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, 1998
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.
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(Name of small business issuer in its charter)
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<S> <C>
Delaware 23-2257354
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
6400 Congress Avenue, Suite 200A, Boca Raton, FL 33487
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(Address of principal executive offices) (Zip Code)
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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
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(Title of class)
Series IV Common Stock Purchase Warrant
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(Title of class)
Preferred Share Purchase Right
to Purchase 1/1,000th of a share of
Series A Junior Participating Preferred Stock, par value $0.01 per share
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(Title of class)
Check whether the issuer (1) 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
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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
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Company's revenues for the year ended December 31, 1998 were $56,968,007.
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As of March 9, 1999, the aggregate market value of common stock held
by non-affiliates of the registrant was approximately $12,495,000. In addition,
as of March 9, 1999, the aggregate market value of Series IV Common Stock
Purchase Warrants held by non-affiliates of the registrant was approximately
$2,816,000.
As of March 9, 1999, there were 4,783,326 shares of the issuer's
common stock and 3,900,000 of the issuer's Series IV Common Stock Purchase
Warrants outstanding.
Transitional Small Business Disclosure Format: Yes No /X/
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Certain information set forth in this Annual Report 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
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Questron Technology, Inc. (the "Company" or "Questron") provides
inventory logistics management programs and is a value-added distributor of
fasteners and other small parts (commonly referred to as "C" inventory items)
sold to original equipment manufacturers ("OEMs") through its wholly-owned
subsidiary, Questron Distribution Logistics, Inc. ("QDL") (formerly named Quest
Electronic Hardware, Inc.). The Company is also a master distributor of
fasteners through its subsidiary Integrated Material Systems, Inc. ("IMS") and a
distributor of lithium batteries through its subsidiary Power Components, Inc.
("PCI").
Effective as of July 1, 1998, QDL acquired 100% of the stock of
Fas-Tronics, Inc., a privately owned distributor of fasteners and other C
inventory items located in Forth Worth, TX, with a primary focus on commercial
aerospace customers, particularly airplane seat manufacturers. Effective as of
July 1, 1998, QDL also acquired 100% of the stock of Fortune Industries, Inc.
("Fortune"), a privately owned distributor of fasteners and other C inventory
items located in Forth Worth, TX, with a primary focus on aerospace defense
contractors. Effective as of December 1, 1998, QDL acquired the business and net
operating assets of AFCOM, Inc. ("AFCOM"), a privately owned distributor of
fasteners and other C inventory items headquartered in Orlando, FL, with
branches in Melbourne, FL and Atlanta, GA.
Business
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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 more than 6,000 customers in the military
aerospace, industrial products, commercial aerospace, semiconductor fabrication
equipment, consumer products, telecommunications, medical electronics contract
manufacturing and computer and computer networking manufacturing industries.
Fasteners and other C inventory items include screws, bolts, nuts,
washers, pins, rings, fittings, springs, spacers, standoffs, plastic components,
cable ties and accessories, drawer slides, connectors and similar 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
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maintenance and repair operations ("MRO") market accounts for 13% of the market,
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 other C inventory items, high quality services, professional
management team, and strong competitive position will allow it to be one of the
leading consolidators.
Fasteners and other C inventory items 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 other C inventory items internally is
relatively high due to: (i) the large number of fasteners and other C inventory
items 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 other C inventory
items. The Company believes that OEMs are increasingly outsourcing their
fastener and other C inventory items 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 other C inventory items, 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 16% per year over the five years ended December 31, 1998, adjusted
for 1997 and 1998 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
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Companies operating in the fastener and other C inventory items
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 other C inventory items distribution market is similar
to most industrial distribution markets. Fasteners and other C inventory items
are purchased from both domestic and overseas manufacturers and sold to both
domestic and overseas customers. The majority of these fasteners and other C
inventory items 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 other C inventory items used for general assembly. QDL provides a
wide range of fasteners and other C inventory items to meet the specialized
needs of its OEM customers.
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Customer demand for inventory management services and electronic data
interchange has required industry participants to invest in the development and
utilization of sophisticated computer 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 providers of
inventory logistics management programs and a value-added distributor of
fasteners and other C inventory items, focused primarily on the needs of OEMs.
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 strives to become integrated
into its customers' internal manufacturing processes and be 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 its belief that its workforce provides an advantage over other
distributors of fasteners and other C inventory items. QDL continually reviews
its training and operating practices at each of its subsidiaries to insure the
highest standards of quality and customer service are maintained throughout its
operations. As part of its commitment to superior quality and customer service,
the Company is SSQA compliant (SEMATECH Quality Standard) and ISO 9002
(International Standards Organization) certified or compliant, 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 that
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 new business as well as additional business from
existing customers that operate nationwide.
The Company's integration of its acquired businesses 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
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benefit plans. All of the businesses acquired prior to 1998 are fully integrated
and operating through an on-line, real-time computer system.
The Company pursued an aggressive acquisition program in 1997 and
1998, having completed seven acquisitions during that period. As described
above, the Company believes that the fastener and other C inventory items
distribution industry is highly fragmented and in the early stages of
consolidation. The Company intends to continue to attempt to acquire other
distributors of fasteners and other C inventory items 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 other C
inventory items 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 and 1998 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 are in various stages and, other than the definitive agreement dated
as of March 11, 1999 with respect to the acquisition of Metro Form Corporation,
d.b.a. Olympic Fasteners and Electronic Hardware ("Olympic"), none have as yet
resulted in any binding agreements, understandings, arrangements or commitments
with respect to any such potential acquisitions. The purchase price for Olympic,
which had revenues of $10 million in 1998, is $9 million, consisting of $8
million in cash and the balance in shares of Questron common stock. Additional
purchase consideration of up to $1 million may be paid based on future operating
results. The acquisition is subject to financing and other customary closing
conditions. 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 acquisition candidate and the ability
of the candidate to provide entry to new markets or OEM customers.
Products
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The Company distributes over 100,000 different fasteners and other C
inventory items, generally denoted by a unique standard identifier known as a
Stockkeeping Unit ("SKU"). The SKUs fall into two general categories: fasteners
and other C inventory items.
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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 other C inventory items commonly
referred to as "C" inventory items used by OEMs to manufacture their products.
These items include spacers, standoffs, inserts, clamps, 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
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In connection with its sale of fasteners and other C inventory items,
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 outsourcing of such functions. Such cost reductions are achievable
as a result of 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 other C inventory items
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 other C inventory
items 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
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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 certified or
compliant (International Standards Organization), becoming certified as required
by its customers on a branch location basis.
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
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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 acquisitions 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
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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 other C inventory items; (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.
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Customers
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QDL sells fasteners and other C inventory items to more than 6,000
customers. These customers include leading military aerospace, industrial
products, commercial aerospace, semiconductor fabrication equipment, consumer
products, telecommunications, medical electronics, contract manufacturing and
computer and computer networking manufacturing companies. QDL's contracts with
its customers for the supply of fasteners and other C inventory items vary in
length up to five years and may be canceled by either party with proper notice.
QDL accepts returns of fasteners and other C inventory items and issues a credit
in exchange for such returns. Historically, returns have not been of an amount
to materially affect the Company's business. For the year ended December 31,
1998, the Company had reported net sales of $57.0 million (pro forma net sales
of $74.0 million). The ten largest customers accounted for approximately 39% of
QDL's sales in 1998 (on a pro forma basis), with no one customer contributing
more than 11%.
Suppliers
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Over 1,000 suppliers located in the United States and abroad
manufacture the fasteners and other C inventory items sold by QDL. QDL purchases
fasteners and other C inventory items 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. In addition, the Company purchases
products from foreign suppliers when favorable pricing is available
(approximately 3% of purchases for 1998 were from foreign suppliers).
QDL routinely reviews its supplier base and believes that it is able
to purchase fasteners and other C inventory items 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 20% of QDL's purchases in 1998, with the largest supplier
accounting for approximately 4%.
Patent, Trademark, Copyright and Proprietary Rights
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The Company received registrations from the United States Patent and
Trademark Office in 1997 for the marks "Questron Technology, Inc.(R)" and "Quest
Electronic Hardware, Inc.(R)" relating to certain of the Company's services. The
Company does not have any patent or copyright applications pending.
Management Information System
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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,
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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
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The Fastener Quality Act of 1991, as amended (the "Fastener Act"),
was signed into law on November 16, 1990 and was subsequently amended in March
1996 and August 1998. Due to a lack of accredited testing facilities required
under the Fastener Act and other factors, the implementation date has been
delayed several times. 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 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 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.
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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 37% of
IMS's 1998 sales. IMS purchases fasteners principally from Taiwan and Japan, as
well as domestic sources. In 1998, IMS's two largest suppliers accounted for
approximately 19% and 9%, respectively, of its total purchases.
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Power Components, Inc.
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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
1998 sales. PCI purchases product from international and domestic manufacturers
of batteries, with one such supplier accounting for approximately 41% of its
1998 purchases.
Employees
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At March 15, 1999, the Company had 266 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
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Limited Combined Operating History; Recent Acquisitions.
The Company has grown significantly in the past two years primarily
as a result of acquisitions. The Company has acquired seven companies since
March 1997. As a result, the Company's historical results of operations are not
necessarily indicative of future results. Prior to the acquisition of these
companies, they were each private companies with different objectives,
management information systems and accounting and other standards. Consequently,
there is limited information about the performance of the acquired companies
under the Company's management which is available for evaluation.
The acquisitions have been accounted for using the purchase method of
accounting and the total purchase prices have been allocated to the assets and
liabilities acquired, based upon their respective fair values. As a result, the
Company has significant non-cash charges for amortization expense related to
goodwill. In addition, the Company has substantial indebtedness in connection
with the acquisitions for which it will have significant debt service
requirements.
Risks Related to the Company's Acquisition Strategy.
A disciplined acquisition program is part of the Company's business
strategy. The success of this program in the future will depend upon finding
strategic acquisition candidates that would expand and complement the Company's
business at attractive prices. The Company expects to face competition for
acquisitions, which may limit the number of acquisition opportunities and lead
to higher acquisition prices. The Company can not assure that it will be able to
identify additional acquisition candidates on terms acceptable to the Company or
in a timely manner, enter into acceptable agreements or close any such
transactions. In addition, the Company may not be able to integrate newly
acquired businesses successfully without unplanned costs, delays or other
difficulties and the Company may not be able to achieve its targeted synergies
and cost savings.
The Company may finance future acquisitions through internally
generated funds, bank borrowings, public offerings or private placements of
equity or debt securities, or a combination of these
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sources. The Company may not be able to obtain any required additional financing
on terms that are acceptable to the Company and the Company may be limited in
its ability to issue equity if the Company's common stock does not maintain a
sufficient market value or if potential acquisition candidates are unwilling to
accept common stock in exchange for the sale of their businesses. The Company's
inability to obtain the necessary funds to make such acquisitions may have a
material adverse effect on its ability to effect its acquisition strategy and to
continue to grow its business.
Challenges of Business Integration -- The Company May Not be Able to Integrate
its Acquired Businesses Successfully.
Since March 1997, the Company has acquired seven businesses. Although
all acquisitions are subject to risks, the high number and aggregate size of the
acquisitions the Company has completed since March 1997 subject the Company to
greater risks than usual. In particular, successful integration of these
companies, or any other companies that the Company may acquire in the future,
into the Company's business presents the Company with significant challenges.
The process of integration could divert management's attention from its daily
operation, require the implementation of enhancements to the Company's
operational and financial systems, require additional management, operational
and financial resources, and place significant demands on the Company's
management and infrastructure. Successful integration will also depend on a
number of other factors, including the Company's ability to maintain the quality
of services it provides to its customers and the recruitment, motivation and
retention of qualified personnel. The Company can not assure that it will be
able to succeed with such integration or effectively manage newly acquired
businesses or that such business will perform as expected. In addition, the
Company can not assure that the acquired companies will not have additional
liabilities or contingencies that the Company did not anticipate at the time of
the acquisitions.
The Company Faces the Pressures of Competitive Industries.
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 have greater financial resources and
technical expertise than the Company. In addition, these competitors may have
greater established customer relationships with certain customers for whose
business the Company competes and may offer lower prices on competing products.
Furthermore, the potential growth of the market in which the Company competes
may attract new participants as they perceive opportunities. The Company can not
assure that it will be able to compete successfully with its existing or future
competitors.
The Company Depends on Significant Customers.
For the year ended December 31, 1998, on a pro forma basis, the
Company's ten largest customers accounted for approximately 39% of its sales,
with no one customer contributing more than 11%. These sales arrangements are
terminable upon short notice and none of these customers is obligated to
continue to use the Company's services, or acquire the Company's products, at
all or at existing prices. The dependence on significant customers subjects the
Company to significant financial risk in the operation of its business. The
Company's ability to maintain these customer relationships and build new
customer relationships is dependent, among other things, upon the Company's
ability to
11
<PAGE>
maintain high quality standards and competitive prices. The Company cannot
assure that it will maintain these relationships. The loss of any of these
significant customers or any other significant customer for any reason or a
reduction in business with a significant customer for any reason could result in
a material loss of revenue or otherwise have a material adverse effect on the
Company's business. In addition, from time to time, certain of the Company's
customers may seek to implement competitive bidding and other procedures
designed to reduce prices for fasteners and other C inventory items, which may
lower the Company's gross margins on sales to these customers. The Company will
seek to mitigate any adverse impact to gross margins in the future through its
own cost reduction initiatives and by providing additional services to these
customers, however, the Company can not assure the timing or the extent to which
such mitigating efforts will offset lower margins, if at all.
Customer Industry Risks and Cyclicality.
The Company sells a significant number of its products to customers
in industries that experience fluctuations in demand because of changes in
economic conditions, consumer demand and other factors beyond its or their
control. As a result, the Company may not be able to increase or maintain its
level of sales in periods of economic stagnation or downturn in the Company's
customers' industries. The Company expects that the cyclicality of the
industries could adversely affect its sales and therefore potentially have a
material adverse effect on the Company's financial condition, liquidity and
results of operations.
The Company Depends on its Information Systems.
The Company operates a management information system that is used to
purchase, monitor and allocate inventory throughout its facilities. The Company
believes that its information system is an integral part of its business and
certain growth strategies are contingent upon such system. The Company depends
heavily on its management information system to provide real-time information
used in monitoring progress relating to sales activities, credit approval,
inventory levels, stock balancing, vendor returns and order fulfillment. Any
disruption in the operation of the Company's information system (including,
without limitation, as a result of Year 2000 issues) could have a material
adverse effect on the Company's financial condition, liquidity and results of
operations. See "Risk Factors - Year 2000 Issues May Negatively Affect the
Company."
The Company Depends on Third-Party Suppliers and Manufacturers.
The Company purchases substantially all of its products, principally
fasteners and other C inventory items, from third-party suppliers and
manufacturers. Although the Company believes there are numerous available
sources of supply for most of its products, the Company is subject to the risk
of price fluctuations, different product performance and quality, and periodic
delays in the delivery of certain specialty fasteners and other products.
The Company Depends on Key Management.
The Company's success depends largely upon the efforts, abilities and
expertise of its executive officers and other senior managers, including Dominic
A. Polimeni, its Chairman, President and Chief
12
<PAGE>
Executive Officer, as well as the executive management of its operating units.
