-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RgnuYb8bJyORrhsRQFksHdVCDAZOKNqe15tnsZRyZ3OMLafE5XHCatG5hreZpYRp gg4MNkU++bp9QNwZ8mAmPg== 0000950136-96-001200.txt : 19961220 0000950136-96-001200.hdr.sgml : 19961220 ACCESSION NUMBER: 0000950136-96-001200 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19961219 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUESTRON TECHNOLOGY INC CENTRAL INDEX KEY: 0000732152 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-LEGAL SERVICES [8111] IRS NUMBER: 232257354 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-18243 FILM NUMBER: 96683252 BUSINESS ADDRESS: STREET 1: 6400 CONGRESS AVENUE STREET 2: SUITE 200 CITY: BOCA RATON STATE: FL ZIP: 33487 BUSINESS PHONE: 4072415251 MAIL ADDRESS: STREET 1: 6400 CONGRESS AVENUE STREET 2: SUITE 200 CITY: BOCA RATON STATE: FL ZIP: 33487 FORMER COMPANY: FORMER CONFORMED NAME: JUDICATE INC DATE OF NAME CHANGE: 19920703 SB-2 1 REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on December 19, 1996 Registration No. ______ FORM SB-2 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 QUESTRON TECHNOLOGY, INC. (Name of small business issuer in its charter) 6400 CONGRESS AVENUE SUITE 200 BOCA RATON, FLORIDA 33487 (407) 241-5251 (Address and telephone number of principal executive offices) 6400 CONGRESS AVENUE SUITE 200 BOCA RATON, FLORIDA 33487 (407) 241-5251 (Address of principal place of business or intended principal place of business) DOMINIC A. POLIMENI CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER 6400 CONGRESS AVENUE SUITE 200 BOCA RATON, FLORIDA 33487 (407) 241-5251 (Name, address and telephone number of agent for service) WITH COPIES TO: FREDERICK W. LONDON, ESQ. STEVEN F. WASSERMAN, ESQ. GOULD & WILKIE BERNSTEIN & WASSERMAN, LLP ONE CHASE MANHATTAN PLAZA 950 THIRD AVENUE NEW YORK, NEW YORK 10005-1401 NEW YORK, NEW YORK 10022-2705 (212) 344-5680 (212) 826-0730 (212) 809-6890 (FAX) (212) 371-4730 (FAX) Approximate Date of Proposed Sale to the Public: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering |_|. (facing page continues) If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE =================================================================================================================================== Proposed Proposed Title of Each Maximum Maximum Class of Securities Amount to be Offering Price Aggregate Offering Amount of to be Registered Registered Per Security Price Registration Fee - ----------------------------------------------------------------------------------------------------------------------------------- Units, each consisting of one share of Series B Convertible Preferred Stock, par value $.01 per share ("Preferred Stock"), and one Series IV Warrant to purchase one share of Common Stock ("Series IV Warrant") 1,150,000 $6.00(1) $6,900,000 $2,091 - ---------------------------------------------------------------------------------------------------------------------------------- Preferred Stock included in the Units 1,150,000 -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Series IV Warrants included in the Units 1,150,000 -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock issuable upon exercise of the Series IV Warrants included in the Units 1,150,000(2) $4.31(1)(3) $4,956,500 $1,502 - ---------------------------------------------------------------------------------------------------------------------------------- Underwriter's Unit Purchase Option 100,000(2) $7.20(1) $720,000 $219 - ---------------------------------------------------------------------------------------------------------------------------------- Preferred Stock included in Unit Purchase Option 100,000 -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Series IV Warrants included in Unit Purchase Option 100,000 -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock issuable upon exercise of Series IV Warrants in Unit Purchase Option 100,000(2) $4.31(1)(3) $431,000 $131 - ---------------------------------------------------------------------------------------------------------------------------------- Series IV Warrants offered by Selling Securityholders 2,750,000 $0.25(1) $687,500 $209 - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock issuable upon exercise of Series IV Warrants offered by Selling Securityholders 2,750,000(2) $4.31(1)(3) $11,852,500 $3,592 - ---------------------------------------------------------------------------------------------------------------------------------- Total Registration Fee $7,744 ==================================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(a). (2) Pursuant to Rule 416, there are also being registered such additional shares of Common Stock as may be issuable pursuant to the anti-dilution provisions of the Preferred Stock and the Series IV Warrants. (3) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) based upon 115% of the closing price for shares of Common Stock on December 16, 1996 (as adjusted for the proposed one-for-ten reverse split of the outstanding Common Stock). (facing page continues) THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. EXPLANATORY NOTE This registration statement covers the primary offering of Units by Questron Technology, Inc. (the "Company") and the offering of securities by certain selling securityholders (the "Selling Securityholders"). The Company is registering, under the primary prospectus ("Primary Prospectus"), certain securities including 1,000,000 Units (excluding Units issuable upon exercise of the Underwriter's over-allotment option and Units issuable upon exercise of the Underwriter's Unit Purchase Option), each Unit consisting of one share of Series B Convertible Preferred Stock ("Series B Preferred Stock") and one Series IV Common Stock Purchase Warrant ("Series IV Warrant") and the shares of Common Stock of the Company issuable upon conversion of the Series B Preferred Stock and exercise of the Series IV Warrants included in the Units. The Company is registering, on behalf of the Selling Securityholders, under an alternate prospectus ("Alternate Prospectus"), 2,750,000 Series IV Warrants and the shares of Common Stock of the Company issuable upon exercise of such Series IV Warrants. The Alternate Prospectus pages, which follow the Primary Prospectus, contain certain sections which are to be combined with all of the sections contained in the Primary Prospectus, with the following exceptions: the front and back cover pages, and the sections entitled "The Offering" and "Selling Securityholders." In addition, the sections entitled "Concurrent Sales" and "Plan of Distribution" will be added to the Alternate Prospectus. Furthermore, all references contained in the Alternate Prospectus to the "offering" shall refer to the Company's offering under the Primary Prospectus. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. Subject to Completion, dated December 19, 1996 PROSPECTUS 1,000,000 UNITS QUESTRON TECHNOLOGY, INC. Questron Technology, Inc., a Delaware corporation ("the Company"), is offering 1,000,000 units ("Units") at a price of $6.00 per Unit. Each Unit consists of one share of the Company's Series B Convertible Preferred Stock, par value $.01 per share ("Series B Preferred Stock"), and one redeemable Series IV Common Stock Purchase Warrant of the Company ("Series IV Warrant"). The Units, the Series B Preferred Stock and the Series IV Warrants are sometimes referred to as the "Securities." The Series B Preferred Stock and Series IV Warrants are detachable and may trade separately immediately upon issuance. See "Risk Factors" and "Description of Securities." Each share of Series B Preferred Stock shall automatically convert, without any action on the part of the holder thereof or the Company, into ___________ shares of Common Stock, par value $.001 per share, of the Company ("Common Stock") on the second anniversary of the date of this Prospectus ("Effective Date"). This conversion ratio is equal to 80% of the closing price per share as reported by the Nasdaq SmallCap Market for the Common Stock on the day immediately preceding the Effective Date compared with an offering price of $5.75 per share of Series B Preferred Stock (based upon a valuation of $0.25 for a Series IV Warrant included in a Unit). Holders of the Series B Preferred Stock will be entitled to receive, in respect of the two years before the Series B Preferred Stock converts, an annual dividend per share equal to 2% of the $5.75 offering price of the Series B Preferred Stock or $0.115 per share. Such dividends will be payable on each of the two anniversaries following the Effective Date, in cash or shares of Common Stock at the option of the Company. The Series IV Warrants shall be exercisable commencing one year after the Effective Date. Each Series IV Warrant entitles the holder to purchase one share of Common Stock at an exercise price of $____ per share (which is 115% of the closing market price per share of the Common Stock on the day preceding the Effective Date) during the four year period commencing one year from the Effective Date. The Series IV Warrants are redeemable by the Company for $.05 per Warrant, at any time after one year from the Effective Date, upon 30 days' prior written notice, if the closing bid price of the Common Stock, as reported by the Nasdaq SmallCap Market, exceeds $ ____ per share for any 20 consecutive trading days ending within ten days prior to the date of the notice of redemption. Upon 30 days' written notice to all holders of the Series IV Warrants, the Company shall have the right to reduce the exercise price and/or extend the term of the Series IV Warrants in compliance with the requirements of Rule 13e-4 to the extent applicable. See "Description of Securities." The registration statement of which this Prospectus is a part also relates to the offering of 2,750,000 Series IV Warrants which may be sold by the holders of such securities (the "Selling Securityholders"). Of these Series IV Warrants, 1,500,000 were issued to a Selling Securityholder by the Company in connection with the proposed acquisition by the Company of all of the issued and outstanding shares of Comp Ware, Inc., a Delaware corporation which does business as Webb Distribution ("Webb"). Such warrants are being held in escrow subject to the completion of the acquisition of Webb. The remaining 1,250,000 Series IV Warrants were issued to certain Selling Securityholders pursuant to an exchange agreement upon cancellation of rights under prior agreements. The securities held by the Selling Securityholders may be sold commencing 18 months from the Effective Date of this Prospectus subject to earlier release at the sole discretion of the Underwriter. Certificates evidencing these securities will bear a legend reflecting such restrictions. The Underwriter may release the securities held by the Selling Securityholders at any time after all securities subject to the Underwriter's Over-Allotment Option (as hereinafter defined) have been sold or such option has expired. The Underwriter's Over-Allotment Option period will expire 30 days following the Effective Date. In other offerings where Biltmore Securities, Inc. has acted as the managing underwriter, it has released similar restrictions applicable to selling securityholders prior to the expiration of the lock-up period and in some cases immediately after the exercise of the Over- Allotment Option or the expiration of the Over-Allotment Option period. The resale of the securities held by the Selling Securityholders is subject to prospectus delivery and other requirements of the Securities Act of 1933, as amended. Sales of such securities or the potential of such sales at any time may have an adverse effect on the market prices of the securities offered hereby. See "Selling Securityholders." The closing of this offering is conditioned upon and is to occur simultaneously with the closing of the Company's acquisition of Webb. See "Business--Proposed Acquisition of Webb" and "Underwriting." It is anticipated that the Units will be sold at a price of $6.00 per Unit. Prior to this offering, there has been no public market for the Units, Series B Preferred Stock or Series IV Warrants. The Company is applying for inclusion of the Units, Series B Preferred Stock and Series IV Warrants on the Nasdaq SmallCap Market, under the symbols [QUSTU], [QUSTP] and [QUSTW], respectively, although there can be no assurances that such securities will be accepted for quotation or, if accepted, that an active trading market will develop. In addition, if the Company's securities are accepted for quotation and active trading develops, the Company is required to maintain certain minimum criteria established by Nasdaq and there can be no assurance that the Company will be able to continue to fulfill such criteria. See "Risk Factors." The Common Stock of the Company is listed on the Nasdaq SmallCap Market under the symbol "QUST". On December 18, 1996, the closing price per share of the Common Stock as reported by the Nasdaq SmallCap Market was $3.125, after giving effect to the proposed one-for-ten reverse split of the issued and outstanding Common Stock. See "Price Range for Common Stock and Dividends." For additional information regarding the factors considered in determining the initial public offering price of the Units and the exercise price of the Series IV Warrants, see "Description of Securities" and "Underwriting." AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS," WHICH BEGINS ON PAGE [ ]. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ============================================================================== UNDERWRITING DISCOUNTS PROCEEDS TO THE PRICE TO PUBLIC AND COMMISSIONS (1) COMPANY (2) - ------------------------------------------------------------------------------ Per Unit....... $6.00 $0.60 $5.40 - ------------------------------------------------------------------------------ Total (3)...... $6,000,000 $600,000 $5,400,000 ============================================================================== (See Notes, next page) The securities are offered by the Underwriter subject to prior sale when, as and if delivered to and accepted by the Underwriter, and subject to the Underwriter's right to reject orders in whole or in part and to certain other conditions. It is expected that delivery of certificates representing the Units, Series B Preferred Stock and Series IV Warrants will be made on or about [ ], 1997. ------------------------------------ BILTMORE SECURITIES, INC. The date of this Prospectus is [ ], 1997. NOTES (1) Does not include additional compensation to be received by the Underwriter in the form of (i) a nonaccountable expense allowance of $180,000 (or $207,000 if the Underwriter's Over-Allotment Option (as defined below) is fully exercised); (ii) an option to purchase Units equal to 10% of those being offered to the public (excluding the Underwriter's Over-Allotment Option Units, if any) at an exercise price of $7.20 per Unit ("Underwriter's Unit Purchase Option"); (iii) a payment of $100,000 in respect of advisory services to be provided by the Underwriter over a two year period; and (iv) a fee payable (subject to certain exclusions) upon the exercise of Series IV Warrants equal to 4% of the exercise price. In addition, the Company and the Underwriter have agreed to indemnity and contribution provisions regarding certain civil liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the offering payable by the Company, estimated at $580,000 (or $607,000 if the Underwriter's Over-Allotment Option, as defined below, is fully exercised), including the Underwriter's nonaccountable expense allowance. See "Underwriting." (3) The Company has granted the Underwriter a 30 day option to purchase an additional 15% of the total Units offered to the public upon the same terms and conditions as set forth above solely to cover over-allotments, if any ("Underwriter's Over-Allotment Option"). If the Underwriter's Over-Allotment Option is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions, and Proceeds to the Company will be $6,900,000, $690,000 and $6,210,000, respectively. See "Underwriting." IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, SERIES B PREFERRED STOCK, AND SERIES IV WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ALTHOUGH OTHER BROKER-DEALERS HAVE EXPRESSED AN INTENTION TO PARTICIPATE IN THE OFFERING, ALL OR A SIGNIFICANT NUMBER OF THE UNITS TO BE SOLD IN THIS OFFERING MAY BE SOLD, IN THE ORDINARY COURSE OF BUSINESS, TO CUSTOMERS OF THE UNDERWRITER, WHICH MAY AFFECT THE MARKET FOR AND LIQUIDITY OF THE COMPANY'S SECURITIES IN THE EVENT THAT ADDITIONAL BROKER-DEALERS DO NOT MAKE A MARKET IN THE COMPANY'S SECURITIES. ALTHOUGH OTHER BROKER-DEALERS HAVE EXPRESSED AN INTENTION TO MAKE A MARKET IN THE COMPANY'S SECURITIES FOLLOWING THE OFFERING, THERE CAN BE NO ASSURANCE THAT ANY OF SUCH BROKER-DEALERS WILL ACTUALLY COMMENCE SUCH MARKET-MAKING ACTIVITIES OR, IF COMMENCED, THAT SUCH ACTIVITIES WILL BE MAINTAINED. BASED UPON THE UNDERWRITER'S EXPERIENCE IN PAST OFFERINGS, IT IS EXPECTED THAT SUCH CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN TRANSACTIONS FOR THE SALE OR PURCHASE OF THE UNITS, SERIES B PREFERRED STOCK AND SERIES IV WARRANTS CONTAINED THEREIN THROUGH AND/OR WITH THE UNDERWRITER. NO AGREEMENTS OR UNDERSTANDINGS, WRITTEN OR ORAL, EXIST WITH RESPECT TO THE PURCHASE OR RESALE OF THE SECURITIES TO BE SOLD IN THIS OFFERING THROUGH OR WITH THE UNDERWRITER AND/OR ITS AFFILIATES. ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM TIME TO TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S SECURITIES. THE UNDERWRITER, IF IT PARTICIPATES IN THE MARKET, MAY BECOME A DOMINATING INFLUENCE IN THE MARKET FOR THE UNITS, SERIES B PREFERRED STOCK AND SERIES IV WARRANTS. HOWEVER, THERE IS NO ASSURANCE THAT THE UNDERWRITER WILL OR WILL NOT CONTINUE TO BE A DOMINATING INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED HEREUNDER MAY BE SIGNIFICANTLY AFFECTED BY THE DEGREE OF THE UNDERWRITER'S PARTICIPATION IN SUCH MARKET. THE UNDERWRITER MAY DISCONTINUE SUCH ACTIVITIES AT ANY TIME OR FROM TIME TO TIME. SEE "RISK FACTORS--LACK OF PRIOR MARKET FOR UNITS, SERIES B PREFERRED STOCK AND SERIES IV WARRANTS" AND "UNDERWRITER'S INFLUENCE ON THE MARKET MAY HAVE ADVERSE CONSEQUENCES." -2- NOTE ON FORWARD-LOOKING STATEMENTS Certain information set forth in this Prospectus includes "Forward-Looking Statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and is subject to certain risks and uncertainties, including those identified under the caption "Risk Factors." Readers are cautioned not to place undue reliance on these statements, which speak only as of the date hereof. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect unanticipated events or developments. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). The reports and other information filed by the Company can be inspected and copied without charge at the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional offices of the Commission: Seven World Trade Center, 13th Floor, New York, New York 10048, and Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Registration statements and other documents and reports that are filed electronically through the Electronic Data Gathering, Analysis and Retrieval System (including the Registration Statement) are publicly available through the Commission's web site on the Internet (http://www.sec.gov). This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement for a more complete description of the matter involved, each such statement being qualified in its entirety by such reference. The Company will provide without charge to each person who receives this Prospectus, upon written or oral request of such person, a copy of any of the information that is incorporated by reference herein (excluding exhibits to the information that is incorporated by reference unless the exhibits are themselves specifically incorporated by reference) by contacting the Company at Questron Technology, Inc., 6400 Congress Avenue, Suite 200, Boca Raton, Florida 33487, telephone (407) 241-5251, attention: Treasurer. -3- PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including information contained under the caption "Risk Factors," and financial statements, including notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus does not give effect to the exercise of the Underwriter's Over-Allotment Option described under "Underwriting." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO THE PROPOSED ONE-FOR-TEN REVERSE SPLIT OF THE ISSUED AND OUTSTANDING COMMON STOCK, THE PROPOSED REDUCTION IN THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK FROM 50,000,000 SHARES TO 20,000,000 SHARES AND THE PROPOSED REDUCTION IN THE AUTHORIZED NUMBER OF SHARES OF PREFERRED STOCK, PAR VALUE $.01 PER SHARE ("PREFERRED STOCK"), FROM 10,000,000 TO 6,000,000. All of the foregoing proposals have been submitted by the Board of Directors of the Company for the approval of the Company's stockholders at the annual meeting of stockholders scheduled for December 27, 1996 and, if so approved, an amendment to the Company's Certificate of Incorporation effecting such proposals will be filed as soon as practicable following such meeting. Each prospective investor is urged to read this Prospectus in its entirety. THE COMPANY Questron Technology, Inc. (the "Company") is a publicly owned company which, through its wholly-owned subsidiary Quest Electronic Hardware, Inc. ("Quest"), is a specialized distributor of fasteners and electronic hardware sold to electronic equipment manufacturers. The Company also conducts an alternative dispute resolution service through its wholly-owned subsidiary Judicate of Philadelphia, Inc. The Company proposes to acquire the business of Comp Ware, Inc., a Delaware corporation which does business as Webb Distribution ("Webb"), and the closing of the offering made hereby (the "Offering") is conditioned upon and is to occur simultaneously with the closing of the Company's acquisition of Webb. Webb is a privately owned specialized distributor of electronic hardware, fasteners and components. The Company has entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") dated as of December 16, 1996 with the stockholders of Webb to acquire all of the issued and outstanding stock of Webb. Under the Stock Purchase Agreement, the stockholders of Webb have agreed to exchange their shares of Webb for $3,250,000 in cash, 1,500,000 Series IV Warrants and two notes (the "Notes") in the aggregate amount of $750,000 (each for $375,000). Note A shall mature eighteen months from the Effective Date, bear interest at 10% per annum and is payable at maturity as to both principal and interest. Note B shall mature five years from the Effective Date, is payable in equal monthly installments over such five year period from the Effective Date and shall bear interest at 10% per annum. The Company delivered to the majority stockholder of Webb the 1,500,000 Series IV Warrants as a deposit on account of the purchase price under said agreement at the time of the signing of the Stock Purchase Agreement. Such warrants are being held in escrow subject to the completion of the acquisition of Webb. These Series IV Warrants will be cancelled if the Webb acquisition does not close. Proceeds received by the majority stockholder of Webb from a sale of the Series IV Warrants may, in some cases, reduce the Company's obligations under the Notes. See "Business--Proposed Acquisition of Webb." It is intended that the business of Webb will operate as a wholly-owned subsidiary of the Company. The Company may elect to merge Webb into Quest at a future date. The Company intends -4- to use the net proceeds from this Offering to pay the $3,250,000 cash portion of the consideration for the acquisition of Webb, to repay $1,180,000 of Webb indebtedness and to repay $390,000 of the Company's indebtedness. Webb and Quest each act as specialized distributors of fasteners and electronic hardware sold to electronic equipment manufacturers. The businesses, with operating locations in Austin, Boston, Colorado Springs, Dallas, Reno, and San Jose, serve more than 1,000 customers in the high technology electronic equipment manufacturing industry, including leading computer, telecommunications and medical instrumentation companies. The Company was incorporated as Judicate, Inc. in the State of Delaware on August 1, 1983. The Company subsequently changed its name to Questron Technology, Inc. on April 2, 1996. The principal executive offices of the Company are located at 6400 Congress Avenue, Suite 200, Boca Raton, Florida 33487 and its telephone number is (407) 241-5251. QUEST ELECTRONIC HARDWARE, INC. Questron, through its wholly-owned subsidiary Quest, acts as a specialized distributor of fasteners and electronic hardware sold to electronic equipment manufacturers. Prior to Quest's acquisition from Arrow Electronics, Inc. in March 1995, the fasteners business had operated as a distributor of fasteners and electronic hardware for more than twenty years. Management's goal is to expand the business though a combination of continued penetration of existing markets and expansion into new markets, including geographic expansion. Approximately 50% of Quest's sales are of industrial fasteners, 10% are of "spacers" and "standoffs" (products used in conjunction with fasteners), and the remaining sales are divided among a variety of products, including plastic components, cable ties and accessories, drawer slides, connectors, and design/prototype components. The demand for products offered by Quest is relatively stable, with minimal technological change. Quest has developed a customer base consisting of over 250 active customers. These customers demand quality service and in many cases are willing to pay premium prices. Over 95% of Quest's sales are recurring sales to existing customers. Currently, the business is concentrated in California, Texas, Colorado and Nevada; however, Quest is seeking to expand its business geographically, particularly into the eastern U.S through the Webb acquisition. Quest's sales have increased at a compound annual growth rate of 17% over the past four years. This sales growth was achieved principally from word-of-mouth referrals without the benefit of a comprehensive marketing program or geographic expansion. Management believes that Quest's future growth will be enhanced by implementing a comprehensive marketing plan, including the present strategy of adding marketing programs responsive to customers' specific requirements (e.g., bin replenishment programs), further penetration of existing accounts and identification of new accounts and geographic expansion. The U.S. market for the distribution of fasteners and related products is divided into two major segments: large manufacturers of fasteners, who supply large industrial users directly; and distributors, -5- who service smaller industrial users. Such distributors, however, are increasingly supplying larger accounts that can no longer be serviced effectively by the manufacturers. The distribution side consists of distributors who provide a rapid response capability to service customer needs and assist in selecting appropriate fasteners. COMP WARE, INC. D/B/A WEBB DISTRIBUTION Webb Distribution, Inc. was incorporated in the State of Connecticut in May 1989 as a distributor of electronic hardware, fasteners and components. In February 1995, Webb Distribution, Inc. was merged into Comp Ware, Inc., a newly created Delaware corporation, in a migratory merger and currently conducts business under the name Webb Distribution. The business is concentrated in the New England area. The Company's principal executive offices are located at 2 Lowell Avenue, Winchester, MA 08190. The business of Webb is substantially similar to the business of Quest, serving customers in the high technology equipment manufacturing industry. Webb serves a variety of different markets on both a direct order basis and in providing services such as bin stock replenishment. Along with serving the original equipment manufacturers ("OEM's") markets, Webb also serves industrial, military, sheet metal and metal fabrication industries. With over 300 suppliers and many product categories and types, Webb does not regard any one supplier of products as essential to its operations. Webb, through its suppliers, is able to serve many market segments, as evidenced by its more than 800 active industrial, commercial and military customers. Webb's annual sales amounted to $7.8 million for the year ended December 31, 1995 and $6.1 million for the nine months ended September 30, 1996. SEE "RISK FACTORS," "MANAGEMENT," "BUSINESS" AND "CERTAIN TRANSACTIONS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS.
