<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1997
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(No Fee Required)
For the transition period from _______________ to _______________
Commission file number 0-13324
QUESTRON TECHNOLOGY, INC.
- -------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 23-2257354
- --------------------------------- -------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
6400 Congress Avenue, Suite 200A, Boca Raton, FL 33487
- ------------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (561) 241 - 5251
----------------
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value
- -------------------------------------------------------------------------------
(Title of class)
Series B Convertible Preferred Stock, $.01 Par Value
- -------------------------------------------------------------------------------
(Title of class)
Series IV Common Stock Purchase Warrant
- -------------------------------------------------------------------------------
(Title of class)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES X NO
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in the definitive proxy
or information statements incorporated by reference in Part III of this Form
10-KSB.
----
State issuer's revenues for its most recent fiscal year. The
Company's revenues for the year ended December 31, 1997 were $25,710,194.
As of March 17, 1998, the aggregate market value of common stock held
by non-affiliates of the registrant was approximately $8,044,717. In addition,
as of March 17, 1998, the aggregate market values of Series B Convertible
Preferred Stock and Series IV Common Stock Purchase Warrant held by
non-affiliates of the registrant were approximately $11,284,375 and
$6,790,625, respectively.
As of March 17, 1998, there were 2,127,934 shares of the issuer's
common stock, 1,150,000 shares of the issuer's Series B Convertible Preferred
Stock, and 3,900,000 of the issuer's Series IV Common Stock Purchase Warrants
outstanding.
Transitional Small Business Disclosure Format: YES NO X
----- ----
<PAGE>
Certain information set forth in this report under the captions "Item
1. Business" and "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations" 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" which appears in Item 1. Readers are
cautioned not to place undue reliance on these forward-looking 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.
PART I
ITEM 1. BUSINESS.
GENERAL
Questron Technology, Inc. (the "Company" or "Questron") is primarily a
value-added distribution company specializing in inventory logistics management
programs for fasteners and related products (commonly referred to as "C"
inventory items) sold to original equipment manufacturers ("OEMs") through its
wholly-owned subsidiaries Quest Electronic Hardware, Inc., Webb Distribution
and California Fasteners, Inc. The Company provides its customers with
inventory management services, such as bin-stock replenishment and other
just-in-time inventory management programs, and is the outsourced materials
management function for many of its customers, providing complete supply chain
management from procurement to deployment of the products managed. The Company
is also a master distributor of fasteners through its subsidiary Integrated
Material Systems, Inc. and a distributor of lithium batteries and customized
battery packs and assemblies through its subsidiary Power Components, Inc.
The Company serves more than 4,000 customers including computer,
telecommunications, semiconductor fabrication equipment, medical electronics,
contract manufacturing, consumer products and industrial equipment
manufacturing companies. Product lines offered to its customers include
fasteners, spacers and standoffs, plastic components, cable ties and
accessories, drawer slides, connectors, design/prototype components, lithium
batteries and customized battery packs and assemblies.
BACKGROUND
The Company was incorporated in Delaware in 1983 to provide a broad
range of alternative dispute resolution ("ADR") services. Competitive
pressures adversely affected the profitability and cash flow of the business
and, accordingly, in September 1993 the Company instituted a vigorous cost
reduction program that led to substantial downsizing of its ADR activities. In
November 1994, the Company agreed to acquire a fastener and electronic
hardware distribution business.
On March 31, 1995 the Company acquired 100% of the stock of Quest
Electronic Hardware, Inc. ("Quest"), a fastener and related products
distribution business. The acquisition was completed pursuant to a Share
Acquisition 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 (the "Share
Agreement"). Pursuant to the Share Agreement, the Company issued to Gulfstream
and Schwiebert (the sole stockholders of Quest) 384,409, as adjusted for the
one-for-ten reverse stock split in December 1996, newly issued, fully-paid
and non-assessable shares of
2
<PAGE>
common stock of the Company, in exchange for all of the issued and
outstanding shares of common stock of Quest. 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 fastener
distribution business (the "Fastener 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 Fastener Business. The price consisted of a cash payment of
$4,850,000 plus the assumption of certain liabilities of the Fastener Business.
The purchase price was funded through a combination of $2.2 million of bank
borrowings, proceeds from the sale of the Company's securities under a private
placement, and available cash. Approximately $1.5 million of the funds used for
the purchase of the Fastener Business were provided from the proceeds of the
sale by the Company of 116,000 shares, as adjusted for the one-for-ten reverse
stock split in December 1996, of common stock at a purchase price of $15.00 per
share to a group of subscribers in the private placement.
Pursuant to a Management Advisory and Consulting Agreement, dated
November 29, 1994, between the Company and Gulfstream, Gulfstream acts as an
advisor and consultant to the Company, and also provides certain
administrative services to the Company. In addition, pursuant to an Exchange
Agreement, dated November 8, 1996, upon the attainment of certain earnings
targets for the Company, Gulfstream will be entitled to receive options to
acquire additional shares of common stock at an exercise price equal to the
fair market value of the common stock at the date of grant (See Item 11 -
"Exchange Agreement").
Pursuant to an Employment Agreement, dated November 29, 1994, by and
between Quest and Dominic A. Polimeni ("Polimeni"), Quest agreed to employ
Polimeni, and Polimeni agreed to serve, as Chairman, Chief Executive Officer
and Chief Financial Officer of Quest for a period of five (5) years unless
terminated pursuant to the terms of said agreement. Polimeni is also a
Director and the President of Gulfstream and is the Chairman, President and
Chief Executive Officer of the Company.
Pursuant to an Employment Agreement, dated November 29, 1994, by and
between Quest and Schwiebert, Quest agreed to employ Schwiebert, and
Schwiebert agreed to serve, as President and Chief Operating Officer of Quest
for a period of five (5) years unless terminated pursuant to the terms of said
agreement. In addition, pursuant to an Exchange Agreement, dated November 8,
1996, upon the attainment of certain earnings targets for the Company,
Schwiebert will be entitled to receive options to acquire additional shares of
common stock at an exercise price equal to the fair market value of the common
stock at the date of grant (See Item 11 "Exchange Agreement").
At a Special Meeting of Shareholders held on April 2, 1996, the
shareholders approved the change of the Corporation's name to Questron
Technology, Inc. The Board of Directors of the Company believes that the
change of name to Questron Technology, Inc. more accurately reflects the
change in focus and strategic direction of the Company's principle business of
providing inventory logistics management programs to OEMs.
At the 1996 Annual Meeting of Shareholders held on December 27, 1996,
the shareholders approved a one-for-ten reverse split of the Company's common
stock. Unless otherwise indicated, the
3
<PAGE>
information contained herein gives effect to the one-for-ten reverse stock
split of the issued and outstanding common stock and the reduction in the
authorized number of shares of common stock from 50,000,000 to 20,000,000.
On March 10, 1997, the Company completed an offering of 1,150,000
Units at a price of $6.00 per unit (the "Offering"). Each Unit consisted of
one share of the Company's Series B Convertible Preferred Stock and one
redeemable Series IV Common Stock Purchase Warrant of the Company. A portion
of the net proceeds of the Offering ($3,250,000) were used by the Company to
acquire the business of Comp Ware, Inc., a privately owned distributor of
fasteners and related products in Boston, MA which conducts business as Webb
Distribution ("Webb"). The remaining amount of net proceeds ($2,353,000) was
used to repay the outstanding balance on Quest's revolving credit facility
($750,000) and to repay the outstanding balance on Webb's revolving credit
facility ($1,000,000), with the remaining balance ($603,000) retained by the
Company for working capital.
Simultaneous with the completion of the Offering, the Company
acquired 100% of the stock of Webb pursuant to a Stock Purchase Agreement
dated as of December 16, 1996. The purchase price for Webb consisted of: (i)
$3,250,000 in cash; (ii) Note A in the amount of $375,000, with principal and
interest at the rate of 10% per annum due and payable 18 months from the
effective date of the Offering; (iii) Note B in the amount of $375,000, with
principal and interest at the rate of 10% per annum payable monthly over five
years from the effective date of the Offering; and (iv) 1,500,000 Series IV
Warrants (the "Webb Warrants") issued to the majority shareholder of Webb as a
down payment under the Stock Purchase Agreement. In connection with the sale
of the Webb Warrants by the majority shareholder of Webb, Note A (as described
in (ii) above) was satisfied pursuant to the terms of the Stock Purchase
Agreement. The Company accounted for the Webb acquisition using the purchase
method of accounting. In connection with such acquisition, the Company entered
into a three-year employment agreement with Douglas Dinicola, a former
shareholder of Webb.
Pursuant to a Stock Purchase Agreement dated May 30, 1997, the
Company acquired 100% of the stock of Integrated Material Systems, Inc.
("IMS"), a privately owned master distributor of fasteners in Scottsdale, AZ.
The purchase price for IMS consisted of: (i) 50,000 shares of the Company's
common stock, having a market value of $299,050, issued to the stockholders of
IMS; (ii) additional cash consideration, in each of the five years from the
anniversary of the closing date, based upon the annual pre-tax earnings of
IMS, up to a maximum of $300,000 per year (maximum of $1,500,000 over the five
years); (iii) 75,000 shares of the Company's common stock, which shares shall
be restricted and not earned until the attainment of $500,000 of annual
pre-tax income by IMS; (iv) options to purchase 100,000 shares of the
Company's common stock at an exercise price of $6.00 per share, which options
become exercisable in five equal annual installments; and (v) upon the
Company's attainment of $4,500,000 of pre-tax income, options to purchase
90,000 shares of the Company's common stock at an exercise price equal to the
market price of the Company's common stock at the date of grant. The Company
has accounted for the IMS acquisition using the purchase method of accounting.
The shares of common stock of the Company issued in connection with the
acquisition of IMS have not been registered under the Securities Act of 1933
(the "Act") and may not be resold absent such registration unless an exemption
from registration is available. In connection with such acquisition, the
Company entered into a five-year employment agreement with James Taylor, a
former shareholder of IMS.
On June 30, 1997, the Company sold its wholly-owned subsidiary
Judicate of Philadelphia, Inc., which provided alternative dispute resolution
services to its clients, to an employee.
4
<PAGE>
On September 4, 1997, the Company acquired the business and net
operating assets of Power Components, Inc. ("PCI"), a privately owned
Philadelphia, PA distributor of lithium batteries and customized battery packs
and assemblies, pursuant to an Asset Purchase Agreement, through a
simultaneously acquired wholly-owned subsidiary, AR Acquisition Company
("AR"). AR was acquired pursuant to a Stock Purchase Agreement. Under the
Asset Purchase Agreement, AR acquired the assets of PCI used exclusively in
connection with PCI's operation of its distribution of lithium batteries and
customized battery packs and assemblies. The purchase price for the
acquisition of PCI's business consisted of: (i) a cash payment of $900,000
plus the assumption of certain liabilities of PCI's business; (ii) 50,000
shares of the Company's common stock; and (iii) a promissory note in the
amount of $250,000. Interest on the outstanding balance of the note shall be
payable monthly at the rate of 8% per annum, commencing on October 1, 1997.
Payments of principal shall be made in monthly installments of $10,000
commencing in April 1998, unless extended, but in no event later than July
1998. The $900,000 of the funds used for the purchase of PCI's business was
provided by the Company from available working capital.
Pursuant to the Stock Purchase Agreement, the Company issued to the
AR Stockholders 100,000 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 AR. Such shares of the Company's common stock shall
vest during the three (3) full calendar years immediately following the
Closing as follows: 20,000 shares upon the attainment by AR of $350,000 of
pre-tax earnings in any of the calendar years 1998, 1999 or 2000 up to a
maximum of 100,000 shares upon the attainment of $750,000 of pre-tax earnings
by AR in any of such years. In the event that the pre-tax earnings are more
than $350,000 but less than $750,000 in any such years, then the number of
shares that vest shall be adjusted on a linear basis. In the event that any
shares of the Company's common stock do not vest, then the AR Stockholders
shall return their certificates to the Company for cancellation of the
appropriate number of shares. The Company has also agreed to pay cash
consideration, in each of the three full calendar years immediately following
the Closing (and pro rata for the partial year from the Closing Date to the
end of 1997), based upon the annual pre-tax earnings of AR, up to a maximum of
$300,000 per year (maximum of $900,000 over the three years).
The Company has accounted for the acquisitions of PCI and AR using
the purchase method of accounting. The shares of common stock of the Company
issued in connection with the acquisition of PCI and AR have not been
registered under the Securities Act of 1933 (the "Act") and may not be resold
absent such registration or unless an exemption from registration is
available. In connection with such acquisition, the Company entered into
five-year employment agreements with Anthony R. Cucchi and Anthony R. Cucchi,
Jr., AR's two former shareholders. Immediately following the completion of
such acquisition, the Company changed AR's name to Power Components, Inc.
On September 22, 1997, the Company acquired 100% of the stock of
California Fasteners, Inc. ("CalFast"), a privately owned distributor of
fasteners and related products with branches in Anaheim, CA, San Diego, CA,
and Phoenix, AZ. The acquisition was completed pursuant to a Stock Purchase
Agreement (the "Purchase Agreement") dated August 29, 1997. The purchase price
for CalFast consisted of an Initial Purchase Price and a Deferred Purchase
Price. The Initial Purchase Price consisted of: (i) a cash payment of
$6,594,441; (ii) the assumption of $1,058,712 of debt net of cash on hand; and
(iii) 475,106 shares of common stock of the Company, valued at $2,981,288. Of
the 475,106 shares of common stock of the Company, the former shareholders of
CalFast were granted the option to sell 125,896 shares back to the Company on
a monthly basis as follows: for each of the seven months during the period
October 1997 through April 1998, an aggregate of 8,879 shares per month valued
at
5
<PAGE>
$6.275 per share, or $55,714.29 per month, and for each of the 53 months
during the period May 1998 through September 2002, an aggregate of 1,203
shares per month valued at $6.275 per share, or $7,547.17 per month. To date,
the former shareholders of CalFast have declined to exercise their option to
sell such shares back to the Company. The Deferred Purchase Price consists of:
(i) a 1997 Deferred Purchase Price equal to the amount of aggregate earnings
before interest, income taxes, amortization of goodwill, and allocation of
corporate expenses associated with the three branches of CalFast (hereinafter
"EBIT") in excess of $1,000,000 for the four month period from September 1997
through December 1997, up to a maximum amount of $795,559; and (ii) a 1998
Deferred Purchase Price equal to the amount of the EBIT for the year ending
December 31, 1998, up to a maximum of $3,500,000, which shall be paid 50% in
cash, up to a maximum of $1,750,000, and 50% in shares of the Company's common
stock, up to a maximum of $1,750,000, with the number of shares to be issued
determined based upon the market price of the Company's common stock at the
date of such payment. In addition, upon the Company's attainment of $4,500,000
of pre-tax income, the former shareholders of CalFast shall be granted options
to purchase 125,000 shares of the Company's common stock at an exercise price
equal to the market price of the Company's common stock at the date of grant.
The Company accounted for the CalFast acquisition using the purchase method of
accounting.
The shares of common stock of the Company issued in connection with
the acquisition of CalFast have not been registered under the Securities Act
of 1933 (the "Act") and may not be resold absent such registration or unless
an exemption from registration is available. As provided in the Purchase
Agreement, the Company filed a registration statement under the Act relating
to the resale of 125,896 shares of common stock of the Company issued as part
of the Initial Purchase Price. In connection with such acquisition, the
Company entered into five-year employment agreements with Douglas D. Zadow and
Terry Bastian, CalFast's two former shareholders.
In connection with the acquisition of CalFast, the Company entered
into a loan and security agreement with Silicon Valley Bank ("SVB") dated
September 22, 1997. The loan and security agreement provides for a $14,000,000
credit facility consisting of a six-year term loan for $10,000,000 and a
$4,000,000 revolving credit facility. Interest on the six-year term loan is
due monthly at the prime rate plus 1.5% and interest on the revolving facility
is due monthly at the prime rate plus 1%. At December 31, 1997, the Company
was indebted to SVB in the amount of $9,583,334 on the six-year term loan and
$1,425,000 on the revolving credit facility.
BUSINESS
The Company's distribution logistics management and services business
("Questron Distribution Logistics", referred to herein as "QDL") is conducted
through its wholly-owned subsidiaries Quest Electronic Hardware, Inc., Webb
Distribution and California Fasteners, Inc. QDL is a specialized value-added
distributor of fasteners and related products (commonly referred to as "C"
inventory items) sold to original equipment manufacturers ("OEMs"). QDL
provides its customers with inventory management services, such as bin-stock
replenishment and other just-in-time inventory management programs, and is the
outsourced materials management function for many of its customers, providing
complete supply chain management from procurement to deployment of the
products managed. QDL serves customers in the computer, telecommunications,
semiconductor fabrication equipment, medical electronics, contract
manufacturing, consumer products, and industrial equipment manufacturing
industries.