In addition, the Company may depend on the management of any significant
business the Company acquires in the future. The loss of the services of one or
more of such individuals could have a material adverse effect on the Company's
financial condition, liquidity and results of operations.
Management Control.
Management owns approximately 39% of the Company's outstanding shares
of common stock. Accordingly, management has the ability to direct many of the
Company's affairs and actions, including actions requiring the approval of our
stockholders.
Government Regulation; Fastener Act.
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. In addition, the Fastener Act regulates the
manufacture, importation and distribution of certain high-grade industrial
fasteners in the United States. (See "Business - Government Regulation"). While
the implementation date of the Fastener Act has been delayed, the act requires
certain testing, certification and recordkeeping requirements by the
manufacturers, importers and distributors of such fasteners. As a result, the
Company and other fastener suppliers are required to maintain records and
product tracking systems. The Company has tracking and traceability systems,
which, to date, have not materially increased expenses. However, the Company can
not assure that future regulations will not result in materially increased costs
for the Company.
Year 2000 Issues May Negatively Affect the Company.
The Company is in the process of evaluating and resolving the
potential impact of the Year 2000 problem on its computerized information
systems and other infrastructure that contain embedded technology. The Year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000, which could result in miscalculations or system
failures.
The Company believes that substantially all of its computerized
information systems and other infrastructure that contain embedded technology
are already Year 2000 ready or will be modified so as to become Year 2000 ready
by mid-1999. Based on preliminary information, the incremental costs of
addressing potential problems are not currently expected to have a material
adverse impact on the Company's financial condition or results of operations.
However, if the Company, its customers or its vendors are unable to resolve such
processing issues in a timely manner or have not identified all of the Year 2000
associated issues, the Company's ability to conduct business may be materially
adversely affected and its financial condition, liquidity and results of
operations could be materially adversely impacted.
The Company is currently evaluating its need to create contingency
plans in the event that the Company does not complete all of its remediation
plans in a timely manner or that third parties who
13
<PAGE>
provide the Company with goods or services fail to address their Year 2000
issues appropriately. These plans may include identifying alternative suppliers
and service providers, depletion of safety stocks of inventory and
identification of important areas of record retention. The Company is presently
formulating a survey and plan for working with key third-parties to understand
their ability to continue providing services and products through the change to
2000.
14
<PAGE>
Item 2. Description of Properties.
The Company is headquartered at 6400 Congress Avenue, Suite 200A,
Boca Raton, Florida 33487, operating from eighteen well-equipped modern
facilities, all but one of which are leased, as follows:
Boca Raton, Florida (Company headquarters) - occupies 3,634 square
feet of office space under a lease expiring May 31, 2000, which space
is approximately 90% utilized;
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;
Atlanta, Georgia - occupies 2,780 square feet of warehouse space
under a lease expiring January 31, 2000, which space is
approximately 60% 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 750 square feet of warehouse space
under a month-to-month lease, which space is approximately 90%
utilized;
Colorado Springs, Colorado - occupies 1,000 square feet of office
space and 4,000 square feet of warehouse space under a lease, which
expired November 30, 1998 (now month-to-month), 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 approximately 65% utilized;
Forth Worth, Texas - occupies 10,000 square feet of office space and
12,000 square feet of warehouse space under a lease expiring June 30,
2000, which space is approximately 95% utilized;
Forth Worth, Texas - occupies 10,000 square feet of office space and
15,000 square feet of warehouse space under a lease expiring February
28, 2000, which space is approximately 90% utilized;
Hialeah, Florida - occupies 750 square feet of warehouse space under
a month-to-month lease, which space is approximately 90% utilized;
Melbourne, Florida - occupies 1,500 square feet of office space and
1,000 square feet of warehouse space under a lease expiring January
5, 2000, which space is approximately 90% utilized;
15
<PAGE>
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;
Orlando, Florida - occupies 4,000 square feet of office space and
6,000 square feet of warehouse space in a facility owned by the
Company, which space is approximately 70% 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 2,600 square feet of office space
and 19,300 square feet of warehouse space under a lease expiring
February 29, 2004, which space is approximately 50% 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;
W. Conshohocken, Pennsylvania - occupies 2,200 square feet of office
and 3,800 square feet of warehouse space under a month to month
lease, which space is approximately 66% 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.
Total rent expense for the Company amounted to $639,601 in 1998. The
aggregate minimum rental commitments under all non-cancelable operating leases
for the year ending December 31, 1999 is $941,182.
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.
16
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to shareholders for a vote during the
quarter ended December 31, 1998.
17
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's common stock is included for quotation on the NASDAQ
SmallCap Market under the symbol "QUST".
The following table sets forth the reported high and low bid
quotations 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
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
1998:
First Quarter $ 9.00 $ 6.13
Second Quarter $ 9.88 $ 6.38
Third Quarter $ 8.25 $ 3.75
Fourth Quarter $ 6.22 $ 3.50
On March 9, 1999, the Company's common stock as reported on the
NASDAQ SmallCap Market system was $4.50 (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, including restrictions under the Company's loan
and security agreement with its lenders.
The Series B Preferred Stock was entitled, as and when declared by
the board of directors, to receive, in respect of the two years before the
Series B Preferred Stock was 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.
18
<PAGE>
On June 11, 1998, the shareholders and the board of directors (the
"Board") of the Company approved a proposed amendment to the Certificate of
Designation of the Company (the "Amended Certificate of Designation") to
accelerate the conversion date (the "Conversion Date") of the Company's Series B
Convertible Preferred Stock, par value $.01 per share ("Series B Preferred
Stock") into common stock, par value $.001 per share ("Common Stock"). The Board
established July 2, 1998 as the Conversion Date upon which the Series B
Preferred Stock would be automatically converted into shares of Common Stock,
together with the payment of the full annual dividend that would have been
payable with respect thereto in 1999.
On June 30, 1998, the Company filed the Amended Certificate of
Designation with the Secretary of State of the State of Delaware, providing that
(i) each share of the Series B Preferred Stock would automatically convert as of
the close of business on the Conversion Date, without any action on the part of
the holder thereof or the Company, into 1.4375 shares of Common Stock; (ii)
holders of the Series B Preferred Stock would be entitled, when and as declared
by the Board, to receive an annual dividend per share equal to $0.115 per share;
(iii) such dividends would accrue from March 4, 1997 and would be payable on
March 4, 1998 and on the Conversion Date (payable with respect to a full year),
in cash or shares of Common Stock of the Company; (iv) the aforementioned
dividends would be cumulative and no dividends would be paid or set apart in
respect of the Common Stock or any other class of securities which ranks junior
to the Series B Preferred Stock unless and until all accrued and unpaid
dividends upon such Series B Preferred Stock had been paid or set apart in full;
and (v) no interest would accrue with respect to dividends in arrears.
On July 2, 1998, each share of Series B Preferred Stock was converted
into Common Stock at a rate of 1.4375 shares of Common Stock and received $0.115
per share in Common Stock for the related dividend.
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.
19
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
- - ---------------------
For the year ended December 31, 1998 compared with 1997.
- - --------------------------------------------------------
The results of operations through December 31, 1998 include the
operating results of the Company's inventory logistics management business,
Questron Distribution Logistics, Inc. ("QDL") (formerly named Quest Electronic
Hardware, Inc.), its master distribution of fasteners business, Integrated
Material Systems, Inc. ("IMS") and its lithium battery distribution business,
Power Components, Inc. (PCI"). QDL includes the operating results of Webb
Distribution ("Webb"), and California Fasteners, Inc. ("Calfast"), which were
acquired in 1997, and the operating results of Fas-Tronics, Inc.
("Fas-Tronics"), Fortune Industries, Inc. ("Fortune") and AFCOM, which were
acquired in 1998.
The Company's revenues for the year ended December 31, 1998 amounted
to $56,968,007, which represent a record level of revenues for the Company,
compared with $25,710,194 for the year ended December 31, 1997. The significant
growth in the Company's revenues in 1998 is primarily attributable to the full
year results of Calfast in 1998 and the acquisitions of Fas-Tronics and Fortune
during the year, as well as the internal growth of the other QDL branches and
the opening of a new QDL branch during the second quarter of 1998. Revenues
associated with Calfast, Fas-Tronics and Fortune included in the Company's
results for the year ended December 31, 1998 amounted to $37,914,140, compared
with revenues associated with Calfast of $12,239,655 included in the Company's
results for the year ended December 31, 1997.
The Company's operating income was $8,279,478 for the year ended
December 31, 1998, compared with operating income of $3,302,403 for the prior
year. The increase in operating income for the year ended December 31, 1998
compared with the prior year is primarily due to the increased operating income
attributable to the acquired businesses, as well as internal growth. In
addition, operating income as a percentage of sales improved to 14.5% for the
year ended December 31, 1998 from 12.8% for the year ended December 31, 1997,
reflecting a 1.7 percentage point improvement in operating expenses as a
percentage of sales. This improvement is attributable to the successful
integration of the 1997 acquired businesses and the resultant cost savings from
the combination of these businesses with the Company.
Interest expense for the years ended December 31, 1998 and 1997
amounted to $2,709,979 and $513,406, respectively. The increase in interest
expense principally reflects the cost of increased borrowings associated with
the acquisition of Calfast in September 1997 and the acquisitions of Fas-Tronics
and Fortune as of July 1, 1998, as well as borrowings associated with QDL's
working capital needs.
The provision for income taxes for the years ended December 31, 1998
and 1997, respectively, reflects a federal income tax provision at an effective
rate of 35% and 35.1%, respectively, and a state income tax provision at an
effective rate of 6% and 6.2%, respectively, for the states in which the Company
does business.
20
<PAGE>
Net income for the year ended December 31, 1998 amounted to
$3,286,004, compared with net income of $1,637,141 for the prior year. This
improvement reflects the increased operating income attributable to the acquired
businesses and continued internal growth, partially reduced by increased
corporate expenses, interest expense, and income taxes.
Net income per share and net income per diluted common share reflect
deductions for preferred stock dividends, including imputed, non-cash dividends
associated with the issuance of the preferred stock. The preferred stock
converted into common stock on July 2, 1998, causing the acceleration of the
amortization of the imputed dividend as a one-time, non-cash dividend. As a
result of this conversion, the common stock into which the preferred stock
converted (1,653,125 shares of common stock) is included for two quarters in the
weighted average number of common shares outstanding for the year ended December
31, 1998. The effect of this one-time, non-cash dividend is anti-dilutive,
accordingly, the presentation of net income per diluted common share is
presented on the face of the income statement as the same amount as net income
per common share. Excluding the one-time, non-cash preferred stock dividend, net
income per diluted common share was $.70 for the year ended December 31, 1998.
Liquidity and Capital Resources
- - -------------------------------
At December 31, 1998, the Company had $229,285 in cash and cash
equivalents, compared to $875,080 as of December 31, 1997. As of December 31,
1998, the Company had working capital of $22,627,028, compared with working
capital of $9,046,826 as of December 31, 1997.
For the year ended December 31, 1998, the net cash used in the
Company's operating activities amounted to $3,067,063, principally reflecting
the increases in inventories and receivables, which working capital requirements
were funded in part by the profits of the Company and the increases in accounts
payable and income taxes payable.
For the year ended December 31, 1998, the net cash used in the
Company's investing activities amounted to $24,398,544, including $23,472,714 of
net cash consideration paid in connection with the acquisitions of Fas-Tronics,
Fortune, and AFCOM and $600,000 net cash consideration paid in connection with
the deferred purchase price of Calfast. The Company also had capital
expenditures of $325,830 for the acquisition of fixed assets. The Company does
not have significant commitments for capital expenditures as of December 31,
1998 and no significant commitments are anticipated for the next twelve months.
For the year ended December 31, 1998, the net cash provided by the
Company's financing activities amounted to $26,819,812, which consists of
$30,000,000 of bank financing associated with the acquisitions of Fas-Tronics
and Fortune and the refinancing of existing bank debt, a $5,000,000 note payable
to AFCOM, Inc. (subsequently paid with proceeds from bank borrowings), as well
as $5,294,519 of bank borrowings under the Company's revolving credit facility,
reduced by long-term debt principal payments of $9,583,334, revolving facility
repayments of $1,425,000, fees and expenses associated with the bank financing
of $2,193,973, principal payments of $79,085 on various capital
21
<PAGE>
leases, payments of $37,744 in respect of the exercise of put options and
principal payments of $155,571 on notes issued for acquired businesses.
In connection with the acquisitions of Fas-Tronics and Fortune, the
Company entered into a $45,000,000 Loan and Security Agreement with its lenders
providing for term debt of $30,000,000 and a revolving facility of $15,000,000.
At December 31, 1998, $5,294,519 was outstanding under the revolving facility.
Of the remaining amount of the $15,000,000 revolving facility, $9,171,885 was
available at December 31, 1998 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 with a minimum rate of interest of 9% per annum.
As of March 9, 1999, the interest rate under the revolving facility was 9%. In
connection with its acquisition of AFCOM, the Company entered into an amendment
to the Loan and Security Agreement in February 1999. The amendment increased the
credit facility to $51,000,000, providing for an additional term loan amount of
$5,000,000 and an increase in the revolving facility to $16,000,000. In order to
secure the obligations of the Company and its subsidiaries under the revolving
facility and the related term loan facility of 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.
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 additional potential acquisition opportunities
are at various stages of consideration and evaluation, none is at any definitive
stage at this time, other than the definitive agreement dated as of March 11,
1999 with respect to the acquisition of the business and assets of Metro Form
Corporation, d.b.a. Olympic Fasteners and Electronic Hardware ("Olympic"). The
purchase price for Olympic, which had revenues of $10 million is 1998, is $9
million, consisting of $8 million in cash and the balance in shares of Questron
common stock. Additional purchase consideration of up to $1 million may be paid
based on future operating results. The acquisition is subject to financing and
other customary closing conditions. Management believes that its working
capital, funds available under its credit agreement, and funds generated from
operations will be sufficient to meet its obligations through 1999, exclusive of
cash requirements associated with any business acquisitions.
Readiness for Year 2000 Compliance
- - ----------------------------------
The Year 2000 presents potential concerns for business and consumer
computing. The consequences of this issue may include systems failures and
business process interruption. It may also include additional business and
competitive differentiation. Aside from the well-known calculation problems with
the use of 2-digit date formats as the year changes from 1999 to 2000, the Year
2000 is a special case leap year and in many organizations using older
technology, dates were used for special programmatic functions.
The Year 2000 issue may affect the Company's internal systems,
including information technology ("IT") and non-IT systems. While the Company's
IT system is prepared to handle all dating implications associated with the new
millennium, the Company's management is presently engaged in
22
<PAGE>
an ongoing assessment of the readiness of all its systems for handling the Year
2000. Although the assessment is still underway, management currently believes
that it will be successful in identifying and resolving any potential
deficiencies in its non-IT systems with respect to the Year 2000 issue by June
1999 and that all such material systems will be compliant by the Year 2000 and
that the cost to address the issues is not material. Nevertheless, the Company
expects to assess its need to create contingency plans during 1999 for certain
internal systems in the event management determines that such contingency plans
may become warranted.