THE OFFERING* Units Offered by the Company (1)........................ 1,000,000 Units Terms of Conversion of Series B Preferred Stock................................................... Each share of Series B Preferred Stock will be automatically converted on the second anniversary of the Effective Date into ____ shares of Common Stock. See "Description of Securities." Series B Preferred Stock Dividend....................... 2% per annum until converted, payable in cash or Common Stock at the Company's option. Series IV Warrants Offered by the Selling Securityholders......................................... 2,750,000 Warrants -6- Use of Net Proceeds..................................... To fund the acquisition of Webb and to repay certain indebtedness. See "Use of Proceeds." OUTSTANDING EQUITY SECURITIES IMMEDIATELY PRIOR TO THE OFFERING: Shares of Common Stock (2).............................. 1,535,484 OUTSTANDING EQUITY SECURITIES IMMEDIATELY SUBSEQUENT TO THE OFFERING: Shares of Common Stock (3).............................. 1,535,484 Shares of Series B Preferred Stock(4)................... 1,000,000 Comparative Share Ownership After Offering: Present Stockholders........................... 1,535,484 New Investors(5)............................... [_____] NASDAQ SYMBOLS: Common Stock............................................ QUST Units (Proposed)........................................ QUSTU Series B Preferred Stock (Proposed)..................... QUSTP Series IV Warrants (Proposed)........................... QUSTW
- ---------- * ALL FIGURES CONTAINED HEREIN REFLECT THE PROPOSED AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION IN CONJUNCTION WITH THE 1996 ANNUAL MEETING WHEREBY THE BOARD OF DIRECTORS HAS PROPOSED A ONE-FOR-TEN REVERSE SPLIT OF THE ISSUED AND OUTSTANDING COMMON STOCK AS WELL AS A REDUCTION IN THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK AND SERIES B PREFERRED STOCK. (1) The Company is offering 1,000,000 Units at a price of $6.00 per Unit. Each Unit consists of one share of Series B Preferred Stock and one Series IV Warrant. Each share of Series B Preferred Stock will automatically convert, without any action on the part of the holder thereof or the Company, into ______ shares of Common Stock on the second anniversary of the Effective Date. Each Series IV Warrant entitles the holder to purchase one share of Common Stock at an exercise price of 115% of the closing market price per share of the Common Stock on the day preceding the Effective Date during the four year period commencing one year from the Effective Date. The Series IV Warrants are redeemable upon certain conditions. Should the Series IV Warrants be exercised, of which there is no assurance, the Company will receive the proceeds therefrom aggregating up to an additional $[ ]. See "Description of Securities." (2) Does not include shares of Common Stock issuable upon the exercise of the Series IV Warrants offered by the Selling Securityholders. (3) Does not include shares of Common Stock issuable (i) upon conversion of the Series B Preferred Stock; (ii) upon the exercise of the Series IV Warrants included in the Units or offered by the Selling Securityholders; (iii) upon the exercise of the Underwriter's Over-Allotment Option to purchase up to 150,000 Units, or (iv) upon exercise of the Underwriter's Unit Purchase Option. (4) These shares of Series B Preferred Stock are convertible into_______ shares of Common Stock. (5) Assumes conversion of the Series B Preferred Stock into ________ shares of Common Stock. -7- SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Prospectus. The statement of operations data for the years ended December 31, 1995 and 1994 and the balance sheet data as of December 31, 1995 are derived from, and should be read in conjunction with, the Company's financial statements and notes thereto audited by Moore Stephens, P.C., independent auditors, included elsewhere in this Prospectus. The selected financial data as of and for the nine months ended September 30, 1996 and 1995 have been derived from unaudited financial statements also appearing herein which, in the opinion of management, include all adjustments (consisting of only normal, recurring adjustments) necessary for a proper statement of the results of operations for such unaudited periods. The results of operations for the nine months ended September 30, 1996 and 1995 are not necessarily indicative of the results to be expected for the entire year or for any other period. The pro forma balance sheet data have been prepared assuming that the acquisition of Webb and other events described in the footnotes below had occurred as of September 30, 1996. The pro forma statement of operations data has been prepared as if the events described in the footnotes below had occurred at the beginning of the earliest fiscal year presented and were carried forward through the latest interim period presented. BALANCE SHEET DATA: December 31, 1995 September 30, 1996 (unaudited) ------------------------------- Actual Actual Pro Forma (1) ---------- ---------- ------------- Current assets $5,053,762 $5,052,502 $8,000,529 Total assets 12,432,998 12,514,539 19,243,787 Current liabilities 2,070,094 1,737,134 2,992,427 Total liabilities 4,255,094 3,947,134 5,506,382 Working capital 2,983,668 3,315,368 5,008,102 Stockholders' equity 8,177,904 8,567,405 13,762,405 - ------------ (1) Gives effect to the following transactions: (i) the acquisition of Webb; and (ii) the sale of 1,000,000 Units by the Company and the net proceeds therefrom and the uses thereof. -8-
STATEMENT OF OPERATIONS DATA: Nine months ended September 30, ------------------------------------------------------ 1995 1996 1996 Actual Actual Pro Forma (1) ------ ------ ------------- (unaudited) (unaudited) (unaudited) Total revenues $4,908,757 $8,264,940 $14,353,886 Operating income 404,134 673,515 1,246,839 Net income 229,117 389,501 929,038 Net income per common share $0.02 $0.03 $0.27 Weighted average number of common shares and common share equivalents outstanding 13,707,612 15,399,846 3,456,652(2) Ratio of earnings to fixed charges 3.1 to 1.0 2.9 to 1.0 5.5 to 1.0 For the Years Ended December 31, --------------------------------------------------------- 1994 1995 1995 Actual Actual Pro Forma (1) ------ ------ ------------- (unaudited) Total revenues $844,025 $7,259,155 $15,052,334 Operating income (641,081) 584,906 1,173,155 Net income (641,033) 352,187 902,926 Net income per common share $(0.23) $0.03 $.27 Weighted average number of common shares and common share equivalents outstanding 2,793,402 13,795,632 3,296,230(2) Ratio of earnings to fixed charges (3) 2.9 to 1.0 5.6 to 1
- --------------- (1) Adjusted to reflect: (i) the reductions of interest expense associated with the repayment of certain debt; (ii) the reduction of salaries resulting from the retirement of the majority selling stockholder; (iii) the additional charges related to the amortization of the cost of the Webb acquisition in excess of the net assets acquired; and (iv) the reduction in income tax expense through the use of available tax loss carryforwards. (2) Reflects the effect of the proposed one-for-ten reverse stock split and the common share equivalents related to the convertible preferred stock to be issued pursuant to the Offering. (3) Earnings are inadequate to cover fixed charges. The coverage deficiency is $606,811. -9- RISK FACTORS THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. ONLY THOSE PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT SHOULD PURCHASE THESE SECURITIES. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY READ THIS PROSPECTUS AND CONSIDER, ALONG WITH OTHER MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS: FORWARD LOOKING STATEMENTS When used in this Prospectus and the documents incorporated herein by reference, the words "believes", "anticipates", "expects" and similar expressions are intended to identify in certain circumstances, forward-looking statements. Such statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected, including the risks described in the "Risk Factors" section. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such statements. The Company also undertakes no obligation to update these forward-looking statements. COMBINED OPERATIONS SUBSEQUENT TO THE ACQUISITION The Company has entered into the Stock Purchase Agreement, pursuant to which the Company has agreed to purchase all issued and outstanding stock of Webb. The consummation of the Offering is conditioned upon and is to occur simultaneously with the acquisition of Webb. If the acquisition of Webb is not so completed, the closing of this Offering will not occur and all proceeds of this Offering will be returned to investors. If the acquisition does occur, upon consummation of the transactions contemplated hereby, the Company's revenues will be derived from the businesses of both its existing business and Webb. Management of the Company, after the acquisition, will be composed of the current management of the Company. The Company can make no assurances that this combination of businesses will prove as successful as each business was independently. See "Dependence on Management and Limitations on Certain Experience." NO ASSURANCE OF FUTURE PROFITABILITY OR PAYMENT OF DIVIDENDS No assurance can be given that the future operations of the Company or its subsidiaries will be profitable. Should the operations of the Company or its subsidiaries remain profitable, it is likely that the Company or its subsidiaries would retain much or all of the earnings in order to finance future growth and expansion. Therefore, the Company does not presently intend to pay dividends on its Common Stock, but may consider the payment of dividends at some time in the future. See "Dividend Policy." The Company will be obligated to pay dividends at the rate of $0.115 or 2% per share of Series B Preferred Stock in respect of the two year period prior to its conversion. Such dividends may be paid in cash or shares of Common Stock, at the Company's option, and, if paid in shares, there can be no assurance that the holder will be able to sell the shares so received for the value of such dividend. 10 DEPENDENCE UPON MAJOR CUSTOMERS Quest serves more than 250 industrial and commercial customers. The ten largest customers account for approximately 50% of Quest's sales, with one customer accounting for 14% of those sales. Webb serves more than 800 customers. The 10 largest customers of Webb account for approximately 38% of Webb's sales, with one customer accounting for 8% of sales. Sales to these twenty customers account for approximately 45% of the combined revenues of Quest and Webb. See "Business." These sales arrangements are terminable upon short notice and none of these customers is obligated to continue to use the services of Quest or Webb at all or at existing prices. In addition, these customers could demand price concessions by Quest and/or Webb which could adversely affect profits and profit margins. The termination by these customers of their relationship with the Company and/or Webb or a substantial decrease in prices paid by these customers would have a material adverse affect upon the business, properties, financial condition, results of operations and prospects of the Company. The dependence on major customers subjects Quest and Webb to significant financial risk in the operation of their businesses should a major customer terminate, for any reason, its business relationship with Quest or Webb. In such an event, the financial condition of the Company may be adversely affected and the Company may be required to obtain additional financing, the availability of which there can be no assurance. The continuing ability of Quest and Webb to maintain these customer relationships and to build new relationships is dependent, among other things, upon their ability to maintain the high quality standards demanded by their customers. POSSIBLE NEED FOR ADDITIONAL FINANCING The Company intends to fund its operations and other capital needs for the next twelve months substantially from operations, available borrowings under the Company's credit agreement with a bank, and the proceeds of this Offering, however there can be no assurance that such funds will be sufficient for these purposes. The Company will use the proceeds of this Offering as partial consideration for the acquisition of Webb and the repayment of certain indebtedness as described in "Use of Proceeds." In addition, a portion of the Webb purchase price has been deferred by means of the delivery of two notes (the "Notes") in the aggregate amount of $750,000 (each for $375,000). Note A shall mature eighteen months from the Effective Date, bear interest at 10% per annum and is payable at maturity as to both principal and interest. Note B shall mature five years from the Effective Date, is payable in equal monthly installments over such five year period from the Effective Date and shall bear interest at 10% per annum. In the event that the Company needs additional financing to fund its operations and capital needs, there can be no assurance that such financing will be available, or that it will be available on acceptable terms. See "Use of Proceeds." DEPENDENCE ON MANAGEMENT AND LIMITATIONS ON CERTAIN EXPERIENCE The Company's business is principally dependent on certain key management personnel for the operation of its business. In particular, Dominic A. Polimeni has played the primary role in the promotion, development and management of the Company. A subsidiary of the Company has entered into an employment agreement with Mr. Polimeni, which expires on March 21, 2000. The agreement requires Mr. Polimeni to devote such portion of his business time and energies to the business and affairs 11 of the Company as is needed to perform his duties under the agreement. If the employment of Mr. Polimeni terminates, or he is unable to perform his duties, the Company may be adversely affected. See "Business" and "Management." SUBSTANTIAL COMPETITION The market for the Company's products is highly competitive, and the Company encounters substantial competition from domestic businesses. Some of the Company's competitors have substantially greater financial resources and technical expertise than the Company and may offer lower prices on competing products. In addition, such competitors may have substantially greater managerial capabilities than the Company and, consequently, the Company may be at a substantial competitive disadvantage in the conduct of its business. Increased competition could result in product price reductions, reduced margins and loss of market share, all of which could have a material adverse effect on the Company's results of operations and financial condition. See "Business." BROAD DISCRETION IN APPLICATION OF PROCEEDS The management of the Company has broad discretion to adjust the application and allocation of the net proceeds of this Offering, including funds received upon exercise of the Series IV Warrants. As a result of the foregoing, the success of the Company will be substantially dependent upon the discretion and judgment of the management of the Company with respect to the application and allocation of the net proceeds hereof. Of the net proceeds of the Offering, $3,250,000 will be immediately used to pay a portion of the purchase price for the Webb acquisition and $1,570,000 will be used to reduce certain outstanding debt. Pending the application of the net proceeds, the funds will be invested by the Company in temporary, short-term interest-bearing obligations. See "Use of Proceeds," "Business" and "Management." VOTING CONTROL; POTENTIAL ANTI-TAKEOVER EFFECT After giving effect to this Offering and to the acquisition of Webb (without giving effect to the sales of any securities by the Selling Securityholders but assuming conversion of the Series B Preferred Stock), the officers, directors and principal stockholders of the Company will beneficially own approximately [ ]% of the Company's Common Stock and will have the right to acquire up to an additional [ ]% of the Common Stock pursuant to outstanding options and warrants. See "Securities Ownership." Accordingly, such persons may, with the votes of the holders of an additional [ ]% of the Company's Common Stock, be able to approve major corporate transactions including those involving amendments to the Certificate of Incorporation of the Company or the sale of substantially all of the Company's assets and may be able to elect all of the directors of the Company and to control the Company's affairs. This voting control may have the effect of delaying or preventing a change in control of the Company and may adversely affect the rights of the holders of the shares of Common Stock of the Company. In addition, the Company is subject to a State of Delaware statute regulating business combinations which may also hinder or delay a change of control. LIMITATION ON DIRECTOR LIABILITY As permitted by the Delaware General Corporation Law, the Company's Certificate of Incorporation limits the liability of directors to the Company or its stockholders for monetary damages for breach of a director's fiduciary duty, except for liability in four specific instances. These four areas 12 are: (i) any breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) unlawful payments of dividends or unlawful stock purchases or redemptions as provided in Section 174 of the Delaware General Corporation Law, or (iv) any transaction from which the director derived an improper personal benefit. As a result of these limitations on a Director's liability, stockholders may have more limited rights to recover against directors for breach of fiduciary duty than they would have otherwise. REQUIREMENTS OF CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN CONNECTION WITH THE EXERCISE OF THE SERIES IV WARRANTS WHICH MAY NOT BE EXERCISABLE AND MAY THEREFORE BE VALUELESS The Company will be able to issue the securities offered hereby and shares of its Common Stock upon the exercise of the Series IV Warrants only if (i) there is a current prospectus relating to the securities offered hereby under an effective registration statement filed with the Commission and (ii) such Common Stock is, to the extent required, then qualified for sale or exempt therefrom under applicable state securities laws of the jurisdictions in which the various holders of Series IV Warrants reside. There can be no assurance, however, that the Company will be successful in maintaining a current registration statement. After a registration statement becomes effective, it may require updating by the filing of a post-effective amendment. A post-effective amendment is required under the Securities Act (i) anytime after nine months subsequent to the effective date thereof when any information contained in the prospectus is over 16 months old; (ii) when facts or events have occurred which represent a fundamental change in the information contained in the registration statement; or (iii) when any material change occurs in the information relating to the plan or distribution of the securities registered by such registration statement. The Prospectus forming a part of this Registration Statement will remain current within the meaning of the Securities Act for not more than nine months following the date of this Prospectus, or until [ ], 1997, assuming a post-effective amendment is not filed by the Company. The Company intends to qualify the sale of the Units in a limited number of states, although certain exemptions under certain state securities ("Blue Sky") laws may permit the Series IV Warrants to be transferred to purchasers in states other than those in which the Series IV Warrants were initially qualified. The Company will be prevented, however, from issuing Common Stock upon exercise of the Series IV Warrants in those states where exemptions are unavailable and the Company has failed to qualify the Common Stock issuable upon exercise of the Series IV Warrants. The Company may decide not to seek, or may not be able to obtain qualification of the issuance of such Common Stock in all of the states in which the ultimate purchasers of the Series IV Warrants reside. In such a case, the Series IV Warrants of those purchasers will expire and have no value if such warrants cannot be exercised or sold. Accordingly, the market for the Series IV Warrants may be limited because of the Company's obligation to fulfill both of the foregoing requirements. See "Description of Securities." ADDITIONAL AUTHORIZED SHARES AVAILABLE FOR ISSUANCE MAY ADVERSELY AFFECT THE MARKET After giving effect to the proposed one-for-ten reverse stock split and the proposed reduction in authorized Common Stock and Preferred Stock, the Company is authorized to issue 20,000,000 of its shares of its Common Stock and 6,000,000 shares of Preferred Stock. There are currently 1,535,484 shares of Common Stock issued and outstanding and upon completion of the proposed offering, there will be a total of 1,000,000 shares of Series B Preferred Stock outstanding. Of the remaining 5,000,000 authorized shares of Preferred Stock, 900,000 shares were previously issued under terms which provided that they could not be reissued at a later date. All 900,000 of such shares were previously converted into Common Stock. In addition, the following securities have been reserved for issuance: _________ shares of Common Stock issuable, commencing two years from the Effective Date, upon conversion of the Series B Preferred Stock: 1,000,000 shares of Common Stock issuable upon exercise of the Series IV 13 Warrants offered to investors in this Offering; 150,000 Units issuable pursuant to the Underwriter's Over- Allotment Option; 150,000 shares of Series B Preferred Stock included in the Underwriter's Over- Allotment Option which are convertible into _________ shares of Common Stock; 150,000 shares of Common Stock issuable upon exercise of the Series IV Warrants included in the Underwriter's Over- Allotment Option; 100,000 Units issuable upon exercise of the Underwriter's Unit Purchase Option; 100,000 shares of Series B Preferred Stock included in the Underwriter's Unit Purchase Option which are convertible into ____ shares of Common Stock; 100,000 shares of Common Stock which are issuable upon exercise of the Series IV Warrants included in the Underwriter's Unit Purchase Option; 2,750,000 shares of Common Stock issuable upon exercise of the Series IV Warrants of the Selling Securityholders and 1,679,767 shares of Common Stock issuable upon the exercise of certain other outstanding options and warrants. The foregoing does not give effect to Common Stock issuable for the payment of Series B Preferred Stock dividends. The Selling Securityholders have agreed not to sell, transfer or assign any of the 2,750,000 Series IV Warrants offered under the Alternate Prospectus for a period of 18 months following the Effective Date without the consent of the Underwriter. In other offerings where the Underwriter has acted as the managing underwriter, it has released similar restrictions applicable to selling securityholders prior to the expiration of the lock-up period and in some cases immediately after the exercise of the Over-Allotment Option or the expiration of the Over-Allotment Option period. After the exercise of all such warrants and options the Company will have [ ] shares of Common Stock outstanding and [ ] shares of authorized but unissued Common Stock available for issuance without further stockholder approval. As a result, any issuance of additional shares of Common Stock may cause current stockholders of the Company to suffer significant dilution which may adversely affect the market. See "Description of Securities" and "Underwriting." LACK OF PRIOR PUBLIC MARKET FOR THE UNITS, SERIES B PREFERRED STOCK AND SERIES IV WARRANTS BEING OFFERED No prior public market has existed for the Units, Series B Preferred Stock and Series IV Warrants offered hereby and no assurance can be given that one will develop subsequent to this Offering. The Company is applying for inclusion of the Units, Series B Preferred Stock and Warrants on the Nasdaq SmallCap Market, although there can be no assurance that an active trading market will develop, even if the securities are accepted for quotation. Additionally, if the Company's securities are accepted for quotation and active trading develops, the Company is required to maintain certain minimum criteria established by Nasdaq, of which