Fasteners and related products include screws, bolts, nuts, washers,
pins, rings, fittings, springs, spacers, standoffs, plastic components, cable
ties and accessories, drawer slides, connectors and similar
6
<PAGE>
parts. According to an industry study, sales of fasteners in 1996 were
approximately $8.0 billion in the United States. The OEM market represents in
excess of 80% of the total U.S. fastener market, the maintenance and repair
operations ("MRO") market accounts for 13% with construction and other markets
accounting for the remaining 7%. The United States fastener market is
estimated to have over 1,900 distributors. The Company believes that the OEM
fastener and related parts distribution industry is in the early stages of
consolidation, and the Company plans to participate in the consolidation of
the industry. The Company believes that its broad selection of fasteners and
related products, high quality services, professional management team, and
strong competitive position will allow it to be one of the leading
consolidators.
Fasteners and related products constitute a majority of the total
number of parts needed by an OEM to manufacture its products, but represent
only a small fraction of the total materials cost. The cost for an OEM to
manage its inventory of fasteners and related products internally is
relatively high due to: (i) the large number of fasteners and related products
in inventory; (ii) the inability of an OEM to achieve scale economies that QDL
is able to derive from servicing multiple customers; (iii) the risk of
interruptions for just-in-time ("JIT") manufacturing operations; and (iv) the
need to perform quality assurance testing of the fasteners and related
products. The Company believes that OEMs are increasingly outsourcing their
fastener and related products inventory procurement and management needs to
distributors like the Company in order to focus on their key competency, their
core manufacturing businesses, thereby reducing costs. To further reduce
costs, many manufacturers are seeking to consolidate the number of suppliers
they use and are selecting distributors with extensive product lines who can
also provide inventory-related services. To capitalize on these trends, the
Company offers a broad array of fasteners and related products and provides a
variety of related procurement and inventory management services, including
inventory management information systems and reports, just-in-time delivery
programs, quality assurance, advisory engineering services, component kit
production and delivery, and electronic data interchange ("EDI") applications.
QDL's combined net sales have increased at a compound annual rate of
approximately 18% per year over the four years ended December 31, 1997,
adjusting for 1997's acquisitions to reflect true internal growth. The Company
has generated such growth primarily by expanding the breadth of its product
offerings and value-added services, which has allowed QDL to increase its
sales to existing customers and attract new customers.
INDUSTRY OVERVIEW
Companies operating in the fastener and related products distribution
business can generally be characterized by the end users they serve, which are
comprised broadly of OEMs, MROs and construction companies. The traditional
fastener and related products distribution market is similar to most
industrial distribution markets. Fasteners and related products are purchased
from both domestic and overseas manufacturers and sold to both domestic and
overseas customers. The majority of these fasteners and related products are
sold to OEM and MRO clients on a purchase order basis. Some smaller
distributors specialize along industry lines because of the uniqueness of
customer requirements. Other smaller distributors provide a wide range of
fasteners and related products used for general assembly. QDL provides a wide
range of fasteners and related products to meet the specialized needs of its
OEM customers.
Customer demand for inventory management services and electronic data
interchange has required industry participants to invest in the development
and utilization of sophisticated computer
7
<PAGE>
systems in order to remain competitive. Automated inventory picking, component
kit assembly and quality control procedures also require investments in
personnel and equipment. In addition, many customers are seeking to reduce
their operating costs by decreasing the number of suppliers with whom they do
business, often eliminating those suppliers offering limited ranges of
products and services. QDL believes that these trends have placed a
substantial number of small, owner-operated fastener distributors at a
competitive disadvantage because of their limited product lines and inventory
systems. In addition, many of these smaller distributors have limited access
to the capital resources necessary to provide working capital needed to
provide a full range of services to their customers.
BUSINESS STRATEGY
QDL intends to become one of the premier national value-added
distributors of fasteners and related products, focused on the needs of OEMs.
In doing so, QDL seeks to develop and supply inventory-related services
designed to reduce its customers' operating costs. Quality assurance, JIT
delivery programs and component kit production are examples of such services
currently provided by QDL to its customers. By supplying such services, QDL
becomes integrated into the customers' internal manufacturing processes and is
able to anticipate its customers' needs, which the Company believes results in
improved profitability and customer retention.
OEMs and other fastener customers choose fastener suppliers based, in
significant part, on the quality of the service supplied. QDL believes that
its superior customer service depends on its well-trained, technically
competent workforce and that its workforce provides an advantage over other
distributors of fasteners and related products. QDL continually reviews its
training and operating practices at each of its subsidiaries to insure that
throughout its operations the highest standards of quality and customer
service are maintained. As part of its commitment to superior quality and
customer service, the Company is SSQA compliant (SEMATECH Quality Standard)
and ISO 9002 compliant (International Standards Organization), becoming
certified as required by its customers on a branch location basis.
One of the primary goals of the Company is to accelerate internal
growth both by expanding the range of products and services provided to
existing customers and by aggressively pursuing new customers. The Company
believes it will be able to expand sales to existing customers by capitalizing
on (i) its diverse product offerings and its marketing expertise, (ii)
cross-selling opportunities across the Company's customer base, and (iii) its
access to financial resources that are necessary to support the demands of its
customers. The Company intends to broaden its geographic coverage which will
present opportunities to capture additional business from existing customers
that operate nationwide.
The Company's integration of its subsidiaries has provided
significant increases in its profitability. The Company has centralized
appropriate administrative functions and used its increased purchasing power
to improve contractual relationships and gain volume discounts from its
suppliers. The Company has also improved productivity through enhanced
inventory management procedures, standardization of its quality procedures,
and the consolidation of its information systems and employee benefit plans.
The Company believes that the fastener and related products
distribution industry is highly fragmented and in the early stages of
consolidation. The Company intends to pursue an aggressive acquisition program
targeting distributors of fasteners and related products that will help the
Company increase its presence in markets it currently services, sell to new
markets, develop new customer
8
<PAGE>
relationships with major OEMs, and expand its range of products and services.
The Company believes there is a significant number of potential acquisition
candidates and that it is regarded as an attractive acquirer due to its
position in the industry, its ability to offer cash and/or publicly-traded
stock for acquisitions, and the acquiree's potential for improved growth and
profitability as part of the Company.
The Company pursued an aggressive acquisition program in 1997 and
completed four acquisitions. The Company intends to continue to acquire other
distributors of fasteners and related products in order to enter new
industries and markets, increase sales in certain industries it currently
serves, develop new customer relationships with major OEM's, expand the
geographical reach of the Company, and expand its range of products and
services. Potential acquisition candidates will be evaluated on the strength
of management, profitability, quality of customer base and service, and
industry orientation. The Company believes it will continue to be regarded by
acquisition candidates as an attractive acquirer because of: (i) its ability
to create a professionally managed value-added distributor of fasteners and
related products to OEMs; (ii) its ability to acquire businesses with a
combination of cash and publicly traded stock; (iii) the Company's access to
financial resources as a public company to support growth; and (iv) the
potential for increased profitability of the acquired company due to
purchasing economies, centralization of administrative functions, enhanced
systems capabilities and access to increased marketing resources.
To date, management of the companies acquired in 1997 has been
instrumental in identifying future acquisition candidates. Several of the
principals of such acquired companies have held leadership roles in industry
trade associations, which has enabled these individuals to develop
relationships with the owners of numerous acquisition candidates across the
country. The Company expects that the visibility of these individuals and the
Company within the industry will increase the awareness and interest of
acquisition candidates in the Company and its acquisition program. The Company
has engaged in preliminary discussions with a number of potential acquisition
candidates, such discussions, however, are in various stages and have not as
yet resulted in any binding agreements, understandings, arrangements or
commitments with respect to any such potential acquisitions. As consideration
for future acquisitions, the Company primarily intends to use various
combinations of cash and its common stock. The consideration for each future
acquisition will vary on a case-by-case basis, with the major factors in
establishing the purchase price being historical operating results, future
prospects of the candidate and the ability of the candidate to provide entry
to new markets or OEM customers.
PRODUCTS
The Company distributes over 50,000 different fasteners and related
products, generally denoted by a unique standard identifier known as a
Stockkeeping Unit ("SKU"). The SKUs fall into two general categories:
fasteners and related products.
Fasteners sold by QDL include screws, bolts, nuts, washers, rings,
pins, rivets and staples. These items come in a variety of materials, sizes,
platings, and shapes. The item sold is driven by the end-use requirement or
specification of the fastener, such as strength, resistance to corrosion,
reusability, and many other factors. QDL's sales and purchasing departments
have extensive knowledge of the available products offered by fastener
manufacturers, and play an important role in assisting OEMs in selecting the
appropriate fastener for a given application.
QDL also distributes a number of related products commonly referred
to as "C" inventory items used by OEMs to manufacture their products. These
items include spacers, standoffs, inserts, clamps,
9
<PAGE>
springs, brackets, connectors, small molded parts, cable ties, plugs, hoses,
fittings and other products. Like fasteners, these parts come in many shapes,
sizes and materials depending upon the designated end-use. OEMs are
increasingly requesting that the Company provide these parts because they are
often used during the manufacturing or assembly process in conjunction with
the fasteners supplied by QDL.
SERVICES
In connection with its sale of fasteners and related products, the
Company also provides a wide range of value-added services to OEMs. The OEMs'
demand for these services is driven by the reduction in costs achievable
through the use of such services, enabled by the Company's ability to derive
scale economies by providing such services to many customers, which economies
the OEM is unable to achieve on its own. These value-added services also
benefit the Company by further integrating the Company into its customers'
internal manufacturing process.
Increasingly, manufacturers are outsourcing their inventory
management needs to distributors like QDL. These services range from
installing a simple inventory bin card system to developing a complete turnkey
inventory management system with full-time staff. These inventory systems are
designed to meet the specific needs of QDL's customers. They range in
sophistication from helping the OEM set appropriate order quantities and
frequencies to delivering the correct fastener or related product to the
assembly floor on a JIT basis. In some cases, the Company utilizes computer
systems deployed at the OEM's sites to facilitate the management of the
fastener and related products inventories. Inventory replenishment services
and product consolidation services decrease the number of invoices and
vendors, lower inventory carrying cost, and allow customers to focus on their
key competency, manufacturing.
OEMs have reduced their operating costs by reducing the number of
suppliers they use. QDL provides a wide array of fasteners and related
products and will, upon a customer's request, stock additional parts. As a
result, QDL's customers are able to reduce the number of suppliers,
distributors as well as manufacturers, that they utilize.
Often OEMs request that QDL package several fasteners or parts into a
package or "kit." A common use of this service is to supply fastener kits
included with products the retail consumer is required to assemble. The use of
kits has also expanded into the manufacturing environment. Manufacturers
frequently desire to have several related fasteners or components arrive at
the assembly line in a single package; this ensures that all of the parts
arrive at the same time and that no part will be missed in the manufacturing
process. This "kit" process aids the manufacturer by decreasing the number of
suppliers needed and improves productivity by having the fasteners delivered
to the assembly line with the other related parts. Kit services improve the
efficiency and effectiveness of the manufacturing line and decrease the number
of stockouts and subsequent manufacturing line stoppages.
Quality assurance services provided by QDL involve the testing of
fasteners to ensure they meet the specifications required by the OEM customer
and stated by the manufacturer. Many OEMs require strict quality control with
respect to fasteners. QDL has installed specialized equipment and hired
trained technicians to perform quality control tests on some of its fastener
products. QDL is SSQA compliant (SEMATECH Quality Standard), and ISO 9002
compliant (International Standards Organization), becoming certified as
required by its customers on a branch location basis.
10
<PAGE>
In order to meet the exacting requirements of customers, QDL
maintains relationships with vendors that provide plating, galvanizing and
coating services. These services are used to meet the specific requirements of
its OEM and other customers.
COMPETITION
The Company is engaged in a highly fragmented and competitive
industry. Competition is based primarily on service, quality and geographic
proximity. The Company competes with a large number of fastener distributors
on a regional and local basis, some of which may have greater financial
resources than the Company and some of which are also public companies or
divisions of public companies. The Company may also face competition for
acquisition candidates from these companies, some of which have acquired
fastener distribution businesses during the past decade. Other smaller
fastener distributors may also seek acquisitions from time to time.
The Company believes that it will be able to compete effectively
because of its strategically situated locations, geographic diversity,
knowledgeable and trained sales force, integrated computer system, modern
equipment, broad-based product line, long-term customer relationships,
combined purchasing volume, operational economies of scale, and expertise in
acquiring and integrating businesses. The Company believes that it
differentiates itself from its competition in terms of service and quality and
by offering a broad range of products and services.
SALES AND MARKETING
QDL utilizes a sales force comprised of both inside and outside sales
people. QDL markets its products and services primarily to OEMs. QDL generally
targets those OEMs that could achieve significant cost savings from the
products and services offered by QDL. These would include OEMs that (i)
maintain substantial inventories of fasteners and related products; (ii)
utilize multiple suppliers and wish to reduce that number; (iii) experience a
significant number of stockouts; (iv) desire to improve the quality and
reliability of their products; and/or (v) desire to improve the efficiency and
effectiveness of the manufacturing process. QDL believes that its commitment
to consistent quality and service has enabled it to develop and maintain
long-term relationships with existing customers, while expanding its market
penetration through the use of its sales and marketing program.
CUSTOMERS
QDL sells fasteners and related products to more than 4,000
customers. These customers include leading computer, telecommunications,
semiconductor fabrication equipment, medical electronics, contract
manufacturing, consumer products, and industrial products manufacturing
companies. For the year ended December 31, 1997, the Company had net sales of
$25.7 million. QDL's contracts with its customers for the supply of fasteners
and related products vary in length up to five years and may be canceled by
either party with proper notice. QDL accepts returns of fasteners and related
products and issues a credit in exchange for such returns. Historically,
returns have not been of an amount to materially affect the Company's
business. The ten largest customers accounted for approximately 50% of QDL's
sales in 1997 (on a pro forma basis), with no one customer contributing more
than 16%.
11
<PAGE>
SUPPLIERS
The fasteners and related products sold by QDL are manufactured by
over 1,000 suppliers located in the United States and abroad. QDL purchases
fasteners and related products directly from manufacturers or, to a lesser
degree, from authorized distributors. QDL's decision to purchase from a
specific supplier is based on product specifications, quality, reliability of
delivery, production lead times and price.
QDL routinely reviews its supplier base and believes that it is able
to purchase fasteners and related products in sufficient volumes necessary to
achieve improved service and pricing. QDL believes that it is not materially
dependent on any single supplier and that it currently maintains good
relationships with all of its suppliers. The ten largest suppliers accounted
for approximately 25% of QDL's purchases in 1997, with the largest supplier
accounting for approximately 5%.
PATENT, TRADEMARK, COPYRIGHT AND PROPRIETARY RIGHTS
The Company received registrations from the United States Patent and
Trademark Office in 1997 for the marks "Questron Technology, Inc.(TM)" and
"Quest Electronic Hardware, Inc.(TM)" relating to certain of the Company's
services. The Company does not have any patent or copyright applications
pending.
MANAGEMENT INFORMATION SYSTEM
The Company operates a management information system that is used to
purchase, monitor and allocate inventory throughout its facilities. The
Company believes that its system enables it to manage inventory costs
effectively and to achieve appropriate inventory turnover rates. QDL's system
includes computerized order entry, sales analysis, inventory status, invoicing
and payment, bar-code tracking, and EDI through which the Company offers its
customers a paperless electronic process for order entry, shipment tracking,
customer billing, remittance processing and other routine matters. The
Company's information system operates over a wide-area network. The real-time
information system allows each sales and warehouse center to share information
and monitor daily progress relating to sales activities, credit approval,
inventory levels, stock balancing, vendor returns, order fulfillment, and
other measures of performance. The Company's computer system and programs are
prepared to handle all dating implications associated with the new millennium.
