1998:
[1] To adjust amortization of goodwill on the acquisitions to a nine month
period.
[2] To reflect a decrease in salary expense to the former shareholder of
Fortune pursuant to employment contracts.
[3] To reflect a decrease in non-compete and consulting expense on Fortune
pursuant to the acquistion agreement.
[4] To reflect a decrease in non-compete and consulting expense on
Fas-Tronics pursuant to the acquisition agreement.
[5] To reflect interest expense and amortization of loan costs associated
with the financing agreement used to pay the cash portion of the purchase price
of Fortune and Fas-Tronics.
[6] To eliminate the interest expense of Fortune.
[7] To eliminate the interest expense of Fas-Tronics.
[8] To properly reflect income tax expense on a pro forma basis.
For the Year ended December 31, 1997:
[1] To reflect amortization of goodwill on the acquisitions for twelve
months.
[2] To reflect a decrease in salary expense to the former shareholder of
Fortune pursuant to employment contracts.
[3] To reflect a decrease in salary expense to the former shareholder of
Fas-Tronics pursuant to employment contracts.
[4] To reflect a decrease in non-compete and consulting expense on Fortune
pursuant to the acquistion agreement.
[5] To reflect a decrease in non-compete and consulting expense on
Fas-Tronics pursuant to the acquisition agreement.
[6] To reflect interest expense and amortization of loan costs associated
with the financing agreement used to pay the cash portion of the purchase price
of Fortune and Fas-Tronics.
[7] To eliminate the interest expense of Fortune.
[8] To eliminate the interest expense of Fas-Tronics.
[9] To properly reflect income tax expense on a pro forma basis.
. . . . . . . .
785663.1
F-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Fortune Industries, Inc.
Fort Worth, Texas
We have audited the accompanying balance sheet of Fortune Industries, Inc.
at December 31, 1997, and the related statements of operations, shareholders'
equity, and cash flows for each of the two years in the period ended December
31, 1997. 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 audit 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 Fortune Industries, Inc. at
December 31, 1997, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Moore Stephens, P.C.
------------------------------
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
May 22, 1998
785663.1
F-5
<PAGE>
FORTUNE INDUSTRIES, INC.
- --------------------------------------------------------------------------------
BALANCE SHEET AS OF DECEMBER 31, 1997.
- --------------------------------------------------------------------------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 733,047
Accounts Receivable, Less Allowance for Doubtful Accounts
of $30,000 1,530,903
Inventories 1,908,051
Other Current Assets 48,959
------------
Total Current Assets 4,220,960
------------
Property and Equipment - Net 63,312
------------
Other Assets:
Goodwill - Net 179,950
Non-Compete Agreement - Net 117,224
Other Assets 2,729
------------
Total Other Assets 299,903
Total Assets $ 4,584,175
============
The Accompanying Notes are an Integral Part of the Financial Statements.
785663.1
F-6
<PAGE>
FORTUNE INDUSTRIES, INC.
- --------------------------------------------------------------------------------
BALANCE SHEET AS OF DECEMBER 31, 1997.
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts Payable $ 690,335
Accrued Profit-Sharing Expense 135,234
Accrued Expenses 302,813
Dividends Payable 146,000
Other Current Liabilities 3,569
Notes Payable - Current Portion 93,785
-----------
Total Current Liabilities 1,371,736
Long-Term Liability:
Notes Payable - Net of Current Portion 146,063
-----------
Total Liabilities 1,517,799
-----------
Commitments and Contingencies --
-----------
Shareholders' Equity:
Common Stock, No Par Value, 200,000 Shares
Authorized, 100,000 Shares Issued 1,000
Additional Paid-in Capital 12,881
Stock Subscriptions Receivable (12,005)
Retained Earnings 3,750,849
Less: Treasury Stock, 22,989 Shares of Common Stock, At Cost (686,349)
-----------
Total Shareholders' Equity 3,066,376
-----------
Total Liabilities and Shareholders' Equity $ 4,584,175
===========
The Accompanying Notes are an Integral Part of the Financial Statements.