All organizations dealing with the Year 2000 issue must address the
effect this issue will have on their third-party supply chain. The Company plans
to also undertake steps to identify whether its vendors have sufficiently
identified and are taking steps to address the Year 2000 issue. Management is
presently formulating a survey and plan for working with key third-parties to
understand their ability to continue providing services and products through the
change to 2000. The Company will work directly with its key vendors,
distributors, and resellers, and coordinate its action with respect to the Year
2000 issue with them, if necessary, to avoid any business interruptions in 2000.
For these key third-parties, contingency plans may be required.
The Company's management believes the impact of the Year 2000 will
not cause any material disruptions in the Company's operations. However, the
impact of such potential disruptions is difficult to discern.
23
<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 subsidiaries as of December 31, 1998, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 subsidiaries at December 31, 1998, and
the consolidated results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
March 1, 1999
24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Questron Technology, Inc.
We have audited the accompanying consolidated statements of income,
changes in shareholders' equity, and cash flows of Questron Technology, Inc. and
its subsidiaries for the year ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated results of
operations of Questron Technology, Inc. and its subsidiaries and their cash
flows for the year 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
25
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 229,285
Accounts receivable, less allowance for
doubtful accounts of $186,256 11,279,876
Other receivables 70,412
Inventories 20,972,593
Other current assets 345,814
--------------
Total current assets 32,897,980
Property and equipment - net 2,042,786
Cost in excess of net assets of businesses acquired,
less accumulated amortization of $1,165,977 37,575,334
Deferred income taxes 2,848,497
Other assets 2,360,656
--------------
Total assets $77,725,253
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,328,023
Accrued expenses 1,415,626
Income taxes payable 1,715,501
Current portion of long-term debt 1,811,802
-------------
Total current liabilities 10,270,952
Deferred income taxes payable 364,639
Long-term debt 39,285,698
-------------
Total liabilities 49,921,289
-------------
Commitments and contingencies
Common stock subject to put option agreement
Shareholders' Equity: 339,697
Common stock, $.001 par value; authorized 20,000,000
Shares; issued 4,795,175 shares 4,795
Additional paid-in capital 39,615,998
Accumulated deficit (11,801,048)
-------------
27,819,745
Less: treasury stock, 11,849 shares of common stock, at cost (355,478)
-------------
Total shareholders' equity 27,464,267
-------------
Total liabilities and shareholders' equity $77,725,253
=============
See Notes to Consolidated Financial Statements.
26
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
------------------- ------------------
Revenue:
Sales $56,968,007 $25,667,245
Fee income -- 42,949
------------------- ------------------
56,968,007 25,710,194
------------------- ------------------
Operating costs and expenses:
Cost of products and services sold 34,319,326 15,486,763
Selling, general & administrative expenses 13,385,018 6,512,757
Depreciation and amortization 984,185 408,271
----------------- ------------------
48,688,529 22,407,791
---------------- ------------------
Operating income 8,279,478 3,302,403
Interest expense 2,709,979 513,406
---------------- ------------------
Income before income taxes 5,569,499 2,788,997
Provision for income taxes 2,283,495 1,151,856
---------------- ------------------
Net income $ 3,286,004 $ 1,637,141
================ ==================
Net income $ 3,286,004 $ 1,637,141
Deduct: Preferred Stock dividend 165,310 99,189
Imputed non-cash Preferred Stock dividend 1,075,988 577,137
---------------- ------------------
Net income used in per common share calculation $ 2,044,706 $ 960,815
================ ==================
Net income per common share $ .60 $ .56
================ ==================
Net income per diluted common share $ .60 $ .47
================ ==================
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Accumulated Treasury
--------------------------- -------------------
Shares Amounts Shares Amounts Paid in Capital Deficit Stock
-------------- ----------- --------- --------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
January 1, 1997 -- $ -- 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 of Webb -- -- -- -- 375,000 -- --
Preferred Stock Offering 1,150,000 11,500 -- -- 5,623,412 -- --
In connection with
the acquisition of IMS -- -- 50,000 50 299,000 -- --
In connection with
the acquisition of PCI -- -- 50,000 50 349,950 -- --
In connection with the
acquisition of Calfast -- -- 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 --
----------- ---------- ------------- ------- ----------- ----------- --------
December 31, 1997 1,150,000 11,500 2,122,439 2,122 33,462,524 (13,845,790) (355,478)
Issuance of securities:
In connection with
the acquisition of
Fas-Tronics: -- -- 421,941 422 1,929,958 -- --
Common stock -- -- -- -- 119,500 -- --
Stock options
In connection with
the acquisition of Fortune -- -- 518,102 518 2,369,798 -- --
In connection with
the acquisition of
the assets of AFCOM -- -- 50,000 50 257,294 -- --
Series B Preferred Stock
dividend -- -- -- -- -- (165,274) --
Payment of Series B
Preferred Stock dividend
in common stock -- -- 35,583 36 165,274 -- --
Imputed non-cash Series B
Preferred Stock dividend -- -- -- -- -- (1,075,988) --
Accretion of Series B
Preferred Stock -- -- -- -- 1,075,988 -- --
Conversion of Series B
Preferred Stock (1,150,000) (11,500) 1,653,125 1,653 (9,847) -- --
Put Agreement exercised
by former shareholders
of Calfast -- -- (6,015) (6) -- -- --
Put Agreement declined
by former shareholders
of Calfast -- -- -- -- 245,509 -- --
Net Income for the Year -- -- -- -- -- 3,286,004 --
December 31, 1998 ----------- --------- ---------- ----------- ------------ ------------- ----------
-- -- 4,795,175 $4,795 $39,615,998 $(11,801,048) $(355,478)
=========== ========= ========== =========== ============ ============= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
QUESTRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,286,004 $ 1,637,141
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 984,185 408,271
Provision for doubtful accounts 26,695 10,702
Recognition of current year income tax benefit of net operating
loss carryforward 344,450 807,053
Change in assets and liabilities:
(Increase) in accounts receivable (3,135,956) (1,265,885)
Decrease in other receivables 7,321 43,323
(Increase) in inventories (7,331,154) (1,456,811)
Decrease in prepaid expenses and other assets 71,243 230,724
Increase in accounts payable 1,178,292 73,587
(Decrease) increase in accrued expenses (194,254) 154,747
Increase (decrease) in income taxes payable 1,514,024 (221,146)
Increase in deferred income taxes payable 182,087 143,329
-------------- ------------
Net cash (used in) provided by operating activities (3,067,063) 565,035
-------------- ------------
Cash flows from investing activities:
Net cash consideration paid for acquired businesses (24,072,714) (12,641,922)
Acquisition of property and equipment (325,830) (187,127)
-------------- ------------
Net cash used in investing activities (24,398,544) (12,829,049)
-------------- ------------
Cash flows from financing activities:
Proceeds from borrowings under revolving facility 5,294,519 1,425,000
Repayment of revolving facilities (1,425,000) (2,158,387)
Proceeds from long-term debt 35,000,000 10,000,000
Repayment of long-term debt (9,583,334) (1,791,666)
Fees and expenses associated with long-term debt financing (2,193,973) --
Payments on capital leases (79,085) --
Payments on exercise of put options (37,744) --
Proceeds from Convertible Preferred Stock Unit Offering -- 6,900,000
Costs associated with Convertible Preferred Stock Unit Offering -- (1,265,188)
Payments on notes issued for acquired business (155,571) (45,065)
--------------- ------------
Net cash provided by financing activities 26,819,812 13,064,694
--------------- ------------
(Decrease) increase in cash and cash equivalents (645,795) 800,680
Cash and cash equivalents at beginning of period 875,080 74,400
--------------- ------------
Cash and cash equivalents at end of period $ 229,285 $ 875,080
================ ============
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $ 2,166,687 $ 398,904
================ ============
Income taxes $ 298,367 $ 27,400
================ ============
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Questron Technology, Inc. ("Questron" or the "Company") provides
inventory logistics management programs and is a value-added distributor of
fasteners and other small parts (commonly referred to as "C" inventory items)
sold to original equipment manufacturers ("OEM's") throughout the United States
through its subsidiary, Questron Distribution Logistics, Inc. ("QDL") (formerly
named Quest Electronic Hardware, Inc.). The Company is also a master distributor
of fasteners through its subsidiary Integrated Material Systems, Inc. ("IMS"),
and a distributor of lithium batteries through its subsidiary Power Components,
Inc. ("PCI"). QDL includes the operations of Comp Ware, Inc., d.b.a. Webb
Distribution ("Webb"), California Fasteners, Inc. ("Calfast"), Fas-Tronics, Inc.
("Fas-Tronics"), Fortune Industries, Inc. ("Fortune") and AFCOM.
Summary of Significant Accounting Policies
Basis of Presentation - In 1998, the Company acquired Fas-Tronics,
Fortune and the business and operating assets of AFCOM, Inc. ("AFCOM") in
transactions accounted for under the purchase method of accounting. In 1997, the
Company acquired Webb, IMS, PCI and Calfast also in transactions accounted for
under the purchase method of accounting. Accordingly, the consolidated financial
statements include the operations of the acquired businesses from their
respective dates of acquisition.
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.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Concentration of Credit Risk - The Company extends credit to its
customers which results in accounts receivable arising from its normal business
activities. The Company does not require collateral from its customers, but
routinely assesses the financial strength of its customers and, based upon
factors surrounding the credit risk of its customers, believes that its
receivable credit risk exposure is limited. Such estimate of the financial
strength of customers may be subject to change in the near term. During
30
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
the years ended December 31, 1998 and 1997, sales to one customer of the Company
amounted to approximately $7,660,392 and $2,967,571, respectively, or
approximately 13.4% and 11.5% of revenue, respectively. Accounts receivable from
this customer amounted to approximately $1,121,125 at December 31, 1998.
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:
Building 30 Years
Furniture and fixtures 7 Years
Computer equipment 5 Years
Office equipment 5 Years
Automobiles 5 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.
Stock Options and Similar Equity Instruments - The Company accounts
for stock options and similar equity instruments (collectively "Options") issued
to employees and directors in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," rather than
the fair value based method of accounting prescribed by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." The exercise price for Options issued to employees and directors
equals or exceeds the fair market value of the Company's common stock at the
date of grant and, accordingly, no compensation expense is recorded. The fair
value method applies to transactions in which an entity issues its equity
instruments to acquire goods and services from non-employees. Those transactions
are accounted for based on the fair value of the
31
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable.
2. Earnings Per Share
Earnings per share is based on the weighted average number of shares
outstanding during the period. Diluted earnings per share reflects the potential
dilution that would occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
The computation of diluted earnings per share does not assume
conversion, exercise, or contingent issuance of securities that would have an
anti-dilutive 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. The following table sets forth
the computation of earnings per share and diluted earnings per share for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------- ---------------
<S> <C> <C>
Numerator:
Net income $ 3,286,004 $ 1,637,141
Less: preferred stock dividends 1,241,298 676,326
------------------- ---------------
Numerator for net income per common share 2,044,706 960,815
Effect of dilutive securities -
Preferred stock dividends 1,241,298 676,326
=================== ==============
Numerator for net income per diluted common
share $ 3,286,004 $ 1,637,141
=================== ===============
Denominator:
Denominator for net income per common share -
weighted-average shares 3,435,162 1,718,062
------------------- ---------------
Effect of dilutive securities:
Options 79,693 125,183
Warrants 374,884 268,164
Convertible preferred stock 828,827 1,345,146
------------------- ---------------
Dilutive potential common shares 1,283,404 1,738,493
------------------- ---------------
Denominator for net income per diluted common
share 4,718,566 3,456,555
=================== ===============
Net income per common share $.60 $.56
==================== ===============
Net income per diluted common share $.60 $.47
==================== ===============
</TABLE>
32
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Net income per common share and net income per diluted common share
for the year ended December 31, 1998 reflect deductions for preferred stock
dividends, including imputed, non-cash dividends associated with the issuance of
the preferred stock. The preferred stock converted into common stock on July 2,
1998, causing the acceleration of the amortization of the imputed dividend as a
one-time, non-cash dividend. As a result of this conversion, the common stock
into which the preferred stock converted (1,653,125 shares of common stock) is
included for two quarters in the weighted average number of common shares
outstanding for the year ended December 31, 1998. The effect of this one-time,
non-cash dividend is anti-dilutive, accordingly, the presentation of net income
per diluted common share is presented on the face of the income statement as the
same amount as net income per common share. Excluding the one-time, non-cash
preferred stock dividend, net income per diluted common share was $.70 for the
year ended December 31, 1998.
3. Acquisitions of Distribution Businesses
Effective as of March 1, 1997, the Company acquired 100% of the stock
of Webb, a privately owned distributor of fasteners and related products. 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"), valued at $375,000, 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.
Effective as of June 1, 1997, the Company acquired 100% of the stock
of IMS, a privately owned master distributor of fasteners. 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; and
(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. In 1998, $51,211 was paid with respect to the first
year's additional cash consideration pursuant to (ii) above. The Company has
accounted for the IMS acquisition using the purchase method of accounting.
Effective as of September 1, 1997, the Company acquired the business
and net operating assets of PCI, a privately owned distributor of lithium
batteries, through a simultaneously acquired wholly-owned subsidiary. The
purchase price for PCI consisted of (i) a cash payment of $900,000 plus the
33
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
assumption of certain liabilities; (ii) 50,000 shares of the Company's common
stock, having a market value of $350,000, issued to the shareholders of PCI;
(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). For the first year, the amount of additional cash
consideration paid amounted to $5,966. The Company has accounted for the
acquisition of PCI using the purchase method of accounting.
Effective as of September 1, 1997, the Company also acquired 100% of
the stock of Calfast, a privately owned distributor of fasteners and related
products. 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. 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.
Of the 125,896 shares, the option to sell 6,015 shares back to the Company was
exercised in 1998 and the option was declined on 39,125 shares and 26,637 shares
in 1998 and 1997, respectively. The deferred purchase price, as amended, is
based upon the earnings before interest and taxes ("EBIT") of Calfast for the
year ended December 31, 1998, up to a maximum of $4,295,559, and is payable as
follows (i) cash payment of $600,000 paid on April 1, 1998; (ii) cash payment of
$450,000 paid on January 4, 1999; (iii) cash payment of 70.9% of the deferred
purchase price of $4,295,559 less $600,000 advanced on April 1, 1998 and
$450,000 advanced on January 4, 1999 up to a maximum additional payment of
$1,995,559 (the "Deferred Cash Consideration"); and (iv) delivery of shares of
the Company's common stock, the value of which shall equal the deferred purchase
price less the Deferred Cash Consideration up to a maximum of $1,250,000. As a
result of the EBIT of the Calfast branches for the year ended December 31, 1998,
the maximum amount of $4,295,559 shall be paid to the former shareholders of
Calfast. The Company accounted for the Calfast acquisition using the purchase
method of accounting.
Effective as of July 1, 1998, the Company acquired 100% of the issued
and outstanding capital stock of Fas-Tronics, a privately owned distributor of
fasteners and related products. The purchase price for Fas-Tronics consisted of
(i) $7,422,803 in cash; (ii) 421,941 shares of the Company's common stock,
valued at $1,930,380; and (iii) up to $4,000,000 (80% in cash and 20% in shares
of the Company's common stock) if Fas-Tronics attains certain earnings targets
for the twelve months ending June 30, 1999. The Company has accounted for such
acquisition using the purchase method of accounting. In addition, the Company
granted to the former shareholders of Fas-Tronics and one key employee options
to purchase an aggregate of 50,000 shares of the Company's common stock at $4.58
for five years.