there can be no assurance that the Company will be able to continue to fulfill such criteria. The Company's Common Stock is currently listed on the Nasdaq SmallCap Market under the symbol "QUST." The Underwriter may make a market in the securities of the Company upon the closing of this Offering, but there is no assurance that it will be successful in its efforts. The loss or failure of market makers for the Company's securities will have a material adverse effect on the market for the Company's securities. See "Description of Securities." PROPOSED CHANGES TO NASDAQ LISTING REQUIREMENTS On November 6, 1996, the Board of Directors of Nasdaq approved proposed changes to the entry standards and maintenance standards necessary to qualify for listing on both the Nasdaq National Market (the "National Market") and the Nasdaq SmallCap Market (the "SmallCap Market"). After a 30-day comment period, the Nasdaq Board of Directors will consider any comments, make modifications of the proposed changes, if warranted, and file the rule changes with the Securities and Exchange Commission for final approval. Among the proposed changes to the Nasdaq SmallCap Market listing and maintenance criteria are the following: eliminating the alternative test to the $1 minimum bid price; extending the corporate governance standards currently required by the National Market to the SmallCap issuers; increasing the quantitative standards; and implementing a requirement that auditors of Nasdaq-listed 14 companies be subject to peer review. If the proposed or other changes to the listing and maintenance criteria are approved by the Securities and Exchange Commission, there can be no assurance that the Company will be able to fulfill such criteria. WARRANTS SUBJECT TO REDEMPTION The Series IV Warrants shall be exercisable for one share of Common Stock at an exercise price of 115% of the closing market price per share of the Common Stock on the day immediately preceding Effective Date for a four year period commencing one year from the Effective Date. The Series IV Warrants are redeemable by the Company for $.05 per Series IV Warrant, at any time after one year from the Effective Date, upon 30 days' prior notice, if the closing bid price of the Common Stock, as reported by the Nasdaq SmallCap Market exceeds $ _____ per share, for any 20 consecutive trading days ending within ten days of the notice of redemption. In the event that the Series IV Warrants are called for redemption, the Series IV Warrant holders may not be able to exercise their Series IV Warrants if the Company has not updated this Prospectus in accordance with the requirements of the Securities Act or these securities have not been qualified for sale under the laws of the state where the Series IV Warrant holder resides. See "Requirements of Current Prospectus and State Blue Sky Registration in Connection with the Exercise of the Series IV Warrants Which May Not Be Exercisable and May Therefore Be Valueless." In addition, in the event that the Series IV Warrants have been called for redemption, such call for redemption could force the warrant holder to either (i) assume the necessary updating to the prospectus and state blue sky qualifications has been effected, exercise the Series IV Warrants and pay the exercise price at a time when, in the event of a decrease in market price from the period preceding the issuance of the call for redemption, it may be less than advantageous economically to do so, or (ii) accept the redemption price, which, in the event of an increase in the price of the stock, could be substantially less than the market value thereof at the time of redemption. Upon 30 days' written notice to all holders of the Series IV Warrants, the Company shall have the right to reduce the exercise price and/or extend the term of the Series IV Warrants in compliance with the requirements of Rule 13e-4 to the extent applicable. See "Certain Transactions," "Description of Securities," "Selling Securityholders" and "Underwriting." LITIGATION INVOLVING UNDERWRITER MAY AFFECT SECURITIES The Company has been advised by the Underwriter that on or about May 22, 1995, the Underwriter and Elliot Loewenstern and Richard Bronson, principals of the Underwriter, and the Commission agreed to an offer of settlement (the "Offer of Settlement") in connection with a complaint filed by the Commission in the United States District Court for the Southern District of Florida alleging violations of the federal securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) and 15(c) of the Securities Exchange Act of 1934, as amended, and Rules 10b-5, 10b-6 and 15c1-2 promulgated thereunder. The complaint also alleged that in connection with the sale of securities in three (3) initial public offerings in 1992 and 1993, the Underwriter engaged in fraudulent sales practices. The proposed Offer of Settlement was consented to by the Underwriter and Messrs. Loewenstern and Bronson without admitting or denying the allegations of the complaint. The Offer of Settlement was approved by Judge Gonzales on June 6, 1995. Pursuant to the final judgment (the "Final Judgment"), the Underwriter: o was required to disgorge $1,000,000 to the Commission, which amount was paid in four (4) equal installments on or before June 22, 1995; and o agreed to the appointment of an independent consultant ("Consultant"). 15 Such Consultant was obligated, on or about November 1, 1996 (or at such later date as may be extended by the Consultant without court approval): o to review the Underwriter's policies, practices and procedures in six (6) areas relating to compliance and sales practices; o to formulate policies, practices and procedures for the Underwriter that the Consultant deems necessary with respect to the Underwriter's compliance and sales practices; o to prepare a report devoted to and which details the aforementioned policies, practices and procedures (the "Report"); o to deliver the Report to the President of the Underwriter and to the staff of the Southeast Regional office of the Commission; o to prepare, if necessary, a supervisory procedures and compliance manual for the Underwriter, or to amend the Underwriter's existing manual; and o to formulate policies, practices and procedures designed to provide mandatory ongoing training to all existing and newly hired employees of the Underwriter. The Final Judgment further provides that, within thirty (30) days of the Underwriter's receipt of the Report, unless such time is extended, the Underwriter shall adopt, implement and maintain any and all policies, practices and procedures set forth in the Report. As of the date of this Prospectus the Consultant had not delivered the Report to the Underwriter. The Final Judgment also provides that an independent auditor ("Auditor") shall conduct four special reviews of the Underwriter's policies, practices and procedures, the first such review to take place six (6) months after the Report has been delivered to the Underwriter and thereafter at six-month intervals. The Auditor is also authorized to conduct a review, on a random basis and without notice to the Underwriter, to certify that any persons associated with the Underwriter who have been suspended or barred by any Commission order are complying with the terms of such orders. On July 10, 1995, the action as against Messrs. Loewenstern and Bronson was dismissed with prejudice. Mr. Bronson has agreed to a suspension from associating in any supervisory capacity with any broker, dealer, municipal securities dealer, investment advisor or investment company for a period of twelve (12) months, dating from the beginning of such suspension. Mr. Loewenstern agreed to a suspension from associating in any supervisory capacity with any broker, dealer, municipal securities dealer, investment advisor or investment company for a period of twelve (12) months commencing upon the expiration of Mr. Bronson's suspension. In the event that the requirements of the foregoing judgment adversely affect the Underwriter's ability to act as a market maker for the Company's stock, and additional brokers do not make a market in the Company's securities, the market for and liquidity of the Company's securities may be adversely affected. In the event that other broker-dealers fail to make a market in the Company's securities, the possibility exists that the market for and the liquidity of the Company's securities may be adversely affected to such an extent that public security holders may not have anyone to purchase their securities when offered for sale at any price. In such event, the market for, liquidity and prices of the Company's securities may not exist. See "Underwriting." FOR ADDITIONAL INFORMATION REGARDING THE UNDERWRITER, INVESTORS MAY CALL THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. AT (800) 289-9999. 16 Recent State Action Involving the Underwriter -- Possible Loss of Liquidity The State of Indiana has commenced an action seeking, among other things, to revoke the Underwriter's license to do business in such state. The hearing in this matter was scheduled for October 7, 1996 and has been adjourned pending settlement discussions. Such proceeding, if ultimately successful, may adversely affect the market for and liquidity of the Company's securities if additional broker-dealers do not make a market in the Company's securities. Moreover, should Indiana investors purchase any of the securities sold in this Offering from the Underwriter prior to the possible revocation of the Underwriter's license in Indiana, such investors will not be able to resell such securities in such state through the Underwriter but will be required to retain a new broker-dealer firm for such purpose. The Company cannot ensure that other broker-dealers will make a market in the Company's securities. In the event that other broker-dealers fail to make a market in the Company's securities, the possibility exists that the market for and the liquidity of the Company's securities may be adversely affected to an extent that public security holders may not have anyone to purchase their securities when offered for sale at any price. In such event, the market for, liquidity and prices of the Company's securities may not exist. The Company does not intend to seek qualification for the sale of the Securities in the State of Indiana. It should be noted that although the Underwriter may not be the sole market maker in the Company's securities, it will most likely be the dominant market maker in the Company's securities. See "Underwriting." UNDERWRITER'S INFLUENCE ON THE MARKET MAY HAVE ADVERSE CONSEQUENCES A significant number of securities may be sold, in the ordinary course of business, to customers of the Underwriter. Such customers subsequently may engage in transactions for the sale or purchase of such securities through or with the Underwriter. Although it has no legal obligation to do so, the Underwriter from time to time in the future may make a market in and otherwise effect transactions in the Company's securities. To the extent the Underwriter acts as market maker in the securities, it may be a dominating influence in that market. The price and liquidity of such securities may be affected by the degree, if any, of the Underwriter's participation in the market, inasmuch as a significant amount of such securities may be sold to customers of the Underwriter. Such customers subsequently may engage in transactions for the sale or purchase of such securities through or with the Underwriter. Such market making activities, if commenced, may be discontinued at any time or from time to time by the Underwriter without obligation or prior notice. If a dominating influence at such time, the Underwriter's discontinuance may adversely affect the price and liquidity of the securities. Further, unless granted an exemption by the Securities and Exchange Commission to Rule 10b-6, the Underwriter may be prohibited from engaging in any market making activities with regard to the Company's securities for the period from two or nine business days prior to any solicitation of the exercise of Series IV Warrants until the later of the termination of such solicitation activity or the termination, by waiver or otherwise, of any right that the Underwriter may have to receive a fee for the exercise of Series IV Warrants following the solicitation. As a result, the Underwriter may be unable to continue to provide a market for the Company's securities during certain periods while the Series IV Warrants are exercisable which may adversely affect the price and liquidity of the securities. EXERCISE OF SERIES IV WARRANTS MAY HAVE DILUTIVE EFFECT ON MARKET The Series IV Warrants will provide, during their term, an opportunity for the holder to exercise the Warrants and profit from a rise in the market price of the Common Stock, of which there is no assurance, with resulting dilution in the ownership interest in the Company held by the then present 17 stockholders. Holders of the Series IV Warrants most likely would exercise the Series IV Warrants and purchase the underlying Common Stock at a time when the Company may be able to obtain capital on terms more favorable than those provided by such Warrants, in which event the terms on which the Company may be able to obtain additional capital would be affected adversely. See "Underwriting." "PENNY STOCK" REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF SECURITIES The Commission has adopted regulations which generally define "penny stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. In the event of authorization of the Units, Series B Preferred Stock and Series IV Warrants for quotation on the Nasdaq SmallCap Market, such securities will initially be exempt from the definition of "penny stock." If such securities or the Common Stock are removed from listing on Nasdaq at any time following the Effective Date, the Company's securities may become subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally, those persons with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser's written consent to the transaction prior to the purchase. In addition, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the "penny stock" rules may restrict the ability of broker-dealers to sell the Company's securities and may affect the ability of purchasers in this Offering to sell the Company's securities in the secondary market. In the event that the Company were not able to qualify its securities for listing on the Nasdaq SmallCap Market, the Company would attempt to have its securities traded in the over-the-counter market via the Electronic Bulletin Board or the "pink sheets." In such event, holders of the Company's securities may encounter substantially greater difficulty in disposing of their securities and/or in obtaining accurate quotations as to the prices of the Company's securities. UNDERWRITER AND SELLING SECURITYHOLDERS TO RECEIVE SUBSTANTIAL BENEFITS IN CONNECTION WITH THE OFFERING The Underwriter will receive substantial benefits from the Company in connection with this Offering. These benefits include underwriting discounts/commissions, a non-accountable expense allowance, an Underwriter's Unit Purchase Option, warrant exercise fees and an advisory fee in connection with certain services to be provided in the future. In addition, the Underwriter has been granted certain rights under the Unit Purchase Option, which rights include the ability to require the Company to include the Underwriter's securities in a registration statement under the Securities Act. The exercise of these rights will result in the Company incurring substantial expenses and may cause the Company to register an offering of its securities at a time which is detrimental to the Company's plans. See "Underwriting." The Selling Securityholders will receive substantial benefits in connection with this Offering. These benefits include having the Series IV Warrants owned by them included in the 18 Registration Statement of which this Prospectus is a part at the Company's expense. Certain of the Selling Securityholders are affiliated with the Company. See "Selling Securityholders." SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET There are currently 384,409 shares of the Company's outstanding Common Stock that are "restricted securities" which were acquired on March 31, 1995 and which, in the future, may be sold upon compliance with Rule 144 adopted under the Securities Act. Rule 144 provides, in essence, that a person holding "restricted securities" for a period of two years may sell every three months a number of shares equal to the greater of (a) one percent of the Company's issued and outstanding shares, or (b) the average weekly volume of sales during the four calendar weeks preceding the sale. The amount of "restricted securities" which a person who is not an affiliate of the Company may sell is not so limited, since non-affiliates may sell without volume limitation their shares held for three years. Therefore, during each three month period, beginning March 31, 1997, a holder of restricted securities who has held them for at least the two year period may sell under Rule 144 up to 15,354 shares. Nonaffiliated persons who hold for the three year period described above may sell unlimited shares once their holding period is met. A proposed rule which may be adopted by the Commission would reduce these two and three year periods to one and two years, respectively. The Company has also agreed not to issue any additional securities other than as contemplated by this Prospectus for a period of twenty-four (24) months following the Effective Date without the consent of the Underwriter. The registration statement of which this Prospectus is a part also covers the offering of 2,750,000 Series IV Warrants, which are being offered by the Selling Securityholders. The securities held by the Selling Securityholders may be sold commencing eighteen months from the date of this Prospectus subject to earlier release at the sole discretion of the Underwriter. In other offerings where the Underwriter has acted as the managing underwriter, it has released similar restrictions applicable to selling securityholders prior to the expiration of the lock-up period and in some cases immediately after the exercise of the Over- Allotment Option or the expiration of the Over-Allotment Option period. Certificates evidencing these securities will bear a legend reflecting such restrictions. The Underwriter may release the securities held by the Selling Securityholders at any time after all securities subject to the Over-Allotment Option (as hereinafter defined) have been sold or such option has expired. The resale of the securities held by the Selling Securityholders is subject to prospectus delivery and other requirements of the Securities Act. Sales of such securities or the potential of such sales at any time may have an adverse effect on the market prices of the securities offered hereby. See "Selling Securityholders." Prospective investors should be aware that the possibility of sales may, in the future, have a depressive effect on the price of the Series B Preferred Stock, Common Stock or Series IV Warrants in any market which exists or may develop and, therefore, the ability of any investor to market his shares may be dependent directly upon the number of shares that are offered and sold. Affiliates of the Company may sell their shares during a favorable movement in the market price of the Company's securities which may have a depressive effect on its price per share. See "Description of Securities." 19 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,000,000 Units offered hereby, assuming an offering price of $6.00 per Unit, are estimated to be $4,820,000 (after deducting approximately $600,000 in underwriting discounts and other expenses of this Offering estimated to be $580,000 which includes the Representative's nonaccountable expense allowance, but giving no effect to the exercise of the Over-Allotment Option or the Unit Purchase Option). The Company expects such proceeds to be utilized approximately as follows: APPROXIMATE AMOUNT OF NET PROCEEDS PERCENT --------------- ------- Webb acquisition(1)...................... $3,250,000 67.43% Webb debt retirement(2).................. 1,088,000 22.57% Quest debt retirement(3) ............... 482,000 10.00% ----------- ------- TOTAL.................. $ 4,820,000 100.00% =========== ======= - --------------- (1) In addition to the cash consideration to be paid at the Closing in connection with the Webb acquisition, the Company is delivering to the former majority stockholder of Webb two notes (the "Notes") in the aggregate amount of $750,000 (each for $375,000). Note A shall mature eighteen months from the Effective Date, bear interest at 10% per annum and is payable at maturity as to both principal and interest. Note B shall mature five years from the Effective Date, is payable in equal monthly installments over such five year period from the Effective Date and shall bear interest at 10% per annum. The Company's obligations under the Notes may be reduced on a dollar for dollar basis in the event and to the extent that the former majority stockholder of Webb receives net proceeds greater than $375,000 from a sale of the Series IV Warrants issued as part of the purchase price. (2) Represents the payment of all of Webb's indebtedness to a financial institution under a loan agreement, consisting of a $500,000 loan, with interest at 10%, due January 1, 1997 and a $588,000 demand Note with interest at 10%. (3) Reflects a partial repayment of Quest's Revolving Facility under its Loan and Security Agreement with a financial institution, which is due March 31, 1998 with interest at 9.25%. Although it is uncertain whether or not the Company's shares of Common Stock will rise to a level at which the Series IV Warrants would be exercised, if subscribers in this Offering elect to exercise all of the Series IV Warrants included in the Units, the Company will realize gross proceeds of approximately $[ ]. Management anticipates that the proceeds from the exercise of the Series IV Warrants would be contributed to working capital of the Company. Nevertheless, the Company may at the time of exercise allocate a portion of the proceeds to any other corporate purposes. Accordingly, investors who exercise their Series IV Warrants will entrust their funds to management, whose specific intentions regarding the use of such funds are not currently known. The amounts set forth above are estimates. Should a reapportionment or redirection of funds be determined to be in the best interests of the Company, the actual amount expended to finance any category of expenses may be increased or decreased by the Company's Board of Directors, at its discretion. 20 The Company believes that the net proceeds of this Offering, together with funds generated from operations, will be sufficient to conduct its operations for at least 18 months. The terms of the underwriting agreement with the Representative does restrict the Company from obtaining additional capital financing. To the extent that the Company's expenditures are less than projected or the proceeds of this Offering increase as a result of the exercise by the Underwriters of the Over-Allotment Option, the resulting balances will be used to pay off additional indebtedness. Conversely, to the extent that such expenditures require the utilization of funds in excess of the amounts anticipated, additional financing may be sought from other sources, although there can be no assurance that such additional financing, if available, will be on terms acceptable to the Company. The net proceeds of this Offering that are not expended immediately may be deposited in interest bearing accounts, or invested in government obligations, certificates of deposit or similar short-term, low risk investments. 21 CAPITALIZATION The following table sets forth the capitalization of the Company (i) as of September 30, 1996, (ii) pro forma combined to give effect to the transactions described in the footnote to the table, (iii) as adjusted to reflect the sale of the Units offered hereby and (iv) as adjusted for the proposed one-for-ten reverse split of the Company's Common Stock and the proposed reduction in the number of authorized shares of Preferred Stock and Common Stock. The table should be read in conjunction with the Financial Statements, the notes thereto and the pro forma financial information included elsewhere in this Prospectus.