GOVERNMENT REGULATION
The Fastener Quality Act (the "Fastener Act") was signed into law by
President Bush on November 16, 1990 and was subsequently amended in March
1996. Due to a lack of accredited testing facilities required under the
Fastener Act, the implementation date has been delayed until May 26, 1998. The
Fastener Act is intended to protect the public safety by deterring the
introduction of non-conforming fasteners into commerce and by improving the
traceability of fasteners. Generally, the Fastener Act covers fasteners
including screws, nuts, bolts or studs with internal or external threads and
load indicating washers with nominal diameters of greater than approximately
one quarter inch, which contain metal or are held out as meeting a standard or
specification that requires through-hardening. The Fastener Act also covers
fasteners and washers that are marked with a grade identification required by
a specification or standard. An estimated 25% to 55% of currently available
fasteners meet this definition and are therefore subject to the Fastener Act's
requirement.
Fastener distributors such as the Company are subject to the Fastener
Act. The Fastener Act places responsibility on fastener manufacturers and
distributors to ensure that fasteners conform to the
12
<PAGE>
standards and specifications to which the manufacturer represents they have
been manufactured by having them tested in a laboratory accredited under the
Fastener Act. Persons who significantly alter fasteners must mark the
fasteners so as to permit identification of the source of the alteration.
Further, the Fastener Act prohibits manufacturers and distributors from
commingling like fasteners from more than two different lots in the same
container during packaging.
The Company currently employs quality control personnel at its
facilities and believes it will not be obligated to make any significant
investment to comply with the Fastener Act. The Company anticipates that the
majority of any additional costs resulting from compliance with the Fastener
Act will be included in the prices to its customers
The Company's operations are subject to various federal, state and
local laws and regulations, including those relating to worker safety and
protection of the environment. The Company is a distributor and does not
generally engage in manufacturing. As a result, environmental laws generally
have a minimal effect on its operations. The Company believes it is in
substantial compliance with applicable regulatory requirements.
INTEGRATED MATERIAL SYSTEMS, INC.
IMS is a master distributor of fasteners based in Scottsdale,
Arizona. The addition of IMS brought to the Company expertise in sourcing
products on a worldwide basis and additional materials management skills. IMS
sells to distributors nationwide, no one of which contributed more than 14% of
IMS's 1997 sales. IMS purchases fasteners principally from Taiwan and Japan,
as well as domestic sources. In 1997, IMS's two largest suppliers accounted for
approximately 53% and 36%, respectively, of its total purchases.
POWER COMPONENTS, INC.
PCI is a distributor of lithium batteries and battery packs and
assemblies based in Norristown, Pennsylvania. PCI sells to distributor and
end-user customers nationwide, no one of which contributed more than 7% of its
1997 sales. PCI purchases product from international and domestic
manufacturers of batteries, with one such supplier accounting for
approximately 79% of its 1997 purchases.
EMPLOYEES
At March 15, 1998, the Company had approximately 130 full-time
employees. The Company is not a party to any collective bargaining agreements.
The Company believes that its relationship with its employees is good.
RISK FACTORS
No Assurances that Recent or Possible Future Acquisitions will be Profitable
Prior to March 1997, the Company derived its revenues primarily
through its wholly-owned subsidiary, Quest Electronic Hardware, Inc.
("Quest"). Subsequent to March 1997, the Company has acquired a number of
companies engaged in the distribution of fasteners and related products. The
Company can make no assurances that this combination of businesses will be as
successful as each business was independently. In addition, the Company may
enter into additional agreements for future
13
<PAGE>
acquisitions. The Company can make no assurances that any such acquisitions
can be successfully completed or that future acquisitions will be profitable.
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.
Economic Factors
The Company's business may be adversely affected by a downturn in the
economy as a whole or in the industries of its major customers. The Company's
business would also be adversely affected in the event of a significant
increase in interest rates, which would result in an increase in the Company's
borrowing costs.
Dependence upon Major Customers
The Company has developed a customer base consisting of over 4,000
active customers. Over 95% of the Company's sales are recurring sales to
existing customers. For the year ended December 31, 1997 (on a pro forma
basis), the Company's 10 largest customers accounted for approximately 50% of
its sales, with no one customer contributing more than 16%.
These sales arrangements are terminable upon short notice and none of
these customers is obligated to continue to use the services of the Company at
all or at existing prices. The dependence on major customers subjects the
Company to significant financial risk in the operation of its business should
a major customer terminate, for any reason, its business relationship with the
Company. The continuing ability of the Company to maintain these customer
relationships and to build new relationships is dependent, among other things,
upon its ability to maintain the high quality standards demanded by its
customers.
Possible Need for Additional Financing
The Company intends to fund its operations and other capital needs
substantially from operations and available borrowings under the Company's
credit agreement with a bank; however there can be no assurance that such
funds will be sufficient for these purposes. In the event that the Company
needs additional financing to fund its operations and capital needs or to
finance future acquisitions, there can be no assurance that such financing
will be available, or that it will be available on acceptable terms.
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.
14
<PAGE>
ITEM 2. PROPERTIES.
The Company is headquartered at 6400 Congress Avenue, Suite 200A,
Boca Raton, Florida 33487.
The Company operates from eleven well-equipped modern facilities, all
of which are leased, as follows:
Anaheim, California - occupies 2,500 square feet of office
space and 8,000 square feet of warehouse space under a lease
expiring March 1, 2016, which space is approximately 90%
utilized;
Austin, Texas - occupies 900 square feet of office space and
8,100 square feet of warehouse space under a lease expiring
September 15, 2000, which space is approximately 50%
utilized;
Boca Raton, Florida - occupies 3,050 square feet of office
space sublet under a lease expiring May 31, 2000, which
space is approximately 95% utilized;
Colorado Springs, Colorado - occupies 1,000 square feet of
office space and 4,000 square feet of warehouse space under
a lease expiring November 30, 1998, which space is
approximately 80% utilized;
Dallas, Texas - occupies 1,575 square feet of office space
and 11,945 square feet of warehouse space under a lease
expiring February 28, 2003, which space is 65% utilized;
Milpitas, California - occupies 3,000 square feet of office
space and 9,405 square feet of warehouse space under a lease
expiring April 14, 2002, which space is 90% utilized;
Norristown, Pennsylvania - occupies 1,500 square feet of
office and warehouse space under a month to month lease,
which space is approximately 95% utilized;
Phoenix, Arizona - occupies 1,000 square feet of office
space and 11,000 square feet of warehouse space under a
lease expiring October 31, 2000, which space is
approximately 80% utilized;
San Diego, California - occupies 800 square feet of office
space and 4,048 square feet of warehouse space under a lease
expiring January 31, 2000, which space is approximately 90%
utilized;
Scottsdale, Arizona - occupies 1,000 square feet of office
space and 2,928 square feet of warehouse space under a lease
expiring May 31, 2000, which space is approximately 75%
utilized; and
Winchester, Massachusetts - occupies 4,000 square feet of
office space and 16,000 square feet of warehouse space under
a lease expiring March 31, 2000, which space is
approximately 90% utilized;
15
<PAGE>
Total rent expense for the Company amounted to $424,176 in 1997. The
aggregate minimum rental commitments under all non-cancelable operating leases
for the year ending December 31, 1998 is $579,748.
ITEM 3. LEGAL PROCEEDINGS.
On July 16, 1997, Unit Instruments, Inc., a California corporation
("Unit"), filed a complaint against California Fasteners, Inc. ("CalFast") and
others in the Superior Court of the State of California for Orange County
(Case No. 781801) (the "Complaint"). The Complaint alleges breach of contract,
breach of various warranties and negligence. The action relates to certain
screws allegedly purchased by Unit from CalFast as a distributor, which Unit
alleges malfunctioned thereby causing Unit to suffer damages. Unit has claimed
damages in an amount to be proved at trial, but alleged damages of not less
than $1,000,000. CalFast filed an answer to the complaint on September 22,
1997, which denies the allegations made therein and asserted cross-claims
against certain of the other defendants in the action, including the
manufacturer of the screws. CalFast has referred this litigation to its
insurance carrier, which has assumed the defense of the case under a
reservation of all rights. The former stockholders of CalFast have provided
the Company with certain indemnities in connection with liabilities arising
out of this litigation. Management of the Company is unable to predict the
outcome of this litigation, but does not believe that this litigation will
have a material adverse effect on its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 26, 1997, at the Annual Meeting of Shareholders, the
appointment of Moore Stephens, P.C. as the Company's auditors for fiscal year
1997 was ratified by the shareholders and received the following votes: For --
1,966,690; Against -- 3,991; Abstain -- 2,100 Also at the Annual Meeting of
Shareholders, the shareholders elected the following Directors:
Election of Directors:
For Withheld
------------------ ----------------
Milton M. Adler 1,954,660 18,121
Robert V. Gubitosi 1,954,714 18,067
Mitchell Hymowitz 1,954,755 18,026
William McSherry, Jr. 1,954,715 18,066
Dominic A. Polimeni 1,954,715 18,066
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded on the NASDAQ SmallCap Market
under the symbol "QUST" following the name change which took effect April 9,
1996 (previously, the symbol was "JUDG").
The following table sets forth the reported high and low bid
quotations (as adjusted for the one-for-ten reverse stock split) of the common
stock for the periods indicated. Such quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Common Stock
--------------------------------------
High Low
---- ---
1996:
First Quarter $ 31.25 $ 15.00
Second Quarter $ 18.75 $ 7.50
Third Quarter $ 10.63 $ 6.88
Fourth Quarter $ 6.88 $ 2.50
1997:
First Quarter $ 6.75 $ 3.25
Second Quarter $ 6.75 $ 4.75
Third Quarter $ 8.44 $ 5.38
Fourth Quarter $ 10.00 $ 7.13
On March 17, 1998, the Company's common stock as reported on the
NASDAQ SmallCap Market system was $7.06 (closing bid price). On that date
there were approximately 1,000 holders of record of common stock (including
entities which hold stock in street name on behalf of other beneficial
owners).
The Company has not paid any cash dividends on its common stock to
date. The Company anticipates that for the foreseeable future it will follow a
policy of retaining earnings, if any, in order to finance the expansion and
development of its business. Payment of common stock dividends is within the
discretion of the Company's Board of Directors and will depend upon the
earnings, capital requirements and operating and financial condition of the
Company, among other factors.
The Series B Preferred Stock will be entitled, as and when declared
by the Board of Directors, to receive, in respect of the two years before the
Series B Preferred Stock is converted, an annual dividend per share payable
either in cash or shares of common stock, at the option of the Company, equal
to $0.115 or 2% of the $5.75 value of the Series B Preferred Stock included in
the Units. In March 1998, the Board of Directors voted to issue 17,344 shares
of common stock to the Series B Preferred Stockholders in payment of the first
year's dividend and also approved a proposal to accelerate the conversion date
of the Series B Preferred Stock. This proposal will be considered by
shareholders of the Company at the Annual Meeting to be held in mid-May.
Presently, the conversion of each share of Series B Preferred Stock will
automatically occur, without any action on the part of the holder or the
Company, on March 4, 1999. If approved by the shareholders, the new conversion
date will be as soon as possible after the Annual Meeting. The dividend on the
Preferred Stock payable on March 4, 1999 will be paid in full upon conversion.
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.
17
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
For the year ended December 31, 1997 compared with 1996.
The results of operations through December 31, 1997 include the
operating results of the Company's distribution business and its alternative
dispute resolution ("ADR") business which was sold as of June 30, 1997. The
distribution business includes the operating results of Quest Electronic
Hardware, Inc. ("Quest") for the twelve months ended December 31, 1997, the
operating results of Webb Distribution ("Webb") for the ten months ended
December 31, 1997, the operating results of Integrated Material Systems, Inc.
("IMS") for the seven months ended December 31, 1997, and the operating
results of California Fasteners, Inc. ("CalFast") and Power Components, Inc.
("PCI") for the four months ended December 31, 1997. Webb, which was acquired
by the Company in March 1997, is a fastener and related products distribution
business serving the New England market. IMS, which was acquired by the
Company in June 1997, is a master distributor of fasteners based in
Scottsdale, AZ. PCI, which was acquired by the Company in September 1997, is a
distributor of lithium batteries and customized battery packs and assemblies,
located outside of Philadelphia, PA. CalFast, which was acquired by the
Company in September of 1997, is a fastener and related products distribution
business with locations in Anaheim, CA, San Diego, CA and Phoenix, AZ.
The Company's revenues for the year ended December 31, 1997 amounted
to $25,710,194, which represents a record level of revenues for the Company,
compared with $11,036,142 for the year ended December 31, 1996. The
significant growth in the Company's revenues for the year ended December 31,
1997 over the year ended December 31, 1996 is due to the acquisition of Webb
in March 1997, the acquisition of IMS in June 1997 and the acquisitions of
CalFast and PCI in September 1997, along with the continued internal growth of
Quest, which amounted to 23.4% for 1997.
The Company's operating income was $3,302,403 for the year ended
December 31, 1997 compared with operating income of $914,504 for the prior
year. The increase in operating income for the year ended December 31, 1997
compared with 1996 is primarily due to the acquisitions discussed above and
internal growth. In addition, operating income as a percentage of sales
improved from 8.3% to 12.8% as a result of a 6.6 percentage point improvement
in operating expenses as a percentage of sales, partially offset by a 2.1
percentage point decline in gross profit margin. The gross profit margin
decline is attributable to changes in the mix of the Company's business as a
result of the acquisitions discussed above.
Interest expense for the years ended December 31, 1997 and 1996
amounted to $513,406 and $300,669, respectively. The increase in interest
expense principally reflects the cost of additional borrowings in September
1997 incurred in connection with the acquisition of CalFast.
The provision for income taxes for the year ended December 31, 1997
reflects a federal income tax provision at an effective rate of 35% and a
state income tax provision at an effective rate of 6.3% for the states in
which the Company does business. The Company is not expected, however, to have
a regular federal income tax liability for 1997 as a result of the
availability of net operating loss carryforwards of approximately $13.1
million as of December 31, 1996, expiring in the years 2000 through 2010. The
Company has recorded a deferred tax asset of $4,000,000 to record the future
tax benefit of the net operating loss carryforward.
18
<PAGE>
Net income for the year ended December 31, 1997 amounted to $1,637,141
compared with net income of $549,452 in the prior year. This improvement
reflects the increased operating income of the Company as a result of the
acquisitions of Webb, IMS, PCI and CalFast, as well as the growth in the
business of Quest, partially reduced by increased corporate expense, interest
expense and income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had $875,080 in cash and short-term
investments, compared to $74,400 at December 31, 1996. At December 31, 1997,
the Company had working capital of $9,046,826, compared with working capital
of $3,042,762 at December 31, 1996.
For the year ended December 31, 1997, the net cash provided by the
Company's operating activities amounted to $565,035, principally reflecting
the profits of the Company and the decrease in other receivables and prepaid
expenses, as well as an increase in accounts payable, accrued expenses and
deferred income taxes payable, offset in part by the increases in accounts
receivable and inventories, and a decrease in income taxes payable.
For the year ended December 31, 1997, the net cash used in the
Company's investing activities amounted to $12,829,049, including $12,641,922
of net cash consideration paid for acquired businesses. In addition, had
capital expenditures of $187,127 for the acquisition of fixed assets,
primarily computer and warehouse equipment to support the continued growth of
the Company's business. The Company does not have significant commitments for
capital expenditures at December 31, 1997, other than a $375,000 commitment,
which together with the Company's existing computer equipment, provides for a
new on-line real-time computer system, which was placed into service on
January 1, 1998. No other significant commitments are anticipated for 1998.
The Company's computer system and programs are prepared to handle all dating
implications associated with the new millennium.
For the year ended December 31, 1997, the net cash provided by the
Company's financing activities amounted to $13,064,694, which consists of
$1,425,000 of bank borrowings under the Company's revolving credit facility,
$10,000,000 of bank borrowings under the Company's term loan facility,
$5,634,812 in net proceeds derived from the Offering of Units of the Company's
securities, reduced by long-term debt principal payments of $1,791,666,
revolving facilities repayments of $2,158,387, and principal payments of
$45,065 on a note issued for an acquired business.
In connection with the acquisition of CalFast, the Company increased
its revolving facility from $1,500,000 to $4,000,000, under terms and
conditions generally consistent with those of its original facility. At
December 31, 1997, $1,425,000 was borrowed and outstanding under the revolving
facility. The remaining amount of the $4,000,000 revolving credit facility, or
$2,575,000, was fully available at December 31, 1997 for future working
capital needs. Amounts outstanding under the revolving facility bear interest
at a rate equal to 1.0% above the lender's prime rate. As of February 28,
1998, the interest rate under the revolving facility was 9.5%. In order to
secure the obligations of the Company and its subsidiaries under the revolving
facility and the related term loan facility under the loan and security
agreement with the lender, the Company entered into a stock pledge agreement
with the lender whereby the Company pledged to the lender the shares of
capital stock of each of its subsidiaries at the date of such agreement and
any shares of its subsidiaries in which the Company may thereafter acquire an
interest. In addition, the Company and its subsidiaries granted a security
interest in substantially all of their assets to the lender.