34
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Effective as of July 1, 1998, the Company also acquired 100% of the
issued and outstanding capital stock of Fortune, a privately owned distributor
of fasteners and related products. The purchase price for Fortune consisted of
(i) $9,830,660 in cash; (ii) 518,102 shares of the Company's common stock,
valued at $2,370,317; and (iii) up to $2,000,000 (81% in cash and 19% in shares
of the Company's common stock) if Fortune attains certain earnings targets for
the year ended December 31, 1998. The Company has not yet determined the amount
of the purchase price to be paid in respect of the attainment of certain
earnings targets for the year ended December 31, 1998. The Company has accounted
for such acquisition using the purchase method of accounting.
Effective as of December 1, 1998, the Company acquired the business
and operating assets of AFCOM, a privately owned distributor of fasteners and
related products. The purchase price for AFCOM consisted of (i) $5,766,718 in
cash; (ii) 50,000 shares of the Company's common stock valued at $257,344; and
(iii) up to $1,500,000 in cash if AFCOM attains certain earnings targets for the
year ending December 31, 1999. The Company has accounted for such 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, Calfast, Fas-Tronics, Fortune
and AFCOM, treating the acquired companies as if they were subsidiaries of the
Company for the full years ended December 31, 1998 and 1997. The pro forma net
income per common share and net income per diluted common share for both 1998
and 1997 assume that all shares of common stock, Series B Preferred Stock and
Series IV Warrants of the Company outstanding as of December 31, 1998 were
outstanding as of January 1, 1997. This pro forma information does not purport
to be indicative of what would have occurred had the acquisitions been completed
as of January 1, 1997 or results which may occur in the future:
35
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997
--------------------- --------------------
<S> <C> <C>
Sales $ 74,399,173 $ 65,512,088
----------------- ----------------
Operating income 11,063,175 8,474,131
----------------- ----------------
Net income $ 3,853,215 $ 2,494,085
================= ================
Net income $ 3,853,215 $ 2,494,085
Less:
Preferred stock dividends 132,252 132,252
Imputed non-cash dividend 872,625 780,500
----------------- ----------------
Net income used in per
common share calculation $ 2,848,338 $ 1,581,333
================= ================
Pro forma net income per common share $ .72 $ .51
================= ================
Pro forma net income per diluted common
share $ .72 $ .51
================= ================
Average number of common shares
outstanding 3,947,073 3,100,633
================= ================
Average number of diluted
common shares outstanding 5,237,236 4,588,060
================= =================
</TABLE>
Pro forma net income per common share and pro forma net income per
diluted common share for the years ended December 31, 1998 and 1997 reflect
deductions for preferred stock dividends, including imputed, non-cash dividends
associated with the issuance of the preferred stock. The preferred stock
converted into common stock on July 2, 1998, causing the acceleration of the
amortization of the imputed dividend as a one-time, non-cash dividend. The
effect of this one-time, non-cash dividend is anti-dilutive, accordingly, the
presentation of pro forma net income per diluted common share is presented above
as the same amount as net income per common share. Excluding the one-time,
non-cash preferred stock dividend, pro forma net income per diluted common share
was $.74 and $.54 for the years ended December 31, 1998 and 1997, respectively.
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:
36
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<S> <C> <C>
1997 Acquisitions:
- - -----------------
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
====================
1998 Acquisitions:
- - -----------------
Current assets:
Accounts receivable $3,429,937
Inventories 5,225,660
Other 1,210,186 $ 9,865,783
----------------------
Property, plant and equipment 802,506
Cost in excess of net assets
of companies acquired 20,994,897
Other assets 8,489
--------------------
31,571,675
Current liabilities:
Accounts payable and accrued
expenses 2,690,325
Other 232,086 2,922,411
---------------------- --------------------
Aggregate consideration paid $ 28,749,264
====================
</TABLE>
4. Long-Term Debt
Long-term debt at December 31, 1998 consisted of the following:
37
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<S> <C>
Term loan A, due in quarterly installments beginning March
31, 1999 through September 24, 2003, with interest
payable monthly at the prime rate plus
1.5% with a minimum rate of 9.5% $ 25,000,000
Term loan B, due September 24, 2003, with
interest payable monthly at the prime rate plus
3% with a minimum rate of 11% 5,000,000
Amount payable to AFCOM, Inc., funded in
February 1999 by term loan C, due
September 24, 2003, with interest payable monthly
at the prime rate plus 4% with a minimum rate of 12% 5,000,000
Revolving facility, due on September 24, 2003,
with interest payable monthly at the prime rate
plus 1.0% with a minimum rate of 9% 5,294,519
Note payable to seller of Webb, due in equal
monthly installments through March 4, 2002,
with interest payable monthly at 10% 264,365
Note payable to sellers of PCI, due in equal monthly
installments with interest payable monthly at 8% 160,000
Other, primarily capitalized leases 378,616
---------------------
41,097,500
Less installments due within one year 1,811,802
---------------------
$ 39,285,698
=====================
</TABLE>
In September 1998, the Company entered into a loan and security
agreement with its lenders. The agreement provides for a $45,000,000 credit
facility consisting of a five-year term loan for $30,000,000 and a $15,000,000
revolving facility. The term loan is divided into two notes: Note A for
$25,000,000 and Note B for $5,000,000. The loan agreement includes a provision
for the calculation of a borrowing base, which determines the amount of
borrowings available under the revolving facility. At December 31, 1998,
$5,294,519 was outstanding under the revolving facility. Of the remaining amount
of the $15,000,000 revolving facility, $9,171,885 was available at December 31,
1998 for future working capital needs. In each case, the minimum interest rate
has been applied to the outstanding balances of the term notes and the revolving
facility as of December 31, 1998. In February 1999, the Company entered into an
amendment to the loan and security agreement. The amendment increased the credit
facility to $51,000,000, providing for a term loan Note C for $5,000,000 and an
increase in the revolving facility to $16,000,000.
In order to secure the obligations under the loan agreement, 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 net worth,
earnings before interest, taxes, depreciation and amortization (EBITDA), the
ratio of senior debt to EBITDA, and the ratio of EBITDA
38
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
to fixed charges 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, including the loan
and security agreement, as amended, for each of the five years in the period
ending December 31, 2003 are: 1999-$1,811,802; 2000-$2,773,024; 2001-$3,638,663;
2002-$4,471,753; and 2003-$28,402,257.
5. Property and Equipment
Property and equipment at December 31, 1998 consisted of the
following:
Land $ 24,000
Building 341,625
Furniture and fixtures 402,966
Computer equipment 1,280,537
Office equipment 381,192
Autos and trucks 208,292
Leasehold improvements 238,261
---------------------
Total 2,876,873
Less: accumulated depreciation 834,087
---------------------
Total $ 2,042,786
=====================
Depreciation expense related to property and equipment for the years
ended December 31, 1998 and 1997 was $367,774 and $167,172, respectively.
6. Shareholders' Equity
As of December 31, 1998, 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.
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.
39
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Each share of the Series B Convertible Preferred Stock were converted
into 1.4375 shares of the Company's common stock on July 2, 1998. 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, has been amortized as an imputed non-cash
dividend to retained earnings over the period from March 1997 through the date
of conversion, July 2, 1998.
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 with 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. In
September 1997, in connection with the acquisitions of PCI and Calfast, 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. In September 1998, in
connection with the acquisitions of Fas-Tronics and Fortune, the Company issued
421,941 shares of common stock to the former shareholders of Fas-Tronics and
518,102 shares of common stock to the former shareholders of Fortune. In
connection with the acquisition of the business and operating assets of AFCOM,
the Company issued 50,000 shares of common stock to the shareholders of AFCOM.
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 through September 2002, an aggregate of 1,203
shares per month valued at $6.275 per share, or $7,547.17 per month. During
1998, the former shareholders of Calfast exercised their options on 6,015
shares.
In 1998, the Company paid a dividend of one preferred share purchase
right on each outstanding share of the Company's common stock. The rights are
exercisable if a person or group acquires 15 percent or more of the outstanding
shares of the Company's common stock or announces or commences a tender offer
for 15 percent or more of such shares. When a person or group acquires such 15
percent, each exercisable right will entitle its holder (other than such person
or group) to purchase, at the right's then-current exercise price (presently
$30), a number of the Company's shares of common stock having a market value of
twice such price. In addition, if the Company is acquired in a merger or other
business combination transaction after a person has acquired 15 percent or more
of the Company's outstanding common stock, each right will entitle its holder to
purchase, at the right's then-current exercise price, a
40
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
number of the acquiring company's shares of common stock having a market value
of twice such price. Prior to the acquisition by a person or group of beneficial
ownership of 15 percent or more of the Company's common stock, the rights are
redeemable for $.01 per right at the option of the board of directors. The
rights do not have voting rights and will expire on November 16, 2008, unless
otherwise extended by the Company's board of directors.
7. Stock Options
1996 Stock Option Plan
Under the terms of the 1996 Stock Option Plan, as amended (the "1996
Plan"), both incentive and nonqualified stock options for an aggregate of
500,000 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 greater than or 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, three equal annual
installments or three years from date of grant.
The transactions under the 1996 Plan during the years ended December
31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------- -----------------------------------
Average Average
Exercise Exercise
Shares Price Shares Price
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Options outstanding at beginning
of year 159,450 $ 6.51 -- $ --
Granted 10,300 4.80 159,450 6.51
Exercised -- -- -- --
Canceled (46,500 ) 6.63 -- --
----------------- ----------------- --------------- -------------
Options outstanding at end of year 123,250 $ 6.32 159,450 $ 6.51
================= ================= =============== =============
Prices per share of options outstanding $4.75- $6.00-
$6.63 $6.63
================= =============
Options exercisable at end of year 65,500 $ 6.53 -- $ --
================= ================= =============== =============
Options available for future grant
at end of year 376,750 90,550
================= ===============
Weighted average remaining
life of options outstanding 8.77 Yrs. 9.70 Yrs
================= ===============
</TABLE>
41
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Performance Options
In connection with certain business acquisitions, the Company agreed
to issue to the former shareholders of such companies acquired, 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
----------------------------- ------------------------------
166,667 $2,500,000
166,667 $3,500,000
631,666 $4,500,000
The Company's pre-tax income for the year ended December 31, 1997 exceeded $2.5
million, accordingly, options to purchase 166,667 shares of common stock of the
Company at an exercise price of $7.75 per share were granted. The Company's
pre-tax income for the year ended December 31, 1998 exceeded $4.5 million,
accordingly, options to purchase 798,333 shares of common stock of the Company
at an exercise price of $4.50 per share shall be granted.
Other Options
In connection with the early termination of a consulting agreement
with one of the former shareholders of an acquired company (see Note 12),
options to purchase a total of 1,160,500 shares of common stock at an average
exercise price of $5.43 were cancelled. In connection with the revised
employment agreement of the chief executive officer of the Company, options to
purchase 1,100,000 shares of common stock at an exercise price of $4.50 were
granted. 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. In connection with
the acquisition of Fas-Tronics, the Company granted to the former shareholders
and one key employee of Fas-Tronics options to purchase an aggregate of 50,000
shares of common stock at an exercise price of $4.50 per share. In connection
with the acquisition of the business of AFCOM, the Company granted to one of the
former shareholders of AFCOM options to purchase 20,000 shares of common stock
at an exercise price of $4.89.
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 of
the Company's common stock may be
42
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
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, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------- -----------------------------------
Average Average
Exercise Exercise
Shares Price Shares Price
---------------- ---------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Options outstanding at beginning
of year 29,000 $ 8.77 12,000 $ 18.01
Granted 33,000 5.72 23,000 6.27
Exercised -- -- -- --
Canceled -- -- (6,000) 17.67
-------------- ------------- --------------- ------------
Options outstanding at end of year 62,000 $ 7.15 29,000 $8.77
============== ============== =============== ===========
Prices per share of options outstanding $3.88- $3.88-
$24.08 $24.08
============= =============
Options exercisable at end of year 62,000 $ 7.15 29,000 $8.77
============== ============= ================ =============
Options available for future grant
at end of year 88,000 121,000
============== ================
Weighted average remaining
life of options outstanding 8.88 Yrs. 9.16 Yrs
============== ================
</TABLE>
Other
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 $1,031,952 and $1,084,887 for the years ended December
31, 1998 and 1997, respectively, and the Company's net income and net income per
share would have been as follows:
43
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------------------- ---------------------
<S> <C> <C>
Net income per common share:
----------------------------
Net income used in per common share
calculation as reported $ 2,044,706 $ 960,815
===================== ======================
Pro forma net income used in per common
share calculation $ 1,435,854 $ 323,986
===================== ======================
Net income per common share as reported $ .60 $ .56
===================== ======================
Pro forma net income per share $ .42 $ .19
===================== ======================
Net income per diluted common share:
------------------------------------
Net income as reported $ 3,286,004 $ 1,637,141
===================== ======================
Pro forma net income $ 2,677,152 $ 1,000,312
===================== ======================
Net income per diluted common share as
reported $ .60 $ .47
===================== ======================
Pro forma net income per diluted common
share $ .42 $ .19
===================== ======================
</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, 1998 and 1997:
December 31, 1998 December 31, 1997
----------------- -----------------
Expected Life (Years) 10 10
Interest Rate 5.61% 6.17%
Annual Rate of Dividends -- --
Volatility 49.51% 106.96%
The weighted average fair value of options at date of grant using the
fair value based method during 1998 and 1997 is estimated at $4.92 and $5.95,
respectively.
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 $76,123 in 1998 and $60,886 in 1997.
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
44
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
participating employees. The Company accrued $75,000 and $68,000 for the years
ended December 31, 1998 and 1997, respectively, 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 $639,601 and
$424,176 was charged to operations for the years ended December 31, 1998 and
1997, respectively. Aggregate minimum rental commitments under all
non-cancelable operating leases approximate $3,964,129 as of December 31, 1998.
Such commitments on annual basis are as follows:
Years ending December 31,
1999 $ 941,182
2000 708,026
2001 499,904
2002 351,607
2003 268,407
2004 123,003
2005 - 2015 ($96,000 per year) 1,056,000
2016 16,000
====================
Total $ 3,964,129
====================
10. Income Taxes
The provision for income taxes for the years ended December 31, 1998
and 1997 consisted of the following:
1998 1997
--------------------- ---------------------
Current
Federal $ 1,450,861 $ 47,969
State 306,097 153,508
-------------------- ---------------------
1,756,958 201,477
-------------------- ---------------------
Deferred
Federal 498,464 930,969
State 28,073 19,410
-------------------- ---------------------
526,537 950,379
-------------------- ---------------------
$ 2,283,495 $ 1,151,856
==================== =====================
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. As a result of the acquisitions completed in 1997,
principally Webb
45
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
and Calfast, and the 1997 and expected future combined results of the Company,
the valuation allowance associated with the deferred tax asset resulting from
net operating loss carryforwards 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 accounted for as a reduction
of cost in excess of net assets of businesses acquired. At December 31, 1998,
the balance of the deferred tax asset relating to the net operating loss
carryforwards is $2,848,497, after having been reduced by $344,450, the amount
of the benefit related to the 1998 utilization of net operating loss
carryforwards. Deferred tax liabilities at December 31, 1998 relate principally
to differences in the book and tax basis of long-lived assets.