785663.1
F-7
<PAGE>
FORTUNE INDUSTRIES, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
Revenues $12,748,815 $11,396,619
----------- -----------
Operating Costs and Expenses:
Cost of Products Sold 7,962,478 7,361,426
Selling, General and Administrative Expenses 3,513,334 2,968,032
Depreciation 62,705 64,512
----------- -----------
Total Operating Costs and Expenses 11,538,517 10,393,970
----------- ------------
Operating Income 1,210,298 1,002,649
Interest Expense 28,541 37,368
----------- ------------
Income Before Pro Forma Income Taxes 1,181,757 965,281
Pro Forma Income Taxes (485,000) (396,000)
----------- ------------
Net Income $ 696,757 $ 569,281
=========== ===========
The Accompanying Notes are an Integral Part of the Financial Statements.
785663.1
F-8
<PAGE>
FORTUNE INDUSTRIES, INC.
- --------------------------------------------------------------------------------
STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Stock Total
Number of Paid-in Retained Treasury Subscriptions Stockholders'
Shares Amount Capital Earnings Stock Receivable Equity
------------------ -------------------- ------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
December 31, 1995 100,000 $ 1,000 $ -- $2,900,811 $(665,017) $ -- $2,236,794
Issuance of Treasury Stock -- -- 9,124 -- 4,309 (6,790) 6,643
Net Income for the Year
Ended December 31, 1996 -- -- -- 965,281 -- -- 965,281
Dividends Paid -- -- -- (537,000) -- -- (537,000)
------- --------- ------ ---------- --------- -------- ----------
Balance -
December 31, 1996 100,000 1,000 9,124 3,329,092 (660,708) (6,790) 2,671,718
Treasury Stock Acquired -- -- -- -- (27,099) -- (27,099)
Issuance of Treasury Stock -- -- 3,757 -- 1,458 (5,215) --
Net Income for the Year Ended
December 31, 1997 -- -- -- 1,181,757 -- -- 1,181,757
Dividends Paid -- -- -- (760,000) -- -- (760,000)
Balance -
December 31, 1997 100,000 $ 1,000 $ 12,881 $ 3,750,849 $ (686,349) $(12,005) $3,066,376
======= ========== =========== =========== ========== ======== ==========
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
785663.1
F-9
<PAGE>
FORTUNE INDUSTRIES, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Operating Activities:
Net Income $ 696,757 $ 569,281
------------- ------------
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used for) Operations:
Depreciation and Amortization 71,093 64,510
Pro Forma Income Tax 485,000 396,000
Other -- (275)
Changes in Assets and Liabilities:
(Increase) Decrease in:
Trade Accounts Receivable (158,482) (98,876)
Inventories (18,022) (436,135)
Other Current Assets (1,281) (7,253)
Increase (Decrease) in:
Accounts Payable 346,035 (119,987)
Accrued Expenses 131,344 35,623
Accrued Profit-Sharing Expense 7,832 17,608
Other Current Liabilities (1,990) 5,559
---------- ---------
Total Adjustments 861,529 (143,226)
---------- ---------
Net Cash - Operating Activities 1,558,286 426,055
---------- ---------
Investing Activities:
Payments on Acquisition of Distributorship (350,000) --
Deposits Paid -- (1,000)
Purchases of Property and Equipment (16,468) (90,227)
Proceeds from Sale of Property and Equipment -- 500
---------- ---------
Net Cash - Investing Activities (366,468) (90,727)
---------- ---------
Financing Activities:
Proceeds from Sale of Treasury Stock -- 6,643
Payments to Acquire Treasury Stock (12,413) --
Payments on Notes Payable (92,806) (90,848)
Dividends Paid (730,000) (472,000)
---------- ---------
Net Cash - Financing Activities (835,219) (556,205)
---------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 356,599 (220,877)
Cash and Cash Equivalents - Beginning of Years 376,448 597,325
---------- ---------
Cash and Cash Equivalents - End of Years $ 733,047 $ 376,448
========== =========
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
785663.1
F-10
<PAGE>
FORTUNE INDUSTRIES, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 28,541 $ 37,368
Income Taxes $ -- $ --
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Acquisition of treasury stock funded by issuance of note payable $ 14,686 $ --
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
785663.1
F-11
<PAGE>
FORTUNE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) Organization and Nature of Operations
Fortune Industries, Inc. (the "Company") was incorporated on June 1, 1964. The
Company is a distributor of fasteners and related products sold primarily to
aeronautical equipment manufacturers throughout the United States.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents - The Company considers certain highly liquid
investments with original maturities of three months or less to be cash
equivalents. The Company maintains its cash and cash equivalents in accounts
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk.