19
<PAGE>
The Company intends to continue to identify and evaluate potential
merger and acquisition candidates engaged in businesses complementary to its
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 1998, exclusive of any cash
requirements which may come about as a result of other business acquisitions.
20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Questron Technology, Inc.
We have audited the accompanying consolidated balance sheet of
Questron Technology, Inc. and its subsidiaries at December 31, 1997, 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, 1997. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Questron Technology, Inc. and its subsidiaries at December 31,
1997, and the consolidated results of their operations and their cash flows
for each of the two years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
February 24, 1998
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 875,080
Accounts receivable, less allowance for
doubtful accounts of $93,561 4,740,678
Other receivables 77,733
Inventories 8,415,777
Other current assets 158,597
----------------
Total current assets 14,267,865
Property and equipment - net 910,988
Cost in excess of net assets of businesses acquired,
less accumulated amortization of $549,566 16,549,726
Deferred income taxes 3,192,947
Other assets 273,321
----------------
Total assets $ 35,194,847
================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,378,381
Accrued expenses 839,514
Income taxes payable 201,477
Current portion of long-term debt 1,801,667
----------------
Total current liabilities 5,221,039
Deferred income taxes payable 182,552
Long-term debt 9,893,521
----------------
Total liabilities 15,297,112
----------------
Commitments and contingencies
Common stock subject to put option agreement 622,857
Shareholders' Equity:
Preferred stock, $.01 par value; authorized 10,000,000 11,500
shares; 1,150,000 issued and outstanding
Common stock, $.001 par value; authorized 20,000,000
shares; issued 2,122,439 shares 2,122
Additional paid-in capital 33,462,524
Accumulated deficit (13,845,790)
----------------
19,630,356
Less: treasury stock, 11,849 shares of common stock, at cost (355,478)
----------------
Total shareholders' equity 19,274,878
----------------
Total liabilities and shareholders' equity $ 35,194,847
================
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
<S> <C> <C>
Revenue:
Sales $ 25,667,245 $ 10,883,393
Fee income 42,949 152,749
--------------------- ---------------------
25,710,194 11,036,142
--------------------- ---------------------
Operating costs and expenses:
Cost of products and services sold 15,486,763 6,408,196
Selling, general & administrative expenses 6,512,757 3,442,382
Depreciation and amortization 408,271 271,060
------------------- ---------------------
22,407,791 10,121,638
--------------------- ---------------------
Operating income 3,302,403 914,504
Interest expense 513,406 300,669
------------------- --------------------
Income before income taxes 2,788,997 613,835
Provision for income taxes 1,151,856 64,383
------------------- --------------------
Net income $ 1,637,141 $ 549,452
=================== ====================
=
Net income $ 1,637,141 $ 549,452
Deduct: Preferred Stock dividend 99,189 --
Imputed non-cash Preferred Stock dividend 577,137 --
------------------- --------------------
Net income used in per common share calculation $ 960,815 $ 549,452
===================== =====================
Net income per common share $ .56 $ .36
============ ============
Net income per diluted common share $ .47 $ .36
============ ============
Average number of common shares outstanding 1,718,062 1,535,484
===================== =====================
Average number of diluted common shares outstanding 3,456,555 1,539,048
===================== =====================
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Accumulated Treasury
--------------------------- -----------------------
Shares Amounts Shares Amounts Capital Deficit Stock
-------------- ----------- ------------ --------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
January 1, 1996 -- $ -- 1,547,333 $ 1,547 $ 23,887,894 $(15,356,057) $(355,478)
Filing fees related to the -- -- -- -- (7,825) -- --
Offering of Units
Net Income for the Year -- -- -- -- -- 549,452 --
-------------- ----------- ------------ --------- -------------- --------------- ------------
Balance -
December 31, 1996 -- -- 1,547,333 1,547 23,880,069 (14,806,605) (355,478)
Issuance of securities:
Series IV Warrants issued
in connection with the
acquisition Webb
Distribution -- -- -- -- 375,000 -- --
Preferred Stock
Offering 1,150,000 11,500 -- -- 5,623,412 -- --
In connection with
the acquisition
of Integrated
Material
Systems, Inc. -- -- 50,000 50 299,000 -- --
In connection with
the acquisition
of Power
Components, Inc. -- -- 50,000 50 349,950 -- --
In connection with
the acquisition of
California
Fasteners, Inc. -- -- 475,106 475 2,357,956 -- --
Series B Preferred
Stock dividend -- -- -- -- -- (99,189) --
Imputed non-cash Series B
Preferred Stock dividend -- -- -- -- -- (577,137) --
Accretion of Series B
Preferred Stock -- -- -- -- 577,137 -- --
Net Income for the Year -- -- -- -- -- 1,637,141 --
-------------- ----------- ------------ --------- -------------- --------------- ------------
Balance -
December 31, 1997 1,150,000 $ 11,500 2,122,439 $ 2,122 $ 33,462,524 $(13,845,790) $(355,478)
============== =========== ============ ========= ============== =============== ============
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,637,141 $ 549,452
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 408,271 271,060
Provision for doubtful accounts 10,702 9,975
Recognition of current year income tax benefit of net
operating loss carryforward 807,053
Gain on sale of fixed assets -- 2,184
Change in assets and liabilities:
(Increase) decrease in accounts receivable (1,265,885) 108,350
Decrease in other receivables 43,323 38,170
(Increase) decrease in inventories (1,456,811) 385,496
Increase (decrease) in accounts payable 73,587 (494,052)
Increase (decrease) in accrued expenses 154,747 (75,162)
(Decrease) Increase in income taxes payable (221,146) 26,383
Increase in deferred income taxes payable 143,329 --
Decrease (increase) in prepaid expenses and other assets 230,724 (323,510)
--------------------- ---------------------
Net cash provided by operating activities 565,035 498,346
--------------------- ---------------------
Cash flows from investing activities:
Net cash consideration paid for acquired businesses (12,641,922) --
Proceeds from sale of fixed assets -- 280
Acquisition of property and equipment (187,127) (55,759)
--------------------- ---------------------
Net cash used for investing activities (12,829,049) (55,479)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from borrowings under revolving facility 1,425,000 12,500
Proceeds from long-term debt 10,000,000 --
Proceeds from Convertible Preferred Stock Unit Offering 6,900,000 --
Costs associated with Convertible Preferred Stock Unit Offering (1,265,188) (7,825)
Repayment of long-term debt (1,791,666) (412,500)
Repayment of revolving facilities (2,158,387) --
Payments on note issued for acquired business (45,065) --
--------------------- ---------------------
Net cash (used) provided by financing activities 13,064,694 (407,825)
--------------------- ---------------------
Increase (decrease) in cash and cash equivalents 800,680 35,042
Cash and cash equivalents at beginning of period 74,400 39,358
--------------------- ---------------------
Cash and cash equivalents at end of period
$ 875,080 $ 74,400
===================== =====================
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 398,904 $ 310,221
=================== =====================
Income taxes $ 27,400 $ 38,000
===================== =====================
Non-cash investing and financing activities:
During the year ended December 31, 1997, the Company
acquired four different businesses in the following manner:
Aggregate consideration paid for acquired businesses $ 17,272,260
Deduct: securities issued as a portion of the consideration 4,005,338
notes issued as a portion of the consideration,
net of satisfaction of $375,000 note as a
result of sale of warrants 625,000
-------------------
Net cash consideration paid $ 12,641,922
===================
As a result of the acquisitions referred to above, the Company recognized
its deferred tax asset associated with its net operating loss
carryforward as follows:
Deferred income taxes $ 4,000,000
===================
Cost in excess of net assets of businesses acquired $ (4,000,000)
===================
Series B Preferred Stock dividends:
Accrued dividend $ 99,189
Imputed non-cash dividend 577,137
---------------------
$ 676,236
=====================
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Questron Technology, Inc. ("Questron" or the "Company") is primarily
a value-added distributor of fasteners and related products (commonly referred
to as "C" inventory items) sold to original equipment manufacturers ("OEM's")
throughout the United States through its subsidiaries, Quest Electronic
Hardware, Inc. ("Quest"), Webb Distribution ("Webb") and California Fasteners,
Inc. ("CalFast"). The Company is also a master distributor of fasteners
through its subsidiary Integrated Material Systems, Inc. ("IMS"), and a
distributor of lithium batteries and battery packs and assemblies through its
subsidiary Power Components, Inc. ("PCI").
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - In 1997, the Company acquired Webb
Distribution, Inc. ("Webb"), Integrated Materials Systems, Inc. ("IMS"), Power
Components, Inc. ("PCI") and California Fasteners, Inc. ("CalFast") in
transactions accounted for under the purchase method of accounting.
Accordingly, the consolidated financial statements include the operations of
the acquired businesses from the dates of acquisition through the end of the
year.
Consolidation - The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly owned.
All significant intercompany amounts 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. 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.
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.
26
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
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 one
customer of the Company amounted to approximately $2,967,571 and $1,090,487,
respectively, or approximately 11.5% and 9.9% of revenue, respectively.
Accounts receivable from this customer amounted to approximately $844,214 in
1997 and $131,527 in 1996.
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 is recorded
using the straight-line method over the shorter of the estimated lives of the
related asset or the remaining lease term. Estimated useful lives are as
follows:
Office equipment 5 Years
Computer equipment 5 Years
Furniture and fixtures 7 Years
Leasehold improvements 5 Years
Cost in Excess of Net Assets of Businesses Acquired - The cost in
excess of net assets of businesses 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 businesses acquired has an indeterminable life based on
historic, current and projected operating results of the businesses acquired.
The Company's policy is to record an impairment loss against the balance of
the net unamortized cost in excess of net assets of businesses acquired in the
period when it is determined that the carrying amount of the asset may not be
recoverable. This determination is based on an evaluation of such factors as
the occurrence of a significant event, a significant change in the environment
in which the businesses operate, or if the expected future non-discounted cash
flow of the businesses would become less than the carrying value of the asset.
Advertising and Marketing - Advertising and marketing expense,
primarily comprised of printed media published in trade publications, is
expensed as incurred. Advertising and marketing expense amounted to $39,098
and $17,409 for the years ended December 31, 1997 and 1996, respectively.
27
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Stock Options and Similar Equity Instruments - On January 1, 1996,
the Company adopted the disclosure requirements of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," for stock options and similar equity instruments (collectively
"Options") issued to employees and Directors, however, the Company will
continue to apply the intrinsic value based method of accounting for options
issued to employees prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" rather than the fair value
based method of accounting prescribed by SFAS No. 123. SFAS No. 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods and services from non-employees. Those transactions must be
accounted for based on the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably
measurable.
2. EARNINGS PER SHARE
The Financial Accounting Standards Board ("FASB") has issued SFAS No.
128, "Earnings per Share"; which is effective for financial statements issued
for periods ending after December 15, 1997. Accordingly, earnings per share
data in the financial statements for the year ended December 31, 1997, have
been calculated in accordance with SFAS No. 128. Prior periods' earnings per
share data have been recalculated as necessary to conform prior years' data to
SFAS No. 128.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15,
"Earnings per Share," and replaces its primary earnings per share with earnings
per share representing the amount of earnings for the period available to each
share of common stock outstanding during the reporting period. SFAS No. 128
also requires a dual presentation of earnings per share and diluted earnings
per share on the face of the statement of operations for all companies with
complex capital structures. Diluted earnings per share reflects the amount of
earnings for the period available to each share of common stock outstanding
during the reporting period, while giving effect to all potentially dilutive
common shares that were outstanding during the period, such as common shares
that could result from the potential exercise or conversion of securities into
common stock.
The computation of diluted earnings per share does not assume
conversion, exercise, or contingent issuance of securities that would have an
antidilutive effect on earnings per share (i.e. improving earnings per share).
The dilutive effect of outstanding options and warrants and their equivalents
are reflected in dilutive earnings per share by the application of the
treasury stock method, which recognizes the use of proceeds that could be
obtained upon exercise of options and warrants in computing diluted earnings
per share. It assumes that any proceeds would be used to purchase common stock
at the average market price during the period. Options and warrants will have
a dilutive effect only when the average market price of the common stock
during the period exceeds the exercise price of the options or warrants.
28
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
The following table sets forth the computation of earnings per share
and diluted earnings per share:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
<S> <C> <C>
Numerator:
Net income $ 1,637,141 $ 549,452
Preferred stock dividends (676,326) --
-------------------- --------------------
Numerator for net income per common share 960,815 549,452
-------------------- --------------------
Effect of dilutive securities -
Preferred stock dividends 676,326 --
-------------------- --------------------
Numerator for net income per diluted common
share $ 1,637,141 $ 549,452
==================== ====================
Denominator:
Denominator for net income per common share -
Weighted-average shares 1,718,062 1,535,484
-------------------- --------------------
Effect of dilutive securities:
Options 125,183 633
Warrants 268,164 2,931
Convertible preferred stock 1,345,146 --
-------------------- --------------------
Dilutive potential common shares 1,738,493 3,564
-------------------- --------------------
Denominator for net income per diluted common
share 3,456,555 1,539,048
==================== ====================
Net income per common share $ .56 $ .36
========= =========
Net income per diluted common share $ .47 $ .36
========= =========
</TABLE>
3. ACQUISITIONS OF DISTRIBUTION BUSINESSES
As of March 1, 1997, the Company acquired 100% of the stock of Comp
Ware, Inc. d/b/a Webb Distribution ("Webb"), a privately owned distributor of
fasteners and related products in Boston, MA. The purchase price for Webb
consisted of: (i) $3,250,000 in cash; (ii) Note A in the amount of $375,000,
with principal and interest at the rate of 10% per annum due and payable 18
months from the effective date of the closing; (iii) Note B in the amount of
$375,000, with principal and interest at the rate of 10% per annum payable
monthly over five years from the effective date of the closing; and (iv)
1,500,000 Series IV Warrants (the "Webb Warrants") issued to the majority
shareholder of Webb as a down payment under the Stock Purchase Agreement. In
connection with the sale of the Webb Warrants by the majority shareholder of
Webb, Note A (as described in (ii) above) was satisfied pursuant to the terms
of the Stock Purchase Agreement, effectively resulting in a $375,000 reduction
in the cost of the acquisition. The Company accounted for the Webb acquisition
using the purchase method of accounting.
29
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
As of June 1, 1997, the Company acquired 100% of the stock of
Integrated Material Systems, Inc. ("IMS"), a privately owned master
distributor of fasteners in Scottsdale, AZ. The purchase price for IMS
consisted of: (i) 50,000 shares of the Company's common stock, having a market
value of $299,050, issued to the stockholders of IMS; (ii) additional cash
consideration, in each of the five years from the anniversary of the closing
date, based upon the annual pre-tax earnings of IMS, up to a maximum of
$300,000 per year (maximum of $1,500,000 over the five years); (iii) 75,000
shares of the Company's common stock, which shares shall be restricted and not
earned until the attainment of $500,000 of annual pre-tax income by IMS; (iv)
options to purchase 100,000 shares of the Company's common stock at an
exercise price of $6.00 per share, which options become exercisable in five
equal annual installments; and (v) upon the Company's attainment of $4,500,000
of pre-tax income, options to purchase 90,000 shares of the Company's common
stock at an exercise price equal to the market price of the Company's common
stock at the date of grant. The Company has accounted for the IMS acquisition
using the purchase method of accounting.
As of September 1, 1997, the Company acquired the business and net
operating assets of Power Components, Inc. ("PCI"), a privately owned
Philadelphia, PA distributor of lithium batteries and customized battery packs
and assemblies, through a simultaneously acquired wholly-owned subsidiary. The
purchase price for PCI consisted of: (i) a cash payment of $900,000 plus the
assumption of certain liabilities; (ii) 50,000 shares of the Company's common
stock; (iii) a promissory note in the amount of $250,000, with 25 equal
monthly principal payment installments commencing in April 1998, unless
extended, but in no event later than July 1998 and interest payable monthly at
the rate of 8% per annum; and (iv) 100,000 shares of the Company's common
stock, which shares shall vest during the three calendar years immediately
following the Closing, based upon the attainment by PCI of certain pre-tax
earnings amounts. In addition, the Company has agreed to pay additional cash
consideration, in each of the three calendar years following the closing date,
based upon the annual pre-tax earnings of PCI, up to a maximum of $300,000 per
year (maximum of $900,000 over the three years). The Company has accounted for
the acquisitions of PCI using the purchase method of accounting.