A reconciliation of the federal statutory rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997
--------------------- ---------------------
<S> <C> <C>
Federal statutory rate 34.0% 34.0%
State income taxes 6.0% 6.2%
Effect of permanent differences between
financial statement treatment and tax
treatment of certain items, primarily
amortization of goodwill 1.0% 1.1%
================= =================
Effective tax rate 41.0% 41.3%
================== ==================
</TABLE>
As of December 31, 1998, 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
------------------------
2003 $ 1,241,813
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 $ 9,744,751
========================
46
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
11. Fair Value of Financial Instruments
The following table summarizes financial instruments by individual
balance sheet accounts at December 31, 1998:
Carrying
Amount Fair Value
----------------- ------------------
Cash and cash equivalents $ 229,285 $ 229,285
Receivables 11,279,876 11,279,876
Accounts payable 5,328,023 5,328,023
Accrued expenses 1,415,626 1,415,626
Current portion of long-term debt 1,811,802 1,811,802
Long-term debt 39,285,698 39,285,698
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. 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.
12. Related Party Transactions
In 1995, the Company entered into a five-year management advisory and
consulting agreement with Gulfstream Financial Group, Inc. ("Gulfstream"), of
which the chairman, president and chief executive officer of the Company is a
50% owner. Under the terms of such agreement, Gulfstream acted as an advisor and
consultant to the Company principally concerning the expansion of the Company's
business through the identification of potential acquisition candidates. This
agreement was terminated effective March 1, 1999, more than one year prior to
its stated expiration. Fees paid to Gulfstream in connection with the agreement
amounted to $305,000 and $105,000 for the years ended December 31, 1998 and
1997, respectively. Such fees have been included in the costs of the Company's
acquisitions in 1998 and 1997. Gulfstream presently owns 5.4% of the Company's
outstanding common stock.
The Company leases three of its facilities from entities owned by
former stockholders of acquired businesses who are now employees of the Company.
Rent expense of $153,436 associated with these facilities has been charged to
selling, general & administrative expenses for the year ended December 31, 1998.
Management believes that the terms of such leases are no less favorable than
those which otherwise are available in the market for those facilities.
47
<PAGE>
QUESTRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Battle Fowler LLP, the law firm in which Mr. McSherry, a director of
the Company, is a partner, provided legal services to the Company during the
year ended December 31, 1998 and is expected to continue to provide legal
services to the Company in the future.
13. Contingencies
The Company is subject to certain legal proceedings and claims which
have arisen in the ordinary course of its business and have not been finally
adjudicated. In the opinion of management, settlement of these actions, when
ultimately concluded, will not have a material adverse effect on the results of
operations, cash flows or the financial condition of the Company.
48
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
(a) As of October 7, 1998, Moore Stephens, P.C. ("Moore Stephens") was
terminated as the Company's independent accountant. The Company's new
independent accountant is Ernst & Young LLP. The decision to change
independent accountants was approved by the Board of Directors on October
7, 1998.
Moore Stephens' report on the Company's financial statements for each of
the two most recent fiscal years did not contain an adverse opinion or a
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles. During the two most recent fiscal
years preceding Moore Stephens' termination, there were no disagreements
with Moore Stephens on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which would
have caused it to make a reference to the subject matter of the
disagreement in connection with its report. Furthermore, there were no
reportable events during the two most recent fiscal years preceding Moore
Stephens' termination arising from Moore Stephens having advised the
Company (a) that the internal controls necessary for the Company to develop
reliable financial statements do not exist; (b) that information has come
to its attention that has led it to no longer be able to rely on
management's representations or that has made it unwilling to be associated
with financial statements prepared by management; (c)(1) of the need to
expand significantly the scope of its audit or that information has come to
its attention that if further investigated may either (i) materially impact
the fairness or reliability of a previously issued audit report or
underlying financial statements or the financial statements issued or to be
issued covering the fiscal period subsequent to the date of the most recent
financial statements covered by an audit report or (ii) cause it to be
unwilling to rely on management's representations or be associated with the
Company's financial statements and (2) due to Moore Stephens' termination,
it did not so expand the scope of its audit or conduct such further
investigation; and (d)(1) that information has come to its attention that
it has concluded materially impacts the fairness or reliability of either
(i) a previously issued audit report or the underlying financial
statements, or (ii) the financial statements issued or to be issued
covering the fiscal periods subsequent to the date of the most recent
financial statements covered by an audit report (including information
that, unless resolved to its satisfaction, would prevent it from rendering
an unqualified audit report on those financial statements) and (2) due to
Moore Stephens' termination, the issue has not been resolved to its
satisfaction prior to its termination.
(b) Ernst & Young LLP has been appointed by the board of directors as the
new independent accountant to the Company effective October 7, 1998. During
the Company's two most recent fiscal years and the subsequent interim
period prior to Moore Stephens' termination, the Company did not consult
with Ernst & Young LLP regarding the application of accounting principles
to a specified transaction or the type of audit opinion that might be
rendered on the Company's financial statements.
(c) During the interim period from the date of the Company's last audited
financial statements to the date hereof, there were no procedures performed
by Moore Stephens and the Company is not aware of any disagreements with
Moore Stephens on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure.
49
<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.
<TABLE>
<CAPTION>
Name Age Position
- - ---- --- --------
<S> <C> <C>
Dominic A. Polimeni................................... 52 Chairman, President and Chief Executive Officer
Robert V. Gubitosi.................................... 51 Director
Milton M. Adler....................................... 71 Secretary, Treasurer and Director
Frederick W. London................................... 47 Director
William J. McSherry, Jr............................... 51 Director
Douglas D. Zadow...................................... 41 Vice President and President of Questron
Distribution Logistics, Inc.
Philip W. Schwiebert.................................. 60 Vice President and Western Regional Vice
President of Questron Distribution Logistics,
Inc.
James W. Taylor....................................... 54 Vice President and President of Integrated
Material Systems, Inc.
</TABLE>
Each of the directors of the Company holds office until the next
annual meeting of stockholders, or until their successors are elected and
qualified. The Company's by-laws currently provide for not less than five
directors nor more than twelve 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.
50
<PAGE>
Since September 1997, he 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. Mr. Polimeni has also practiced as a Certified Public
Accountant for more than 12 years and was a Partner in the New York office of
Arthur Young & Company. Mr. Polimeni is the brother-in-law of Mr. Gubitosi.
Robert V. Gubitosi has been a Director of the Company since February
1996. 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, Mr. Gubitosi 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. Mr. Gubitosi is the brother-in-law of Mr. Polimeni.
Milton M. Adler has been a Director of the Company since February
1996, Secretary of the Company since October 1993, and Treasurer of the Company
since February 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.
Frederick W. London has been a Director of the Company since April
1998. Mr. London has been Vice President and Deputy General Counsel of
Pinkerton's, Inc., a provider of global security solutions based in Westlake
Village, California, since February 1998. During the period January 1995 through
February 1998, Mr. London was a partner of Gould & Wilkie, a law firm based in
New York City. Prior to that, he was a partner of the law firm of Dunnington,
Bartholow & Miller, also based in New York City.
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. Battle Fowler is
legal counsel to the Company. Prior to July 1991, Mr. McSherry was a partner in
the law firm of Bryan Cave. He is also President and a director of Playtex
Marketing Corporation, a privately-owned corporation, and, up to April 1998,
served as a trustee and as Deputy Mayor of the Village of Larchmont, State of
New York.
Douglas D. Zadow has been a Vice President of the Company and
President of QDL since May 1998 and President of Calfast since May 1995. From
1987 to 1996, he served as President of All-Spec, Inc., a manufacturers
representative of fastener products. In 1986, Mr. Zadow served as President of
the Southwest Fastener Association.
51
<PAGE>
Phillip D. Schwiebert has been a Vice President of the Company and
Western Regional Vice President of QDL since May 1998. From March 1995 to May
1998, he was President of Quest Electronic Hardware, Inc., which is now QDL.
From 1991 to 1995, Mr. Schwiebert served as the Vice President and General
Manager of the Fastener Division of Arrow Electronics, Inc. Prior to that, he
held the position of Vice President of Connector Marketing for Arrow and Vice
President of Marketing for Amphenol, a division of Allied Corporation.
James W. Taylor has been a Vice President of the Company since May
1998 and President of IMS since its inception in 1997. From 1971 to 1996, he
served as Executive Vice President of Semblex Corporation, a manufacturer of
fasteners. From 1992 to 1995, Mr. Taylor served as Chairman of the National
Fastener Distributor Association and, from 1994 to 1997 he served as one of nine
industry representatives on the Public Law Task Force, a federal government
committee for fastener regulation.
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, 1998, all such reports were filed on a
timely basis, other than with respect to Douglas D. Zadow, a Vice President of
the Company and President of QDL, who has filed a corrective Form 5 in March
1999 reflecting sales to the Company of 4,570 shares of common stock from
October 1998 through December 1998, pursuant to a serial-put agreement dated
September 22, 1997, by and between the Company and Mr. Zadow.
52
<PAGE>
Item 10. Executive Compensation.
The following Summary Compensation Table sets forth the compensation
of the named executive for the periods indicated. No other 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 1998 $182,800 -- --
Chairman, President and 1997 $100,000 -- --
Chief Executive Officer 1996 $100,000 -- --
Douglas D. Zadow 1998 $198,000 -- --
Vice President and 1997 $60,000 -- --
President of Questron 1996 -- -- --
Distribution Logistics, Inc.
Phillip D. Schwiebert 1998 $106,000 $62,050 --
Vice President and 1997 $106,000 $63,578 --
Western Regional Vice 1996 $106,000 $56,760 --
President of Questron
Distribution Logistics, Inc.
James W. Taylor 1998 $156,000 -- --
Vice President and 1997 $91,000 -- --
President of Integrated 1996 -- -- --
Material Systems, Inc.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------------------------------
Awards Payouts
-------------------------------------- ----------------
(a) (b) (f) (g) (h) (i)
Restricted Securities
Name and Stock Underlying LTIP All other
Principal Position Year Awards ($) Options/SARs(#) Payouts ($) Compensation ($)
- - -------------------------- ---- ---------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Dominic A. Polimeni 1998 -- 1,100,000 -- --
Chairman, President and 1997 -- -- -- --
Chief Executive Officer 1996 -- -- -- --
Douglas D. Zadow 1998 -- 300,000 -- --
Vice President and 1997 -- -- -- --
President of Questron 1996 -- -- -- --
Distribution Logistics, Inc.
Phillip D. Schwiebert 1998 -- 333,333 -- --
Vice President and 1997 -- 196,667 -- --
Western Regional Vice 1996 -- 30,000 -- --
President of Questron
Distribution Logistics, Inc.
James W. Taylor 1998 -- 90,000 -- --
Vice President and 1997 -- 90,000 -- --
President of Integrated 1996 -- -- -- --
Material Systems, Inc.
</TABLE>
Employment Agreements
Dominic A. Polimeni, Chairman, Chief Executive Officer and President
of the Company, is a party to a five-year employment agreement with the Company
effective July 1, 1998. Under the terms of such employment agreement, the
Company has agreed to compensate Mr. Polimeni a regular salary at the rate of
$250,000 per annum and incentive compensation of up to $100,000 based upon the
attainment of certain operating and earnings targets. Effective March 29, 1999,
options to purchase 1,100,000 shares of common stock of the Company at an
exercise price of $4.50 per share were awarded to Mr. Polimeni pursuant to the
terms of the agreement.
Mr. Polimeni is 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 acted as an advisor and
consultant to the Company. Such advisory and consulting services were directed
principally at the expansion of the Company's business through the
identification of potential acquisition candidates. The agreement was terminated
effective March 1, 1999, more than one year prior to its stated expiration and
options to purchase 1,160,500 shares of common stock at an average exercise
price of $5.43 were cancelled. Fees
54
<PAGE>
paid to Gulfstream in connection with the agreement and the termination thereof
amounted to $305,000 in 1998 and $105,000 in 1997. Pursuant to a shareholders'
agreement, Mr. Polimeni has agreed to share his beneficial ownership of the
options received under his employment agreement with the other 50% shareholder
of Gulfstream.
In connection with the acquisition of Calfast, the Company entered
into a five-year employment agreement with Douglas D. Zadow, a former
shareholder and President of Calfast, effective September 1, 1997. Under the
terms of such employment agreement, the Company has agreed to compensate Mr.
Zadow with a regular salary at the rate of $200,000 per year and incentive
compensation of up to $100,000 based on the attainment of certain operating
goals. In addition, upon the attainment of certain earnings targets for the
Company, Mr. Zadow is entitled to receive options to purchase up to 300,000
shares of common stock at an exercise price equal to the fair market value of
the common stock at the date of grant. Effective March 31, 1999, options to
purchase 300,000 shares of common stock at an exercise price of $4.50 per share
were awarded to Mr. Zadow pursuant to the terms of the agreement.
QDL entered into a five-year employment agreement with Phillip D.
Schwiebert, its Western Regional Vice President, effective March 31, 1995. Under
the terms of such employment agreement, QDL has agreed to compensate Mr.
Schwiebert with regular salary at the rate of $106,000 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 dated
November 8, 1996, upon the attainment of certain earnings targets for the
Company, Mr. Schwiebert is entitled to receive options to purchase up to 500,000
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. Effective March 31, 1999, options to purchase 333,333 shares of
common stock at an exercise price of $4.50 per share were awarded to Mr.
Schwiebert pursuant to the terms of the Exchange Agreement.
In connection with the acquisition of IMS, the Company entered into a
five-year employment agreement with James W. Taylor, the former shareholder and
President of IMS, effective June 1, 1997. 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
addition, upon the attainment of certain earnings targets for the Company, Mr.
Taylor is entitled to receive options to purchase up to 90,000 shares of common
stock at an exercise price equal to the fair market value of the common stock at
the date of grant. Effective March 31, 1999, options to purchase 90,000 shares
of common stock at an exercise price of $4.50 per share were awarded to Mr.
Taylor pursuant to the terms of the agreement.
Option/SAR Grants
Effective March 29, 1999, pursuant to the terms of the Company's
employment agreement with Mr. Polimeni, options to purchase 1,100,000 shares of
common stock at an exercise price of $4.50 per share were awarded to Mr.
Polimeni. Effective March 31, 1999, pursuant to the terms of the Company's
employment agreement with Mr. Zadow, options to purchase 300,000 shares of
common stock at an exercise price of $4.50 per share were awarded to Mr. Zadow.
Pursuant to the terms of the Exchange
55
<PAGE>
Agreement dated November 8, 1996, Mr. Schwiebert was granted options to purchase
30,000 shares of common stock at $3.75 per share. Effective May 31, 1997, Mr.
Schwiebert was granted options to purchase 30,000 shares of common stock at
$6.00 per share, such options vest and become exercisable as to 10,000 shares on
each of the first three anniversary dates of the date of the grant. Pursuant to
the terms of the 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 and effective March 31, 1999, options to
purchase 333,333 shares of common stock at an exercise price of $4.50 per share
were awarded to Mr. Schwiebert. Effective March 31, 1999, pursuant to the terms
of the Company's employment agreement with Mr. Taylor, options to purchase
90,000 shares of common stock at an exercise price of $4.50 per share were
awarded to Mr. Taylor.