Inventories - Inventories, which consist solely of finished products, are stated
at the lower of cost or market. Cost is determined on an average cost basis.
Property and Equipment and Depreciation - 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 is recorded using primarily
the declining balance method over the shorter of the estimated lives of the
related asset or the remaining lease term. Estimated useful lives are as
follows:
Estimated Useful Life
---------------------
Leasehold Improvements Remaining Lease Term
Furniture and Fixtures 3 - 7 Years
Warehouse Equipment 5 - 7 Years
Motor Vehicles 3 -5 Years
Intangible Assets - Intangible assets are stated at cost. Amortization is
computed utilizing the straight-line method generally over the estimated useful
lives as follows:
Estimated Useful Life
---------------------
Goodwill 15 years
Non-Compete Agreement 5 years
Income Taxes - From January 1988, the Company elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under those provisions,
the Company does not pay federal corporate income taxes on its taxable income.
Instead, the shareholders are liable for federal income taxes on the Company's
taxable income.
Pro Forma Income Taxes - Upon the consummation of the sale of the Company (See
Note 13), the Subchapter S election under the Internal Revenue Code will be
terminated. Pro forma income tax expense is presented in order to show the
effect of income taxes on the historical statements of operations assuming the
Subchapter S election had not been effective for those periods.
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.
785663.1
F-12
<PAGE>
FORTUNE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (Continued)
Concentration of Credit Risk (Continued) - During the years ended December 31,
1997 and 1996, sales to one customer of the Company amounted to $2,967,571 and
$1,090,487, respectively, or approximately 23.3% and 9.6% of revenue,
respectively. Accounts receivable from this customer amounted to approximately
$321,042 at December 31, 1997.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Advertising - The Company expenses advertising costs as incurred.
(3) Property and Equipment and Depreciation
Property and equipment consisted of the following:
December 31,
1 9 9 7
-------
Leasehold Improvements $ 66,291
Furniture and Fixtures 405,795
Warehouse Equipment 92,037
Motor Vehicles 10,637
---------------
Total 574,760
Less: Accumulated Depreciation (511,448)
----------------
Total $ 63,312
----- ===============
(4) Goodwill
Goodwill derives from the acquisition on October 2, 1997, of a parts
distributorship. On that date, the Company paid for the acquisition of:
Inventories $ 43,606
Non-Compete Agreement 123,394
Goodwill 183,000
---------------
Total $ 350,000
----- ===============
At December 31, 1997, goodwill consisted of the following:
Goodwill - At Cost $ 183,000
Less: Accumulated Amortization (3,050)
---------------
Total $ 179,950
----- ===============
The acquisition was accounted for as a purchase. Operations of the acquired
business are included with the Company from date of acquisition onward.
Management estimates that the effect of the acquisition will not be material to
future operations. Pro forma operations information is therefore not meaningful.
Amortization expense amounted to $833 for the year ended December 31, 1997.
785663.1
F-13
<PAGE>
FORTUNE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
(5) Non-Compete Agreement
At December 31, 1997, the non-compete agreement consisted of the following:
Non-compete Agreement - At Cost $ 123,394
Less: Accumulated Amortization (6,170)
----------------
Total $ 117,224
----- ================
Amortization expense amounted to $6,170 for the year ended December 31, 1997.