Also as of September 1, 1997, the Company acquired 100% of the stock
of California Fasteners, Inc. ("CalFast"), a privately owned distributor of
fasteners and related products with branches in Anaheim, CA, San Diego, CA,
and Phoenix, AZ. The purchase price for CalFast consisted of an Initial
Purchase Price and a Deferred Purchase Price. The Initial Purchase Price
consisted of: (i) a cash payment of $6,594,441; (ii) the assumption of
$1,058,712 of debt net of cash on hand; and (iii) 475,106 shares of common
stock of the Company, valued at $2,981,288. Of the 475,106 shares of common
stock of the Company, the former shareholders of CalFast were granted the
option to sell 125,896 shares back to the Company on a monthly basis over a
five-year period. The Deferred Purchase Price consists of: (i) a 1997 Deferred
Purchase Price, up to a maximum amount of $795,559, determined based upon the
earnings before interest and taxes ("EBIT") of CalFast for the four month
period September 1, 1997 through December 31, 1997, to be paid in cash; and
(ii) a 1998 Deferred Purchase Price, up to a maximum of $3,500,000, determined
based upon the EBIT of CalFast for the year ending December 31, 1998, which
shall be paid 50% in cash (up to a maximum of $1,750,000) and 50% in shares of
the Company's common stock (up to a maximum of $1,750,000), with the number of
shares to be issued determined based upon the market price of the Company's
common stock at the date of such payment.
30
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
In addition, upon the Company's attainment of $4,500,000 of pre-tax income,
the former shareholders of CalFast shall be granted options to purchase
125,000 shares of the Company's common stock at an exercise price equal to the
market price of the Company's common stock at the date of grant. The Company
accounted for the CalFast acquisition using the purchase method of accounting.
In connection with certain of the above acquisitions, the Company may
be required to make additional purchase price payments that are contingent
upon the achievement of specified operating goals. Such payments may be in the
form of cash and/or shares of common stock of the Company and will be recorded
at fair market value at the time of payment. The amounts of such additional
consideration, if any, will be recorded when paid as cost in excess of net
assets of businesses acquired and amortized over the remaining life of the
asset.
The following unaudited pro forma information presents the combined
operating results of the Company, Webb, IMS, PCI and CalFast, treating the
acquired companies as if they were subsidiaries of the Company for the full
years ended December 31, 1997 and 1996. The pro forma net income for 1996
reflects a full tax provision at the Company's current effective tax rate of
41.3%. This effective tax rate differs from the effective tax rate reported
for 1996 because in 1997 the Company recognized the deferred tax asset
associated with its net operating loss carryforwards (see Note 10 of Notes to
Consolidated Financial Statements). The pro forma net income per common share
and diluted common share for both 1997 and 1996 assume that all shares of
common stock, Series B Preferred Stock and Series IV Warrants of the Company
outstanding as of December 31, 1997 were outstanding as of January 1, 1996.
This pro forma information does not purport to be indicative of what would
have occurred had the acquisitions been completed as of January 1, 1996 or
results which may occur in the future:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
<S> <C> <C>
Revenues:
Questron $ 13,470,539 $ 11,036,142
Webb 7,782,103 7,830,637
IMS 928,357 --
PCI 3,207,879 2,087,473
CalFast 12,375,357 8,664,993
--------------------- ---------------------
Combined $ 37,764,235 $ 29,619,245
===================== =====================
Net income:
Questron $ 483,489 $ 259,125
Webb 365,618 362,913
IMS (39,819) --
PCI 188,725 84,819
CalFast 1,087,042 560,216
--------------------- ---------------------
Combined $ 2,085,055 $ 1,267,073
===================== =====================
Pro forma net income
per common share $ .59 $ .21
=================== ====================
Pro forma net income per
diluted common share $ .50 $ .21
=================== ====================
</TABLE>
31
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
A summary of the allocation of the aggregate consideration paid for
the aforementioned acquisitions to the fair market value of the assets
acquired and liabilities assumed is as follows:
<TABLE>
<S> <C> <C>
Current assets:
Accounts receivable $ 2,250,692
Inventories 3,790,199
Other 273,293 $ 6,314,184
------------------
Property, plant and equipment 510,466
Cost in excess of net assets
of companies acquired 14,103,874
Other assets 18,097
-------------------
20,946,621
Current liabilities:
Accounts payable and accrued
expenses 2,307,151
Other 1,367,210 3,674,361
------------------ -------------------
Aggregate consideration paid $ 17,272,260
===================
</TABLE>
4. LONG-TERM DEBT
Long-term debt at December 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Term loan, due in equal quarterly installments through August
31, 2003, with interest payable
monthly at the prime rate plus 1.5% $ 9,583,333
Revolving facility, due on September 22, 1999,
with interest payable monthly at the prime rate
plus 1.0% 1,425,000
Note payable to seller of Webb, due in equal
monthly installments through March 4, 2002,
with interest payable monthly at 10% 329,935
Note payable to sellers of PCI, due in 25
equal monthly installments beginning in April 1998,
unless extended, but in no event later than July 1998,
with interest payable
monthly at 8% 250,000
Other 106,920
------------------
11,695,188
Less installments due within one year 1,801,667
------------------
$ 9,893,521
==================
</TABLE>
In connection with the acquisition of CalFast, the Company entered
into a loan agreement with a bank. The agreement provides for a $14,000,000
credit facility consisting of a six-year term loan for $10,000,000 and a
$4,000,000 revolving credit facility. The loan agreement contains a provision
for the calculation of a borrowing base, which determines the amount of
borrowings available under the revolving facility. At December 31, 1997, the
Company had unused borrowing capacity of $2,575,000 under the loan
32
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
agreement. Interest on the six-year term loan is due monthly at the prime rate
plus 1.5%. Interest on the revolving facility is due monthly at the prime rate
plus 1%. The prime rate at December 31, 1997 was 8.5%.
In order to secure the obligations under the loan agreement, Questron
entered into a stock pledge agreement, dated as of September 22, 1997, with
the bank, under which the Company pledged to the bank the shares of capital
stock of all of its subsidiaries which the Company held at such date and in
which the Company may thereafter acquire an interest. In addition, the Company
granted a security interest in substantially all of its assets and the assets
of its subsidiaries to the bank. The loan agreement restricts the payments of
cash dividends by the Company and certain other payments, limits long-term and
short-term borrowings of the Company, and requires that debt service coverage,
net worth, tangible net worth, the ratio of total liabilities to earnings
before interest, taxes, depreciation and amortization (EBITDA), and the ratio
of quick assets (cash and accounts receivable) to current liabilities be
maintained at certain designated levels by the Company. The Company is in
compliance with all such requirements of the loan agreement.
The aggregate annual maturities of long-term debt for each of the
five years in the period ending December 31, 2002 are: 1998-$1,801,667;
1999-$1,861,667; 2000-$1,811,667; 2001-$1,741,667; and 2002-$1,685,417.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 consisted of the
following:
Office equipment $ 87,154
Computer equipment 759,537
Furniture and fixtures 312,437
Autos and trucks 123,195
Leasehold improvements 108,638
-------------------
Total 1,390,961
Less: accumulated depreciation 479,973
-------------------
Total $ 910,988
===================
Depreciation expense related to property and equipment for the years
ended December 31, 1997 and 1996 was $167,172 and $98,907, respectively.
6. SHAREHOLDERS' EQUITY
At the Annual Meeting of Shareholders held on December 27, 1996, the
shareholders approved a one-for-ten reverse stock split. All share information
has been retroactively adjusted and the following information reflects the
effects of the reverse stock split.
As of December 31, 1997, the Company was authorized to issue
20,000,000 shares of common stock and 10,000,000 of preferred stock. The
outstanding shares of common stock are fully paid and non-assessable.
33
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
On March 10, 1997 the Company completed an offering of 1,150,000
Units (the "Offering") at a price of $6.00 per unit. Each Unit consisted of
one share of the Company's Series B Convertible Preferred Stock and one
redeemable Series IV Common Stock Purchase Warrant of the Company. A portion
of the net proceeds of the offering ($3,250,000) were used by the Company to
acquire Webb. The remaining amount of net proceeds ($2,353,000) was used to
repay the outstanding balance on the Company's revolving credit facility
($750,000) and to repay the outstanding balance on Webb's revolving credit
facility ($1,000,000), with the remaining balance ($603,000) retained by the
Company for working capital.
Each share of the Series B Convertible Preferred Stock shall
automatically convert into 1.4375 shares of the Company's common stock on the
second anniversary of the effective date of the Offering, March 4, 1999. Such
conversion ratio represented a 20% discount to the price of the Company's
common stock on the day immediately preceding the effective date of the
offering. The amount of such discount, $1,653,125, is being amortized to
retained earnings as an imputed non-cash dividend over a two year period.
Holders of the Series B Preferred Stock are entitled to: (i) annual dividends
in respect of the two years prior to conversion at the rate of $0.115 per
share; (ii) one vote for each share of common stock of the Company into which
such preferred stock is convertible; and (iii) a liquidation preference equal
to $0.01 per share.
In addition to the 1,150,000 Series IV Warrants issued in connection
with the Offering, the Company issued 1,500,000 Series IV Warrants to the
majority shareholder of Webb as a down payment under the Stock Purchase
Agreement and 1,250,000 Series IV Warrants to the former shareholders of Quest
in connection an exchange agreement. Each of the 3,900,000 Series IV Common
Stock Purchase Warrants becomes exercisable on the first anniversary of the
effective date of the Offering, is exercisable for the ensuing four years, and
entitles the holder to purchase one share of the Company's common stock at
$5.75 per share.
In June 1997, in connection with the acquisition of IMS, the Company
issued 50,000 shares of common stock to the former shareholders of IMS. Such
shares were issued pursuant to a Stock Purchase Agreement dated May 30, 1997
and valued at $299,050.
In September 1997, in connection with the acquisitions of CalFast and
PCI, the Company issued 50,000 shares of common stock to the former
shareholders of PCI and 475,106 shares to the former shareholders of CalFast.
Of the 475,106 shares of common stock of the Company, the former shareholders
of CalFast were granted the option to sell 125,896 shares back to the Company
on a monthly basis as follows: for each of the seven months during the period
October 1997 through April 1998, an aggregate of 8,879 shares per month valued
at $6.275 per share, or $55,714.29 per month, and for each of the 53 months
during the period May 1998 through September 2002, an aggregate of 1,203
shares per month valued at $6.275 per share, or $7,547.17 per month. To date,
the former shareholders of CalFast have declined to exercise their option to
sell such shares back to the Company.
34
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
7. STOCK OPTIONS
1996 STOCK OPTION PLAN
Under the terms of the 1996 Stock Option Plan (the "1996 Plan"), both
incentive and nonqualified stock options for an aggregate of 250,000 shares of
the Company's common stock were authorized for grant at prices determined by
the board of directors in its discretion. In the case of incentive stock
options, which may be granted only to employees of the Company and its
subsidiaries, such options are to be granted at prices equal to fair market
value of the shares at date of grant. Options currently outstanding under the
1996 Plan were issued with an exercise price equal to the fair market value of
the common stock on the date of grant, have terms of ten years and become
exercisable in three equal nine month installments or three equal annual
installments from date of grant.
The transactions under the 1996 Plan during the year ended December
31, 1997 are summarized as follows (there were no transactions during 1996):
<TABLE>
<CAPTION>
1997
---------------------------------------
Weighted Average
Shares Exercise Price
---------------- ---------------------
<S> <C> <C>
Outstanding - beginning of year -- $ --
Options granted 159,450 6.51
Options exercised
---------------- ---------------------
Outstanding - end of year 159,450 $ 6.51
================ =====================
Options exercisable at year end -- $ --
================ =====================
Options available at December 31
for future grant 90,550
================
Weighted average remaining
life of options 9.70 Yrs.
================
</TABLE>
PERFORMANCE OPTIONS
The Company agreed to issue to the former shareholders of Quest
performance options to purchase shares of common stock upon the Company's
attainment of certain pre-tax income targets. Such options will be awarded
based upon the following pre-tax income levels, with an exercise price equal
to the fair market value of the Company's common stock on the date that the
options are granted:
Pre-tax Income
No. of Shares Of at least
------------------------- --------------------------
500,000 $2,500,000
500,000 $3,500,000
500,000 $4,500,000
35
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
The Company's pre-tax income for the year ended December 31, 1997
exceeded $2.5 million, accordingly, options to purchase 500,000 shares of
common stock of the Company at an exercise price of $7.75 per share shall be
granted.
In addition to the above performance options, the Company also agreed
to issue performance options to a former shareholder of IMS and the former
shareholders of CalFast in connection with the acquisitions. The former
shareholder of IMS will receive performance options to purchase 90,000 shares
of common stock upon the Company's attainment of $4,500,000 in pre-tax income.
The former shareholders of CalFast will receive performance options to
purchase 125,000 shares of the common stock upon the Company's attainment of
$4,500,000 in pre-tax income.
ACQUISITION OPTIONS
In connection with the acquisition of IMS, the Company granted to the
former shareholders of IMS options to purchase 100,000 shares of common stock
at an exercise price of $6.00 per share. Such options vest and become
exercisable in five equal annual installments commencing on June 1, 1998.
1994 DIRECTOR NON-QUALIFIED STOCK OPTION PLAN
Under the terms of the 1994 Director Non-qualified Stock Option Plan,
as amended (the "1994 Plan"), options to purchase up to an aggregate of 150,000
shares (subject to shareholder approval of the increase from 30,000 shares) of
the Company's common stock may be granted to non-employee directors of the
Company. Under the 1994 Plan, options are to be granted to each eligible
director at the rate of 5,000 per year at an exercise price equal to the fair
market value of the underlying stock on the date of grant, are immediately
exercisable, and have a term of ten years. Transactions under the 1994 Plan
during the years ended December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 12,000 $ 18.01 10,500 $ 16.74
Options granted 23,000 $ 6.27 3,000 $ 19.06
Options exercised
Options canceled and
Terminated (6,000) 17.67 (1,500) $ 11.25
=============== =============== =============== =============
Outstanding - end of year 29,000 $ 8.77 12,000 $ 18.01
=============== =============== =============== =============
Options exercisable at year end 9,000 $ 8.77 12,000 $ 18.01
============= =============== =============== =============
Options available on December 31
for future grant 121,000 3,000
============= =============
Weighted average remaining
life of options 7.300 Yrs. 7.875 Yrs.
============== ===============
</TABLE>
36
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
The Company has granted non-incentive stock options pursuant to
consulting agreements. At December 31, 1997 and 1996, the total number of
options outstanding under such agreements was 11,600. These options are
exercisable at $35.00 per share and expire on March 31, 2000.
If the Company had accounted for the issuance of all options pursuant
to the fair value based method of SFAS No. 123, the Company would have
recorded compensation expense of $96,298 and $50,627 for the years ended
December 31, 1997 and 1996, respectively, and the Company's net income and net
income per share would have been as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -------------------
<S> <C> <C>
Net income per common share:
Net income used in per common share
calculation as reported $ 960,815 $ 549,452
================= ===================
Pro forma net income used in per common
share calculation $ 864,517 $ 498,825
================= ===================
Net income per common share as reported $ .56 $ .36
================= ===================
Pro forma net Income per share $ .50 $ .32
================= ===================
Net income per diluted common share:
Net income as reported $ 1,637,141 $ 549,452
================= ===================
Pro forma net income $ 1,540,843 $ 498,825
================= ===================
Net income per diluted common share as
Reported $ .47 $ .36
================= ===================
Pro forma net income per diluted common
Share $ .45 $ .32
================= ===================
</TABLE>
The fair value of options at date of grant was estimated using the
fair value based method with the following weighted average assumptions for
the years ended December 31, 1997 and 1996:
December 31, 1997 December 31, 1996
----------------- -----------------
Expected Life (Years) 10 10
Interest Rate 6% 6%
Annual Rate of Dividends -- --
Volatility 46.57% 94.56%
The weighted average fair value of options at date of grant using the
fair value based method during 1997 and 1996 is estimated at $4.33 and $16.90,
respectively.
No compensation cost was recognized for stock-based employee awards.
8. RETIREMENT PLAN
The Company has a defined contribution plan for eligible employees,
which qualifies under Section 401(k) of the Internal Revenue Code. The
Company's contribution to the plan, which is based on a specified percentage
of employee contributions, has been charged to selling, general &
administrative expenses in the amounts of $60,886 in 1997 and $43,249 in 1996.