QUESTRON PROFORMA SEPTEMBER 30, 1996 COMBINED (1) ------------------ ------------ Short-term debt $ 550,000 $ 709,352 Long-term debt 2,210,000 2,513,955 --------------- --------------- 2,760,000 3,223,307 --------------- --------------- Stockholders' Equity Preferred stock, $.01 par -- 10,000 value Common stock, $.001 1,547 1,547 par value, 20,000,000 shares authorized, 1,535,484 outstanding September 30, 1996; proforma combined; [ ] shares outstanding, as adjusted Additional paid-in capital 23,887,894 29,072,894 Retained earnings (deficit) (14,966,558) (14,966,558) Less: treasury stock (355,478) (355,478) --------------- --------------- Total stockholders' equity 8,567,405 13,762,405 --------------- --------------- Total capitalization $ 11,327,405 $ 16,985,712 =============== ===============
- ------------------- (1) Gives effect to the following transactions: (i) the acquisition of Webb for $3,250,000 in cash, 1,500,000 Series IV Warrants and two notes in the aggregate amount of $750,000 (each for $375,000). Note A shall mature eighteen months from the Effective Date, bear interest at 10% per annum and is payable at maturity as to both principal and interest. Note B shall mature five years from the Effective Date, is payable in equal monthly installments over such five year period from the Effective Date and shall bear interest at 10% per annum; and (ii) the sale of 1,000,000 Units by the Company and the net proceeds therefrom, at a price of $6.00 per Unit. Each Unit consists of one share of the Company's Series B Convertible Preferred Stock and one redeemable Series IV Warrant to purchase one share of Common Stock. 22 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Company's Common Stock is traded on the NASDAQ SmallCap Market under the symbol "QUST." The following table sets forth the reported high and low bid quotations (AS ADJUSTED FOR THE PROPOSED ONE-FOR-TEN REVERSE SPLIT OF THE COMPANY'S COMMON STOCK) of the Common Stock for the periods indicated. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Common Stock ------------ High Low ---- --- 1994: ----- First Quarter $14.06 $11.25 Second Quarter $11.88 $11.25 Third Quarter $11.88 $10.00 Fourth Quarter $30.63 $ 8.75 1995: ----- First Quarter $27.50 $18.13 Second Quarter $33.75 $20.00 Third Quarter $25.00 $16.25 Fourth Quarter $39.38 $13.75 1996: ----- First Quarter $31.25 $15.00 Second Quarter $18.75 $ 7.50 Third Quarter $10.63 $ 6.88 Fourth Quarter $ 4.38 $ 2.50 (through December 18, 1996) On December 18, 1996, the closing price for the Company's Common Stock as reported on the NASDAQ SmallCap Market system was $3.125. On that date there were approximately 1,000 holders or record of Common Stock (including entities which hold stock in street name on behalf of other beneficial owners). The Company has not paid any cash dividends on its Common Stock to date. The Company anticipates that for the foreseeable future it will follow a policy of retaining earnings, if any, in order to finance the expansion and development of its business. Payment of dividends is within the discretion of the Company's Board of Directors and will depend upon the earnings, capital requirements and operating and financial condition of the Company, among other factors. The Series B Preferred Stock will be entitled, as and when declared by the Board of Directors, to receive, in respect of the two years before the Series B Preferred Stock is converted, an annual 23 dividend per share payable either in cash or shares of Common Stock, at the option of the Company, equal to $0.115 or 2% of the $5.75 value of the Series B Preferred Stock included in the Units. Other than the foregoing, the Company does not anticipate the declaration or payment of any dividends in the foreseeable future. There can be no assurance that cash dividends of any kind will ever be paid. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS GENERAL The Company has entered into a Stock Purchase Agreement with the stockholders of Comp Ware, Inc., a Delaware corporation doing business as Webb Distribution ("Webb"). Pursuant to the agreement, the Company will acquire all of the issued and outstanding stock of Webb. The stockholders of Webb will receive at closing $3,250,000 in cash, 1,500,000 Series IV Warrants and two notes (the "Notes") in the aggregate amount of $750,000 (each for $375,000). Note A shall mature eighteen months from the Effective Date, bear interest at 10% per annum and is payable at maturity as to both principal and interest. Note B shall mature five years from the Effective Date, is payable in equal monthly installments over such five year period from the Effective Date and shall bear interest at 10% per annum. The majority stockholder of Webb received as a down payment at the signing of the Stock Purchase Agreement 1,500,000 Series IV Warrants which will be cancelled in the event that the Webb acquisition does not close. The Company's obligations under the Notes may be reduced on a dollar-for-dollar basis in the event and to the extent that the former majority stockholder receives net proceeds greater than $375,000 from a sale of the Series IV Warrants issued as part of the purchase price. Webb is a specialized distributor of electronic hardware, fasteners and components which serves customers in the high technology electronic equipment manufacturing industry. Webb operates primarily in the New England region. By acquiring the operations of Webb, the Company hopes to expand its market in the U.S. for fasteners and related products. By consolidating its administrative activities and accessing Webb's customer base, the Company anticipates that it will be able to use its combined resources in order to develop new services based upon the demand of its existing customers or upon requests from potential new customers. PLAN OF OPERATIONS The Company, upon completion of the Offering, will market and sell its electronic hardware, fasteners, and components products and services through Quest and Webb. The Company will use a portion of the net proceeds from the Offering which are expected to be approximately $4,820,000 (assuming that the Underwriter's overallotment option is not exercised) to pay the $3,250,000 cash consideration in connection with the acquisition of Webb and to retire the following outstanding indebtedness of Quest and Webb: Webb debt retirement................................... $1,088,000 Quest debt retirement.................................. 482,000 ---------- Total debt retired............................ $1,570,000 ========== 25 RESULTS OF OPERATIONS - QUESTRON For the three and nine months ended September 30, 1996 compared with 1995 The results of operations through September 30, 1996 include the operating results of Quest Electronic Hardware, Inc. ("Quest"), the Company's fasteners and electronic hardware distribution business, and the operating results of the Company's alternative dispute resolution ("ADR") business. The following summarizes the results of operations for each of the Company's businesses and corporate for the three month and nine month periods ended September 30, 1996:
Three months ended September 30, 1996 ------------------------------------- QUEST ADR Corporate Total ----- --- -------- ----- Revenue $2,525,884 $ 31,920 $ -- $2,557,804 Costs and expenses 2,201,645 57,212 67,031 2,325,888 ---------- ---------- --------- --------- Operating income (loss) 324,239 (25,292) (67,031) 231,916 Interest expense 75,095 -- 283 75,378 ----------- ------------- ----------- ---------- Income (loss) before taxes 249,144 (25,292) (67,314) 156,538 Tax provision 9,733 -- -- 9,733 ----------- ------------- ------------ ---------- Net income (loss) $ 239,411 $ (25,292) $(67,314) $ 146,805 ========== =========== ========= ========= Nine months ended September 30, 1996 ------------------------------------ QUEST ADR CORPORATE TOTAL ----- --- -------- ----- Revenue $8,141,107 $123,833 $ -- $8,264,940 Costs and expenses 7,167,900 196,103 227,422 7,591,425 ----------- ------- ------- ---------- Operating income (loss) 973,207 (72,270) (227,422) 673,515 Interest expense 233,385 -- 1,246 234,631 -------- ---------- --------- ----------- Income (loss) before taxes 739,822 (72,270) (228,668) 438,884 Tax provision 49,383 -- -- 49,383 --------- ---------- ----------- ----------- Net income (loss) $ 690,439 $(72,270) $(228,668) $ 389,501 ========== ========= ========== ===========
The significant growth in the Company's revenues for the nine months ended September 30, 1996 over the nine months ended September 30, 1995 is due to the acquisition of Quest on March 31, 1995. Revenues for Quest were $2,525,884 and $8,141,107 for the three month and nine month periods ended September 30, 1996, respectively. The nine month sales level of more then $8 million represents a record level of revenues for the business. The growth in revenues of Quest is attributable to its expansion into the Austin, Texas market as well as growth in the other markets that it serves. The opening of a new branch in Austin is primarily directed at servicing Applied Materials, which signed a three-year Master Purchase Order and Sales Agreement with Quest on November 13, 1995. Revenues of the ADR business for the three month and nine month periods ended September 30, 1996 declined 31% and 45%, respectively, compared with the comparable periods in the prior year. This decline reflects the Company's downsizing and restructuring of the ADR business in response to increased competition and historical losses. The Company is continuing to evaluate its alternatives with respect to the future operation of its ADR business, including the possible sale, disposition or discontinuance of the business. 26 The Company's operating income was $231,916 for the three months ended September 30, 1996 compared with operating income of $319,519 for the comparable period of the prior year. The decline in operating income for the three month period ended September 30, 1996 compared with the comparable prior year period is primarily due to increased operating costs associated with Quest's expansion into the Austin market coupled with an 11% decline in sales from the immediately preceding quarter as a result of the recent pause in the semiconductor industry, which management believes to be temporary. In August 1996, Quest reduced its costs of operations to a level more consistent with this reduced level of sales. Management believes that once the semiconductor industry rebounds, which recent months suggest is beginning to occur, Quest will be able to restore an increased level of sales. For the nine month period ended September 30, 1996, operating income was $673,515 compared with operating income of $404,134 for the comparable prior year period. The improvements over the nine month period ended September 30, 1996 compared to the comparable prior year period are primarily due to the operating income achieved by Quest of $973,207 compared with operating income from Quest of $692,003 for the comparable prior year period. Quest's operating income of $324,239 and $973,207 for the three month and nine month periods ended September 30, 1996 represent approximately 12% of its revenues, a relationship which is slightly less than the historical performance of the business primarily due to increased operating costs relative to sales, which costs are principally associated with the opening of the Austin branch. Interest expense for the three month and nine month periods ended September 30, 1996 amounted to $75,378 and $234,631, respectively, which principally reflects the cost of borrowings associated with the acquisition and operation of the fasteners and electronic hardware distribution business. For the comparable periods of the prior year, the Company's results include interest expense of $72,526 and $130,502, respectively. The provision for income taxes for the three month and nine month periods ended September 30, 1996 principally reflects state income tax provisions for states in which Quest does business. The provision for income taxes also includes a minimal provision for federal income taxes for the federal alternative minimum tax. The Company is not expected to have a regular federal income tax liability for 1996, as a result of the availability of net operating loss income tax carryforwards of approximately $13.1 million as of December 31, 1995, expiring in the years 2000 through 2009. Net income for the three months ended September 30, 1996 amounted to $146,805 compared with net income of $228,918 for the comparable period of the prior year. This decline reflects the start-up costs and investment associated with Quest's expansion into Austin, Texas. Due to the recent pause in the semiconductor industry, the investment in the Austin market has yet to provide the anticipated results of such an expansion. Net income for the nine months ended September 30, 1996 amounted to $389,501 compared with net income of $229,117 for the comparable period of the prior year. This improvement reflects the operating income of Quest (partially reduced by interest expense and income taxes) and the reduction in operating losses of the ADR business. For the year ended December 31, 1995 compared with 1994 The results of operations for the year ended December 31, 1995 include the operating results for the nine months ended December 31, 1995, of Quest, the fasteners and electronic hardware distribution business acquired by the Company on March 31, 1995 (see Note 2 of Notes to Consolidated Financial Statements) and the operating results of the Company's ADR business for year ended December 31, 1995. 27 The following summarizes the results of operations for each of Questron's businesses for the year ended December 31, 1995:
QUEST(1) ADR CORPORATE(2) TOTAL -------- --- ------------ ----- Revenue $6,982,902 $276,253 $ -- $7,259,155 Costs and expenses 6,020,800 301,508 351,941 6,674,249 ---------- -------- --------- ---------- Operating Income 962,102 (25,255) (351,941) 584,906 Interest expense 201,096 -- 4,459 205,555 --------- ----------- --------- ---------- Income (loss) before taxes 761,006 (25,255) (356,400) 379,351 Tax provision 27,164 -- -- 27,164 ---------- ----------- ----------- ---------- Net income (loss) $ 733,842 $ (25,255) $(356,400) $ 352,187 ========== ========== ========= ==========
- ---------------------- (1) The operating results for Quest are for the nine months ended December 31, 1995. (2) Corporate expenses include non-recurring charges of $146,867, principally associated with the downsizing and restructuring of Questron's ADR business. The significant growth in Questron's revenues for the year ended December 31, 1995 over the year ended December 31, 1994 is due to the acquisition of Quest. Revenues for Quest for the period April 1, 1995 through December 31, 1995 were $6,982,902. Revenues of the ADR business declined by $567,772 and $1,732,573 for the years ended December 31, 1995 and 1994, respectively, compared with the comparable periods in the prior year. This decline reflects Questron's continuing program of downsizing and restructuring its ADR business in response to increased competition and historical losses. Such restructuring has resulted in bringing the ADR business, excluding corporate expenses and non-recurring charges, to a modest operating loss for the year ended December 31, 1995 of $25,255. Questron is continuing to evaluate its alternatives with respect to the future operation of its ADR business, including the possible sale, disposition or discontinuance of the business. Questron's operating income was $584,906 for the year ended December 31, 1995 compared with an operating loss of $641,081 for the prior year. These improvements are due to the operating income achieved by Quest of $962,102 since its acquisition on March 31, 1995, as well as the significant reductions in costs and expenses of the ADR business. Such expenses were $301,508 for the year ended December 31, 1995 compared with $1,485,106 in the prior year. Expenses for 1995 include non-recurring charges of $146,867, principally associated with the downsizing and restructuring of Questron's ADR business. Such charges include the write-off of fixed assets and idle equipment associated with the downsizing of the ADR business, as well as lease termination costs, the relocation to more suitable office space, forfeiture of security deposits and other costs associated with the downsizing and restructuring of the ADR business. Quest's operating income of $962,102 for the nine months ended December 31, 1995 represents 14% of its revenues, a relationship which is consistent with the historical performance of the business. Interest expense for the years ended December 31, 1995 and 1994 amounted to $205,555 and $34,222, respectively. The increase in interest expense principally reflects the cost of borrowings associated with the acquisition of the fasteners and electronic hardware distribution business (see Note 3 28 of Notes to the Company's Consolidated Financial Statements for the year ended December 31, 1995). For the comparable prior year period, the Company's results include $34,270 of interest income resulting from the investment of excess cash. The provision for income taxes for the year ended December 31, 1995 principally reflects state income tax provisions for states in which Quest does business. No provision for federal income taxes is required, as Questron has no federal tax liability for 1995 as a result of the availability of net operating loss income tax carryforwards; of approximately $13.1 million as of December 31, 1995, expiring in the years 2000 through 2009. Net income for the year ended December 31, 1995 amounted to $352,187 compared with a net loss of $641,033 in the prior year. These improvements reflect the operating income of Quest, partially reduced by interest expense and income taxes, and the reduction in operating expenses of the ADR business. LIQUIDITY AND CAPITAL RESOURCES - QUESTRON As of September 30, 1996, the Company had $360,235 in cash and short-term investments, compared to $39,358 as of December 31, 1995. As of September 30, 1996, the Company had working capital of $3,315,365, compared with working capital of $2,983,668 as of December 31, 1995. For the nine months ended September 30, 1996, the net cash provided by the Company's operating activities amounted to $343,459 principally reflecting the profits of Quest and a decrease in inventory and other receivables, offset in part by the decrease in accounts payable and accrued expenses and the increase in other assets. Corporate expenses and the operations of the Company's ADR business continued to use cash, although at a reduced rate compared with prior years. As previously discussed, the Company is continuing to evaluate its alternatives with respect to the future operations of the ADR business and there can be no assurance that the Company will continue its ADR operations. For the nine months ended September 30, 1996, the net cash used in the Company's investing activities amounted to $47,582 for the acquisition of fixed assets, primarily computer and warehouse equipment to support the continued growth of Quest's fastener distribution business. The Company did not have significant commitments for capital expenditures as of September 30, 1996 and no significant commitments are anticipated for the remainder of 1996 and the first half of 1997. For the nine months ended September 30, 1996, the net cash provided by the Company's financing activities amounted to $25,000 which consists of advances drawn on its revolving credit facility of $437,500 less $412,500 of principal repaid on the term debt. For the year ended December 31, 1995, the net cash used in Questron's operating activities amounted to $843,105, principally reflecting cash requirements associated with increased accounts receivable and inventories associated with the business of Quest. Such cash requirements were partially offset by an increase in accounts payable and profits generated by Quest. Corporate expenses and the operations of Questron's ADR business continued to use cash, although at a much reduced rate compared with prior years. 29 For the year ended December 31, 1995, the net cash used in Questron's investing activities amounted to $5,682,034, including $5,262,268 net cash consideration paid for the acquisition of the fasteners and electronic hardware distribution business. In addition, Questron had capital expenditures of $419,766, primarily related to the acquisition of computer system equipment for Quest. Questron does not have significant commitments for capital expenditures as of December 31, 1995 and no significant commitments are anticipated for 1996. For the year ended December 31, 1995, the net cash provided by Questron's financing activities amounted to $5,043,767, including $2,200,000 of long-term bank borrowings under a term loan facility and $1,468,902 in net proceeds derived from the private placement of Questron's Common Stock. In addition, Questron received net proceeds of $851,593 from the exercise of warrants and $343,750 from the exercise of stock options. Questron also repaid borrowings obtained earlier in 1995 under short-term notes payable and made $412,500 in principal payments under the term loan facility. In December 1995, in connection with certain obligations amounting to $355,478 owed to Questron by two of its former officers and directors, the Company received 118,493 shares of its Common Stock in full satisfaction of such amounts owed. In conjunction with the acquisition of the fasteners and electronic hardware distribution business, Quest initially obtained an $800,000 revolving facility as a part of its loan agreement with a bank to provide working capital financing for its business. In November 1995, Quest signed a three-year Master Purchase Order and Sales Agreement with a major customer in Austin, Texas. Management believes that this agreement, together with other sales opportunities in the Austin market, could result in a material increase in Quest's annual sales. In view of this increased level of sales and other potential growth opportunities, Quest increased its revolving facility to $1,500,000, under terms and conditions generally consistent with those already in effect for the original facility. At September 30, 1996, $1,385,000 was borrowed and outstanding under the revolving facility. The remaining amount of the $1,500,000 revolving facility, or $115,000, was fully available at September 30, 1996 for future working capital needs. At December 31, 1995, $947,500 was borrowed and outstanding under the revolving facility. Of the remaining $552,500 revolving facility amount, $527,500 was fully available at December 31, 1995 for future working capital needs. Amounts outstanding under the revolving facility bear interest at a rate equal to: (i) 1.5% above the lender's prime rate should Quest's tangible net worth be less than or equal to $1,750,000; or (ii) 1.0% above the lender's prime rate should Quest's tangible net worth be in excess of $1,750,000. As of October 27, 1996, the interest rate on the amount outstanding under the revolving facility was 9.25%. As of March 29, 1996, the interest rate on the amount outstanding under the revolving facility was 9.75%. In order to secure the obligations of Quest under the revolving facility and the related term loan facility under the loan and security agreement with the lender, the Company entered into guarantee and stock pledge agreements with the lender whereby the Company guaranteed the obligations of Quest under the loan agreement and pledged to the lender the shares of capital stock of Quest which the Company held at the date of such agreement and any shares of Quest in which the Company may thereafter acquire an interest. In addition, Quest granted a security interest in substantially all of its assets to the lender and a major stockholder of Questron guaranteed the obligations of Quest under the loan agreement. In order to fund the cash portion of the purchase price for Webb and to repay certain indebtedness of both Quest and Webb, Questron entered into a letter of intent with an underwriter to sell 1,000,000 Units at a price of $6.00 per Unit, each Unit consisting of one share of the Company's Series B Convertible Preferred Stock and one redeemable Series IV Common Stock Purchase Warrant of the Company. Of the estimated $4,820,000 net proceeds from the sale of the Units, $3,250,000 will be paid to the Selling Securityholders of Webb at the Closing of such sale and $1,570,000 will be used to repay certain indebtedness of Quest and Webb. See "Use of Proceeds." Questron intends to continue 30 identifying and evaluating potential merger and acquisition candidates engaged in lines of business complementary to the fasteners and electronic hardware distribution business conducted by both Quest and by the Webb business. While certain of such potential acquisition opportunities are at various stages of consideration and evaluation, none is at any definitive stage at this time. Management believes that its working capital, funds available under its credit agreement, and funds generated from operations will be sufficient to meets its obligations through 1997, exclusive of any cash requirements which may come about as a result of other business acquisitions. 31 RESULTS OF OPERATIONS - WEBB For the nine months ended September 30, 1996 compared with 1995 The following summarizes the results of operations of Webb for the nine months ended September 30, 1996 compared with the nine months ended September 30, 1995:
NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 ------------------ ------------------ Revenue $ 6,088,946 $ 5,673,320 Costs and expenses 5,598,862 5,295,182 ---------------- ---------------- Operating income 490,084 378,138 Interest expense 109,536 122,545 ---------------- ---------------- Income before taxes 380,548 255,593 Tax provision 171,300 115,040 ---------------- ---------------- Net income $ 209,248 $ 140,553 ================ ================
Revenues for Webb for the nine months ended September 30, 1996 were $6,088,946, an increase of 7.3% compared with the nine months ended September 30, 1995. This growth in revenues reflects Webb's increased market penetration and continuing growth of Webb's bin replenishment programs. Operating income for Webb for the nine months ended September 30, 1996 amounted to $490,084, or 8.0% of sales, compared with $378,138, or 6.7% of sales, for the comparable prior year period. The improvement in operating income as a percentage of sales principally reflects higher gross margins as a result of a shift in the mix of the business to higher gross margin accounts, while expenses as a percentage of sales remained relatively constant. Webb's interest expense for the nine months ended September 30, 1996 amounted to $109,536, representing a reduction of $13,009 compared with interest expense for the nine months ended September 30, 1995. The reduction in interest expense for the period principally reflects reduced borrowings necessary to fund the working capital requirements of Webb. The provision for income taxes for Webb for the nine months ended September 30, 1996 amounted to $171,300 compared with $115,040 for the nine months ended September 30, 1995. The provision for income taxes for both periods reflects federal and state income taxes. Net income for Webb for the nine months ended September 30, 1996 amounted to $209,248 compared with $140,553 for the comparable prior year period. The increase in net income principally reflects increased revenues and gross margin for the period, offset in part by operating expenses which held relatively constant as a percentage of sales. 32 For the year ended December 31, 1995 compared with 1994 The following summarizes the results of operations of Webb for the year ended December 31, 1995 compared with the year ended December 31, 1994:
YEAR ENDED YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, 1994 ----------------- ----------------- Revenue $ 7,793,179 $ 8,880,742 Costs and expenses 7,315,920 8,525,325 --------------- --------------- Operating income 477,259 355,417 Interest expense 161,545 117,732 ---------------- ---------------- Income before taxes 315,714 237,685 Tax provision 113,681 63,129 ----------------- ---------------- Net income $ 202,033 $ 174,556 ================= =================
Revenues for Webb for the year ended December 31, 1995 were $7,793,179, a decrease of 12.2% compared with the year ended December 31, 1994. The decline in revenues reflects the termination of a sales agreement which Webb had with IBM (which termination was the result of a change in status for Webb from a small disadvantaged business to a small business), partially offset by new business with other accounts. Operating income for Webb for the year ended December 31, 1995 amounted to $477,259, or 6.1% of sales, compared with the $355,417, or 4.0% of sales for the year ended December 31, 1994. The improvement in operating income as a percentage of sales principally reflects the replacement of low gross margin business from IBM with new customers and new bin replenishment programs at higher gross margins, partially offset by an increase in operating expenses as a percentage of sales as a result of a change in operating cost structure following the termination of the IBM agreement. Webb's interest expense for the year ended December 31, 1995 amounted to $161,545, representing an increase of $43,813 compared with interest expense for the year ended December 31, 1994. The increase in interest expense for the year principally reflects increased borrowings necessary to fund the working capital requirements of Webb. The provision for income taxes for Webb for the year ended December 31, 1995 amounted to $113,681 compared with $63,129 for the year ended December 31, 1994. The provision for income taxes in 1995 and 1994 reflects federal and state income taxes. In addition, in 1994 Webb's tax status changed from an S Corporation to a C Corporation, which resulted in a change in accounting for income taxes. Net income for Webb for the year ended December 31, 1995 amounted to $202,044 compared with $174,556 for the year ended December 31, 1994. The increase in net income principally reflects increased gross margin, offset in part by increased operating expenses as well as increases in interest expense and the provision for income taxes. 33 BUSINESS OVERVIEW Questron Technology, Inc. (the "Company") consists of two wholly-owned subsidiaries, Quest Electronic Hardware, Inc. ("Quest") and Judicate of Philadelphia, Inc. ("Judicate"). Judicate provides alternative dispute resolution services. Quest is a distributor of fasteners and electronic hardware. The Company has signed an agreement to acquire Comp Ware, Inc. d/b/a Webb Distribution ("Webb"), a distributor of electronic hardware, fasteners and components. Webb serves customers in the high technology electronic equipment manufacturing industry, primarily in the New England region. It is intended that, upon consummation of the acquisition of Webb by Questron, that the businesses of Quest and Webb will operate as wholly-owned subsidiaries of the Company. The Company may determine to merge these two subsidiaries at a future date. By acquiring Webb's business, the Company hopes to expand its market in the U.S. for fasteners and related products. By consolidating its administrative activities and accessing Webb's customer basis, the Company anticipates that it will be able to use its combined resources in order to develop new services based upon the demand of its existing customers or upon requests from potential new customers. BUSINESS OF THE COMPANY CHANGE OF NAME At a Special Meeting of Stockholders held on April 2, 1996, the stockholders of Judicate, Inc. approved the change of the Company's name to Questron Technology, Inc. The Board of Directors of the Company believes that the change of name from Judicate, Inc. to Questron Technology, Inc. more accurately reflects the change in focus and strategic direction of Questron's business of supplying low technology products to high technology industries through its wholly-owned subsidiary Quest Electronic Hardware, Inc. ("Quest"). The Company, through its wholly-owned subsidiary Judicate of Philadelphia, Inc. ("Judicate") continues to provide alternative dispute resolution ("ADR") services to its clients. BACKGROUND The Company was incorporated in Delaware in 1983 to provide a broad range of ADR services, including non-binding mediations and binding arbitrations to assist private parties in settling civil disputes. The increasing awareness of ADR by the legal community and the resulting publicity fostered a substantial number of competitors in Questron's ADR marketing areas. These competitive pressures adversely affected the profitability of the business and the Company experienced substantial cash flow deficits and operating losses. In September 1993, the Company instituted a vigorous cost reduction program with a goal of establishing appropriate cost relationships with revenues. This led to substantial downsizing of its activities, and by December 31, 1994, all of the Company's ADR services and operations were handled by Judicate of Philadelphia, Inc. (a wholly-owned subsidiary) and the ADR business was operating with a substantially reduced staff of administrative and sales personnel. The foregoing caused the Company to explore acquisition opportunities, and in November 1994, the Company announced that it had agreed to acquire a fasteners and electronic hardware distribution business. 34 On March 31, 1995 the Company acquired 100% of the stock of Quest, a fasteners and electronic hardware distribution business, in exchange for a 25% interest in the Company on a fully diluted basis. The acquisition was completed pursuant to a Share Acquisition Agreement (the "Share Agreement") dated November 29, 1994, by and among Gulfstream Financial Group, Inc., a Florida corporation ("Gulfstream"), Phillip D. Schwiebert, an individual ("Schwiebert"), Quest and the Company. Pursuant to the Share Agreement, the Company issued to Gulfstream and Schwiebert (the sole stockholders of Quest) 384,409 newly issued, fully-paid and non-assessable shares of common stock of the Company, in exchange for all of the issued and outstanding shares of common stock of Quest owned by such stockholders. As required by the Share Agreement, these shares represented 25% of the outstanding common stock of the Company on a fully diluted basis. The Company has accounted for the acquisition of Quest using the purchase method of accounting. Simultaneously with the foregoing events, Quest acquired the fasteners distribution business (the "Business") of Arrow Electronics, Inc., a New York corporation ("Arrow"). Such acquisition was effected pursuant to a Purchase of Assets Agreement, dated November 29, 1994, by and between Quest and Arrow (the "Purchase Agreement"). Under the Purchase Agreement, Quest acquired the assets of Arrow used exclusively in connection with Arrow's operation of the Business. Such assets included, but were not limited to, machinery, equipment, furniture, motor vehicles and other personal property, inventories, rights under contracts (including accounts receivable), agreements, leases, permits and licenses (to the extent assignable), expensed items, price lists and other documents. The purchase price for the acquisition of the Business was a negotiated fixed price. The price consisted of a cash payment of $4,850,000 plus the assumption of certain liabilities of the Business. As more fully described below, the purchase price was funded through a combination of proceeds from borrowings under the Loan and Security Agreement (as defined below), proceeds from the sale of the Company's securities under a private placement, and available cash. Under the Loan and Security Agreement, dated March 31, 1995, by and between Quest and Silicon Valley Bank (the "Loan Agreement"), Quest borrowed $2.2 million to partially fund the acquisition of the Business. In order to secure the obligations of Quest under the Loan Agreement, the Company entered into a Stock Pledge Agreement, dated March 31, 1995, with Silicon Valley Bank (the "Bank"). Under the terms of said agreement, the Company pledged to the Bank the shares of capital stock of Quest which the Company held at such date and in which the Company may thereafter acquire an interest. In connection with a subsequent increase in the amount which may be borrowed by Quest under the Revolving Facility of the Loan Agreement, the Company entered into a guarantee agreement whereby the Company guaranteed the obligation of Quest under the Loan Agreement. In addition, Quest granted a security interest in substantially all of its assets to the Bank. In addition, Quest's obligations under the Loan Agreement have been guaranteed by Gulfstream. Approximately $1.5 million of the funds used for the purchase of the Business were provided from the proceeds of the sale by the Company of 116,000 shares of Common Stock at a purchase price of $15.00 per share to a group of subscribers in a private placement. The balance of the cash portion of the purchase price for the Business was provided by available cash. QUEST ELECTRONIC HARDWARE, INC. ("QUEST") Quest is a specialized distributor of fasteners and electronic hardware sold to electronic equipment manufacturers. The business serves customers in the high technology electronic equipment manufacturing industry, including leading computer, telecommunications, and medical instrumentation companies. Prior 35 to Quest's acquisition from Arrow, the fasteners business had operated as a distributor of fasteners and electronic hardware for more than twenty years. Management believes that Quest has the opportunity to become a significant participant in a very fragmented industry dominated by so-called "mom and pop" type operations. Management's goal is to expand the business through a combination of continued penetration of existing markets, expansion into new markets (including geographic expansion), and acquisitions. Approximately 50% of Quest's sales are of industrial fasteners, 10% are of "spacers" and "standoffs" (products used in conjunction with fasteners), and the remaining sales are divided among a variety of products, including plastic components, cable ties and accessories, drawer slides, connectors, and design/prototype components. The demand for products offered by Quest is relatively stable, with minimal technological change. Quest has developed a customer base consisting of over 250 active customers. These customers demand quality service and in many cases are willing to pay premium prices. Over 95% of Quest's sales are recurring sales to existing customers. Currently, the business is concentrated in California, Texas, Colorado and Nevada; however, Quest is seeking to expand its business geographically, particularly into the eastern U.S. through the Webb acquisition. MARKETS Quest's sales have increased at a compound annual growth rate of 17% over the past four years. This sales growth was achieved from word-of-mouth referrals without the benefit of a comprehensive marketing program or geographic expansion. Management believes that Quest's future growth will be achieved by implementing a comprehensive marketing plan, including the present strategy of adding marketing programs responsive to customer's specific requirements (e.g., bin replenishment programs), further penetration of existing accounts, identification of new accounts and geographic expansion. The U.S. market for the distribution of fasteners and related products is divided into two major segments: large manufacturers of fasteners, who supply large industrial users directly; and distributors, who service smaller industrial users. Such distributors, however, are increasingly supplying larger accounts that can no longer be serviced effectively by the manufacturers. The distribution side consists of distributors who provide a rapid response capability to service customer needs and assist in selecting appropriate fasteners. As a distributor, Quest's business falls into this latter category, providing such services as bin stock replenishment programs. COMPETITION Quest principally competes with a number of small distributors located within the markets it serves and, to a lesser extent, its own suppliers. There are a small number of larger companies serving regional geographic markets, that also compete directly with Quest. Fasteners distribution is very fragmented in terms of customers served, as well as the products carried. Such fragmentation allows Quest to conduct its business with service and support being more important to its customers than product price. This fragmented market also provides an opportunity for industry consolidation through acquisitions where meaningful economies of scale can be achieved, thereby increasing the profits of any consolidating survivors. 36 SUPPLIERS Quest carries approximately 20 basic product categories and multiple line items within each of these categories. Additional and/or new products or suppliers are added only after they have been accepted in the marketplace, are required by new or existing customers, and have the potential for making a contribution to profits. Of the approximately 100 suppliers whose products are sold by Quest, the ten largest account for approximately 30% of Quest's purchases, with the largest supplier accounting for approximately 5%. Management does not regard any one supplier of products to be essential to its operations and believes that most of the products presently sold are available from other sources at competitive prices. The Company believes that Quest's products are not subject to significant technological obsolescence and generally represent standard parts manufactured by multiple suppliers. CUSTOMERS Most of Quest's customers require delivery of products on schedules which are generally not available on direct purchases from the manufacturer or involve orders of insufficient size to be placed directly with the manufacturer. The ten largest customers account for approximately 50% of Quest's sales, with no one customer contributing more than 14%. ORGANIZATION, MANAGEMENT AND EMPLOYEES Quest has a total of 44 employees, which include sales, purchasing, marketing, accounting, operations and warehouse personnel. Quest's employees are not covered by any collective bargaining agreement. Management believes that its relationship with its employees is satisfactory. Quest uses its computer systems for accounting, inventory management and order processing. All of Quest's transactions, which include order processing, invoicing, and inventory receiving and shipping, are processed locally by employees through their local computer system. The local system permits each of the locations to process all of their transactions as if each location were an independent company. All order entry and shipping is handled from the respective locations. Periodically, the transactions from each local system are consolidated into a central computer system where all billing, credit and collection functions are centralized and controlled by Quest from its headquarters location in Boca Raton, Florida. In addition, general accounting, payable and receivable functions, and related accounting reports are produced in Boca Raton, Florida, from data generated by Quest's computer system which reflect the transactions processed by each of the locations. Similarly, Quest's payroll is processed centrally through a payroll service. Quest is covered by its own blanket insurance policies. FACILITIES The Company is headquartered at 6400 Congress Avenue, Suite 200, Boca Raton, Florida 33487. 37 Quest Electronic Hardware, Inc. operates from six well equipped modern facilities, all of which are leased, as follows: (i) San Jose, California - includes 3,300 square feet of office space and 10,000 square feet of warehouse space under a lease expiring December 31, 1997 and is Quest's principal warehouse, which space is 90% utilized; (ii) Dallas, Texas - occupies 250 square feet of office space and 1,750 square feet of warehouse space under a lease expiring March 31, 1998, which space is 90% utilized; (iii) Austin, Texas - occupies 900 square feet of office space and 8,100 square feet of warehouse space under a lease expiring September 15, 2000, which space is approximately 40% utilized; (iv) Colorado Springs, Colorado - occupies 1,000 square feet of office space and 4,000 square feet of warehouse space under a lease expiring November 30, 1998, which space is approximately 80% utilized; (v) Sparks, Nevada - occupies 200 square feet of office space and 800 square feet of warehouse space under a lease expiring April 30, 1998, which space is approximately 60% utilized; and (vi) Boca Raton, Florida - occupies 2,000 square feet of office space sublet under a lease expiring May 31, 2000, which space is approximately 80% utilized. Total rent expense for Quest amounted to $112,249 in 1995. The aggregate minimum rental commitments under all non-cancelable operating leases for the year ending December 31, 1996 is $184,712. JUDICATE OF PHILADELPHIA, INC. ("JUDICATE") The Company also provides alternative dispute resolution ("ADR") services through its wholly owned subsidiary Judicate of Philadelphia, Inc. ("Judicate"). Judicate's ADR services afford an alternative to the often overburdened public courts and to existing lay arbitration forums. Judicate's arbitrations and mediations are heard by the judges currently on Judicate's judicial panel ("Company Judges"). Company Judges are independent contractors who make their services available to Judicate on a case-by-case basis. Compensation to the Company Judges is based on the number of proceedings conducted and the length of time of such proceedings. The Company Judges can discontinue service on the judicial panel at any time and may provide services to competing ADR providers. In addition, Judicate maintains a panel of non-judicial arbitrators and mediators (almost exclusively practicing attorneys) to hear its disputes. As of April 3, 1996, Judicate employed four full-time persons; one in an executive position and three in sales, marketing, administrative, and clerical activities. As of that date, Judicate had approximately 600 Company Judges listed on its National Panel of Judges, enabling Judicate to offer dispute resolution services in all 50 states, the District of Columbia, Puerto Rico and the United States Virgin Islands. In addition, Judicate has compiled a panel of 90 Company Neutrals (almost exclusively 38 practicing attorneys), to preside over its commercial mediations and arbitrations. The Company Judges and Company Neutrals are independent contractors and are not employees of the Company. Judicate's employees are not covered by any collective bargaining agreement. Management believes that its relationship with its employees is satisfactory. Judicate of Philadelphia, Inc. entered into a lease agreement commencing February 1, 1994 and ending February 1, 1996 for its Philadelphia facility consisting of 6,940 square feet which included two court rooms and three mediation rooms for a base rental of $48,000 annually. Judicate of Philadelphia, Inc. negotiated a settlement of this lease and entered into a monthly renewable lease agreement commencing on August 1, 1995 for a more suitable facility consisting of 500 square feet for a base rental of $6,000 annually. Its premises are located in a modern office building in downtown Philadelphia. BUSINESS OF WEBB Webb Distribution, Inc. was incorporated in the State of Connecticut in May 1989 as a distributor of electronic hardware fasteners and components. In February 1995, Webb Distribution, Inc. was merged into Comp Ware, Inc., a newly created Delaware corporation, in a migratory merger and currently conducts business under the name Webb Distribution. The business is concentrated in the New England area. The Company's principal executive offices are located at 2 Lowell Avenue, Winchester, MA 08190. The business of Webb is substantially similar to the business of Quest, serving customers in the high technology equipment manufacturing industry. Webb serves a variety of different markets on both a direct order basis and in providing services such as bin stock replenishment. Along with serving the original equipment manufacturers markets, Webb also serves industrial, military, sheet metal and metal fabrication industries. With over 300 suppliers and many product categories and types, Webb does not regard any one supplier of products as essential to its operations. Webb, through its suppliers, is able to serve many market segments, as evidenced by its more than 800 active industrial, commercial and military customers. Webb's annual sales amounted to $7.8 million for the year ended December 31, 1995 and $6.1 million for the nine months ended September 30, 1996. PROPOSED ACQUISITION OF WEBB The Company has entered into a Stock Purchase Agreement dated as of December 16, 1996 (the "Webb Agreement") whereby it has agreed to acquire all of the outstanding stock of Comp Ware, Inc. d/b/a Webb Distribution, a Delaware corporation ("Webb"), from the current stockholders of Webb (the "Webb Stockholders"). The purchase price for the acquisition will consist of: (i) 1,500,000 Series IV Warrants (the "Webb Warrants") issued to the majority shareholder of Webb as a down payment under the Webb Agreement, which warrants are to be cancelled in the event that the Webb acquisition does not close. Such warrants are being held in escrow subject to the completion of the acquisition of Webb; 39 (ii) $3,250,000 in cash; (iii) Note A in the amount of $375,000. Principal and interest at the rate of 10% are due and payable 18 months from the Effective Date; and (iv) Note B in the amount $375,000. Principal and interest at the rate of 10% are payable monthly over five years from the Effective Date. The Webb Warrants are being registered by the Company for resale by the majority stockholder of Webb pursuant to the Registration Statement of which this Prospectus is a part and are the subject of an alternative prospectus. The Company's obligations under the Notes may be reduced on a dollar for dollar basis in the event and to the extent that the former majority stockholder receives net proceeds greater than $375,000 from a sale of the Webb Warrants. In addition, the Notes will be cancelled in the event that the Underwriter releases the lock-up in connection with a proposed transaction to sell the Webb Warrants and the majority stockholder of Webb declines to sell such warrants following such release. 40 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS It is anticipated that, upon consummation of the acquisition, the current management of Questron will continue to operate the Company. The Board of Directors is currently comprised of the following: Name Age Position - ---- --- -------- Dominic A. Polimeni 50 Chairman, President, and Chief Executive Officer Milton M. Adler 69 Secretary, Treasurer, Controller and Director Robert V. Gubitosi 49 Director Mitchell Hymowitz 34 Director William J. McSherry, Jr. 49 Director Each of the directors of the Company holds office until the next annual meeting of stockholders, or until their successors are elected and qualified. The Company's by-laws currently provide for not less than three directors nor more than nine directors. Currently, there are five directors in the Company. The by-laws permit the Board of Directors to fill any vacancy and such director may serve until the next annual meeting of stockholders or until his successor is elected and qualified. Officers serve at the discretion of the Board of Directors. There are no family relationships among any of the officers or directors of the Company except that Dominic A. Polimeni is the brother-in-law of Robert V. Gubitosi. The principal occupation and business experience for each officer and director of the Company for the last five years as follows: DOMINIC A. POLIMENI has been President, Chief Operating Officer and a Director of the Company since March 1995, and Chairman and Chief Executive Officer since February 1996. He has also been Chairman, Chief Executive Officer and Chief Financial Officer of Quest Electronic Hardware, Inc. since October 1994. Since May 1996, Mr. Polimeni has been a director of Healthcare Imaging Services, Inc., a publicly held company based in Middletown, New Jersey which provides healthcare management and services. Since March 1996 Mr. Polimeni has also been a director of TMCI Electronics, Inc., a publicly held company based in San Jose, California which provides custom manufacturing and value-added services to the information technology industry. Mr. Polimeni has been a Managing Director of Gulfstream Financial Group, Inc., a privately held financial consulting and investment banking firm, since August 1990. Prior to that he held the position of Chief Financial Officer of Arrow Electronics, Inc. ("Arrow") for four (4) years. He also held several other positions, including general management positions, with Arrow over an eight-year period. Prior to that he practiced as a Certified Public Accountant for more than 12 years and was a Partner in the New York office of Arthur Young & 41 Company. He has also held the position of Chief Operating Officer of Fugazy Express, Inc., a New York based transportation company in its start-up phase. He holds a bachelor of business administration degree from Hofstra University. Mr. Polimeni is the brother-in-law of Mr. Gubitosi. MILTON M. ADLER has been a Director of the Company since February 1996, Controller of the Company since January 1992, Treasurer of the Company since February 1992 and Secretary since October 1993. Prior thereto, Mr. Adler was employed by Travelco, a travel consulting firm, for more than 18 years in various capacities, the most recent of which was Vice President of Administration. Mr. Adler is a Certified Public Accountant. ROBERT V. GUBITOSI has been a Director of the Company since February 1996 and Director of Operations of Quest Electronic Hardware, Inc., a subsidiary of the Company, since March 1995. Mr. Gubitosi has been a Managing Director of Gulfstream Financial Group, Inc., a privately held financial consulting and investment banking firm, since August 1990. Prior to that he held the position of General Partner and Chief Financial Officer of the Securities Groups, a New York investment banking firm and primary dealer of U.S. government securities, with responsibility for the investment banking activities of the firm. In addition, he has held managerial positions at Goldman Sachs & Company and Oppenheimer & Company and specialized in brokerage accounting and auditing at Haskins & Sells and Touche Ross & Co. He holds a bachelor of business administration degree from Hofstra University. Mr. Gubitosi is the brother-in-law of Mr. Polimeni. MITCHELL HYMOWITZ has been a Director of the Company since December 1993. Mr. Hymowitz has also been Principal/Chief Financial Officer of H&W Hardware Co., Inc. and Vice President of Two Twenty First Avenue Realty Corp. since September 1990. Prior to that he was Senior Accountant with Paritz and Company, P.A., in New Jersey. Mr. Hymowitz earned a Bachelor of Science in Business Administration with a degree in Accounting from State University of New York at Buffalo in 1984. WILLIAM J. MCSHERRY, JR. has been a Director of the Company since February 1996. Mr. McSherry has been a partner of Battle Fowler LLP, a law firm with offices in New York City and Los Angeles, since July 1991. Prior to July 1991, Mr. McSherry was a partner in the law firm of Bryan Cave. Mr. McSherry is also the President and a director of Playtex Marketing Corporation, a privately- owned corporation, and serves as a trustee and as Deputy Mayor of the Village of Larchmont, State of New York. 42 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth the compensation of the named executives for the periods indicated. No executive officer had total annual salary and bonus during any such period equal to or greater than $100,000.