(6) Notes Payable
Notes payable consisted of the following:
<TABLE>
<CAPTION>
December 31, 1997
Current Long-Term
<S> <C> <C>
Prior shareholder, R. Bright, payable in 60 installments of $7,570
plus interest at 10% per year, from July 21, 1995, unsecured $ 90,848 $136,272
Prior shareholder, N. Theobald, payable in 60 installments of $245
plus interest at 10% per year, from April 30, 1997, unsecured 2,937 9,791
--------- --------
Totals $ 93,785 $146,063
------ ========= ========
</TABLE>
Principal maturities of notes payable over the next five approximates the
following:
December 31,
- ------------
1998 $ 93,785
1999 93,785
2000 48,361
2001 2,937
2002 980
------------
Total $ 239,848
----- ============
(7) Commitments
Lease Commitments - The Company leases its premises under two non-cancelable
operating leases. Of these, one is between the Company and a related party. At
December 31, 1997, future minimum rents consisted of the following:
Related Party Other Total
December 31, ------------- ----- -----
- ------------
1998 $ 35,916 $ 11,300 $ 47,216
1999 -- 1,900 1,900
2000 -- -- --
---------------- --------------- ----------------
$ 35,916 $ 13,200 $ 49,116
================ =============== ================
Rent expense amounted to $45,613 and $37,221 for the years ended December 31,
1997 and 1996, respectively (of which $33,054 and $28,476 were paid to related
party).
785663.1
F-14
<PAGE>
FORTUNE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
(7) Commitments (Continued)
Loan Guarantees - The Company has provided guarantees for certain employees'
debts. The amount of the debts aggregated approximately $15,000 at December 31,
1997.
(8) Employee Profit-Sharing Plan
The Company has a defined contribution profit-sharing plan covering employees
who have completed one year of service (which comprises a 12 month period in
which employees have provided 1,000 hours of service). The Company contributes
to the plan on a discretionary basis, unless the plan is top heavy in which case
a minimum contribution for non-key employees is required (usually 3% of their
compensation). Generally, the Company contributes maturing employee
contributions paid under elective deferrals. Each employees' account vests 100%
over six years of service. The Company contributions charged to expense were
$135,239 and $123,856 for the years ended December 31, 1997 and 1996,
respectively.
(9) Treasury Stock
Treasury stock is shown at cost and consists of 22,989 shares of common stock.
(10) New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Earlier application is permitted. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. SFAS No. 130
is not expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. SFAS No. 131 is not expected to have a material impact on the
Company.
(11) Fair Value of Financial Instruments
In assessing the fair value of financial instruments, the Company is required to
make assumptions, which are based on estimates of market conditions and risks
existing at that time. For the financial instruments, including cash,
investments, accounts receivable, accounts payable, and short-term debt,
management estimates that the carrying amount approximated fair value for the
majority of these instruments because of their short maturities. Management
estimates that the carrying amount of its long-term indebtedness approximates
fair value since the interest rates currently offered to the Company for debt of
the same remaining maturities approximates the average interest rates which the
Company is currently paying.
785663.1
F-15
<PAGE>
FORTUNE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------
(12) Subsequent Events
Subsequent to December 31, 1997, the Company entered into a letter of intent
which contemplates the sale of all Company common stock to Questron Technology,
Inc. ("Questron"), a public corporation in the same industry. It is anticipated
that the sale will be consummated in the form of cash and common stock of
Questron.
. . . . . . . . . . . . .
785663.1
F-16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholder of
Fas-Tronics, Inc.
Haltom City, Texas
We have audited the accompanying balance sheet of Fas-Tronics, Inc. at
December 31, 1997, and the related statements of operations, shareholder's
equity, and cash flows for each of the two years in the period ended December
31, 1997. 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 audit 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 Fas-Tronics, Inc. at
December 31, 1997, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/Moore Stephens, P.C.
------------------------------
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
May 29, 1998
785663.1
F-17
<PAGE>
FAS-TRONICS, INC.