37
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
In 1997, the Board of Directors of the Company approved the adoption
of a noncontributory employee stock ownership plan which enables all eligible
employees to acquire shares of the Company's common stock. Contributions,
which are determined by the Board of Directors, are in the form of common
stock or cash which is used to purchase the Company's common stock for the
benefit of participating employees. The Company accrued $68,000 for the year
ended December 31, 1997 to fund the purchase of the Company's common stock
pursuant to the plan.
9. LEASE COMMITMENTS
The Company leases certain office and warehouse space under
non-cancelable operating leases expiring at various dates through 2016. Rental
expenses of all non-cancelable operating leases amounting to $424,176 and
$189,252 was charged to operations for the years ended December 31, 1997 and
1996, respectively. Aggregate minimum rental commitments under all
non-cancelable operating leases approximate $3,313,269 as of December 31,
1997. Such commitments on annual basis are as follows:
Years ending December 31,
1998 $ 579,748
1999 567,436
2000 420,081
2001 282,028
2002 189,588
2003 106,388
2004 - 2015 ($96,000 per year) 1,152,000
2016 16,000
------------------
Total $ 3,313,269
==================
10. INCOME TAXES
The provision for income taxes for the years ended December 31, 1997
and 1996 consisted of the following:
1997 1996
---------------------- ---------------------
Current
Federal $ 47,969 $ 9,125
State 153,508 55,258
---------------------- ---------------------
201,477 64,383
---------------------- ---------------------
Deferred
Federal 930,969 --
State 19,410 --
---------------------- ---------------------
950,379 --
---------------------- ---------------------
$ 1,151,856 $ 64,383
====================== =====================
SFAS No. 109, "Accounting for Income Taxes" requires the
establishment of a deferred tax asset for all deductible temporary differences
and operating loss carryforwards and a deferred tax liability for all taxable
temporary differences. The Company had net operating loss carryforwards for
the years ended December 31, 1997 and 1996. At December 31, 1996, the Company
had provided a valuation allowance of 100% against the deferred tax asset
arising from such net operating loss carryforwards, as
38
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
the Company could not reasonably estimate how much, if any, of the net
operating losses could be utilized by the Company in future periods.
Accordingly, no regular federal income taxes were provided for 1996. The
provision for income taxes included in the consolidated statement of income
for 1996 is for state income taxes to which the Company and its subsidiaries
are subject and the federal alternative minimum tax. As a result of the
acquisitions completed in 1997, principally Webb and CalFast, and the 1997 and
expected future combined results of the Company, the valuation allowance
associated with the deferred tax asset was reduced and a deferred tax asset in
the amount of $4,000,000 was reflected on the Company's balance sheet. Since
the reduction in such valuation allowance was a direct consequence of the
acquisitions made in 1997, such reduction has been properly accounted for as a
reduction of the costs in excess of net assets of businesses acquired. At
December 31, 1997, the balance of the deferred tax asset relating to the net
operating loss carryforwards is $3,192,947, after having been reduced by
$807,053, the amount of the benefit related to the 1997 utilization of net
operating loss carryforwards.
A reconciliation of the federal statutory rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996
------------------ ------------------
<S> <C> <C>
Federal statutory rate 34.0% 2.0%
State income taxes 6.2% 7.0%
Effect of permanent differences between
financial statement treatment and tax
treatment of certain items, primarily
amortization of goodwill 1.1% --
------------------ ------------------
Effective tax rate 41.3% 9.0%
================== ==================
</TABLE>
As of December 31, 1997, the amount of the net operating loss
carryforwards and their expiration dates are as follows:
Net
Operating Loss
Expiring in Years Ending December 31, Carryforwards
--------------------
2000 $ 398,128
2001 1,242,960
2002 1,413,510
2003 1,573,987
2004 1,100,173
2005 579,718
2006 782,129
2007 2,945,421
2008 2,336,094
2009 591,906
2010 167,497
--------------------
Total $ 13,131,523
====================
39
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted 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 at December 31, 1997:
<TABLE>
<CAPTION>
Carrying
Amount Fair Value
-------------------- --------------------
<S> <C> <C>
Cash and cash equivalents $ 875,080 $ 875,080
Receivables 4,740,678 4,740,678
Accounts payable 2,378,381 2,378,381
Accrued expenses 839,514 839,514
Current portion of long-term debt 1,741,667 1,741,667
Long-term debt 9,953,521 9,953,521
</TABLE>
For certain financial instruments, including cash and cash
equivalents, trade receivables and payables, and short-term debt, 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.
12. 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 the
Company is a 50% owner. Under the terms of such agreement, Gulfstream acts as
an advisor and consultant to the Company, and also provides certain
administrative services to the companies. Such advisory and consulting
services are directed principally at the expansion of the Company's business
through the identification of new marketing opportunities and potential
acquisitions, as well as the procurement of financing as needed by the
Company. For such services Gulfstream is paid a fee of $150,000 per year. In
addition, upon the attainment of certain earnings targets by the Company,
Gulfstream will be entitled to receive options to acquire additional shares of
common stock at an exercise price equal to the fair market value of the common
stock at the date of grant. Gulfstream presently owns 12.3% of the Company's
common stock outstanding.
40
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
The Company leases one of its facilities from an entity owned by the
former stockholders of an acquired business who are now employees of the
Company. Rent expense of $32,000 associated with this facility has been
charged to selling, general & administrative expenses for the year ended
December 31, 1997. Management believes that the terms of such lease are no
less favorable than those which otherwise are available in the market for that
facility.
13. NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENT
The FASB has issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Financial Information". This statement is effective for
fiscal years ending after December 15, 1998 and establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders.
SFAS No 131 is not expected to have a material impact on the Company.
14. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT AUDITORS
(UNAUDITED)
On March 10, 1998, the Company announced that its Board of Directors
voted to eliminate the call provision on its Series IV Warrants. The Series IV
Warrants were redeemable by the Company for $.05 per Warrant, upon 30 day's
written notice, if the closing bid price of the common stock exceeded $8.50
per share for any 20 consecutive trading days ending within 10 days prior to
the date of the notice of redemption. The Series IV Warrants can still be
exercised by holders at a price of $5.75 per share during a four year period
which commenced March 4, 1998.
On March 17, 1998, the Company announced that its Board of Directors
approved a proposal to accelerate the conversion date of its Series B
Preferred Stock. The proposal will be considered by shareholders of the
Company at the Annual Meeting to be held in mid-May. Presently, the conversion
of each share of Series B Preferred Stock will automatically occur, without
any action on the part of the holder or the Company, on March 4, 1999. If
approved by the shareholders, the new conversion date will be as soon as
possible after the Annual Meeting. The dividend on the Series B Preferred
Stock, in the amount of $0.115 per share, payable on March 4, 1999, will be
paid in full upon conversion.
41
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
42
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
A. Directors and Executive Officers
The Directors and Executive Officers of the Company are set forth
herein. All directors serve until the next Annual Meeting of Stockholders or
until their successors are duly elected and qualified. All officers serve at
the pleasure of the Board of Directors, subject to any applicable employment
agreements.
Name Age Position
- ---- --- --------
Dominic A. Polimeni 51 Chairman, President and Chief Executive
Officer
Milton M. Adler 70 Secretary, Treasurer, Controller and Director
Robert V. Gubitosi 50 Director
Mitchell Hymowitz 35 Director
William J. McSherry, Jr. 50 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 of
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 is as follows:
DOMINIC A. POLIMENI has been President, Chief Operating Officer and a
Director of the Company since March 1995, and Chairman and Chief Executive
Officer of the Company since February 1996. 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. Since September 1997, Mr.
Polimeni has been a director of Nu Horizons, Inc., a publicly held company
based in Melville, New York, which is a distributor of electronic components.
Mr. Polimeni has been a Managing Director of Gulfstream Financial Group, Inc.,
a privately held financial consulting and investment banking firm since August
1990. Prior to that he held the position of Chief Financial Officer of Arrow
Electronics, Inc. ("Arrow") for four (4) years. He also held several other
positions, including general management positions, with Arrow over an
eight-year period. Prior to that he practiced as a Certified Public Accountant
for more than 12 years and was a Partner in the New York office of Arthur
Young & Company. He has also held the position of Chief Operating Officer of
Fugazy Express, Inc., a New York based transportation company in its start-up
phase. He holds a bachelor of business administration degree from Hofstra
University. Mr. Polimeni is the brother-in-law of Mr. Gubitosi.
43
<PAGE>
MILTON M. ADLER has been a Director of the Company since February
1996, Secretary of the Company since October 1993, Treasurer of the Company
since February 1992, and Controller of the Company since January 1992. Since
July 1997, he has been President, Secretary, and Treasurer of Judicate of
Philadelphia, Inc., a former subsidiary of the Company. Prior to October 1993,
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. He was elected as a director of Worldwide Equipment Corp., a publicly
held company based in Ardsley, New York, in February 1998. Mr. Gubitosi has
been a Managing Director of Gulfstream Financial Group, Inc., a privately held
financial consulting and investment banking firm since August 1990. Prior to
that he held the position of General Partner and Chief Financial Officer of
the Securities Groups, a New York investment banking firm and primary dealer
of U.S. government securities, with responsibility for the investment banking
activities of the firm. In addition, he has held managerial positions at
Goldman Sachs & Company and Oppenheimer & Company, and specialized in
brokerage accounting and auditing at Haskins & Sells and Touche Ross &
Company. He holds a bachelor of business administration degree from Hofstra
University. Mr. Gubitosi is the brother-in-law of Mr. Polimeni.
MITCHELL HYMOWITZ has been a Director of the Company since December
1993. He became Chief Financial Officer of Worldwide Equipment Corp. in early
1998. Mr. Hymowitz has also been Secretary of H&W Hardware Co., Inc. and Vice
President of Two Twenty First Avenue Realty Corp. since September 1990. Prior to
that, he was Senior Accountant with Paritz and Company, P.A., in New Jersey. Mr.
Hymowitz earned a Bachelor of Science in Business Administration with a degree
in Accounting from State University of New York at Buffalo in 1984.
WILLIAM J. MCSHERRY, JR. has been a Director of the Company since
February 1996. Mr. McSherry has been a partner of Battle Fowler LLP, a law firm
with offices in New York City and Los Angeles, since July 1991. Prior to July
1991, Mr. McSherry was a partner in the law firm of Bryan Cave. Mr. McSherry is
also the President and a director of Playtex Marketing Corporation, a
privately-owned corporation, and serves as a trustee and as Deputy Mayor of the
Village of Larchmont, State of New York.
B. Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership of equity securities of the Company with the Securities and Exchange
Commission and the National Association Of Securities Dealers. Officers,
directors and greater-than-ten percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms that
they file.
Based solely on a review of the copies of Forms 3, 4 and 5 and
amendments thereto furnished to the Company, or written representations from
certain reporting persons that such persons have filed on a timely basis all
reports required by Section 16 (a), and without researching or making any
inquiry regarding delinquent Section 16 (a) filings, the Company believes
that, during the fiscal year ended December 31, 1997, all such reports were
filed on a timely basis.
44
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth the compensation
of the named executive for the periods indicated. No executive officer of the
Company received total annual salary and bonus greater than $100,000 during
the periods indicated.
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------------------------
(a) (b) (c) (d) (e)
Name and Other Annual
Principal Position Year Salary Bonus Compensation ($)
- ------------------ ---- ------ ----- ----------------
<S> <C> <C> <C> <C>
Dominic A. Polimeni 1997 $100,000 -- --
Chairman, President 1996 $100,000 -- --
and Chief Executive 1995 $75,000 -- --
Officer
</TABLE>
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------------------------------------------------------
Awards Payouts
------------------------
(a) (b) (f) (g) (h) (i)
Restricted Securities
Name and Stock Underlying LTIP All other
Principal Position Year Awards ($) Options/SARs(#) Payouts ($) Compensation ($)
- ------------------ ---- ---------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Dominic A. Polimeni 1997 -- -- -- --
Chairman, President 1996 -- -- -- --
and Chief Executive 1995 -- -- -- --
Officer
</TABLE>
EMPLOYMENT AGREEMENTS
Dominic A. Polimeni, Chairman, Chief Executive Officer and President
of the Company, is a party to an employment agreement with Quest Electronic
Hardware, Inc., a subsidiary of the Company. This agreement expires on March
31, 2000 and provides for a base salary of $100,000 per annum.
In addition, Mr. Polimeni is an executive officer and a 50%
stockholder of Gulfstream Financial Group, Inc. ("Gulfstream"), and shares
voting and investment power with respect to the shares of the Company's common
stock owned by Gulfstream. Pursuant to a Management Advisory and Consulting
Agreement, dated as of November 29, 1994, between the Company and Gulfstream,
Gulfstream acts as an advisor and consultant to the Company, and also provides
certain administrative services to the Company. Such advisory and consulting
services are directed principally at the expansion of the Company's business
through the identification of new marketing opportunities and potential
acquisitions, the procurement of financing as needed by the Company, and
maximizing the Company's profitability. For such services Gulfstream is paid a
fee of $150,000 per year. In addition, pursuant to an Exchange Agreement dated
November 8, 1996, upon the attainment of certain earnings targets for the
Company, Gulfstream will be entitled to receive options to acquire additional
shares of common stock at an exercise price equal to the fair market value of
the common stock at the date of grant (See Item 11 - "Exchange Agreement"). On
February 24, 1998, options to purchase 333,333 shares of common stock of the
Company at an exercise price of $7.75 per share were awarded to Gulfstream
pursuant to the terms of the Exchange Agreement.
45
<PAGE>
Quest has also entered into a five-year employment agreement with
Phillip D. Schwiebert, its President and Chief Operating Officer. Under the
terms of such employment agreement, Quest has agreed to compensate Mr.
Schwiebert with regular salary at the rate of $100,000 per year, plus bonus
compensation based on the attainment of certain operating goals at the rate of
$15,000 per quarter. In addition, pursuant to an Exchange Agreement date
November 8, 1996, upon the attainment of certain earnings targets for the
Company, Schwiebert will be entitled to receive options to acquire additional
shares of common stock at an exercise price equal to the fair market value of
the common stock at the date of grant (See Item 11 - "Exchange Agreement"). On
February 24, 1998, options to purchase 166,667 shares of common stock of the
Company at an exercise price of $7.75 per share were awarded to Mr. Schwiebert
pursuant to the terms of the Exchange Agreement.
In connection with the acquisition of Integrated Material Systems,
Inc., the Company has entered into a five-year employment agreement with James
Taylor, the former shareholder and President of IMS. Under the terms of such
employment agreement, the Company has agreed to compensate Mr. Taylor with
regular salary at the rate of $144,000 per year, plus bonus compensation based
on the attainment of certain operating goals at the rate of $14,400 per year.
In connection with the acquisition of California Fasteners, Inc., the
Company has entered into a five-year employment agreement with Doug Zadow, a
former shareholder and President of CalFast. Under the terms of such
employment agreement, the Company has agreed to compensate Mr. Zadow with a
regular salary of $120,000, plus bonus compensation based on the attainment of
certain operating goals at the rate of $60,000 per year.
OPTION/SAR GRANTS
There were no grants during 1997 of stock options or stock
appreciation rights to any to any person named in the Summary Compensation
Table. For information relating to warrants and rights granted to Gulfstream,
a company owned by Dominic A. Polimeni and Joan R. Gubitosi, and to Phillip D.
Schwiebert, see Item 11 "Exchange Agreement."
OPTION/SAR EXERCISES
Set forth below is information concerning exercises of options during
1996 and the year-end value of unexercised options for the persons named in the
Summary Compensation Table:
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities
Underlying Unexercised Value of Unexercised In-the
Shares Options/SAR's at Fiscal -Money Options/SARs at
Acquired on Value Year End (#) Fiscal Year End ($)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- -------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Dominic A. Polimeni
Chairman, President
and Chief Executive
Officer -- -- -- --
</TABLE>
COMPENSATION OF DIRECTORS
Other than the 1994 Director Non-Qualified Stock Option Plan
described below, the Company does not have a standard policy regarding
compensation of members of the Board of Directors. Other
46
<PAGE>
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, 1997.