Long Term Compensation ----------------------------------------------------- Annual Compensation Awards Payouts -------------------------------------------- ---------------------------- ------------------------ (a) (b) (c) (d) (e) (f) (g) (h) (i) Restricted Securities Name and Other Annual Stock Underlying LTIP All other Principal Position Year Salary Bonus Compensation Awards ($) Options/SARs(#) Payouts Compensation - ------------------ ---- ------ ----- ------------ ---------- --------------- ------- ------------ Dominic A. Polimeni 1995(1) $75,000 -- -- -- -- -- -- Chairman, President and 1994 -- -- -- -- -- -- -- Chief Executive Officer 1993 -- -- -- -- -- -- -- Stephen J. Drescher 1995(1) $52,000 -- -- -- -- -- -- Former Chairman and Chief 1994 $52,000 -- -- -- 25,000(2) -- -- Executive Officer 1993 $19,000 -- -- -- -- -- --
- --------------- (1) Mr. Polimeni served as President and Chief Operating Officer of the Company during the period March-December 1995. Mr. Drescher acted as Chairman and Chief Executive Officer until January 1996. In February 1996, Mr. Polimeni was elected to the additional capacities of Chairman and Chief Executive Officer. Prior to March 1995, Mr. Polimeni was not associated with the Company. (2) Options to acquire 25,000 shares at $6.25 per share were granted to Mr. Drescher in 1994 pursuant to the 1992 Amended and Restated Management Incentive Option Plan. EMPLOYMENT AGREEMENTS Dominic A. Polimeni, Chairman, Chief Executive Officer and President of the Company, is party to an employment agreement with Quest Electronic Hardware, Inc., a subsidiary of the Company. This agreement expires on March 31, 2000, provides for a base salary of $100,000 per annum and requires Mr. Polimeni to devote such portion of his business time and energies to the business and affairs of the Company as is needed to perform his duties under the agreement. See also "Certain Transactions" with respect to a Management Advisory and Consulting Agreement between the Company and Gulfstream Financial Group, Inc., a company owned by Mr. Polimeni and Joan R. Gubitosi. OPTION/SAR GRANTS There were no grants during 1995 of stock options or stock appreciation rights to any person named in the Summary Compensation Table. For information relating to warrants and rights granted to Gulfstream, a company owned by Dominic A. Polimeni and Joan R. Gubitosi, and to Phillip D. Schwiebert. See "Securities Ownership--Exchange Agreements." 43 OPTION/SAR EXERCISES Set forth below is information concerning exercises of options during 1995 and the year-end value of unexercised options for the persons named in the Summary Compensation Table:
(a) (b) (c) (d) (e) Number of Securities Underlying Unexercised Value of Unexercised-In- Shares Options/SAR's at Fiscal the-Money Options/SARs Acquired Value Year End (#) at Fiscal Year End ($) Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable ---- ----------- -------- ------------------------- ------------------------- Dominic A.Polimeni -- -- -- -- Chief Executive Officer, Chairman and President Stephen J. Drescher 25,000 $656,250 -- -- Former Chief Executive Officer and Chairman
The value realized is based on the difference between the exercise price of $6.25 per share and the average of the high and low bid prices for the Common Stock on April 28, 1995, the date of exercise. COMPENSATION OF DIRECTORS Other than the 1994 Director Non-Qualified Stock Option Plan described below, the Company does not have a standard policy regarding compensation of members of the Board of Directors. Other than as reported below, the members of the Board of Directors did not receive compensation for their services as such during the year ended December 31, 1995. THE 1994 DIRECTOR NON-QUALIFIED STOCK OPTION PLAN On January 26, 1994, the Board of Directors (the "Board") adopted, subject to stockholder approval, the above captioned plan and in February 1996 amended the plan so as to change the annual date of the grant to the first Wednesday of February. On April 2, 1996, the Director Non-Qualified Stock Option Plan was approved by the Company's stockholders at a special meeting. The plan, as amended and approved, is hereinafter referred to as the "1994 Plan." Pursuant to the terms of the 1994 Plan, options for an aggregate of 30,000 shares of the Company's Common Stock may be granted. All non-employee directors shall receive an option to purchase 1,500 shares of the Common Stock of the Company on the first Wednesday of February in each calendar year at an exercise price equal to the fair market value per share of the Common Stock on that date. Such options shall be exercisable immediately for a period of 10 years from date of grant unless terminated earlier pursuant to the terms of the plan. Under the 1994 Plan, 12,000 options have been granted to date at exercise prices of $11.25 per share, $19.06 per share and $24.06 per share. 44 1992 STOCK OPTION PLAN In June 1992, the Board unanimously approved the adoption of the "1992 Plan" which was approved by the stockholders of the Company on January 8, 1993. Under the 1992 Plan, both incentive stock options ("ISOs") and non-qualified stock options ("Non-Qualified Options") may have been granted (together, the "Options"). Each option was to be specifically designated at the time of its grant as an ISO (within the meaning of Section 422 of the Internal Revenue Code of 1986) (the "Code"), or a Non- Qualified Option. All non-management employees were eligible to receive ISOs under the 1992 Plan. All non-management employees and non-employee consultants and Company Judges were eligible to receive Non-Qualified Options under the 1992 Plan. No options were granted under the 1992 Plan during 1995. The Board of Directors has terminated the 1992 Plan and no additional options will be granted thereunder. THE 1992 AMENDED AND RESTATED MANAGEMENT INCENTIVE OPTION PLAN In December 1991, the Board approved the Company's 1992 Management Incentive Option Plan (the "Incentive Plan"). In September and October 1992, effective as of the date of the original plan, the Board approved certain amendments to the original plan which were ratified by the stockholders of the Company on January 8, 1993. Pursuant to the terms of the Incentive Plan non-qualified options to purchase up to 53,333 shares of the Company's Common Stock may have been granted to officers, directors, key employees and consultants of the Company. No options were granted under the Incentive Plan during 1995. The Board of Directors has terminated the Incentive Plan and no additional options will be granted thereunder. 1996 STOCK OPTION PLAN The Board of Directors of the Company has submitted for the approval of the Company's stockholders at the annual meeting of stockholders scheduled for December 27, 1996, a 1996 Stock Option Plan (the "1996 Plan"). Under the 1996 Plan, either Incentive Stock Options or Non-Qualified Stock Options may be granted; however, the former may be granted only to employees of the Company and its subsidiaries. Pursuant to the terms of the 1996 Plan, a total of 250,000 shares of the Company's Common Stock (as adjusted to reflect the proposed one-for-ten reverse split) will be reserved and available for distribution as awards under the 1996 Plan. CERTAIN TRANSACTIONS As of the close of business on March 31, 1995, the Company acquired from Gulfstream Financial Group, Inc., a Florida corporation owned by Dominic A. Polimeni and Joan R. Gubitosi, and from Phillip D. Schwiebert all of the outstanding capital stock of Quest Electronic Hardware, Inc. This transaction is described under "Securities Ownership--Security Ownership of Management and Principal Stockholders." Pursuant to the Management Advisory and Consulting Agreement therein described, the Company has also agreed to compensate Gulfstream for advisory and consulting services at the rate of $150,000 per year. This agreement expires on March 31, 2000 and can be terminated by either party 45 on 90 days notice. See also "Securities Ownership--Exchange Agreement" for the terms of a related exchange agreement. In April 1995, the Company loaned Stephen J. Drescher, then Chairman and Chief Executive Officer of the Company, $156,250 in connection with the exercise by Mr. Drescher of options to purchase Common Stock. The obligation to repay this loan was satisfied by Gulfstream and Mr. Schwiebert by the contribution of shares of Common Stock to the Company in connection with Mr. Drescher's resignation in January 1996 as an officer and director of the Company. In April 1995, the Company loaned Paul L. Burton, then Executive Vice President and a Director of the Company, $125,000 in connection with the exercise by Mr. Burton of options to purchase Common Stock. The obligation to repay this loan and to repay $69,228 of expenses paid by the Company on Mr. Burton's behalf was satisfied by Gulfstream and Mr. Schwiebert by the contribution of shares of Common Stock to the Company in connection with Mr. Burton's resignation in January 1996 as an officer and director of the Company. 46 SECURITIES OWNERSHIP SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS The following table sets forth certain information, as of December 1, 1996, known to the Company regarding beneficial ownership of the Company's Common Stock by (i) any person who is known by the Company to own beneficially more than five percent of the outstanding shares of the Company's Common Stock; (ii) the Company's directors; and (iii) all executive officers and directors as a group. The following calculations were based upon 1,535,484 shares of the Company's Common Stock issued and outstanding as of the above date. ALL AMOUNTS SHOWN HAVE BEEN ADJUSTED TO REFLECT THE PROPOSED ONE-FOR-TEN REVERSE SPLIT OF THE OUTSTANDING COMMON STOCK.
Percentage of Shares -------------------- Position with Number Before After Name & Address the Company of Shares Offering Offering - -------------- ----------- --------- -------- -------- Dominic A. Polimeni(1) Chairman, President 380,273(2) 22.97% and Chief Executive Officer Milton M. Adler (1) Director, Secretary, 767(3) * Treasurer and Controller Robert V. Gubitosi(1) Director __(4) __ Mitchell Hymowitz(1) Director 4,500(5) * William J. McSherry, Jr.(1) Director 3,500(6) * Joan R. Gubitosi 380,273(2) 22.97% c/o Gulfstream Financial Group, Inc. 6400 Congress Ave., Suite 200 Boca Raton, FL 33487 Phillip D. Schwiebert President and Chief 166,136(7) 10.61% c/o Quest Electronic Operating Officer of Hardware, Inc. Quest Electronic 1180 Murphy Avenue Hardware, Inc., a San Jose, CA 95131 subsidiary of the Company 47 Percentage of Shares -------------------- Position with Number Before After Name & Address the Company of Shares Offering Offering - -------------- ----------- --------- -------- -------- The Miami Project to Cure Paralysis 100,000 6.51% The University of Miami School of Medicine 1600 NW Tenth Avenue Miami, FL 33136 All officers and directors as a group 389,040 23.00% (five persons)
- ------------ * Less than 1% (1) c/o Questron Technology, Inc., 6400 Congress Avenue, Suite 200, Boca Raton, FL 33487. (2) These shares are owned by Gulfstream Financial Group, Inc. ("Gulfstream"). Joan R. Gubitosi and Mr. Polimeni are executive officers and the stockholders of Gulfstream and share voting and investment power with respect to shares owned by Gulfstream. The 380,273 shares reported above consist of 260,273 shares owned by Gulfstream and options to purchase 120,000 shares at $3.75 per share. This number does not include warrants to purchase 1,000,000 shares of Common Stock granted pursuant to the November 8, 1996 Exchange Agreement, as defined below. Pursuant to a Management Advisory and Consulting Agreement, dated as of November 29, 1994, between the Company and Gulfstream, Gulfstream was previously entitled to be awarded as incentive compensation warrants to purchase up to 10.0% of the Company's Common Stock outstanding at March 31, 1995 (for purposes of such calculation, the common stock outstanding at March 31, 1995 assumes the conversion of all outstanding warrants, options and preferred stock), at a price of $1.00 per share, upon the attainment of certain earnings targets. These rights have been modified. See "Securities Ownership--Exchange Agreement." (3) Includes options to purchase 667 shares of Common Stock at $127.50 per share granted pursuant to the 1992 Stock Option Plan. (4) Mr. Gubitosi's wife, Joan R. Gubitosi, has shared beneficial ownership of 380,273 shares of Common Stock (see Footnote 2). Mr. Gubitosi disclaims beneficial ownership of such shares. (5) Consists of options to purchase 1,500 shares of Common Stock at $11.25 per share, options to purchase 1,500 shares of Common Stock at $24.06 per share and options to purchase 1,500 shares of Common Stock at $19.06 per share granted pursuant to the 1994 Director Non-Qualified Stock Option Plan. (6) Includes options to purchase 1,500 shares of Common Stock at $19.06 per share granted pursuant to the 1994 Director Non-Qualified Stock Option Plan. (7) The 166,136 shares reported above consist of 136,136 shares owned by Schwiebert and options to purchase 30,000 shares at $3.75 per share. This number does not include warrants to purchase 250,000 shares of Common Stock granted pursuant to the November 8, 1996 Exchange Agreement, as defined below. Pursuant to an Employment Agreement, dated as of November 29, 1994, between Quest and Phillip D. Schwiebert, Mr. Schwiebert was previously entitled to be awarded as incentive compensation warrants to purchase up to 5.0% of the Company's Common Stock outstanding at March 31, 1995 (for purposes of such calculation, the common stock outstanding at March 31, 1995 assumes the conversion of all outstanding warrants, options and preferred stock), at a price of $1.00 per share, upon the attainment of certain earnings targets. These rights have been modified. See "Securities Ownership--Exchange Agreement." 48 As of the close of business on March 31, 1995, the Company acquired from Gulfstream Financial Group, Inc. ("Gulfstream"), a Florida corporation owned by Dominic A. Polimeni and Joan R. Gubitosi, and from Phillip D. Schwiebert all of the outstanding capital stock of Quest Electronic Hardware, Inc. ("Quest"). Quest, in turn, simultaneously acquired the fasteners distribution business of Arrow Electronics, Inc. These events resulted in changes in ownership of the capital stock of the Company which may have affected the control of the Company. These changes included the following: (a) Gulfstream became the direct beneficial owner of 22.1% of the shares of Common Stock of the Company outstanding at March 31, 1995; (b) Gulfstream, in consideration of its services to the Company under a Management Advisory and Consulting Agreement, dated as of November 29, 1994, was to be entitled to be awarded as incentive compensation, subject to certain conditions and restrictions, warrants to purchase up to 10.0% of the Common Stock outstanding at March 31, 1995 (for purposes of such calculation, the Common Stock outstanding at March 31, 1995 assumes the conversion of all outstanding warrants, options and preferred stock), at a price of $1.00 per share, upon the attainment of certain earnings targets. See "Securities Ownership -- Exchange Agreement"; (c) Dominic A. Polimeni ("Polimeni"), a Director, Executive Officer and principal stockholder of Gulfstream, and the Chairman, Chief Executive Officer and Chief Financial Officer of Quest, which became a subsidiary of the Company, was named President and Chief Operating Officer of the Company (Mr. Polimeni was subsequently named Chairman, President and Chief Executive Officer of the Company); and (d) Phillip D. Schwiebert ("Schwiebert"), the President and Chief Operating Officer of Quest, became the beneficial owner of 11.6% of the shares of Common Stock of the Company outstanding at March 31, 1995, and, pursuant to an Employment Agreement, dated as of November 29, 1994, by and between Quest and Schwiebert, was to be entitled to be awarded as incentive compensation, subject to certain conditions and restrictions, warrants to purchase up to 5.0% of the Company's Common Stock outstanding at March 31, 1995 (for purposes of such calculation, the Common Stock outstanding at March 31, 1995 assumes the conversion of all outstanding warrants, options and preferred stock), at a price of $1.00 per share, upon the attainment of certain earnings targets. See "Securities Ownership -- Exchange Agreement." Subsequent to the foregoing events, certain principal stockholders of the Company (Jordan R. Belfort, Richard Bronson, Elliot Loewenstern and Daniel Porush) who, in the aggregate, beneficially owned approximately 45% of the Company's outstanding stock disposed of the bulk of these shares. Messrs. Bronson and Loewenstern are principals of the Underwriter. In addition, the Board of Directors of the Company underwent a restructuring by reason of the resignation of four (4) former directors and the election of Messrs. Adler, Gubitosi and McSherry to the Board. EXCHANGE AGREEMENT In connection with the Offering and the Webb acquisition, Gulfstream and Philip Schwiebert, shareholders of the Company, have entered into an Exchange Agreement dated as of November 8, 1996 (the "Exchange Agreement") pursuant to which Gulfstream and Schwiebert have agreed to exchange their rights to receive warrants to purchase up to 10% and 5%, respectively, of the Common Stock outstanding as of March 31, 1995. The Exchange Agreement is conditioned upon the effectiveness of the reverse 49 split. Based upon the number of shares of Common Stock outstanding on such date (after giving effect to the exercise of all the outstanding options and warrants), the foregoing represented the right of Gulfstream and Schwiebert to acquire up to 2,641,720 and 1,320,860 shares of Common Stock, respectively, at $.10 per share. After giving effect to the proposed one-for-ten reverse split, the foregoing would represent the right to acquire 264,172 and 132,086 shares of post-split Common Stock, respectively, at $1.00 per share. The Board of Directors deemed it desirable to enter into the Exchange Agreement by reason of the fact that the rights previously granted to Gulfstream and Schwiebert would have resulted in substantial charges to the Company's earnings by reason of accounting rules now in effect and would have resulted in substantial dilution to the other stockholders. Under the options, warrants and rights granted under the Exchange Agreement, no charge to earnings should result as a result of their being exercisable at the fair market value at the date of grant in lieu of $.10 per share ($1.00 per share after giving effect to the proposed one-for-ten reverse split). In addition, pursuant to the Exchange Agreement the Company has substantially increased the pre-tax income targets needed to earn certain of the awards from $1.4 million, $1.8 million, $2.2 million and $2.6 million to $2.5 million, $3.5 million and $4.5 million. Under the prior arrangements, one half of the awards would have been earned upon completion of the proposed acquisition of Webb, thereby resulting in a substantial charge to earnings and substantial dilution to stockholders. Under the Exchange Agreement, no awards which are conditioned on meeting the pre-tax income targets set forth below will be earned until the $2.5 million pre-tax income target is met or exceeded. Finally, although Gulfstream and Schwiebert have the opportunity to earn a substantially greater number of shares, the amount of consideration which will have to be paid for such shares has substantially increased as well. Based upon current market prices and giving effect to the proposed reverse split, the price to be paid per share acquired will have increased under the Exchange Agreement from $1.00 to at least $3.75. Pursuant to the Exchange Agreement, Gulfstream and Schwiebert received the following in exchange for the rights previously granted under their agreements. ALL AMOUNTS HAVE BEEN ADJUSTED TO REFLECT THE PROPOSED ONE-FOR-TEN REVERSE SPLIT. Gulfstream: 1) Options to acquire 120,000 shares of Common Stock for a per share exercise price equal to $3.75; and 2) Series IV Warrants to acquire 1,000,000 shares of Common Stock. If the proposed offering is not consummated, the exercise price shall be $4.3125 per share. Schwiebert: 1) Options to acquire 30,000 shares of Common Stock for a per share exercise price equal to $3.75; and 2) Series IV Warrants to acquire 250,000 shares of Common Stock. If the proposed offering is not consummated, the exercise price shall be $4.3125 per share. In addition, Gulfstream and Schwiebert will be entitled to receive options to acquire additional shares of Common Stock at an exercise price equal to the fair market value of the Common Stock at the 50 date of grant if the pre-tax income targets set forth below are met or exceeded in any fiscal year up to and including fiscal year 2001: No. of Additional No. of Additional Gulfstream Shares Schwiebert Shares Pre-tax Income at Least ----------------- ----------------- ----------------------- 333,333 166,667 $2,500,000 333,333 166,667 $3,500,000 333,334 166,666 $4,500,000 The following table summarizes the effect of the Exchange Agreement. ALL AMOUNTS HAVE BEEN ADJUSTED TO REFLECT THE PROPOSED ONE-FOR-TEN REVERSE SPLIT.