- --------------------------------------------------------------------------------
BALANCE SHEET AS OF DECEMBER 31, 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 218,623
Accounts Receivable, Less Allowance for Doubtful Accounts of $40,000 1,085,126
Inventories 2,327,786
Other Current Assets 17,316
---------------
Total Current Assets 3,648,851
Property, Plant and Equipment - Net 358,374
Other Assets 12,430
---------------
Total Assets $ 4,019,655
===============
Liabilities and Shareholder's Equity:
Current Liabilities:
Accounts Payable $ 900,849
Accrued Expenses 53,715
Current Portion of Long-Term Debt 693,116
---------------
Total Current Liabilities 1,647,680
Long-Term Debt:
Long-Term Debt - Net of Current Portion 1,040,944
---------------
Total Liabilities 2,688,624
---------------
Commitments and Contingencies --
---------------
Shareholder's Equity:
Common Stock, $1.00 Par Value, 100,000 Shares Authorized,
1,000 Shares Issued 1,000
Less: Treasury Stock, 510 Shares of Common Stock - At Cost (210,000)
Retained Earnings 1,540,031
---------------
Total Shareholder's Equity 1,331,031
---------------
Total Liabilities and Shareholder's Equity $ 4,019,655
===============
</TABLE>
See Notes to Financial Statements.
785663.1
F-18
<PAGE>
FAS-TRONICS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Revenues $ 8,651,774 $ 7,670,788
---------------- --------------
Operating Costs and Expenses:
Cost of Products Sold 5,285,265 4,911,682
Selling, General and Administrative Expenses 2,228,239 1,948,145
Depreciation 24,813 22,382
---------------- --------------
Total Operating Costs and Expenses 7,538,317 6,882,209
---------------- --------------
Operating Income 1,113,457 788,579
Interest Expense 191,576 180,894
---------------- --------------
Income Before Pro Forma Income Taxes 921,881 607,685
Pro Forma Income Taxes (378,000) (249,000)
---------------- --------------
Net Income $ 543,881 $ 358,685
================ ==============
</TABLE>
See Notes to Financial Statements.
785663.1
F-19
<PAGE>
FAS-TRONICS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Total
Number of Retained Treasury Stockholder's
Shares Amount Earnings Stock Equity
------ ------ -------- ----- ------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1995 1,000 $ 1,000 $ 145,792 $(210,000) $ (63,208)
Net Income for the Year Ended
December 31, 1996 -- -- 607,685 -- 607,685
Dividends Paid -- -- (118,327) -- (118,327)
------- --------- --------- --------- --------
Balance - December 31, 1996 1,000 1,000 635,150 (210,000) 426,150
Net Income for the Year Ended
December 31, 1997 -- -- 921,881 -- 921,881
Dividends Paid -- -- (17,000) -- (17,000)
------- ---------- ---------- --------- ----------
Balance - December 31, 1997 1,000 $ 1,000 $1,540,031 $(210,000) $1,331,031
======= ========== ========== ========= ==========
</TABLE>
See Notes to Financial Statements.
785663.1
F-20
<PAGE>
FAS-TRONICS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Operating Activities:
Net Income $ 543,881 $ 358,685
---------------- --------------
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used for) Operations:
Depreciation 24,813 22,382
Pro Forma Income Taxes 378,000 249,000
Other 676 675
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (130,539) (350,590)
Inventories (759,512) (397,922)
Other Current Assets (10,546) (3,732)
Other Assets (898) --
Increase (Decrease) in:
Accounts Payable and Accrued Expenses 176,727 76,734
---------------- --------------
Total Adjustments (321,279) (403,453)
---------------- --------------
Net Cash - Operating Activities 225,042 (44,768)
---------------- --------------
Investing Activities:
Purchases of Property, Plant and Equipment (18,007) (9,879)
---------------- --------------
Financing Activities:
Proceeds from Bank Line of Credit 80,000 250,000
Proceeds from Related Party Note Payable -- 295,650
Proceeds from Notes Payable 250,000 --
Payments on Bank Line of Credit (290,000) (40,000)
Payments on Notes Payable (208,050) (162,581)
Payments on Bank Mortgage Payable (22,920) (16,572)
Payments on Capital Lease Obligations (2,781) --
Dividends Paid (17,000) (118,326)
---------------- --------------
Net Cash - Financing Activities (210,751) 208,171
---------------- --------------
Net (Decrease) Increase in Cash and Cash Equivalents (6,156) 153,524
Cash and Cash Equivalents - Beginning of Years 224,779 71,255
---------------- --------------
Cash and Cash Equivalents - End of Years $ 218,623 $ 224,779
================ ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 182,954 $ 171,872
Income Taxes $ -- $ --
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Equipment Financed Through Capital Lease $ 33,027 $ --
See Notes to Financial Statements.