THE 1994 DIRECTOR NON-QUALIFIED STOCK OPTION PLAN
On January 26, 1994, the Board of Directors (the "Board") adopted,
subject to stockholder approval, the above captioned plan and in February 1996
amended the plan so as to change the annual date of the grant to the first
Wednesday of February. On April 2, 1996, the 1994 Director Non-Qualified Stock
Option Plan was approved by shareholders at a special meeting. The plan was
further amended to increase the aggregate number of shares of the Company's
common stock that may be granted under the plan from 30,000 to 150,000,
subject to shareholder approval at the next Annual Meeting. The plan, as
amended, is hereinafter referred to as the "1994 Plan."
All non-employee directors shall receive an option to purchase 5,000
shares of the common stock of the Company on the first Wednesday of February
in each calendar year at an exercise price equal to the fair market value per
share of the common stock on that date. Such options shall be exercisable
immediately for a period of 10 years from date of grant unless terminated
earlier pursuant to the terms of the Plan. Under the 1994 Plan, 29,000 options
have been granted to date at exercise prices ranging from $3.88 per share to
$24.06 per share.
1996 STOCK OPTION PLAN
At the annual meeting of stockholders held on December 27, 1996, the
stockholders approved a 1996 Stock Option Plan (the "1996 Plan"). Under the
1996 Plan, either Incentive Stock Options or Non-Qualified Stock Options may
be granted; however, the former may be granted only to employees of the
Company and its subsidiaries. Pursuant to the terms of the 1996 Plan, a total
of 250,000 shares of the Company's common stock (as adjusted to reflect the
one-for-ten reverse split) will be reserved and available for distribution as
awards under the 1996 Plan.
In September 1997, the Company granted 159,450 options to its
employees. Such options were issued with an exercise price equal to the fair
market value of the common stock on the date of grant. The options have terms
of ten years and become exercisable in three equal nine-month installments or
three equal annual installments from date of grant.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1997, the Board approved the adoption of an Employee Stock
Ownership Plan ("ESOP") beginning with the year ended December 31, 1997. The
Company accrued $68,000 for the year ended December 31, 1997 to fund the
purchase of the Company's common stock pursuant to the ESOP.
47
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of March 24,
1998, known to the Company regarding beneficial ownership of the Company's
common stock and Preferred Stock by (i) any holder of more than five percent
of the outstanding shares; (ii) the Company's directors; and (iii) all
executive officers and directors as a group:
<TABLE>
<CAPTION>
Number of
Number of % of Shares of % of
Shares of Common Series B Series B % of
Name & Address Position With the Company Common Stock Stock Preferred Stock Preferred Voting
Stock Power (1)
- ----------------------------- -------------------------- ----------------- ---------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Dominic A. Polimeni (2)(4) Chairman, President and 1,713,757 (3) 47.85 10,000 * 33.01
Chief Executive Officer
Milton M. Adler (2) Director, Secretary, 3,102 (5) 100
Treasurer and Controller * * *
Robert V. Gubitosi (2) Director -- (6) -- -- -- --
Mitchell Hymowitz (2) Director 21,000 (7) -- --
* *
William J. McSherry, Jr. (2) Director 36,041 (8) 1.67 2,700 * 1.05
Joan R. Gubitosi(4) -- 1,713,606 (3) 47.85 -- -- 32.74
c/o Gulfstream Financial
Group, Inc.
6400 Congress Ave.,
Suite 200A
Boca Raton, FL 33487
13.43
Phillip D. Schwiebert(4) President and Chief 567,817 (9) 22.05 -- --
c/o Quest Electronic Operating Officer of
Hardware, Inc. Quest Electronic
1180 Murphy Avenue Hardware, Inc., a
San Jose, CA subsidiary of the Company
Douglas D. Zadow President of California 361,065 (14) 16.97 -- -- 9.55
c/o The Z Group, Inc. Fasteners, Inc., a
P.O. Box 1148 subsidiary of the Company
McKinney, TX 75070
Terry Bastian General Manager of San 114,041 (15) 5.36 -- -- 3.02
c/o California Fasteners, Diego and Purchasing
Inc. Manager of California
7076 Convoy Court Fasteners, Inc. a
San Diego, CA 92111 subsidiary of the Company
Gerald Levine(10) -- 115,000 5.4 -- -- 3.04
c/o Bentley Capital
Management,
Inc.
520 Madison Avenue,
41st Floor
New York, NY 10022
Robert Sussman(10) -- 115,000 5.4 -- -- 3.04
c/o Bentley Capital
Management,
Inc.
520 Madison Avenue,
41st Floor
New York, NY 10022
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
% of Number of % of
Number of % of Shares of Series B % of
Shares of Common Series B Preferred Voting
Name & Address Position With the Company Common Stock Stock Preferred Stock Stock Power (1)
- ----------------------------- -------------------------- ----------------- ---------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Debra L. Hagan(10) -- 115,000 5.4 -- -- 3.04
c/o Bentley Capital
Management, Inc.
520 Madison Avenue,
41st Floor
New York, NY 10022
Gerald Kennedy(11) -- 4,373 (13) * 290,000 25.22 11.14
c/o Kennedy Capital
Management
10829 Olive Blvd.
St. Louis, MO 63141
Jay R. Petschek -- 2.262 (13) -- 150,000 (12) 13.04 5.76
c/o Ladenburg Thalman &
Co., Inc.
540 Madison Avenue
New York, NY 10022
All officers and directors 1,773,900 48.74 12,800 1.11 33.87
as a group
(five persons)
- -----------------------------
* Less than 1 %
</TABLE>
(1) Percentage of Voting Power reflects combined votes of common stock and
preferred stock.
(2) c/o Questron Technology, Inc., 6400 Congress Avenue, Suite 200A, Boca
Raton, FL 33487.
(3) These shares are owned by Gulfstream Financial Group, Inc.
("Gulfstream"). Joan R. Gubitosi and Dominic A. Polimeni are
executive officers and the stockholders of Gulfstream and share
voting and investment power with respect to the shares owned by
Gulfstream. The shares reported above consist of 260,273 shares owned
by Gulfstream, options to purchase 453,333 shares, Series IV Warrants
to purchase 1,000,000 shares of common stock and 150 shares of common
stock issued to Mr. Polimeni as a dividend in respect of his Series B
Preferred Stock. These amounts do not include options to purchase
40,500 shares of common stock at $6.625 per share granted effective
September 22, 1997. The foregoing options vest and become exercisable
as to 13,500 shares on each of the nine month anniversary dates of
the date of the grant.
(4) In addition, Gulfstream and Mr. Schwiebert will be entitled to
receive options to acquire additional shares of common stock upon the
attainment of certain earnings targets for the Company in any fiscal
year up to and including fiscal year 2001 as follows:
<TABLE>
<CAPTION>
No. of Additional No. of Additional
Gulfstream Shares Schwiebert Shares Pre-tax Income at Least
---------------------------------- ----------------------------------- ----------------------------------
<S> <C> <C>
333,333 166,667 $ 3,500,000
333,334 166,666 $ 4,500,000
</TABLE>
(5) Includes options to purchase 3,000 shares of common stock.
(6) Mr. Gubitosi's wife, Joan R. Gubitosi, has shared beneficial ownership
with Mr. Polimeni of 1,713,607 shares of common stock (see Footnote 3).
Mr. Gubitosi disclaims beneficial ownership of such shares.
49
<PAGE>
(7) Consists of options to purchase 21,000 shares of common stock.
(8) Includes 2,000 shares of common stock, options to purchase 18,000
shares of common stock, Series IV Warrants to purchase 16,000 shares
and 41 shares of common stock issued as a dividend in respect of his
Series B Preferred Stock.
(9) The 401,150 shares reported above consist of 121,150 shares owned by
Mr. Schwiebert, options to purchase 197,667 shares of common stock
and Series IV Warrants to purchase 250,000 shares of common stock.
These amounts do not include options to purchase 30,000 shares of
common stock at $6.00 per share granted effective May 31, 1997. The
foregoing options vest and become exercisable as to 10,000 shares on
each of the first three anniversary dates of the date of the grant.
See also footnote 4.
(10) Based on the Schedule 13G of Bentley Capital Management, Inc.
("Bentley"), dated February 18, 1998. The 115,000 shares reported
above are owned by Bentley. Gerald Levine, Robert M. Sussman and
Debra L. Hagan are beneficial owners and share voting and investment
power with respect to the 115,000 shares reported above.
(11) Based on the Schedule 13G of Kennedy Capital Management, Inc.
("Kennedy"), dated February 10, 1998. The 290,000 shares of Series B
preferred stock reported above are owned by Kennedy.
(12) Based on the Schedule 13G of Jay R. Petschek, dated October 1, 1997.
Jay R. Petschek, Corsair Management Company, Inc. ("CMC") and Corsair
Managing Partners ("CMP") expressly disclaim beneficial ownership of
any shares of Preferred Stock not directly held for the accounts of
CMC. and CMP. Jay R. Petschek beneficially owns the 150,000 shares
reported above, which consists of 117,350 shares held for the account
of Corsair Capital Partners, L.P. and 32,650 shares beneficially
owned by CMC and CMP.
(13) Represents shares issued as a dividend in respect of the Series B
Preferred Stock.
(14) The 361,065 shares reported above include 55,205 shares subject to a
serial put agreement dated 9/22/97, which gives Mr. Zadow the option
to put the shares to the Company on a monthly basis during the five
year period following 9/22/97 for a price of $6.275 per share.
(15) The 114,041 shares reported above include 17,433 shares subject to a
serial put agreement dated 9/22/97, which gives Mr. Bastian the
option to put the shares to the Company on a monthly basis during the
five year period following 9/22/97 for a price of $6.275 per share.
As of the close of business on March 31, 1995, the Company acquired
from Gulfstream Financial Group, Inc. ("Gulfstream"), a Florida corporation
owned by Dominic A. Polimeni and Joan R. Gubitosi, and from Phillip D.
Schwiebert all of the outstanding capital stock of Quest Electronic Hardware,
Inc. ("Quest"). Quest, in turn, simultaneously acquired the fasteners
distribution business of Arrow Electronics, Inc. These events resulted in
changes in ownership of the capital stock of the Company which may have
affected the control of the Company. These changes included the following:
a. Gulfstream became the direct beneficial owner of 22.10% of
common stock, par value $.001 per share ("Common Stock"), of
the Company outstanding at March 31, 1995;
b. Dominic A. Polimeni ("Polimeni"), a Director, Executive
Officer and a 50% stockholder of Gulfstream, and Chairman,
Chief Executive Officer and Chief Financial Officer of
Quest, which became a subsidiary of the Company, was named
President and Chief
50
<PAGE>
Operating Officer of the Company and was subsequently named
to his current position of Chairman, President and Chief
Executive Officer of the Company; and
c. Phillip D. Schwiebert ("Schwiebert"), the President and Chief
Operating Officer of Quest, became the beneficial owner of
11.60% of the shares of Common Stock of the Company
outstanding at March 31, 1995.
Subsequent to the foregoing events, certain principal stockholders of
the Company (Jordan R. Belfort, Richard Bronson, Elliot Lowenstern and Daniel
Porush), who, in the aggregate, beneficially owned approximately 45.00% of the
Company's outstanding stock, disposed of the bulk of these shares. In
addition, the Board of Directors of the Company has undergone a substantial
restructuring by reason of the resignation of four (4) former directors and
the election of Messrs. Adler, Gubitosi and McSherry to the Board.
EXCHANGE AGREEMENT
In connection with the Webb acquisition and the related Offering of
Units, Gulfstream and Philip Schwiebert, shareholders of the Company, entered
into an Exchange Agreement dated as of November 8, 1996 (the "Exchange
Agreement") pursuant to which Gulfstream and Schwiebert have agreed to
exchange their rights to receive warrants to purchase up to 10% and 5%,
respectively, of the Common Stock outstanding as of March 31, 1995. Based upon
the number of shares of Common Stock outstanding on such date (after giving
effect to the exercise of all the outstanding options and warrants), the
foregoing represented the right of Gulfstream and Schwiebert to acquire up to
264,172 and 132,086 shares of Common Stock, respectively, at $1.00 per share
(after giving effect to the one-for-ten reverse split).
The Board of Directors deemed it desirable to enter into the Exchange
Agreement by reason of the fact that the rights previously granted to
Gulfstream and Schwiebert would have resulted in substantial charges to the
Company's earnings by reason of accounting rules now in effect and would have
resulted in substantial dilution to the other stockholders. Under the options,
warrants and rights granted under the Exchange Agreement, no charge to
earnings should result as a result of their being exercisable at the fair
market value at the date of grant in lieu of $1.00 per share. In addition,
pursuant to the Exchange Agreement the Company has substantially increased the
pre-tax income targets needed to earn certain of the awards from $1.4 million,
$1.8 million, $2.2 million and $2.6 million to $2.5 million, $3.5 million and
$4.5 million. Under the prior arrangements, one half of the awards would have
been earned upon completion of the acquisition of Webb, thereby resulting in a
substantial charge to earnings and substantial dilution to stockholders. Under
the Exchange Agreement, no awards which are conditioned on meeting the pre-tax
income targets set forth below will be earned until the $2.5 million pre-tax
income target is met or exceeded. Finally, although Gulfstream and Schwiebert
have the opportunity to earn a substantially greater number of shares, the
amount of consideration which will have to be paid for such shares has
substantially increased as well. Based upon current market prices, the price
to be paid per share acquired will have increased under the Exchange Agreement
from $1.00 to at least $3.75.
Pursuant to the Exchange Agreement, Gulfstream and Schwiebert
received the following in exchange for the rights previously granted under
their agreements.
51
<PAGE>
Gulfstream: 1) Options to acquire 120,000 shares of Common
Stock for a per share exercise price equal to
$3.75; and
2) Series IV Warrants to acquire 1,000,000 shares
of Common Stock.
Schwiebert: 1) Options to acquire 30,000 shares of Common Stock
for a per share exercise price equal to $3.75;
and
2) Series IV Warrants to acquire 250,000 shares of
Common Stock.
The Company's pre-tax income for the year ended December 31, 1997
exceeded $2.5 million, accordingly, pursuant to the terms of the Exchange
Agreement, on February 24, 1998, options to purchase 333,333 shares of Common
Stock of the Company at an exercise price of $7.75 per share were granted to
Gulfstream and options to purchase 166,667 shares of Common Stock of the
Company at an exercise price of $7.75 per share were granted to Schwiebert.
In addition to the foregoing, Gulfstream and Schwiebert will be
entitled to receive options as set forth in Note 4 to the table included in
this Item 11.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As of the close of business on March 31, 1995, the Company acquired
from Gulfstream Financial Group, Inc. (a Florida corporation owned by Dominic
A. Polimeni and Joan R. Gubitosi) and Phillip D. Schwiebert all of the
outstanding capital stock of Quest Electronic Hardware, Inc. This transaction
and related transactions are described more fully under "Item 1. Business",
"Item 7. Financial Statements", "Item 10. Executive Compensation", and "Item
11. Security Ownership of Certain Beneficial Owners and Management", included
elsewhere herein. Pursuant to a Management and Advisory Consulting Agreement,
the Company has agreed to compensate Gulfstream for advisory and consulting
services at the rate of $150,000 per year. This agreement expires on March 31,
2000 and can be terminated by either party on 90 days notice.
52
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Financial Statements and Exhibits.
1. The financial statements listed in the accompanying index to
financial statements are filed as part of this annual report.
2. See Index to Exhibits on page 59.
(b) Report on Form 8-K.
<TABLE>
<CAPTION>
Date of Report
(Date of Earliest Event Reported) Item Reported
------------------------------------------- -------------------------------------------------------------
<S> <C>
October 7, 1997 Acquisition of fastener distributor; included pro forma
(amended December 8, 1997) combined statement of operations for the Company and
California Fasteners, Inc. for the nine months ended
September 30, 1997 and for the year ended December 31, 1996,
and audited balance sheet at July 31, 1997 and audited
statements of operations, stockholders equity, and cash flows
for the eleven months ended July 31, 1997 and for the year
ended August 31, 1996 for California Fasteners, Inc.
</TABLE>
53
<PAGE>
QUESTRON TECHNOLOGY, INC.
INDEX TO FINANCIAL STATEMENTS
(Item 13 (a))
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 22
Consolidated Balance Sheet as of December 31, 1997 23
For the years ended December 31, 1997 and 1996:
Consolidated Statement of Operations 24
Consolidated Statement of Changes in Stockholders' Equity 25
Consolidated Statement of Cash Flows 26
Notes to Consolidated Financial Statements at and for the years ended
December 31, 1997 and 1996 28
</TABLE>
54
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
QUESTRON TECHNOLOGY, INC.