Before Exchange Agreement After Exchange Agreement --------------------------------------------------- -------------------------------------------------- Maximum No. Aggregate Maximum No. Aggregate of Shares to be Exercise Price Percentage of Shares to be Exercise Price Percentage Purchased to be Paid of Stock Purchased to be Paid* of Stock** --------- ---------- -------- --------- ---------- ---------- Gulfstream 264,172 $264,172 13.68% 2,120,000 $8,512,500 47.80% Schwiebert 132,086 $132,086 6.84% 780,000 $3,065,625 17.59%
* In the case of the options, an exercise price of $3.75 per share of the Common Stock was used for the purpose of determining the aggregate exercise price to be paid. In the case of the Warrants, an exercise price of $4.3125 per share of the Common Stock was used for the purpose of determining the aggregate exercise price to be paid. ** These amounts do not give effect to any issuances of shares as a result of the Offering or the Webb acquisition. 51 DESCRIPTION OF SECURITIES UNITS Each of the Units offered hereby at $6.00 per Unit consists of one share of Series B Preferred Stock and one Series IV Warrant. The Series B Preferred Stock and Series IV Warrants are detachable and may trade separately immediately upon issuance. Should the Series IV Warrants be exercised, of which there is no assurance, the Company will receive the proceeds therefrom, aggregating up to an additional $[ ]. COMMON STOCK The authorized Common Stock of the Company consists of 20,000,000 shares of Common Stock, $.001 par value per share (adjusted to reflect the proposed reduction in authorized common stock). There are presently 1,535,484 issued and outstanding shares of Common Stock (ADJUSTED TO REFLECT THE PROPOSED ONE-FOR-TEN REVERSE SPLIT). Immediately prior to the date of this Prospectus, there were approximately 1,000 stockholders of record of the Company. Holders of the Common Stock do not have preemptive rights to purchase additional shares of Common Stock or other subscription rights. The Common Stock carries no conversion rights and is not subject to redemption or to any sinking fund provisions. All shares of Common Stock are entitled to share equally in dividends from sources legally available therefor when, as and if declared by the Board of Directors and, upon liquidation or dissolution of the Company, whether voluntary or involuntary, to share equally in the assets of the Company available for distribution to stockholders. All outstanding shares of Common Stock are validly authorized and issued, fully paid and nonassessable, and all shares to be sold and issued as contemplated hereby, will be validly authorized and issued, fully paid and nonassessable. The Board of Directors is authorized to issue additional shares of Common Stock, not to exceed the amount authorized by the Company's Certificate of Incorporation, and to issue options and warrants for the purchase of such shares, on such terms and conditions and for such consideration as the Board may deem appropriate without further stockholder action. The above description concerning the Common Stock of the Company does not purport to be complete. Reference is made to the Company's Certificate of Incorporation and By-laws which are available for inspection upon proper notice at the Company's offices, as well as to the applicable statutes of the State of Delaware for a more complete description concerning the rights and liabilities of stockholders. Each holder of Common Stock is entitled to one vote per share on all matters on which such stockholders are entitled to vote. Since the shares of Common Stock do not have cumulative voting rights, the holders of more than fifty percent (50%) of the shares voting for the election of directors can elect all the directors if they choose to do so and, in such event, the holders of the remaining shares will not be able to elect any person to the Board of Directors. PREFERRED STOCK The authorized Preferred Stock of the Company consists of 6,000,000 shares of Preferred Stock, $.01 par value per share (adjusted to reflect the proposed reduction in authorized preferred stock). Immediately prior to the date of this Prospectus, there were no shares of Preferred Stock outstanding. Previously, 900,000 shares of Preferred Stock had been issued under terms which prohibited their reissuance. 52 The terms and conditions of the 1,000,000 shares of Series B Preferred Stock included in the Units are set forth in a Certificate of Designations and Preferences which is being filed as an exhibit to the Registration Statement of which this Prospectus is a part. Each share of Series B Preferred Stock shall be automatically converted without any action on the part of the Company or the holder thereof into ____ shares of Common Stock on the second anniversary of the Effective Date. This conversion ratio is equal to 80% of the closing price per share as represented on the Nasdaq SmallCap Market for the Common stock on the day immediately preceding the Effective Date compared with an offering price of $5.75 per share of Series B Preferred Stock. Annual dividends on the Series B Preferred Stock in respect of the two year period prior to conversion at the rate of $0.115 per share. Holders of Series B Preferred Stock will be entitled to one vote for each share of Common Stock into which such Preferred Stock is convertible. Each share of Series B Preferred Stock will be entitled to a liquidation preference equal to $0.01 per share. Up to 4,100,000 additional shares of Preferred Stock may be issued from time to time in one or more series and the Board of Directors, without further approval of the stockholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights, liquidation preferences and other rights and restrictions relating to any such series. The issuances of additional shares of Preferred Stock, while providing flexibility in connection with possible financings, acquisitions and other corporate purposes, could, among other things adversely affect the voting power of the holders of other securities of the Company and may, under certain circumstances, have the effect of deterring hostile takeovers or delaying changes in control or management of the Company. SERIES IV WARRANTS The Series IV Warrants shall be exercisable commencing one year after the date of this Prospectus ("Effective Date"). Each Series IV Warrant entitles the holder to purchase during the four year period commencing one year from the Effective Date one share of Common Stock at an exercise price of 115% of the closing market price per share of Common Stock on the day immediately preceding the Effective Date. The Common Stock underlying the Warrants will, upon exercise of the Warrants, be validly issued, fully paid and nonassessable. The Series IV Warrants will be subject to redemption by the Company for $.05, upon 30 days' prior written notice, if the closing bid price of the Common Stock, as reported by the Nasdaq SmallCap Market, exceeds $ _____ per share for any 20 consecutive trading days ending within ten days prior to the date of the notice of redemption. The Series IV Warrants can only be exercised when there is a current effective registration statement covering the shares of Common Stock underlying the Series IV Warrants. If the Company does not or is unable to maintain a current effective registration statement the Series IV Warrant holders will be unable to exercise the Series IV Warrants and the Series IV Warrants may become valueless. Moreover, if the shares of Common Stock underlying the Series IV Warrants are not registered or qualified for sale in the state in which a Series IV Warrant holder resides, such holder might not be permitted to exercise the Series IV Warrants. See "Risk Factors--Requirements of Current Prospectus and State Blue Sky Registration in Connection with the Exercise of the Series IV Warrants Which May Not Be Exercisable and May Therefore Be Valueless." The Company will deliver Series IV Warrant certificates to the purchasers of Units representing one Series IV Warrant for each Unit purchased. Thereafter, Series IV Warrant certificates may be exchanged for new certificates of different denominations, and may be exercised or transferred by presenting them at the offices of the Transfer Agent. Holders of the Series IV Warrants may sell the Series IV Warrants if a market exists rather than exercise them. However, there can be no assurance that 53 a market will develop or continue as to such Series IV Warrants. If the Company is unable to qualify its Common Stock underlying such Series IV Warrants for sale in certain states, holders of the Company's Series IV Warrants in those states will have no choice but to either sell such Series IV Warrants or allow them to expire. Each Series IV Warrant may be exercised by surrendering the Series IV Warrant certificate, with the form of election to purchase on the reverse side of the Series IV Warrant certificate properly completed and executed, together with payment of the exercise price to the Series IV Warrant Agent. The Series IV Warrants may be exercised in whole or from time to time in part. If less than all of the Series IV Warrants evidenced by a Series IV Warrant certificate are exercised, a new Series IV Warrant certificate will be issued for the remaining number of Series IV Warrants. Holders of the Series IV Warrants are protected against dilution of the equity interest represented by the underlying shares of Common Stock upon the occurrence of certain events, including, but not limited to, issuance of stock dividends other than dividends paid in respect of the Series B Preferred Stock. If the Company merges, reorganizes or is acquired in such a way as to terminate the Series IV Warrants, the Series IV Warrants may be exercised immediately prior to such action. In the event of liquidation, dissolution or winding up of the Company, holders of the Series IV Warrants are not entitled to participate in the Company's assets. For the life of the Series IV Warrants, the holders thereof are given the opportunity to profit from a rise in the market price of the Common Stock of the Company. The exercise of the Series IV Warrants will result in the dilution of the then book value of the Common Stock of the Company held by the public investors and would result in a dilution of their percentage ownership of the Company. The terms upon which the Company may obtain additional capital may be adversely affected through the period that the Series IV Warrants remain exercisable. The holders of these Series IV Warrants may be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain equity capital on terms more favorable than those provided for by the Series IV Warrants. Because the Series IV Warrants included in the Units being offered hereby may be transferred, it is possible that the Series IV Warrants may be acquired by persons residing in states where the Company has not registered, or is not exempt from registration such that the shares of common stock underlying the Series IV Warrants may not be sold or transferred upon exercise of the Series IV Warrants. Series IV Warrant holders residing in those states would have no choice but to attempt to sell their Series IV Warrants or to let them expire unexercised. Also, it is possible that the Company may be unable, for unforeseen reasons, to cause a registration statement covering the shares underlying the Series IV Warrants to be in effect when the Series IV Warrants are exercisable. In that event, the Series IV Warrants may expire unless extended by the Company as permitted by the Series IV Warrant because a registration statement must be in effect in order for warrant holders to exercise their Series IV Warrants. In the event that the Series IV Warrants are called for redemption, the Series IV Warrant holders may not be able to exercise their Series IV Warrants if the Company has not updated this Prospectus in accordance with the requirements of the Act or these securities have not been qualified for sale under the laws of the state where the Series IV Warrant holder resides. See "Requirements of Current Prospectus and State Blue Sky Registration in Connection with the Exercise of the Series IV Warrants Which May Not Be Exercisable and May Therefore Be Valueless." In addition, in the event that the Series IV Warrants have been called for redemption, such call for redemption could force the Series IV Warrant holder to either (i) assuming the necessary updating to the Prospectus and state blue sky qualifications 54 have been effected, exercise the Series IV Warrants and pay the exercise price at a time when, in the event of a decrease in market price from the period preceding the issuance of the call for redemption, it may be less than advantageous economically to do so, or (ii) accept the redemption price, which, in the event of an increase in the price of the stock, could be substantially less than the market value thereof at the time of redemption. RESTRICTED SHARES ELIGIBLE FOR FUTURE SALE There are currently 384,409 shares of the Company's outstanding Common Stock that are "restricted securities" which were acquired on March 31, 1995 which in the future, may be sold upon compliance with Rule 144 adopted under the Securities Act. Rule 144 provides, in essence, that a person holding "restricted securities" for a period of two years may sell every three months a number of shares equal to the greater of (a) one percent of the Company's issued and outstanding shares, or (b) the average weekly volume of sales during the four calendar weeks preceding the sale. The amount of "restricted securities" which a person who is not an affiliate of the Company may sell is not so limited, since non-affiliates may sell without volume limitation their shares held for three years. Therefore, during each three month period, beginning March 31, 1996, a holder of restricted securities who has held them for at least the two year period may sell under Rule 144 up to 15,354 shares. Non-affiliated persons who hold for the three-year period described above may sell unlimited shares once their holding period is met. A proposed rule which may be adopted by the Commission would reduce these two and three year periods to one and two years, respectively. The Company has also agreed not to issue any additional securities other than as contemplated by this Prospectus for a period of twenty-four (24) months following the Effective Date without the consent of the Underwriter. The registration statement of which this Prospectus is a part also covers the offering of 2,750,000 Series IV Warrants which are being offered by the Selling Securityholders. The securities held by the Selling Securityholders may be sold commencing eighteen (18) months from the date of this Prospectus subject to earlier release at the sole discretion of the Underwriter. In other offerings where the Underwriter has released similar restrictions applicable to selling securityholders prior to the expiration of the lock-up period and in some cases immediately after the exercise of the over-allotment option or the expiration of the over-allotment option. Certificates evidencing these securities will bear a legend reflecting such restrictions. The Underwriter may release the securities held by the Selling Securityholders at any time after all securities subject to the Over-Allotment Option (as hereinafter defined) have been sold or such option has expired. The resale of the securities held by the Selling Securityholders is subject to prospectus delivery and other requirements of the Securities Act. Sales of such securities or the potential of such sales at any time any have an adverse effect on the market prices of the securities offered hereby. See "Selling Securityholders." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the securities of the Company is American Stock Transfer & Trust, 40 Wall Street, New York, New York 10005, telephone number (212) 936-5100. REPORTS TO SECURITYHOLDERS The Company will furnish to holders of its Units, Series B Preferred Stock, Common Stock and Series IV Warrants annual reports containing audited financial statements. The Company may issue other unaudited interim reports to its securityholders as it deems appropriate. 55 SELLING SECURITYHOLDERS The registration statement, of which this Prospectus forms a part, also relates to the registration of 2,750,000 Series IV Warrants offered under the Alternate Prospectus by the selling securityholders identified in the table below (the "Selling Securityholders"). The securities held by the Selling Securityholders may be sold commencing 18 months from the date of this Prospectus, subject to earlier release at the sole discretion of the Underwriter. The certificates evidencing the foregoing securities will bear a legend with such restrictions. The Underwriter may release the securities held by the Selling Securityholders at any time after all securities subject to the Over-Allotment Option have been sold or such option has expired. The Over-Allotment Option will expire 30 days from the date of this Prospectus. In other offerings where the Underwriter has acted as the managing underwriter, it has released similar restrictions applicable to selling stockholders prior to the expiration of the lock-up period and in some cases immediately after the exercise of the Over-Allotment Option or the expiration of the Over-Allotment Option period. The resale of the securities of the Selling Securityholders is subject to prospectus delivery and other requirements of the Securities Act. Sales of such securities or the potential of such sales at any time may have an adverse effect on the market prices of the securities offered hereby. The following table sets forth certain information with respect to the Selling Securityholders. The Securities to which this Prospectus relates may be sold from time to time in whole or in part by the Selling Securityholders as described herein.
Shares of Shares that may Series IV Warrants Shares of Percent of Common Stock be offered that may be Common Class owned prior to pursuant to this offered pursuant to Stock owned owned after Selling Securityholders this offering Prospectus this Prospectus after offering offering ----------------------- ------------- ---------- --------------- -------------- -------- Gulfstream Financial Group, Inc. 380,273 -- 1,000,000 380,273 22.97% 6400 Congress Ave. Suite 200 Boca Raton, FL 33487 Phillip D. Schwiebert 166,136 -- 250,000 166,136 10.61% c/o Quest Electronic Hardware, Inc. 1180 Murphy Ave. San Jose, CA 95131 A.J. Dinicola -- -- 1,500,000 -- -- c/o Webb Distribution Two Lowell Ave. Winchester, MA 08190
The Series IV Warrants are being offered by the Selling Securityholders, in the corresponding amounts above, under this alternate Prospectus. Gulfstream owns in excess of 5% of the Company's Common Stock and Mr. Polimeni, the Chairman, Chief Executive Officer and President of the Company, is an officer, director and 50% stockholder of Gulfstream. Mr. Schwiebert also owns in excess of 5% 56 of the Common Stock and is an employee of a subsidiary of the Company. See "Securities Ownership" and "Certain Transactions." Mr. Dinicola is the majority stockholder of Webb. All costs incurred by the Company in connection with the registration of the Securities of the Selling Securityholders are being borne by the Company. The securities offered hereby may be sold from time to time directly by the Selling Securityholders. The Company will not receive any of the proceeds from such sale. However, the Company's obligations under the Notes to be delivered in connection with the Webb acquisition may be reduced by the proceeds from the sale of Series IV Warrants by Mr. Dinicola. Alternatively, the Selling Securityholders may from time to time offer such securities through underwriters, dealers or agents. The Selling Securityholders are not required to effect sales through the Underwriter. The distribution of securities by the Selling Securityholders may be effected in one or more transactions that may take place on the over-the-counter market, including ordinary broker's transactions, privately-negotiated transactions or through sales to one or more broker-dealers for resale of such shares as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the Selling Securityholders in connection with such sales of securities. The securities offered by the Selling Securityholders may be sold by one or more of the following methods, without limitations: (a) a block trade in which a broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) ordinary brokerage transactions and transactions in which the broker solicits purchasers; and (d) face-to-face transactions between sellers and purchasers without a broker-dealer. In effecting sales, brokers or dealers engaged by the Selling Securityholders may arrange for other brokers or dealers to participate. The Selling Securityholders and intermediaries through whom such securities are sold may be deemed "underwriters" within the meaning of the Act with respect to the securities offered, and any profits realized or commissions received may be deemed underwriting compensation. At the time a particular offer of securities is made by or on behalf of a Selling Securityholder, to the extent required, a Prospectus will be distributed which will set forth the numbers of securities being offered and the terms of the offering, including the name or names of any underwriters, dealers or agents, if any, the purchase price paid by any underwriter for shares purchased from the Selling Securityholders and any discounts, commissions or concessions allowed or reallowed or paid to dealers, and the proposed selling price to the public. Under the Exchange Act, and the regulations thereto, any person engaged in a distribution of the securities of the Company offered by this Prospectus may not simultaneously engage in market-making activities with respect to such Securities of the Company during the applicable "cooling off" period (nine days) prior to the commencement of such distribution. In addition, and without limiting the foregoing, the Selling Securityholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including without limitation, Rule 10b-6 and 10b-7, in connection with the transactions in such securities, which provisions may limit the timing of purchases and sales of such securities by the Selling Securityholders. 57 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part, the Underwriter has agreed to purchase from the Company 1,000,000 Units offered hereby from the Company on a "firm commitment" basis, if any are purchased. The Underwriter has advised the Company that it proposes to offer the Units to the public at $6.00 per Unit as set forth on the cover page of this Prospectus and that it may allow to certain dealers who are NASD members, and such dealers may reallow, concessions not to exceed $[ ] per Unit. After the initial public offering, the public offering price, concession and reallowance may be changed by the Underwriter. The Company has granted an option to the Underwriter, exercisable during the 30-day period from the date of this Prospectus, to purchase an additional 15% of the total Units offered to the public at the offering price, less the underwriting discount, to cover over-allotments, if any. The Underwriting Agreement provides for reciprocal indemnification between the Company and the Underwriter against certain liabilities in connection with the Registration Statement, including liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be provided to officers, directors or persons controlling the Company, the Company has been informed that in the opinion of the Commission, such indemnification is against public policy and is therefore unenforceable. The registration statement, of which this Prospectus forms a part, also relates to the registration of 2,750,000 Series IV Warrants offered under the Alternate Prospectus by the Selling Securityholders. The securities held by the Selling Securityholders may be sold commencing 18 months from the Effective Date of this Prospectus subject to earlier release at the sole discretion of the Underwriter. Certificates evidencing these securities will bear a legend reflecting such restrictions. The Underwriter may release the securities held by the Selling Securityholders at any time after all securities subject to the Underwriter's Over-Allotment Option have been sold or such option has expired. The Underwriter's Over-Allotment Option period will expire 30 days following the Effective Date. In other offerings where Biltmore Securities, Inc. has acted as the managing underwriter, it has released similar restrictions applicable to selling securityholders prior to the expiration of the lock-up period and in some cases immediately after the exercise of the Over-Allotment Option or the expiration of the Over-Allotment Option period. See "Selling Securityholders." The Company has agreed to pay to the Underwriter a non-accountable expense allowance of three percent (3%) of the aggregate offering price of the Units offered hereby, including any Units purchased pursuant to the Over-Allotment Option. The Underwriter's Expenses in excess of the stated expense allowance will be borne by the Underwriter. To the extent that the expenses of the Underwriter are less than the stated expense allowance, the difference may be deemed compensation to the Underwriter in addition to the sales commission payable to the Underwriter. The Company has agreed to pay to the Underwriter, upon the closing of this Offering, a fee in the amount of $100,000 in respect of advisory services to be provided by the Underwriter to the Company over a two-year period. The Company has agreed to grant to the Underwriter, or its designees an option ("Underwriter's Purchase Option") to purchase up to an aggregate of 100,000 Units. The Underwriter's Purchase Option shall be exercisable during the four-year period commencing one (1) year after the Effective Date and will provide for a demand registration right in favor of the Underwriter. The Underwriter's Purchase Option may not be assigned, transferred, sold or hypothecated by the Underwriter after the Effective Date 58 of this Prospectus, except to officers or partners of the Underwriter or of selling group members in this offering. Any profits realized by the Underwriter upon the sale of the Securities issuable upon exercise of the Underwriter's Unit Purchase Option may be deemed to be additional underwriting compensation. The exercise price of the Units issuable upon exercise of the Underwriter's Unit Purchase Option during the period of excercisability shall be not less than 120% of the initial public offering prices of such Units. The exercise price of the Underwriter's Purchase Option and the number of Units covered thereby are subject to adjustment in certain events to prevent dilution. For the life of the Underwriter's Purchase Option, the holders thereof are given, at a nominal cost, the opportunity to profit from a rise in the market price of the Company's shares and warrants with a resulting dilution in the interest of other shareholders. The Company may find it more difficult to raise capital for its business if the need should arise while the Underwriter's Unit Purchase Option is outstanding. At any time when the holders of the Underwriter's Purchase Option might be expected to exercise it, the Company would probably be able to obtain additional capital on more favorable terms. The Company will also pay a warrant solicitation fee to the Underwriter equal to four percent (4%) of the exercise price of the Series IV Warrants on all Warrants exercised (excluding Warrants exercised by the Underwriter or certain affiliates of the Company), subject to the Underwriter's compliance with the rules and regulations of the National Association of Securities Dealers ("NASD"). In accordance with NASD Notice to Members 81-38, no warrant solicitation fee shall be paid (i) upon exercise where the market price of the underlying Common Stock is lower than the exercise price; (ii) for the exercise of warrants held in any discretionary account; (iii) upon the exercise of warrants where disclosure of compensation arrangements has not been made in documents provided to customers both as part of the original offering and at the time of exercise; and (iv) upon the exercise of warrants in unsolicited transactions. The broker-dealer to receive the warrant solicitation fee must be designated, in writing, as the soliciting broker. See "Risk Factors -- Exercise of Series IV Warrants May Have Dilutive Effect on Market and Underwriter's Influence on the Market May Have Adverse Consequences." If the Company enters into a merger, acquisition, joint venture and/or other capital business transaction for the Company with another party introduced to the Company by the Underwriter within a five year period following the Effective Date, the Company has agreed to pay the Underwriter a fee equal to five percent of the first $3 million of consideration involved in the transaction, four percent of the next $3 million, three percent of the next $2 million, two percent of the next $2 million and one percent of the excess, if any, over $10 million. The Underwriter has historically made a market in the Company's securities and has acted as a placement agent in connection with a number of private placements by the Company. The Underwriter also acted as placement agent for the Company in a November 1994 private placement of 200,000 units consisting of Common Stock and Warrants to purchase Common Stock. As compensation, the Underwriter received 20,000 shares of the Company's Common Stock and Warrants to purchase 20,000 shares of Common Stock of the Company at $3.50 per share. These Warrants were exercised in December 1995. A company affiliated with the Underwriter also participated in such private placement as an investor. The Underwriter also acted as placement agent in connection with a 1994 exchange offer by the Company in consideration of which the Underwriter was issued 6,183 shares. On March 31, 1995, the Underwriter, in consideration of its serving as Placement Agent, was granted options to purchase 11,600 shares of the Common Stock of the Company at $35.00 per share. Such options expire March 31, 2000. The Company also agreed to pay the Underwriter a cash payment of $217,500 which represents a 10% placement fee and a 2.5% non-accountable expense allowance based on total proceeds of $1,740,000. 