</TABLE>
785663.1
F-21
<PAGE>
FAS-TRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) Organization and Nature of Operations
Fas-Tronics, Inc. (the "Company") was incorporated on February 12, 1986. The
Company is a distributor of fasteners and related products sold primarily to
aeronautical equipment manufacturers throughout the United States.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents - The Company considers certain highly liquid
investments with original maturities of three months or less to be cash
equivalents. The Company maintains its cash and cash equivalents in accounts
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk.
Property and Equipment and Depreciation - 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 is recorded using primarily
the declining balance method over the shorter of the estimated lives of the
related asset or the remaining lease term. Estimated useful lives are as
follows:
Estimated Useful Life
Buildings and Improvements 30 Years
Furniture and Fixtures 5 - 7 Years
Office Equipment 5 - 7 Years
Warehouse Equipment 5 - 7 Years
Motor Vehicles 5 Years
Capitalized Lease Assets 7 Years
Income Taxes - From January 1993, the Company elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under those provisions,
the Company does not pay federal corporate income taxes on its taxable income.
Instead, the shareholder is liable for federal income taxes on the Company's
taxable income.
Pro Forma Income Taxes - Upon the consummation of the sale of the Company (See
Note 12), the Subchapter S election under the Internal Revenue Code will be
terminated. Pro forma income tax expense is presented in order to show the
effect of income taxes on the historical statements of operations, assuming the
Subchapter S election had not been effective for those periods.
Concentration of Credit Risk - The Company extends credit to its customers which
results in accounts receivable arising from its normal business activities. The
Company does not require collateral from its customers, but routinely assesses
the financial strength of its customers and, based upon factors surrounding the
credit risk of its customers, believes that its receivable credit risk exposure
is limited. Such estimate of the financial strength of such customers may be
subject to change in the near term.
During the years ended December 31, 1997 and 1996, sales to three customers and
two customers amounted to approximately $2,900,000 and $2,100,000, respectively,
or approximately 33.4% and 27.4% of revenue, respectively. Accounts receivable
from significant customers amounted to approximately $283,000 at December 31,
1997.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
785663.1
F-22
<PAGE>
FAS-TRONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (Continued)
Advertising - The Company expenses advertising costs as incurred.
Inventories - Inventories, which consist solely of finished products, are stated
at the lower of cost or market. Cost is determined on an average cost basis.
(3) Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------
1 9 9 7
-------
<S> <C>
Land $ 35,950
Building and Improvements 302,682
Furniture and Fixtures 20,916
Office Equipment 150,205
Warehouse Equipment Including Capitalized Leased Assets of $33,027 91,843
Motor Vehicles 21,878
---------------
Total 623,474
Less: Accumulated Depreciation including Accumulated
Depreciation of Capitalized Leased Assets of $1,966 (265,100)
---------------
Total $ 358,374
=======
</TABLE>
(4) Current and Long-Term Debt
<TABLE>
Current and long-term debt consisted of the following at December 31, 1997:
Current Long-Term
------- ---------
<S> <C> <C>
Bank mortgage payable - to Landmark Bank, payable in variable monthly
installments (1997 - $7,448) including interest, maturing September 2010,
interest at 2.75% over prime (1997 - 11.25%) per year, collateralized by
accounts receivable, inventories, real estate and other property, plant and
equipment, Small Business
Administration guarantee and pledge of stock $ 22,906 $ 599,650
Note payable - related party to shareholder, V. Fitzgerald, payable on
demand, interest at 10% per year, payable quarterly, unsecured 404,673 --
-------------- --------------
Totals - Forward 427,579 599,650
-------------- --------------
Bank:
To Landmark Bank, payable in monthly installments of $8,292 including interest,
maturing May 2000, interest of 11.5% per year, collateralized by accounts
receivable, inventories, real estate and other property,
plant and equipment and shareholder guarantee 79,600 129,182
-------------- --------------
Totals - Forward $ 79,600 $ 129,182
</TABLE>
785663.1
F-23
<PAGE>
FAS-TRONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