By: /s/ Dominic A. Polimeni
-----------------------------
Dominic A. Polimeni,
Chairman, President and Chief
Executive Officer
Date: March 27, 1998
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities indicated on March 27, 1998:
<TABLE>
<CAPTION>
<S> <C>
(1) Principal Executive Officer: (3) A Majority of the Board of Directors:
/s/ Dominic A. Polimeni /s/ Milton M. Adler
------------------------ --------------------
Dominic A. Polimeni, Chief Executive Officer Milton M. Adler, Director
/s/ Robert V. Gubitosi
-----------------------
Robert V. Gubitosi, Director
(2) Principal Financial and Accounting /s/ Mitchell Hymowitz
----------------------
Officer: Mitchell Hymowitz, Director
/s/ Milton M. Adler /s/ William J. McSherry, Jr.
-------------------- -----------------------------
Milton M. Adler, William J. McSherry, Jr., Director
Treasurer
/s/ Dominic A. Polimeni
-----------------------
Dominic A. Polimeni, Director
</TABLE>
55
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS TO
FORM 10-KSB
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
-- ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
-- EXCHANGE ACT OF 1934
(No Fee Required)
For the transition period from _______________ to _______________
Commission file number 0-13324
QUESTRON TECHNOLOGY, INC.
- -------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 23-2257354
----------------- ----------------------
(State or other (I.R.S. Employer
jurisdiction of Identification Number)
incorporation or
organization)
6400 Congress Avenue, Suite 200A, Boca Raton, FL 33487
- ------------------------------------------------ ---------
(Address of principal executive offices)) (Zip Code)
Issuer's telephone number: (561) 241 - 5251
----------------
56
<PAGE>
INDEX TO EXHIBITS
3.0 Certificate of Incorporation, incorporated by reference to Exhibit
3(i) to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1987 (File
No. 0-13324).
3.1 Certificate of Amendment, dated March 20, 1985, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
4.1 to Amendment No. 1 of the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on March
9, 1995 (File No. 33-44331).
3.2 Certificate of Amendment, dated June 9, 1989, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
4.1 to Amendment No. 1 of the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on March
9, 1995 (File No. 33-44331).
3.3 Certificate of Correction, dated May 17, 1991, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
4.1 to Amendment No. 1 of the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on March
9, 1995 (File No. 33-44331).
3.4 Certificate of Amendment, dated December 20, 1993, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
3(i) to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1993 (File
No. 0-13324).
3.5 Certificate of Correction, dated December 22, 1993, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
3.3 to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1993 (File
No. 0-13324).
3.6 Certificate of Correction, dated July 19, 1994, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
4.1 to Amendment No. 1 to the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on March
9, 1995 (File No. 33-44331).
3.7 Certificate of Amendment, dated April 2, 1996, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
3.5 to the Registrant's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1995 (File
No. 0-13324)
3.8 Certificate of Amendment, filed December 31, 1996, to Certificate of
Incorporation of the Registrant, incorporated by reference to Exhibit
3.10 to Amendment No. 1 to the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on February 25, 1997 (File No.
333-18243)
57
<PAGE>
3.9 By-Laws of the Registrant, incorporated by reference to Exhibit 3b(ii)
to the Registrant's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1987 (File No.
0-13324).
3.10 Amendment to By-Laws of the Registrant, incorporated by reference to
Exhibit 3.4 of the Registrant's Form 10-KSB filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1992
(File No. 0-13324).
4.0 Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4.0 to Amendment No. 1 to the Registrant's Form SB-2 filed
with the Securities and Exchange Commission on February 25, 1997 (File
No. 333-18243)
4.1 Specimen Preferred Stock Certificate, incorporated by reference to
Exhibit 4.1 to Amendment No. 1 to the Registrant's Form SB-2 filed
with the Securities and Exchange Commission on February 25, 1997 (File
No. 333-18243)
4.2 Certificate of Designations, Preferences and Rights of the
Registrant's Series B Convertible Preferred Stock, incorporated by
reference to Exhibit 4.2 to Amendment No. 1 to the Registrant's Form
SB-2 filed with the Securities and Exchange Commission on February 25,
1997 (File No. 333-18243)
4.3 Form of Series IV Warrant Agreement, incorporated by reference to
Exhibit 4.3 to Amendment No. 1 to the Registrant's Form SB-2 filed
with the Securities and Exchange Commission on February 25, 1997 (File
No. 333-18243)
4.4 Form of Series III Warrant Agreement, dated as of November 7, 1994,
incorporated by reference to Exhibit 10.22 to the Registrant's Form
10-K filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1994 (File No. 0-13324).
4.5 Form of Underwriters' Purchase Option, incorporated by reference to
Exhibit 4.5 to Amendment No. 1 to the Registrant's Form SB-2 filed
with the Securities and Exchange Commission on February 25, 1997 (File
No. 333-18243)
4.6 Stock Purchase Warrant Certificate for Purchase of Common Stock of
Questron Technology, Inc., incorporated by reference to Exhibit 4.6 to
Amendment No. 1 to the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on February 25, 1997 (File No.
333-18243)
10.1 The Company's 1994 Director Non-Qualified Stock Option Plan,
incorporated by reference to Exhibit 10.28 of the Registrant's Report
on Form 10-K filed with the Securities and Exchange Commission for the
fiscal year ended December 31 1993 (File No. 0-13324).
10.2 Employment Agreement, dated November 29, 1994, between Quest
Electronic Hardware, Inc. and Dominic A. Polimeni, incorporated by
reference to Exhibit 10.24 to the Registrant's Form 10-K filed with
the Securities and Exchange Commission for the fiscal year ended
December 31, 1994 (File No. 0-13324).
10.3 Employment Agreement, dated November 29, 1994, between Quest
Electronic Hardware, Inc. and Phillip D. Schwiebert, incorporated by
reference to Exhibit 10.25 to the Registrant's Form
58
<PAGE>
10-K filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1994 (File No. 0-13324).
10.4 Management Advisory and Consulting Agreement, dated as of November
29, 1994, between Gulfstream Financial Group, Inc. and the
Registrant, incorporated by reference to Exhibit 10.26 to the
Registrant's Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1994 (File No.
0-13324).
10.5 Waiver, dated as of March 31, 1995, by Gulfstream Financial Group,
Inc. and Philip D. Schwiebert, incorporated by reference to Exhibit
10.27 to the Registrant's Form 10-K filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1994 (File
No. 0-13324).
10.6 Share Acquisition Agreement, dated as of November 29 1994, by and
among Gulfstream Financial Group, Inc., Phillip D. Schwiebert, Quest
Electronic Hardware, Inc. and the Registrant, incorporated by
reference to Exhibit 10.28 to the Registrant's Form 10-K filed with
the Securities and Exchange Commission for the fiscal year ended
December 31, 1994 (File No. 0-13324).
10.7 Purchase of Assets Agreement, dated as of November 29, 1994, between
Quest Electronic Hardware, Inc. and Arrow Electronics, Inc.,
incorporated by reference to Exhibit 10.29 to the Registrant's Form
10-K filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1994 (File No.
0-13324).
10.8 Loan and Security Agreement, dated as of March 31, 1995, between
Silicon Valley Bank and Quest Electronics Hardware, Inc.,
incorporated by reference to Exhibit 10.30 to the Registrant's Form
10-K filed with the Securities and Exchange Commission for the fiscal
year ended December 31, 1994 (File No. 0-13324).
10.9 Third Party Stock Pledge Agreement, dated as of March 31, 1995,
between Silicon Valley Bank and the Registrant, incorporated by
reference to Exhibit 10.34 to the Registrant's Form 10-K filed with
the Securities and Exchange Commission for the fiscal year ended
December 31, 1994 (File No. 0-13324).
10.10 Common Stock Purchase Option, dated as of March 31, 1995, for Biltmore
Securities, Inc., incorporated by reference to Exhibit 10.35 to the
Registrant's Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1994 (File No.
0-13324).
10.11 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).
10.12 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).
59
<PAGE>
10.13 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).
10.14 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)
10.15 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)
10.16 1996 Stock Option Plan, incorporated by reference to Exhibit 10.19 to
Amendment No. 1 to the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on February 25, 1997 (File No.
333-18243)
10.17 Exchange Agreement, dated November 8, 1996 by and among the
Registrant, Gulfstream Financial Group, Inc. and Phillip D.
Schwiebert, incorporated by reference to Exhibit 10.21 to Amendment
No. 1 to the Registrant's Form SB-2 filed with the Securities and
Exchange Commission on February 25, 1997 (File No. 333-18243)
10.18 Stock Purchase Agreement dated as of December 16, 1996 relating to
Webb Distribution, Inc., incorporated by reference to Exhibit 2.0 to
Amendment No. 1 to the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on February 25, 1997 (File No.
333-18243)
10.19 Form of Underwriting Agreement, incorporated by reference to Exhibit
2.0 to Amendment No. 1 to the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on February 25, 1997 (File No.
333-18243)
10.20 Stock Option Grant Agreement between the Company and Gulfstream
Financial Group, Inc. made as of November 8, 1996, incorporated by
reference to Exhibit 10.20 to the Registrant's Form 10-KSB filed with
the Securities and Exchange Commission for the fiscal year ended
December 31, 1996 (File No. 0-13324)
10.21 Stock Option Grant Agreement between the Company and Phillip D.
Schwiebert made as of November 8, 1996, incorporated by reference to
Exhibit 10.20 to the Registrant's Form 10-KSB filed with the
Securities and Exchange Commission for the fiscal year ended
December 31, 1996 (File No. 0-13324)
10.22 Stock Purchase Agreement between Questron Technology, Inc. and the
shareholders of California Fasteners, Inc. dated August 29, 1997,
incorporated by reference to Exhibit 2.0 to the Registrant's Form 8-K,
filed October 7, 1997 (file no. 000-13324)
10.23 Serial Put Agreement between Questron Technology, Inc. and Doug Zadow
and Terry Bastian dated September 22, 1997, incorporated by reference
to Exhibit 2.1 to the Registrant's Form 8-K, filed October 7, 1997
(file no. 000-13324)
11.1 Statement Re: Computation of Per Share Earnings for years ended
December 31, 1997 and 1996.
60
<PAGE>
21.1 Statement of Subsidiaries.
23.1 Consent of Moore Stephens, P. C., dated February 24, 1998.
61
<PAGE>
Exhibit 11.1
QUESTRON TECHNOLOGY, INC.
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997
---------------
<S> <C>
Average number of shares of common stock outstanding
during the year 1,718,062
Assumed exercise of dilutive stock options and warrants, based on
the treasury method of accounting using the average market price
per share of the registrant's
common stock 1,738,493
---------------
Average number of diluted shares of common
stock outstanding during the year 3,456,555
===============
Net income used in per common share calculation $ 960,815
===============
Net income per common share $ .56
===============
Net income $ 1,637,141
===============
Net income per diluted common share $ .47
===============
</TABLE>
<PAGE>
Exhibit 21.1
QUESTRON TECHNOLOGY, INC.
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
AT MARCH 31, 1998
<TABLE>
<CAPTION>
Date of State of
Name of Subsidiary Incorporation Incorporation
---------------------------------------- ----------------------- -------------------------
<S> <C> <C>
Quest Electronic Hardware, Inc. October 12, 1994 Delaware
Questnet Components, Inc. February 13, 1996 Delaware
CompWare, Inc. d/b/a Webb Distribution November 21, 1994 Delaware
Power Components, Inc. July 17, 1997 Pennsylvania
Integrated Material Systems, Inc. January 14, 1997 Arizona
California Fasteners, Inc. August 17, 1973 California
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 33-84222) and related Prospectus pertaining to the
registration of 2,140,442 shares of Questron Technology, Inc. common stock, in
the Registration Statement on Form S-3 (No. 33-63555) and related Prospectus
pertaining to the registration of 6,017,444 shares of Questron Technology,
Inc. common stock, in the Registration Statement on Form S-8 (No. 33-87628)
pertaining to the registration of 756,667 shares of Questron Technology, Inc.
common stock issuable pursuant to the various stock option plans of Questron
Technology, Inc., in the Registration Statement on Form S-3 (No. 333-7049) and
related Prospectus pertaining to the registration of 1,070,000 shares of
Questron Technology, Inc. common stock, in the Registration Statement on Form
S-3 (No. 333-40835) and related Prospectus pertaining to the registration of
125,912 shares of Questron Technology, Inc. common stock, in the Registration
Statement on Form S-8 (No. 333-42983) pertaining to the registration of 60,000
shares of Questron Technology, Inc. common stock issuable upon the exercise of
options granted pursuant to a stock option grant agreement made in connection
with an acquisition, of our report dated February 24, 1998 with respect to the
consolidated financial statements of Questron Technology, Inc. included in
this Annual Report on Form 10-KSB for the year ended December 31, 1997.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR YEAR ENDED DECEMBER 31, 1997 AND THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 875,080
<SECURITIES> 0
<RECEIVABLES> 4,818,411
<ALLOWANCES> 93,561
<INVENTORY> 8,415,777
<CURRENT-ASSETS> 14,267,865
<PP&E> 1,390,961
<DEPRECIATION> 479,973
<TOTAL-ASSETS> 35,194,847
<CURRENT-LIABILITIES> 5,221,039
<BONDS> 0
0
11,500
<COMMON> 2,122
<OTHER-SE> 19,272,756
<TOTAL-LIABILITY-AND-EQUITY> 35,194,847
<SALES> 25,667,245
<TOTAL-REVENUES> 25,710,194
<CGS> 15,486,763
<TOTAL-COSTS> 21,999,520
<OTHER-EXPENSES> 408,271
<LOSS-PROVISION> 93,561
<INTEREST-EXPENSE> 513,406
<INCOME-PRETAX> 2,788,997
<INCOME-TAX> 1,151,856
<INCOME-CONTINUING> 1,637,141
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,637,141
<EPS-PRIMARY> .56
<EPS-DILUTED> .47
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED EARNINGS PER SHARE INFORMATION TO REFLECT THE
FINANCIAL ACCOUNTING STANDARDS BOARD'S ADOPTION OF NEW STANDARDS UNDER SFAS 128
REGARDING SELECTED QUARTERLY FINANCIAL DATA (REPLACING "PRIMARY" AND "FULLY
DILUTED" WITH "BASIC" AND "DILUTED").
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1997 JUN-30-1997 MAR-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997 DEC-31-1996
<CASH>
<SECURITIES>
<RECEIVABLES>
<ALLOWANCES>
<INVENTORY>
<CURRENT-ASSETS>
<PP&E>
<DEPRECIATION>
<TOTAL-ASSETS>
<CURRENT-LIABILITIES>
<BONDS>
<COMMON>
<OTHER-SE>
<TOTAL-LIABILITY-AND-EQUITY>
<SALES>
<TOTAL-REVENUES>
<CGS>
<TOTAL-COSTS>
<OTHER-EXPENSES>
<LOSS-PROVISION>
<INTEREST-EXPENSE>
<INCOME-PRETAX>
<INCOME-TAX>
<INCOME-CONTINUING>
<DISCONTINUED>
<EXTRAORDINARY>
<CHANGES>
<NET-INCOME>
<EPS-PRIMARY> .11 .03 .14 .36
<EPS-DILUTED> .11 .03 .11 .36
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED EARNINGS PER SHARE INFORMATION TO REFLECT THE
FINANCIAL ACCOUNTING STANDARDS BOARD'S ADOPTION OF NEW STANDARDS UNDER SFAS 128
REGARDING SELECTED QUARTERLY FINANCIAL DATA (REPLACING "PRIMARY" AND "FULLY
DILUTED" WITH "BASIC" AND "DILUTED").
</LEGEND>
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-END> SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995 DEC-31-1994
<CASH>
<SECURITIES>
<RECEIVABLES>
<ALLOWANCES>
<INVENTORY>
<CURRENT-ASSETS>
<PP&E>
<DEPRECIATION>
<TOTAL-ASSETS>
<CURRENT-LIABILITIES>
<BONDS>
<COMMON>
<OTHER-SE>
<TOTAL-LIABILITY-AND-EQUITY>
<SALES>
<TOTAL-REVENUES>
<CGS>
<TOTAL-COSTS>
<OTHER-EXPENSES>
<LOSS-PROVISION>
<INTEREST-EXPENSE>
<INCOME-PRETAX>
<INCOME-TAX>
<INCOME-CONTINUING>
<DISCONTINUED>
<EXTRAORDINARY>
<CHANGES>
<NET-INCOME>
<EPS-PRIMARY> .10 .08 .08 .03 (.23)
<EPS-DILUTED> .10 .08 .08 .03 (.23)
</TABLE>