For information relating to warrants issued to Gulfstream, a (company
owned by Dominic A. Polimeni and Joan R. Gubitosi) and to Mr. Schwiebert, see
Item 11 - "Exchange Agreement."
Option/SAR Exercises
Set forth below is information concerning exercises of options during
1998 and the year-end value of unexercised options for the persons named in the
Summary Compensation Table:
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities
Shares Underlying Unexercised Value of Unexercised In-the
Acquired Options/SAR's at Fiscal -Money Options/SARs at
on Value Year End (#) Fiscal Year End ($)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- - ----------- --------- -------- ------------------------- ---------------------------
<S> <C> <C> <C> <C>
Dominic A. Polimeni
Chairman, President and
Chief Executive Officer -- -- 1,100,000 / -- --
Douglas D. Zadow
Vice President and
President of Questron
Distribution Logistics, Inc. -- -- 300,000 / -- --
Phillip D. Schwiebert
Vice President and
Western Regional Vice
President of Questron
Distribution Logistics, Inc. -- -- 540,000 / 20,000 $22,500
James W. Taylor
Vice President and
President of Integrated
Material Systems, Inc. -- -- 108,000 / 72,000 --
</TABLE>
56
<PAGE>
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 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, 1998.
The 1994 Director Non-Qualified Stock Option Plan
The 1994 Director Non-qualified Stock Option Plan, as amended (the
"1994 Plan"), was approved by shareholders at the annual meeting held June 11,
1998. The 1994 Plan provides for options to purchase an aggregate of 150,000
shares of the Company's common stock that may be granted to non-employee
directors of the Company.
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. In addition, on September 8, 1998 Mr. McSherry
was awarded options to purchase 20,000 shares of common stock of the Company at
an exercise price equal to the fair market value per share of the common stock
on that date and Mr. London was awarded options to purchase 3,000 shares of
common stock of the Company at an exercise price equal to the fair market value
per share of the common stock on that date. Such options are 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, 62,000 options
have been granted to date at exercise prices ranging from $3.88 per share to
$24.06 per share.
1996 Stock Option Plan
The 1996 Stock Option Plan, as amended (the "1996 Plan"), was
approved by shareholders at the annual meeting held June 11, 1998. 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. The 1996 Plan provides for options to purchase an aggregate of
500,000 shares of the Company's common stock that be granted to employees of the
Company and its subsidiaries.
In 1998 and 1997, the Company granted to its employees options to
purchase 10,300 and 159,450 shares of the Company's common stock, respectively.
In 1998, options to purchase 46,500 shares of the Company's common stock were
cancelled. Options granted 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, three
equal annual installments or three years from date of grant. Accordingly,
pursuant to the terms of the 1996 Plan, a total of 376,750 shares of the
Company's common stock are reserved and available for distribution as awards
under the 1996 Plan.
57
<PAGE>
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. In
1998, the Company purchased 14,300 shares in respect of the 1997 contribution to
the ESOP. For the year ended December 31, 1998 the Company accrued $75,000 to
fund the purchase of additional shares of the Company's common stock pursuant to
the ESOP.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information, as of March 23,
1999, known to the Company regarding beneficial ownership of the Company's
common 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>
% of
Number of Shares of Common Stock
Name & Address Position With the Company Common Stock
- - ------------------------------------- ---------------------------------------- -------------------------- ------------
<S> <C> <C> <C>
Dominic A. Polimeni (1) Chairman, President and Chief 2,374,957 (2) 34.51
Executive Officer
Milton M. Adler (1) Director, Secretary, and Treasurer 3,247 (3) *
Robert V. Gubitosi (1) Director -- (4) --
Frederick W. London (1) Director 9,000 (5) *
William J. McSherry, Jr. (1) Director 79,984 (6) 1.65
Douglas D. Zadow Vice President and President of 654,667 (7) 12.88
c/o Questron Distribution Questron Distribution Logistics, Inc.,
Logistics, Inc. a subsidiary of the Company
321 N. Central Expressway
McKinney, TX 75070
Phillip D. Schwiebert (8) Vice President and Western Regional 903,339 (9) 16.21
c/o Questron Distribution Vice President of Questron
Logistics, Inc. Distribution Logistics, Inc., a
386 Railroad Court subsidiary of the Company
Milpitas, CA 95035
58
<PAGE>
Gulfstream Financial Group, Inc. -- 1,260,273 (10) 21.80
6400 Congress Ave., Suite 200A
Boca Raton, FL 33487
Joan R. Gubitosi (4) -- 2,360,273 (11) 34.30
c/o Gulfstream Financial Group, Inc.
6400 Congress Ave., Suite 200A
Boca Raton, FL 33487
Malcolm A. Tallmon President and General Manager of 436,476 (12) 9.12
c/o Fortune Industries, Inc. Fortune Industries, Inc., a subsidiary
3408 S. Jones of the Company
Fort Worth, TX 76110
Gregory S. Fitzgerald President and General Manager of 476,475 (13) 9.88
c/o Fas-Tronics, Inc. Fas-Tronics, Inc., a subsidiary of the
4324 Garland Drive Company
Fort Worth, TX 76117
Valerie L. Fitzgerald Operations Manager of Fas-Tronics, 476,475 (13) 9.88
c/o Fas-Tronics, Inc. Inc., a subsidiary of the Company
4324 Garland Drive
Fort Worth, TX 76117
All officers and directors as a group 4,263,239 53.04
(eight persons)
- - ----------------------------
* Less than 1 %
</TABLE>
1. c/o Questron Technology, Inc., 6400 Congress Avenue, Suite
200A, Boca Raton, FL 33487.
2. Consists of 260,273 shares of common stock and Series IV
Warrants to purchase 1,000,000 shares of common stock owned
by Gulfstream, and 14,684 shares of common stock owned by
Mr. Polimeni and options to purchase 1,100,000 shares of
common stock at an exercise price of $4.50 per share that
were awarded to Mr. Polimeni pursuant to the terms of his
employment agreement. Pursuant to the terms of a Gulfstream
shareholder agreement, beneficial interest in such options
is shared equally by Mr. Polimeni and Mrs. Gubitosi.
3. Includes options to purchase 3,000 shares of common stock.
59
<PAGE>
4. Mr. Gubitosi's wife, Joan R. Gubitosi, has shared
beneficial ownership with Mr. Polimeni of 2,360,273 shares
of common stock (see Footnote 11). Mr. Gubitosi disclaims
beneficial ownership of such shares.
5. Consists of 500 shares of common stock, Series IV Warrants
to purchase 500 shares of common stock and options to
purchase 8,000 shares of common stock.
6. Includes 5,984 shares of common stock owned by Mr.
McSherry, options to purchase 43,000 shares of common stock
and Series IV Warrants to purchase 31,000 shares of common
stock. These amounts do not include 7,900 Series IV
Warrants, 2,500 Series IV Warrants and 886 shares of common
stock owned by his two adult sons, as to which Mr. McSherry
disclaims beneficial ownership.
7. The 654,667 shares reported above include 48,807 shares
subject to a serial put agreement dated September 22, 1997,
which gives Mr. Zadow the option to sell the shares to the
Company on a monthly basis during the five year period
ending September 22, 2002 for a price of $6.275 per share,
and options to purchase 300,000 shares of common stock at
an exercise price of $4.50 per share that were awarded to
Mr. Zadow effective March 31, 1999 pursuant to the terms of
his employment agreement.
8. Pursuant to the terms of the Exchange Agreement, Mr.
Schwiebert is 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: options to
purchase 166,667 shares of common stock if pre-tax income
is at least $2,500,000, options to purchase an additional
166,667 shares of common stock if pre-tax income is at
least $3,500,000, and options to purchase an additional
166,667 shares of common stock if pre-tax income is at
least $4,500,000. 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 and options to purchase 333,333 shares of common
stock at an exercise price of $4.50 per share were awarded
effective March 31, 1998 to Mr. Schwiebert pursuant to the
terms of the Exchange Agreement.
9. The shares reported above consist of 113,339 shares owned
by Mr. Schwiebert, options to purchase 540,000 shares of
common stock and Series IV Warrants to purchase 250,000
shares of common stock. These amounts do not include
options to purchase 20,000 shares of common stock at $6.00
per share granted effective May 31, 1997, which vest and
become exercisable as to 10,000 shares on each of the
second and third anniversary dates of the date of the
grant. Also see footnote 8.
10. Consists of 260,273 shares of common stock and Series IV
Warrants to purchase 1,000,000 shares of common stock. 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.
60
<PAGE>
11. Consists of 260,273 shares and Series IV Warrants to
purchase 1,000,000 shares of common stock owned by
Gulfstream, and options to purchase 1,100,000 shares of
common stock, at an exercise price of $4.50 per share, in
which beneficial interest is shared equally by Mrs.
Gubitosi and Mr. Polimeni pursuant to a Gulfstream
shareholder agreement.
12. The 436,476 shares of common stock owned by Mr. Tallmon
were issued by the Company as partial consideration in
connection with the acquisition of Fortune Industries, Inc.
13. Of the 476,475 shares of common stock owned jointly by Mr.
and Mrs. Fitzgerald, 421,941 shares and options to purchase
40,000 shares of common stock were issued by the Company as
partial consideration in connection with the acquisition of
Fas-Tronics, Inc. In addition, Mr. and Mrs. Fitzgerald
purchased 14,534 shares of common stock in open market
transactions.
Exchange Agreement
In connection with the Webb acquisition and the related Offering of
Units, Gulfstream and Philip D. 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 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.
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 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 Mr. 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.
61
<PAGE>
Pursuant to the Exchange Agreement, Gulfstream and Schwiebert
received the following in exchange for the rights previously granted under their
agreements.
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.
In addition, Gulfstream and Schwiebert will be entitled to receive
options to acquire additional shares of common stock at an exercise price equal
to the fair market value of the common stock at the date of grant if the pre-tax
income targets set forth below are met or exceeded in any fiscal year up to and
including fiscal year 2001:
No. of Additional
No. of Additional Schwiebert
Gulfstream Shares Shares Pre-tax Income at Least
- - ---------------------- ---------------------- -----------------------
333,333 166,667 $2,500,000
333,333 166,667 $3,500,000
333,334 166,668 $4,500,000
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. The
Company's pre-tax income for the year ended December 31, 1998 exceeded $4.5
million, accordingly, options to purchase 333,333 shares of common stock of the
Company at an exercise price of $4.50 were granted to Schwiebert effective March
31, 1999. Effective March 1, 1999, the Company and Gulfstream agreed to cancel
all the Gulfstream options earned and to be earned pursuant to the terms of the
Exchange Agreement. Accordingly, options awarded to Gulfstream, on November 8,
1996, to acquire 120,000 shares of common stock at an exercise price of $3.75
per share and options awarded to Gulfstream, on February 24, 1998, to purchase
333,333 shares of common stock at an exercise price of $7.75 per share have been
cancelled.
62
<PAGE>
Item 12. Certain Relationships and Related Transactions.
Pursuant to a Management and Advisory Consulting Agreement, the
Company agreed to compensate Gulfstream for advisory and consulting services.
This agreement, which can be terminated by either party on 90 days notice, was
to expire on March 31, 2000. The agreement, was terminated effective March 1,
1999, more than one year prior to its stated expiration. Fees paid to Gulfstream
in connection with the agreement and the termination thereof amounted to
$305,000 in 1998 and $105,000 in 1997.
Battle Fowler LLP, the law firm in which Mr. McSherry, a director of
the Company, is a partner, provided legal services to the Company during the
year ended December 31, 1998 and is expected to continue to provide legal
services to the Company in the future.
63
<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 68.
(b) Report on Form 8-K.
<TABLE>
Date of Report
(Date of Earliest Event Reported) Item Reported
--------------------------------- ---------------------------------------------------
<S> <C>
October 8, 1998 Acquisition of fastener distributors; included pro
(amended December 8, 1998) forma combined statement of operations for the
Company, Fas-Tronics, Inc. and Fortune Industries,
Inc., for the six months ended June 30, 1998 and
for the year ended December 31, 1997, and audited
balance sheet at December 31,1997 and audited
statements of operations, stockholders equity, and
cash flows for the year ended December 31, 1997 for
Fas-Tronics, Inc. and Fortune Industries, Inc.
</TABLE>
<PAGE>
QUESTRON TECHNOLOGY, INC.
INDEX
TO FINANCIAL STATEMENTS
(Item 13 (a))
Page
Report of Independent Auditors covering consolidated financial statements
at December 31, 1998 and for the year then ended 24
Report of Independent Auditors covering consolidated financial statements
for the year ended December 31, 1997 25
Consolidated Balance Sheet as of December 31, 1998 26
For the years ended December 31, 1998 and 1997:
Consolidated Statement of Operations 27
Consolidated Statement of Changes in Stockholders' Equity 28
Consolidated Statement of Cash Flows 29
Notes to Consolidated Financial Statements at December 31, 1998 and
1997 and for the years then ended 30
65
<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 31, 1999
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 31, 1999:
(1) Principal Executive Officer: (3) A Majority of the Board of Directors:
/s/ Dominic A. Polimeni /s/ Milton M. Adler
------------------------ --------------------
Dominic A. Polimeni, Milton M. Adler, Director
Chief Executive Officer
/s/ Robert V. Gubitosi
-----------------------
Robert V. Gubitosi, Director
(2) Principal Financial and Accounting /s/ Frederick W. London
------------------------
Officer: Frederick W. London, Director
/s/ Milton M. Adler /s/ William J. McSherry, Jr.
----------------------------- -----------------------------
Milton M. Adler, Treasurer William J. McSherry, Jr., Director
/s/ Dominic A. Polimeni
------------------------
Dominic A. Polimeni, Director
66
<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, 1998
------------------
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)
<TABLE>
<S> <C>
Delaware 23-2257354
- - ------------------------------------------------------------------------- ----------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
6400 Congress Avenue, Suite 200A, Boca Raton, FL 33487
- - ------------------------------------------------------------------------- ----------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Issuer's telephone number: (561) 241 - 5251
----------------
<PAGE>
INDEX TO EXHIBITS
- - -----------------
The following exhibits are filed as part of this Annual Report on
Form 10-KSB:
3.0 Certificate of Incorporation, incorporated by reference to Exhibit
3(i) to the Company'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 Company, incorporated by reference to Exhibit
4.1 to Amendment No. 1 of the Company'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 Company, incorporated by reference to Exhibit
4.1 to Amendment No. 1 of the Company'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 Company, incorporated by reference to Exhibit
4.1 to Amendment No. 1 of the Company'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 Company, incorporated by reference to Exhibit
3(i) to the Company'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 Company, incorporated by reference to Exhibit
3.3 to the Company'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 Company, incorporated by reference to Exhibit
4.1 to Amendment No. 1 to the Company'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 Company, incorporated by reference to Exhibit
3.5 to the Company'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 Company, incorporated by reference to Exhibit
3.10 to Amendment No. 1 to the Company's Form SB-2 filed with the
Securities and Exchange Commission on February 25, 1997 (File No.
333-18243).
68
<PAGE>
3.9 By-Laws of the Company, incorporated by reference to Exhibit 3b(ii)
to the Company'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 Company, incorporated by reference to
Exhibit 3.4 of the Company'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 Company's Form SB-2 filed with
the Securities and Exchange Commission on February 25, 1997 (File No.
333-18243).