(4) Current and Long-Term Debt (Continued)
<TABLE>
<CAPTION>
Current Long-Term
------- ---------
<S> <C> <C>
Totals - Forwarded $ 427,579 $ 599,650
-------------- --------------
Total Bank - Forwarded 79,600 129,182
-------------- --------------
Other:
Finance company, payable in monthly installments of $719 including interest,
maturing September 1999, interest at 7.5% per year,
collateralized by a motor vehicle 7,833 6,243
Prior shareholders, N.L.B Hutchins, two notes each payable in weekly
installments of $2,000 including interest, maturing June 2000 (when all
outstanding principal and interest is due), interest at 10% per year,
collateralized by pledge of stock and shareholder guarantee 170,867 282,862
-------------- --------------
Totals 178,700 289,105
-------------- --------------
Capital Lease Obligations (See Note 5) 7,237 23,007
-------------- --------------
Totals $ 693,116 $ 1,040,944
------ ============== ==============
</TABLE>
Principal maturity of long-term debt over the next five years is as follows:
December 31,
- ------------
1998 $ 693,116
1999 322,291
2000 168,186
2001 38,363
2002 36,418
Thereafter 475,686
----------------
Total $ 1,734,060
----- ================
(5) Capital Lease Commitments
The Company leases certain equipment under agreements classified as capital
leases. The capitalized cost and accumulated depreciation at December 31, 1997,
relating to such equipment, was as follows:
December 31,
------------
1 9 9 7
-------
Capitalized Cost $ 33,027
Less: Accumulated Amortization (1,966)
----------------
Capitalized Cost - Net $ 31,061
---------------------- ================
Certain other equipment costing $16,625 acquired under capital lease during the
year ended December 31, 1997 was provided to Fitz Manufacturing, LLP, a related
party.
785663.1
F-24
<PAGE>
FAS-TRONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
(5) Capital Lease Commitments (Continued)
Future minimum payments under capital leases as of December 31, 1997 were as
follows:
1998 $ 10,330
1999 10,330
2000 10,330
2001 6,026
-------------
Total Future Minimum Lease Payments 37,016
Less: Amount Representing Interest (6,772)
Present Value of Net Minimum Capital Lease Payments 30,244
Less: Current Portion (7,237)
Long-Term Portion $ 23,007
----------------- =============
(6) Treasury Stock
Treasury stock is shown at cost and consists of 510 shares of common stock.
(7) Defined Contribution Plan
The Company has established a defined contribution (401-K) pension plan.
Substantially, all employees are eligible to participate upon completion of
certain minimum service requirements. The Company does not contribute to the
Plan.
(8) New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Earlier application is permitted. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. SFAS No. 130
is not expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. SFAS No. 131 is not expected to have a material impact on the
Company.
(9) Fair Value of Financial Instruments
In assessing the fair value of financial instruments, the Company is required to
make assumptions, which are based on estimates of market conditions and risks
existing at that time. For the financial instruments, including cash, accounts
receivable, accounts payable, amounts due to and from related parties, and
short-term debt, management estimates that the carrying amount approximated fair
value for the majority of these instruments because of their short maturities.
Management estimates that the carrying amount of its long-term indebtedness
approximates fair value since the interest rates currently offered to the
Company for debt of the same remaining maturities approximates the average
interest rates which the Company is currently paying.
785663.1
F-25
<PAGE>
FAS-TRONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------
(10) Related Party Transactions
Interest expense on the related party note payable (see note 4) note amounted to
$40,467 and $10,902 for the year ended December 31, 1997 and 1996, respectively.
(11) Subsequent Event - Proposed Sale of the Company
Subsequent to December 31, 1997, the Company entered into a letter of intent
which contemplates the sale of all Company common stock to Questron Technology,
Inc. ("Questron"), a public corporation in the same industry. It is anticipated
that the sale will be consummated in the form of cash and common stock of
Questron.
. . . . . . . . . . . . .
785663.1
F-26
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
QUESTRON TECHNOLOGY, INC.
Date: December 8, 1998 By: /s/ Dominic A. Polimeni
------------------------
Dominic A. Polimeni
Chairman, President and
Chief Executive Officer
<PAGE>