4.1 Form of Series IV Warrant Agreement, incorporated by reference to
Exhibit 4.3 to Amendment No. 1 to the Company's Form SB-2 filed with
the Securities and Exchange Commission on February 25, 1997 (File No.
333-18243).
4.2 Form of Series III Warrant Agreement, dated as of November 7, 1994,
incorporated by reference to Exhibit 10.22 to the Company's Form
10-KSB filed with the Securities and Exchange Commission for the
fiscal year ended December 31, 1994 (File No. 0-13324).
4.3 Form of Underwriters' Purchase Option, incorporated by reference to
Exhibit 4.5 to Amendment No. 1 to the Company's Form SB-2 filed with
the Securities and Exchange Commission on February 25, 1997 (File No.
333-18243).
4.4 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 Company's Form SB-2 filed with the
Securities and Exchange Commission on February 25, 1997 (File No.
333-18243).
4.5 Amended Certificate of Designation Establishing Series of Preferred
Stock of Questron Technology, Inc., incorporated by reference to
Exhibit 4.7 to the Company's Quarterly Report on Form 10-QSB for the
three month period ended June 30, 1998 filed with the Securities and
Exchange Commission on May 15, 1998 (File No. 0-13324).
4.6 Registration Rights Agreement, dated as of September 24, 1998, by and
between the Company and the persons listed on Schedule A thereto,
incorporated by reference to the Company's Current Report on Form
8-K, filed with the Securities and Exchange Commission on October 8,
1998 (File No. 0-13324).
4.7 Certificate of Designation of Series A Junior Participating Preferred
Stock of Questron Technology, Inc., incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the three month period
ended September 30, 1998, filed with the Securities and Exchange
Commission on November 16, 1998 (File No. 0-13324).
10.1 The Company's 1994 Director Non-Qualified Stock Option Plan,
incorporated by reference to Exhibit 10.28 of the Company's Report on
Form 10-KSB filed with the Securities and Exchange Commission for the
fiscal year ended December 31, 1993 (File No. 0-13324).
69
<PAGE>
10.2 Employment Agreement, dated March 29, 1999 between Questron
Technology, Inc. and Dominic A. Polimeni.
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 Company's Form 10-KSB filed with
the Securities and Exchange Commission for the fiscal year ended
December 31, 1994 (File No. 0-13324).
10.4 Management Advisory and Consulting Agreement, dated as of November
29, 1994, between Gulfstream Financial Group, Inc. and the Company,
incorporated by reference to Exhibit 10.26 to the Company's Form
10-KSB filed with the Securities and Exchange Commission for the
fiscal year ended December 31, 1994 (File No. 0-13324).
10.5 Termination of Management Advisory and Consulting Agreement, dated as
of March 1, 1999, between Gulfstream Financial Group, Inc. and the
Company.
10.6 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 Company's Form 10-KSB filed with the Securities and
Exchange Commission for the fiscal year ended December 31, 1994 (File
No. 0-13324).
10.7 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 Company, incorporated by reference
to Exhibit 10.28 to the Company's Form 10-KSB filed with the
Securities and Exchange Commission for the fiscal year ended December
31, 1994 (File No. 0-13324).
10.8 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 Company's Form
10-KSB filed with the Securities and Exchange Commission for the
fiscal year ended December 31, 1994 (File No. 0-13324).
10.9 Common Stock Purchase Option, dated as of March 31, 1995, for
Biltmore Securities, Inc., incorporated by reference to Exhibit 10.35
to the Company's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1994 (File No.
0-13324).
10.10 Letter agreement, dated December 29, 1995, between the Company and
Stephen J. Drescher, incorporated by reference to Exhibit 10.28 to
the Company's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1995 (File No.
0-13324).
10.11 Letter agreement, dated December 29, 1995, between the Company and
Paul L. Burton, incorporated by reference to Exhibit 10.29 to the
Company's Form 10-KSB filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1995 (File No.
0-13324).
70
<PAGE>
10.12 1996 Stock Option Plan, incorporated by reference to Exhibit 10.19 to
Amendment No. 1 to the Company's Form SB-2 filed with the Securities
and Exchange Commission on February 25, 1997 (File No. 333-18243).
10.13 Exchange Agreement, dated November 8, 1996 by and among the Company,
Gulfstream Financial Group, Inc. and Phillip D. Schwiebert,
incorporated by reference to Exhibit 10.21 to Amendment No. 1 to the
Company's Form SB-2 filed with the Securities and Exchange Commission
on February 25, 1997 (File No. 333-18243).
10.14 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 Company's Form SB-2 filed with the Securities
and Exchange Commission on February 25, 1997 (File No. 333-18243).
10.15 Form of Underwriting Agreement, incorporated by reference to Exhibit
2.0 to Amendment No. 1 to the Company's Form SB-2 filed with the
Securities and Exchange Commission on February 25, 1997 (File No.
333-18243).
10.16 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 Company's Form 10-KSB filed with
the Securities and Exchange Commission for the fiscal year ended
December 31, 1996 (File No. 0-13324).
10.17 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 Company's Form 10-KSB filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1996
(File No. 0-13324).
10.18 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 Company's Form 8-K,
filed October 7, 1997 (File No. 0-13324).
10.19 Serial Put Agreement between Questron Technology, Inc. and Douglas D.
Zadow and Terry Bastian dated September 22, 1997, incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K, filed October 7,
1997 (File No. 0-13324).
10.20 Stock Purchase Agreement, dated as of June 12, 1998, by and between
the Company, Fortune Industries, Inc. and the Stockholders of the
Company listed on Schedule 1.1 thereto (the "Fortune Stock Purchase
Agreement"), incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB for the three-month period
ended June 30, 1998 filed with the Securities and Exchange Commission
on August 14, 1998 (File. No. 0-13324).
10.21 Stock Purchase Agreement, dated as of June 12, 1998, by and between
the Company, Gregory Fitzgerald, Valerie Fitzgerald and Fas-Tronics,
Inc. (the "Fas-Tronics Stock Purchase Agreement"), incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-QSB for the three-month period ended June 30, 1998 filed with the
Securities and Exchange Commission on August 14, 1998 (File. No.
0-13324).
71
<PAGE>
10.22 Letter Agreement, dated July 29, 1998, by and between the Company,
Fortune Industries, Inc. and the Stockholders listed on Schedule 1.1
to the Fortune Stock Purchase Agreement, incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-QSB for the
three-month period ended June 30, 1998 filed with the Securities and
Exchange Commission on August 14, 1998 (File. No. 0-13324).
10.23 Letter Agreement, dated July 29, 1998 by and between the Company,
Gregory Fitzgerald, Valerie Fitzgerald and Fas-Tronics, Inc.,
incorporated by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-QSB filed with the Securities and Exchange
Commission on August 14, 1998 (File No. 0-13324).
10.24 Second Amendment to the Fas-Tronics Stock Purchase Agreement,
incorporated by reference to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 8, 1998
(File No. 0-13324).
10.25 Second Amendment to the Fortune Stock Purchase Agreement,
incorporated by reference to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 8, 1998
(File No. 0-13324).
10.26 Rights Agreement, dated as of October 23, 1998, between the Company
and American Stock Transfer & Trust Company, as Rights Agent,
incorporated by reference to the Company's Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on
November 6, 1998 (File No. 0-13324).
10.27 Loan and Security Agreement, dated as of September 24, 1998, by and
among the Company, Questron Distribution Logistics, Inc., Integrated
Material Systems, Inc., Power Components, Inc., California Fasteners,
Inc., Comp Ware, Inc., Fas-Tronics, Inc., Fortune Industries, Inc.,
each of the signatures which is a signatory thereto, Congress
Financial Corporation (Florida), as administrative agent, and
Madeleine L.L.C., as collateral agent, incorporated by reference to
Exhibit 10.17 to the Company's Quarterly Report on Form 10-QSB for
the three-month period ended September 30, 1998, filed with the
Securities and Exchange Commission on November 16, 1998 (File No.
0-13324)
10.28 Amendment Number One to the Loan and Security Agreement, dated
November 2, 1998, by and among the Company, Questron Distribution
Logistics, Inc., Integrated Material Systems, Inc., Power Components,
Inc., California Fasteners, Inc., Comp Ware, Inc., Fas-Tronics, Inc.,
Fortune Industries, Inc., each of the signatures which is a signatory
thereto, Congress Financial Corporation (Florida), as administrative
agent and Madeleine L.L.C., as collateral agent, incorporated by
reference to Exhibit 10.18 to the Company's Quarterly Report on Form
10-QSB for the three-month period ended September 30, 1998, filed
with the Securities and Exchange Commission on November 16, 1998
(File No. 0-13324).
10.29 Termination of Management Advisory and Consulting Agreement, made
effective as of March 1, 1999, between Gulfstream Financial Group,
Inc. and Questron Technology, Inc.
10.30 Employment Agrement, dated March 29, 1999, between Questron
Technology, Inc. and Dominic A. Polimeni.
21.1 Subsidiaries of the Company, as amended.
23.1 Consent of Ernst & Young L.L.P., dated March 29, 1999.
23.2 Consent of Moore Stephens, P.C., dated March 29, 1999.
72
Exhibit 10.29
TERMINATION OF MANAGEMENT ADVISORY
AND CONSULTING AGREEMENT
This TERMINATION OF MANAGEMENT ADVISORY AND CONSULTING AGREEMENT (the
"Termination Agreement") is made effective March 1, 1999, between Gulfstream
Financial Group, Inc., a Florida corporation ("Gulfstream"), and Questron
Technology, Inc., a Delaware corporation ("Questron").
WHEREAS, the parties hereto have entered into that certain management
advisory and consulting agreement, dated as of November 28, 1994 (the
"Agreement");
WHEREAS, the parties desire to terminate the Agreement pursuant to
the terms set forth herein.
NOW, THEREFORE, based on mutual premises set forth above and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto hereby agree as follows:
1. Compensation. In consideration of Gulfstream's services under the
Agreement and the early termination thereof:
(a) Questron shall pay to Gulfstream, effective July 1, 1998, at the
rate of $205,000 per annum, such amount to be payable in twelve
equal monthly installments of $17,033.33 on or before the 10th
of each month;
(b) Questron shall reimburse the reasonable out-of-pocket expenses
of Gulfstream incurred in the performance of its services under
the Agreement in accordance with Questron's customary policies;
and
(c) In addition to the amounts referred to in 1. (a) and (b) above,
fees of $185,000 have been or will be paid through April 1,
1999, in connection with Gulfstream's services provided in
connection with Questron's recent business acquisitions and the
termination of the Agreement.
2. Cancellation of Options
In connection with the termination of the Agreement, the following
options to purchase shares of Questron's common stock, including Gulfstream's
right to the options listed below under the caption, "Earned but not yet
awarded," are hereby cancelled,
<PAGE>
forever discharged and of no further force and effect as of the date hereof:
Date of Grant * Shares Exercise Price
------------------------ --------------- ----------------
11/08/96 120,000 $3.750
09/24/97 40,500 $6.625
12/31/97 333,333 $7.750
Earned, but not
yet awarded 666,667 $4.500
===============
1,160,500
===============
* All such options vest on the date of grant.
3. Termination
In advance of the original termination date set forth in Section 3 of
the Agreement, which date is March 31, 2000 (subject to certain conditions
provided therein), the Agreement shall terminate as of the date hereof.
[Signature page follows]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have entered into this
amendment to the Agreement as of the date first herein above written.
GULFSTREAM FINANCIAL GROUP, INC.
By: /s/Dominic A. Polimeni
-------------------------------
Name:
Title:
QUESTRON TECHNOLOGY, INC.
By: /s/ Milton M. Adler
--------------------------------
Name:
Title:
EMPLOYMENT AGREEMENT
AGREEMENT dated March 29, 1999, between Questron
Technology, Inc., a Delaware corporation (referred to herein as
"Employer" or "Questron"), and Dominic A. Polimeni ("Executive").
W I T N E S S E T H
WHEREAS, the Employer desires to retain the services of
Executive and Executive desires to be employed by Employer upon the
terms and conditions hereinafter set forth; and
WHEREAS, Employer and Executive have each discussed,
considered and approved of the material terms of employment set forth
herein and each has been operating pursuant to such agreed upon terms
since July 1, 1998.
NOW, THEREFORE, in consideration of the premises and the
mutual undertakings and agreements contained herein, Employer and
Executive agree as follows:
1. EMPLOYMENT. Employer hereby employs Executive, and
Executive hereby agrees to serve as Chairman, President and Chief
Executive Officer of Employer, or in such other senior executive
positions as shall be assigned to Executive by Employer's board of
directors with Executive's consent during the Term of Employment (as
hereinafter defined). Executive further agrees to use his best
efforts to promote the interests of Employer and to devote all his
business time and energies to the business and affairs of Employer
during the Term of Employment.
2. TERM OF EMPLOYMENT. Unless earlier terminated pursuant
to Paragraph 7 hereof, the employment hereunder shall commence as of
July 1, 1998 and shall end on June 30, 2003 (the "Term of
Employment").
<PAGE>
3. COMPENSATION. As compensation for services hereunder and
in consideration of the covenants set forth in Paragraph 4 hereof,
during the Term of Employment Executive shall be compensated as
follows:
(a) Base Salary. Effective July 1, 1998 and during the
Term of Employment, Employer shall pay Executive a base salary at the
rate of Two Hundred and Fifty Thousand Dollars ($250,000) per annum.
Such salary shall be payable in appropriate installments to conform
to the regular payroll dates for salaried personnel of Employer. The
base salary of the Executive shall be reviewed annually by the
Employer's board of directors or compensation committee of the board
who may, in their sole discretion, approve an increase to the
Executive's base salary.
(b) Stock Options. Employer shall grant to the
Executive as of March 29, 1999, options to purchase 1,100,000 shares
of Questron's common stock at $4.50 per share; such options shall be
immediately exercisable, as to any and all such shares, and will
expire, unless sooner exercised, on March 29, 2009.
(c) Bonuses. Employer shall pay Executive annual
bonuses as follows (i) a discretionary bonus of up to Fifty Thousand
Dollars ($50,000), to be determined by the board of directors or
compensation committee of the board in their sole discretion; and
(ii) an additional bonus of up to $50,000 based upon attaining
targeted increases in diluted earnings per share as mutually agreed
upon at the beginning of each year by the Executive and the board of
directors or compensation committee of the board.
(d) Expenses. Employer shall provide Executive with a
car allowance of $1,300 per month. Employer shall also reimburse
Executive for all reasonable out-of-pocket expenses incurred in
<PAGE>
connection with rendering services hereunder in accordance with
Employer's customary policies, including without limitation,
reimbursement of travel expenses for business purposes and
reimbursement of Executive's cellular telephone expenses.
(e) Fringe Benefits. Executive shall be eligible to
participate in and to receive benefits under any pension plan,
profit-sharing plan, savings plan, stock option/savings plan, ESOP,
life insurance, health and accident plan or arrangement made
available by Employer to its senior executives and key management
employees generally, subject to and on a basis consistent with the
terms, conditions and overall administration of each such plan or
arrangement; provided, however, that with respect to any plan or
arrangement under which participation is at the discretion of a
committee or other body administering such plan or arrangement,
nothing contained herein shall entitle Executive to participate in
such plan or arrangement to be paid for by the Employer. Nothing paid
to Executive under any plan or arrangement presently in effect or
made available in the future shall be deemed to be in lieu of
compensation to Executive hereunder, and nothing paid to Executive
hereunder shall be deemed to be in lieu of any payment to which
Executive may be entitled under any such plan or arrangement.
(f) Vacation. Executive shall be entitled to four (4)
weeks of paid vacation days in each calendar year during the Term of
Employment. In the event that Executive is employed hereunder during
a calendar year for less than all of that year, he shall be entitled
in that year to a number of paid vacation days which shall be
prorated in accordance with the number of days on which he is so
employed in that year. Executive shall also be entitled to all paid
holidays given by Employer to its senior executive officers during
the Term of Employment.
<PAGE>
4. COVENANT NOT TO COMPETE; INTELLECTUAL PROPERTY;
CONFIDENTIALITY.
(a) Covenant Not To Compete. Executive acknowledges
that in consideration of the Employer entering into this Agreement,
Executive is simultaneously executing and delivering to Employer the
attached letter (the "Restrictive Letter") containing certain
covenants relating to his conduct during and after the Term of
Employment. Notwithstanding the provisions of the Restrictive Letter,
during the Term of Employment Executive will not manage, operate,
control, be employed by or participate in the ownership, management
operation or control of, or be connected in any manner with, any
business of the type and character engaged in and competitive with
that to be conducted by Employer. The decision of Employer's Board of
Directors as to what constitutes a competing business shall be final
and binding upon Executive. For these purposes, Executive's service
as a director of or his ownership of 1% or less of any class of
securities of a public company shall not be considered to be
competition with Employer.
(b) Intellectual Property. Executive agrees that all
ideas, sketches, designs, prototypes, samples, patterns, and related
work product developed by him during the Term of Employment which
relate directly or indirectly to the business of Employer or any of
its subsidiaries or affiliates are work-for-hire and will be the
property of Employer and that he will, at Employer's request and
cost, do whatever is reasonably necessary to secure the rights
thereto to Employer.
(c) Confidentiality. Except as required pursuant to a
court order or applicable law, Executive agrees that he will not
divulge to anyone (other than Employer or any persons employed or
designated by Employer) any knowledge or information of any type
<PAGE>
whatsoever of a confidential nature relating to the business of
Employer or any of its subsidiaries or affiliates, including, without
limitation, all types of trade secrets. Executive further agrees not
to disclose, publish or make use of any such knowledge or information
of a confidential nature without the prior written consent of
Employer.
5. BREACH BY EXECUTIVE. Both parties hereto recognize that
the services to be rendered under this Agreement by Executive are
special, unique and extraordinary in character, and that in the event
of the breach by Executive of the terms and conditions of this
Agreement or the Restrictive Letter to be performed by him, then
Employer shall be entitled, if it so elects, to institute and
prosecute proceedings in any court of competent jurisdiction, either
in law or in equity, to obtain damages for any breach of this
Agreement or of the Restrictive Letter, or to enforce the specific
performance thereof by Executive, or to enjoin Executive from
performing services for another person, firm or corporation in
violation of this Agreement or the Restrictive Letter. If any of the
restrictive covenants set forth in this Agreement or in the
Restrictive Letter are held to be unenforceable because of the
duration or scope of any such covenant, the parties hereto agree that
the duration or scope of such provision shall be reduced to the
maximum scope permitted by law, and, in its reduced form, shall be
enforceable.
6. INDEMNIFICATION. The Employer agrees to indemnify the
Executive to the fullest extent permitted by Delaware law for any and
all liabilities to which he may be subject as a result of his
employment hereunder (and as a result of his services as an officer
or director of the Employer, or as an officer or director of any of
its subsidiaries or affiliates), as well as the costs of any legal
action brought
<PAGE>
or threatened against him as a result of such employment, to the
fullest extent permitted by law.
7. TERMINATION.
(a) General. The employment of Executive hereunder
shall terminate as provided in Paragraph 2 hereof and may be sooner
terminated in accordance with the provisions of this Paragraph 7.
(b) Death or Disability of Executive. The employment of
Executive hereunder shall terminate upon (i) the death of Executive;
and (ii) at the option of Employer, upon not less than thirty (30)
days' prior written notice to Executive or his legal representative,
in the event that Executive becomes disabled. Executive shall be
deemed to be disabled if by reason of physical or mental incapacity
or disability, he is unable to render the services to be rendered by
him pursuant to this Agreement for a continuous period of ninety (90)
successive days or for shorter periods aggregating one hundred twenty
(120) days or more during any twelve (12) successive months (the
advice of a reputable physician mutually acceptable to Employer and
Executive as to the existence of any such incapacity or disability to
be final and binding upon the parties).
(c) Termination for Cause. The employment of the
Executive under this Agreement shall terminate for cause upon
delivery to the Executive of notice in writing from Employer of
termination of the Executive's employment for cause. Cause shall mean
(i) any willful or grossly negligent act or failure to act by the
Executive that causes material harm to Employer; any fraud by
Executive upon the Employer; the conviction by the Executive or the
plea of nolo contendere by the Executive, with respect to any felony;
(ii) the Executive's habitual absenteeism, chronic alcoholism or
other form of
<PAGE>
chemical addiction; or (iii) any material breach by the Executive of
the Executive's obligations under this Agreement which remain uncured
thirty (30) days after receipt of notice from Employer of such
breach.
(d) Effect of Termination on Salary and Benefits. If
Executive's employment is terminated under this Paragraph 7(a), (b)
or (c) hereof, Employer shall have no further obligation to Executive
hereunder other than as provided by this subparagraph (d) but the
restrictions on the Executive's activities contained in Paragraph 4
and the obligations of Executive contained in the Restrictive Letter
shall continue in effect as provided therein. In the event that the
Executive's employment hereunder is terminated by Employer other than
pursuant to Paragraph 7(a), (b) or (c) hereof, prior to the end of
the Term of Employment, then Employer shall be obligated to pay
Executive all salary and benefits (excluding any unpaid bonuses for
this purpose) in installments through the remainder of the Term of
Employment; provided, however, if Executive is in breach of the
Restrictive Letter at any time, the Employer shall have no further
obligation to pay salary to Executive. For purposes of the
immediately preceding sentence, Executive will also be treated as
having been terminated by Employer other than pursuant to Paragraph
7(a), (b) or (c) hereof if, after a Change in Control of Employer,
(as that term is defined in Paragraph 7(e), occurs, Executive is
assigned duties materially inconsistent with Executive's positions as
described in Paragraph 1 hereof or there is any significant
diminution in Executive's duties or responsibilities, other than in
connection with the termination of Executive's employment for Cause
or disability. In the event of a termination of Executive's
employment for any reason other than termination by Employer for
Cause, as set forth in this Paragraph 7, whether before or after
termination
<PAGE>
of employment, Executive's entitlement to salary and benefits shall
cease as of the effective date of termination and Executive shall be
entitled to all salary and benefits (excluding any unpaid bonuses)
accrued but unpaid as of the date of termination.
(e) Change in Control. For purposes of this Agreement,
the term "Change of Control" shall mean the occurrence of any of the
following events: (i) any "person" as such term is used in Sections
13(d) and 14(d) of the Securities Exchange of 1934, as amended (the
"Exchange Act"), other than a trustee or other fiduciary holding
securities under an employee benefit plan of Employer or any
subsidiary or affiliate of Employer or any stockholder (and such
stockholder's affiliates) as of the date hereof and direct
transferees thereof, becomes, after the date hereof, the "beneficial
owner" (as defined in Rule 13d-3 of the Exchange Act), directly or
indirectly, of the securities of Employer representing 50.1% or more
of the total voting power represented by Employer's then outstanding
securities that vote generally in the election of directors ("Voting
Securities") (excluding any current stockholder of Employer owning
15% or more of such Voting Securities on the date hereof); or (ii)
the merger or consolidation of Employer with any other corporation,
other than a merger or consolidation in which the Voting Securities
of Employer outstanding immediately prior thereto continue to
represent (either by remaining outstanding or by being converted into
Voting Securities of the surviving entity) at least a majority of the
total voting power of the surviving entity, or the sale (in one
transaction) of all or substantially all of the assets of Employer,
other than to a subsidiary or affiliate of Employer.
8. ASSIGNMENT. This Agreement is a personal contract, and
except as specifically set forth herein, the rights and interests of
Employer and Executive herein
<PAGE>
may not be sold, transferred, assigned, pledged or hypothecated. The
rights and obligations of Employer hereunder shall be binding upon
and run in favor of the successors of Employer as a result of the
sale, merger or reorganization of Employer or Employer's present
corporation, subject to Executive's rights set forth in Paragraph
7(d).
<PAGE>
9. GOVERNING LAW: CAPTIONS: CONSENT TO JURISDICTION.
(a) This Agreement contains the entire agreement
between the parties hereto, supersedes any prior agreements relating
to the employment of the Executive and shall be governed by the laws
of the State of Florida. It may not be changed orally, but only by
agreement in writing signed by the party against whom enforcement of
any waiver, change, modification or discharge is sought. Section
headings are for convenience of reference only and shall not be
considered a part of this Agreement.
(b) Each of the parties hereby irrevocably and
unconditionally consent to the exclusive jurisdiction of the courts
of the State of Florida and the United States District Court for the
District of Florida for any action, suit or proceeding arising out of
or relating to this Agreement, or the transactions contemplated
hereby, and agrees not to commence any action, suit or proceeding
related thereto except in such courts. Each of the parties further
hereby irrevocably and unconditionally waive any objection to laying
of venue of any lawsuit, claim or other proceeding arising out of or
related to this Agreement in the courts of the State of Florida or
the United States district Court for the District of Florida, hereby
further irrevocably and unconditionally waive and agree not to plead
or claim an inconvenient forum, and further covenant and agree not to
institute any action or proceeding in any jurisdiction other than
Florida. Each of the parties further agree that service of any
process, summons, notice or document by U.S. registered mail to its
address set forth below shall be effective service of process for any
action, suit or proceeding brought against it in any such court. The
prevailing party of any action, suit or proceeding arising out of or
relating to this Agreement shall be entitled to receive its
attorney's fees and court costs from the other party hereto.
<PAGE>
10. NOTICES. Any notices or other communications required
or permitted hereunder shall be in writing and shall be deemed to be
duly given if personally delivered, or, if mailed (by certified or
registered mail, return receipt requested) or if delivered by a
nationally recognized-overnight mail or courier service, to the party
at its address set forth below: If to Executive: Dominic A. Polimeni
6567 Newport Lake Circle Boca Raton, FL 33496
If to Employer:
Questron Technology, Inc.
6400 Congress Avenue
Suite 200A
Boca Raton, FL 33487
With a copy to:
Battle Fowler LLP
75 East 55th Street
New York, NY 10022
Attn: Luke P. Iovine, III, Esq.
11. RIGHT TO WITHHOLD/REPORT. Employer shall have the right
to withhold from Executive's salary and other compensation hereunder
and to report to appropriate federal, state and local taxing
authorities all amounts required to be withheld or reported,
including such amounts in respect of any compensation deemed paid to
Executive under federal, state and local tax laws.
<PAGE>
IN WITNESS WHEREOF, Employer has by its duly authorized
officer signed this Agreement and Executive has signed this
Agreement, as of the day and year first above written.
EXECUTIVE QUESTRON TECHNOLOGY, INC.
/s/Dominic A. Polimeni
----------------------------- By: /s/ Milton M. Adler
DOMINIC A. POLIMENI ------------------------
Name:
Title:
RESTRICTIVE COVENANT
March 29, 1999
Questron Technology, Inc.
6400 Congress Avenue
Suite 200A
Boca Raton, FL 33487
Gentlemen:
This will confirm my agreement with Questron Technology, Inc. (the
"Company", which term for purposes of this letter shall include all of the
Company's successor, subsidiary and affiliated companies).
1. In consideration of my employment, I agree that while I am in the
Company's employ, and for two years thereafter (provided that the Company elects
to pay me a consulting and non-competition fee of $100,000 per year in equal
quarterly installments in arrears, which Executive cannot waive, I will not,
directly or indirectly: (a) Persuade or attempt to persuade any customer of the
Company to cease doing business with the Company, or to reduce the amount of
business it does with the Company; (b) Persuade or attempt to persuade any
potential customer to which the Company has made a sales presentation, not to
purchase the Company's products; (c) Solicit for myself or any person other than
the Company the business of any person or entity which is a customer of the
Company, or was its customer within two years prior to the termination of my
employment; (d) Persuade or attempt to persuade any employees of the Company, or
any individual who was its employee during the two years prior to my termination
of employment, to leave the Company's employ, or to become employed by any
person other than the Company; (e) Perform any service for any person other than
the Company in connection with the design or development of any product, which
competes, with a product of the Company; and (f) Work for any other firm,
corporation, partnership or other entity, which compete with the Company. 2. I
also agree that during my employment by the Company, or at any time thereafter,
I will not disclose or use any confidential or secret information relating to
the Company or any of its products, designs, processes or operations. 3. If I
violate any of the terms outlined above, I agree that the Company, in addition
to any other rights it may have, shall be entitled to injunctive relief.
Very truly yours,
Dominic A. Polimeni
Exhibit 21.1
QUESTRON TECHNOLOGY, INC.
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
AT MARCH 31, 1999
<TABLE>
<CAPTION>
Name of Subsidiary Date of State of
Incorporation Incorporation
------------------------------------------------------- ------------------------------ ---------------------------
<S> <C> <C>
Questron Distribution Logistics, Inc., formerly
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
Fas-Tronics, Inc. February 12, 1985 Texas
Fortune Industries, Inc. March 10,1964 Texas
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-3 No. 33-18243) and related prospectus pertaining to the
registration of 4,143,750 shares of Questron Technology, Inc. common stock, in
the Registration Statement (Form S-3 No. 33-84222) and related Prospectus
pertaining to the registration of 214,044 shares of Questron Technology, Inc.
common stock, in the Registration Statement (Form S-3 No. 33-63555) and related
Prospectus pertaining to the registration of 601,744 shares of Questron
Technology, Inc. common stock, in the Registration Statement (Form S-8 No.
33-87628) pertaining to the registration of 75,667 shares of Questron
Technology, Inc. common stock issuable pursuant to the various stock option
plans of Questron Technology, Inc., in the Registration Statement (Form S-3 No.
333-07049) and related Prospectus pertaining to the registration of 107,000
shares of Questron Technology, Inc. common stock, in the Registration Statement
(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 (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 March 1, 1999 with respect to the
consolidated financial statements of Questron Technology, Inc. included in the
Annual Report (Form 10-KSB) for the year ended December 31, 1998.
ERNST & YOUNG LLP
New York, New York
March 29, 1999
74
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement Form S-3 (No. 33-18243) and related prospectus pertaining to the
registration of 4,143,750 shares of Questron Technology, Inc. common stock, in
the Registration Statement on Form S-3 (No. 33-84222) and related Prospectus
pertaining to the registration of 214,044 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 601,744 shares of Questron
Technology, Inc. common stock, in the Registration Statement on Form S-8 (No.
33-87628) pertaining to the registration of 75,667 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. 333-07049) and related Prospectus pertaining to the registration of 107,000
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 the Annual Report (Form 10-KSB) for the year ended December 31,
1998.
MOORE STEPHENS, P.C.
Certified Public Accountants
New York, New York
March 29, 1999
75