59 The Underwriter received 25,000 shares of Common Stock of the Company as compensation under a consulting agreement dated as of January 1, 1994, and options which, after the application of anti-dilution provisions, represented the right to purchase 62,696 shares of Common Stock at an exercise price of $2.49 per share. These options were exercised in December 1995. LITIGATION INVOLVING UNDERWRITER MAY AFFECT SECURITIES The Company has been advised by the Underwriter that on or about May 22, 1995, the Underwriter and Elliot Loewenstern and Richard Bronson, principals of the Underwriter, and the Commission agreed to an offer of settlement (the "Offer of Settlement") in connection with a complaint filed by the Commission in the United States District Court for the Southern District of Florida alleging violations of the federal securities laws, Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(c) of the Securities Exchange Act of 1934, and Rules 10b-5, 10b-6 and 15c1-2 promulgated thereunder. The complaint also alleged that in connection with the sale of securities in three (3) IPOs in 1992 and 1993, the Underwriter engaged in fraudulent sales practices. The proposed Offer of Settlement was consented to by the Underwriter and Messrs. Loewenstern and Bronson without admitting or denying the allegations of the complaint. The Offer of Settlement was approved by Judge Gonzales on June 6, 1995. Pursuant to the final judgment (the "Final Judgment"), the Underwriter: o was required to disgorge $1,000,000 to the Commission, which amount was paid in four (4) equal installments on or before June 22, 1995; and o agreed to the appointment of an independent consultant ("Consultant"). Such Consultant was obligated, on or before November 1, 1996 (or at such later date as may be extended by the Consultant without approval): o to review the Underwriter's policies, practices and procedures in six (6) areas relating to compliance and sales practices; o to formulate policies, practices and procedures for the Underwriter that the Consultant deems necessary with respect to the Underwriter's compliance and sales practices; o to prepare a report devoted to and which details the aforementioned policies, practices and procedures (the "Report"); o to deliver the Report to the President of the Underwriter and to the staff of the Southeast Regional office of the Commission; o to prepare, if necessary, a supervisory procedures and compliance manual for the Underwriter, or to amend the Underwriter's existing manual; and o to formulate policies, practices and procedures designed to provide mandatory on-going training to all existing and newly hired employees of the Underwriter. The Final Judgment further provides that, within thirty (30) days of the Underwriter's receipt of the Report, unless such time 60 is extended, the Underwriter shall adopt, implement and maintain any and all policies, practices and procedures set forth in the Report. As of the date of this Prospectus the Consultant had not delivered the Report to the Underwriter. The Final Judgment also provides that an independent auditor ("Auditor") shall conduct four (4) special reviews of the Underwriter's policies, practices and procedures, the first such review to take place six (6) months after the Report has been delivered to the Underwriter and thereafter at six-month intervals. The Auditor is also authorized to conduct a review, on a random basis and without notice to the Underwriter, to certify that any persons associated with the Underwriter who have been suspended or barred by any Commission order are complying with the terms of such orders. On July 10, 1995, the action as against Messrs. Loewenstern and Bronson was dismissed with prejudice. Mr. Bronson agreed to a suspension from associating in any supervisory capacity with any broker, dealer, municipal securities dealer, investment advisor or investment company for a period of twelve (12) months, dating from the beginning of such suspension. Mr. Loewenstern agreed to a suspension from associating in any supervisory capacity with any broker, dealer, municipal securities dealer, investment advisor or investment company for a period of twelve (12) months commencing upon the expiration of Mr. Bronson's suspension. In the event that the requirements of the foregoing judgment adversely affect the Underwriter's ability to act as a market maker for the Company's stock, and additional brokers do not make a market in the Company's securities, the market for and liquidity of the Company's securities may be adversely affected. In the event that other broker-dealers fail to make a market in the Company's securities, the possibility exists that the market for and the liquidity of the Company's securities may be adversely affected to such an extent that public securityholders may not have anyone to purchase their securities when offered for sale at any price. In such event, the market for, liquidity and prices of the Company's securities may not exist. FOR ADDITIONAL INFORMATION REGARDING THE UNDERWRITER, INVESTORS MAY CALL THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. AT (800) 289-9999. Recent State Action Involving the Underwriter--Possible Loss of Liquidity The State of Indiana has commenced an action seeking among other things to revoke the Underwriter's license to do business in such state. The hearing in this matter was scheduled for October 7, 1996 and has been adjourned pending settlement discussions. Such proceeding if ultimately successful may adversely affect the market for and liquidity of the Company's securities if additional broker-dealers do not make a market in the Company's securities. Moreover, should Indiana investors purchase any of the securities sold in this Offering from the Underwriter prior to the possible revocation of the Underwriter's license in Indiana, such investors will not be able to resell such securities in such state through the Underwriter but will be required to retain a new broker-dealer firm for such purpose. The Company cannot ensure that other broker-dealers will make a market in the Company's securities. In the event that other broker-dealers fail to make a market in the Company's securities, the possibility exists that the market for and the liquidity of the Company's securities may be adversely affected to an extent that public securityholders may not have anyone to purchase their securities when offered for a sale at any price. In such event, the market for, liquidity and prices of the Company's securities may not exist. The Company does not intend to seek qualification for the sale of the securities in the State of Indiana. 61 It should be noted that although the Underwriter may not be the sole market maker in the Company's securities, it will most likely be the dominant market maker in the Company's securities. DETERMINATION OF PUBLIC OFFERING PRICE Prior to this offering, there has been no public market for the Units, Series B Preferred Stock and Series IV Warrants. The Common Stock is listed on the Nasdaq SmallCap Market. The rate at which the Series B Preferred Stock is convertible into Common Stock is based upon 80% of the closing market price per share of the Common Stock on the date preceding the Effective Date ("Closing Price"). The exercise price of the Series IV Warrants equals 115% of the Closing Price. The method for setting both the conversion rate of the Series B Preferred Stock and the exercise price of the Series IV Warrants was the product of negotiations between the Company and the Underwriter. Among the factors considered in the negotiations were the market price of the Company's Common Stock, an analysis of the areas of activity in which the Company is engaged, the present state of the Company's business, the Company's financial condition, the Company's prospects, an assessment of management, the general condition of the securities market at the time of this offering and the demand for similar securities of comparable companies. LEGAL PROCEEDINGS Neither the Company nor Webb is a party to any material legal proceedings and to the best of the Company's belief, none is contemplated or has been threatened. LEGAL MATTERS The validity of the securities being offered hereby will be passed upon for the Company by Gould & Wilkie, One Chase Manhattan Plaza, New York, New York 10005. Certain legal matters will be passed upon for the Underwriter by Bernstein & Wasserman, LLP, 950 Third Avenue, New York, New York 10022. EXPERTS The financial statements of the Company, both as of and for the periods ended December 31, 1995 and 1994, included in the Registration Statement and this Prospectus have been included herein in reliance on the report of Moore Stephens, P.C., independent certified public accountants, and upon the authority of such firm as experts in accounting and auditing. The financial statements of Webb, both as of and for the periods ended December 31, 1995 and 1994, included in the Registration Statement and this Prospectus have been included herein in reliance on the report of Estabrook & Co., Inc., P.C., independent certified public accountants, and upon the authority of such firm as experts in accounting and auditing. 62 INDEX TO FINANCIAL STATEMENTS QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED): Introduction.................................................................................................P-1 Pro Forma Combined Balance Sheet as of September 30, 1996 (unaudited)..........................................................................................P-2 - P-3 Pro Forma Combined Statement of Operations for the nine months ended September 30, 1996 (unaudited).......................................................................P-4 Pro Forma Combined Statement of Operations for the year ended December 31, 1995 (unaudited)..............................................................................P-5 Notes to Pro Forma Combined Financial Statements (unaudited)...........................................P-6 - P-7 HISTORICAL FINANCIAL STATEMENTS OF QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES: Report of Independent Auditors...............................................................................F-1 Consolidated Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995................................................................................F-2 - F-3 Consolidated Statement of Operations for the nine months ended September 30, 1996 and 1995 (unaudited) and for the years ended December 31, 1995 and 1994.................................................................................F-4 Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 1996 and 1995 (unaudited) and for the years ended December 31, 1995 and 1994...........................................................................F-5 - F-6 Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995 (unaudited) and for the years ended December 31, 1995 and 1994..........................................................................F-7 - F-10 63 Notes to Consolidated Financial Statement............................................................F-11 - F-24 HISTORICAL FINANCIAL STATEMENTS OF COMP WARE, INC., D/B/A WEBB DISTRIBUTION, INC.: Report of Independent Auditors..............................................................................F-25 Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995..................................................................................F-26 - F-27 Statement of Operations and Retained Earnings for the nine months ended September 30, 1996 and 1995 (unaudited) and for the years ended December 31, 1995 and 1994................................................................................F-28 Statement of Stockholders' Equity...........................................................................F-29 Statement of Cash Flows for the nine months ended September 30, 1996 and 1995 (unaudited) and for the years ended December 31, 1995 and 1994.....................................F-30 - F-33 Notes to Financial Statements........................................................................F-34 - F-41
64 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED) The following pro forma combined balance sheet as of September 30, 1996 and the combined statement of operations for the nine months then ended and the year ended December 31, 1995 give effect to the following: (i) the Unit offering, the proceeds therefrom and the uses thereof and (ii) the acquisition of Webb, as described in the following paragraphs. The Company is offering 1,000,000 units at a price of $6.00 per Unit in a proposed public offering. Each Unit consists of one share of the Company's Series B Convertible Preferred Stock, par value $.01 per share, and one redeemable Series IV Common Stock Purchase Warrant. The Company anticipates net proceeds of $4,820,000 from the offering. The Company intends to use the net proceeds of the Offering to pay the $3,250,000 cash portion of the consideration for the acquisition of Webb and to repay certain indebtedness of the Company and Webb in the aggregate amount of $1,570,000. The Company has entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") dated as of December 9, 1996 with the stockholders of Webb to acquire all of the issued and outstanding stock of Webb, in a business combination accounted for as a purchase. Under the Stock Purchase Agreement, the stockholders of Webb have agreed to exchange their shares of Webb for $3,250,000 in cash, 1,500,000 Series IV Common Stock Purchase Warrants and two notes (the "Notes") in the aggregate amount of $750,000 (each for $375,000). Note A shall mature eighteen months from the Effective Date of the proposed public offering and bear interest at 10% per annum. Note B shall mature in equal monthly installments over a five year period from the same date and bear interest at 10% per annum. At the time of the signing of the Stock Purchase Agreement, the Company delivered to the majority stockholder of Webb the 1,500,000 Series IV Warrants as a deposit on account of the purchase price under said agreement. The Company has valued these Series IV Warrants at $.25 per Warrant. These Series IV Warrants will be cancelled if the Webb acquisition does not close. Any proceeds received by the majority stockholder of Webb from a sale of the Series IV Warrants in excess of $375,000 shall reduce the Company's obligations under the Notes. The amount of the purchase price ($4,375,000) in excess of the estimated fair value of the net assets acquired will be recorded as "cost in excess of net assets acquired" and amortized over forty years. The pro forma information is based on the historical financial statements of the Company and Webb, giving effect to the transactions under the purchase method of accounting and the assumptions and adjustments in the accompanying notes to the pro forma financial statements. The pro forma balance sheet assumes that the transactions occurred as of the balance sheet date. The pro forma statements of operations give effect to these transactions as if they had occurred at the beginning of the fiscal year presented (i.e., January 1, 1995) and were carried forward through the interim period presented. The historical statement of operations will reflect the effects of these transactions from the date on which they occurred. The pro forma combined statements have been prepared by the Company's management based upon the historical financial statements of the Company and Webb. These pro forma statements may not be indicative of the results that actually would have occurred if the combination had been in effect on the date indicated or which may be obtained in the future. The pro forma financial statements should be read in conjunction with the financial statements and notes of the Company and Webb appearing elsewhere herein. P-1 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (UNAUDITED)
H I S T O R I C A L S ---------------------- PROFORMA PRO FORMA QUESTRON WEBB ADJUSTMENTS COMBINED -------- ---- ----------- -------- Assets Current assets: Cash and cash equivalents $ 360,235 $ 1,716 (1) $ 4,820,000 $ 361,951 (2) (3,250,000) (3) (1,570,000) Accounts receivable - net 1,266,903 1,094,890 2,361,793 Other receivables 15,853 -- -- 15,853 Inventories 3,344,073 1,715,137 -- 5,059,210 Deferred income taxes -- 115,839 -- 115,839 Other current assets 65,438 20,445 -- 85,883 ------------ ------------ ------------ ------------ Total current assets 5,052,502 2,948,027 -- 8,000,529 Property & equipment-net 399,505 109,931 -- 509,436 Cost in excess of net assets of Business acquired - net 6,737,646 -- (2) 3,560,435 10,298,081 Other assets 324,886 135,855 -- 460,741 ------------ ------------ ------------ ------------ Total assets $ 12,514,539 $ 3,193,813 $ 3,560,435 $ 19,268,787 ============ ============ ============ ============
P-2 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1996 (UNAUDITED)
H I S T O R I C A L S ---------------------- PROFORMA PRO FORMA QUESTRON WEBB ADJUSTMENTS COMBINED -------- ---- ----------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ -- $ 588,218 (3) $(588,218) $ -- Accounts payable and Accrued expenses 1,187,134 1,095,941 -- 2,283,075 Current portion of long -term debt 550,000 22,448 -- 572,448 Current portion of notes payable shareholders -- 61,904 (2) 75,000 136,904 ------------ ------------ ------------- ------------ Total current liabilities 1,737,134 1,768,511 (2) (513,218) 2,992,427 ------------ ------------ ------------ ------------ Long-term debt: Notes payable- shareholders-net of current portion -- 30,954 (2) 675,000 705,954 Notes payable-net of current portion 2,210,000 579,783 (3) (981,782) 1,808,001 ------------ ------------ ------------ ------------ Total long-term debt 2,210,000 610,737 (306,782) 2,513,955 ------------ ------------ ------------ ------------ Commitments and contingencies -- -- -- -- Shareholders' equity: Preferred stock -- -- (1) 10,000 10,000 Common stock 1,547 6,512 (2) (6,512) 1,547 Additional paid-in capital 23,887,894 340,857 (1) 4,810,000 29,072,894 (2) 375,000 (2) (340,857) Retained earnings (deficit) (14,966,558) 467,196 (2) (467,196) (14,966,558) Less: treasury stock (355,478) -- -- (355,478) ------------ ------------ ------------ ------------ Total shareholders' equity 8,567,405 814,565 4,380,435 13,762,405 ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity: $ 12,514,539 $ 3,193,813 $ 3,560,435 $ 19,268,787 ============ ============ ============ ============
P-3 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
H I S T O R I C A L S --------------------------- PRO FORMA PRO FORMA QUESTRON WEBB ADJUSTMENTS COMBINED -------- ---- ----------- -------- Total revenue $ 8,264,940 $ 6,088,946 $ -- $14,353,886 Total operating costs and (A) 66,760 expenses 7,591,425 5,598,862 (B) (150,000) 13,107,047 --------- --------- ------------- ---------- Operating income (loss) 673,515 490,084 83,240 1,246,839 Total other income (expense) (234,631) (109,537) (C) 117,750 (226,418) --------- -------- ----------- --------- Income before income taxes 438,884 380,547 200,990 1,020,421 Provision for income taxes 49,383 171,300 (D) (129,300) 91,383 ------------- ------------ ------------ ------------ Net income $ 389,501 $ 209,247 $ 330,290 $ 929,038 ============= ============ ============ =========== Net income per common share $ 0.03 $ .27 ============= ============ Average number of common shares and common share equivalents outstanding 15,399,846 3,456,652 ============= ===========
P-4 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
H I S T O R I C A L S ---------------------- PRO FORMA PRO FORMA QUESTRON WEBB ADJUSTMENTS COMBINED -------- ---- ----------- -------- Total revenue $ 7,259,155 $ 7,793,179 $ -- $ 15,052,334 Total operating costs and (A) 89,010 expenses 6,674,249 7,315,920 (B) (200,000) 13,879,179 ------------ ------------ ------------ ------------ Operating income (loss) 584,906 477,259 110,990 1,173,155 Total other income (expense) (205,555) (161,545) (C) 157,000 (210,100) ------------ ------------ ------------ ------------ Income before income taxes 379,351 315,714 267,990 963,055 Provision for income taxes 27,164 113,681 (D) (80,716) 60,129 ------------ ------------ ------------ ------------ Net income $ 352,187 $ 202,033 $ 348,706 $ 902,926 ============ ============ ============ ============ Net income per common share $ 0.03 $ .27 ============ ============ Average number of common shares and common share equivalents outstanding 13,795,632 3,296,230 ============ ============
P-5 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED) The Company is pursuing a public offering of units, consisting of one share of Series B Preferred Stock and one Series IV Warrant. The Company anticipates selling 1,000,000 units at an initial offering price of $6.00 per unit. Simultaneously with the closing of the proposed public offering, the Company intends to acquire all outstanding shares of the capital stock of Comp Ware, Inc. d/b/a Webb Distribution for $3,250,000 in cash, Notes in the aggregate amount of $750,000 and 1,500,000 Series IV Warrants. The Company also intends to repay certain indebtedness in the amount of approximately $1,570,000 from the proceeds of the Offering. ADJUSTMENTS TO BALANCE SHEETS: 1. To reflect the net proceeds from the public offering: 1,000,000 units x $6.00 per unit $6,000,000 Less: Expenses of Offering 1,180,000 ---------- Net Proceeds $4,820,000 ========== 2. To reflect the acquisition of Webb: Cash $3,250,000 Notes payable (current portion) $ 75,000 Notes payable (long-term portion) $675,000 750,000 -------- Issuance of 1,500,000 Series IV Warrants 375,000 ---------- Total purchase price 4,375,000 Less: Net assets acquired (814,565) ---------- Cost in excess of net assets acquired $3,560,435 ========== 3. To reflect the repayment of certain indebtedness from the use of proceeds: Notes payable--financial institution (Webb) $1,088,218 Notes payable--financial institution (Questron) 481,782 Total (current portion - $588,218; long-term portion $981,782) $1,570,000 ========= P-6 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
ADJUSTMENTS TO STATEMENTS OF OPERATIONS: Nine Months Annual ------ ------ (A) To reflect additional charges for the amortization of the cost in excess of net assets acquired over the estimated useful life of forty years on a straight line basis $ 66,760 $ 89,010 ======= ========= (B) To reflect the reduction of salaries resulting from the retirement of the majority selling stockholder $150,000 $ 200,000 ======= ========= (C) To reflect the reduction of interest expense due to payoff of certain indebtedness, using an effective interest rate of 10% $117,750 $ 157,000 ========= ========= (D) To reflect the reduction in income tax expense through the use of Questron Technology, Inc.'s tax loss carryforwards $129,300 $ 80,716 ========= =========
SUPPLEMENTAL DISCLOSURES TO THE PRO FORMA COMBINED STATEMENT OF OPERATIONS: To the extent that the underwriter exercises the Over-Allotment Option to purchase 150,000 Units, the Company will realize additional net proceeds of $783,000. The Company intends to utilize such additional net proceeds to reduce outstanding indebtedness. Accordingly, interest expense for the nine month period ended September 30, 1996 and for the year ended December 31, 1995 would be reduced by an additional $58,725 and $78,300, respectively. In addition, net income for the nine months ended September 30, 1996 and the year ended December 31, 1995 would be $982,504 and $976,337, respectively. Earnings per share for these periods would be $.28 for the nine months ended September 30, 1996 and $.30 for the year ended December 31, 1995. P-7 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Questron Technology, Inc. We have audited the accompanying consolidated balance sheet of Questron Technology, Inc. and its subsidiaries as of December 31, 1995, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the two years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Questron Technology, Inc. and its subsidiaries as of December 31, 1995, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. MOORE STEPHENS, P.C. Certified Public Accountants. Cranford, New Jersey April 2, 1996 F-1 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, DECEMBER 31, 1 9 9 6 1 9 9 5 ------------- ------------ (UNAUDITED) ASSETS: Current Assets: Cash and cash equivalents $ 360,235 $ 39,358 Accounts receivable, less allowance for doubtful accounts of $50,773 and $43,798, respectively 1,266,903 1,347,128 Other receivables 15,853 52,808 Inventories 3,344,073 3,554,263 Other current assets 65,438 60,205 ------------ ------------ Total current assets 5,052,502 5,053,762 Property and equipment - net 399,505 418,980 Cost in excess of net assets of business acquired, less accumulated amortization of $257,772 and $131,203, respectively 6,737,646 6,866,305 Other assets 324,886 93,951 ------------ ------------ Total assets $ 12,514,539 $ 12,432,998 ============ ============
See Notes to Consolidated Financial Statements. F-2 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, DECEMBER 31, 1 9 9 6 1 9 9 5 ------------- ------------ (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable and accrued expenses $ 1,187,134 $ 1,520,094 Current portion of long-term debt 550,000 550,000 ------------- ------------- Total current liabilities 1,737,134 2,070,094 Long-term debt 2,210,000 2,185,000 ------------- ------------- Total Liabilities 3,947,134 4,255,094 ------------- ------------- Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value; authorized 10,000,000 shares; none issued and outstanding -- -- Common stock, $.0001 par value; authorized 50,000,000 shares; issued and outstanding 15,473,335 shares in 1996 and 1995 1,547 1,547 Additional paid-in capital 23,887,894 23,887,894 Accumulated deficit (14,966,558) (15,356,059) ------------- ------------ 8,922,883 8,533,382 Less: treasury stock, 118,493 shares, at cost (355,478) (355,478) ------------- ------------- Total shareholders' equity 8,567,405 8,177,904 ------------- ------------- Total liabilities and shareholders' equity $ 12,514,539 $ 12,432,998 ============= ============
See Notes to Consolidated Financial Statements. F-3 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, -------------------------- ---------------------------- 1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4 ------- ------- ------- ------- (UNAUDITED) (UNAUDITED) Revenue: Sales $ 8,141,107 $ 4,682,402 $ 6,982,902 $ -- Fee income 123,833 226,355 276,253 844,025 -------------- ------------- ------------- ------------- 8,264,940 4,908,757 7,259,155 844,025 -------------- ------------- ------------- ------------- Operating costs and expenses: Cost of products and services sold 4,854,502 2,817,002 4,146,564 272,660 Selling, general and administration expenses 2,543,394 1,442,705 2,180,886 1,154,034 Non-recurring charges -- 125,000 146,867 -- Depreciation and amortization 193,529 119,916 199,932 58,412 -------------- ------------- ------------- ------------- 7,591,425 4,504,623 6,674,249 1,485,106 -------------- ------------- ------------- ------------- Operating Income (loss) 673,515 404,134 584,906 (641,081) -------------- ------------- ------------- ------------ Interest income (expense): Interest expense (234,631) (130,502) (205,555) (34,222) Interest income -- -- -- 34,270 -------------- ------------- ------------- ------------- (234,631) (130,502) (205,555) 48 -------------- ------------- ------------- ------------ Income (loss) before income taxes 438,884 273,632 379,351 (641,033) Provision for income taxes 49,383 44,515 27,164 -- -------------- ------------- ------------- ------------- Net income (loss) $ 389,501 $ 229,117 $ 352,187 $ (641,033) ============= ============= ============= ============= Net income (loss) per common share $ .03 $ .02 $ .03 $ (.23) ============= ============= ============= ============= Average number of common shares and common share equivalents outstanding 15,399,846 13,707,612 13,795,632 2,793,402 ============= ============= ============= =============
See Notes to Consolidated Financial Statements. F-4 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ADDITIONAL PREFERRED STOCK COMMON STOCK PAID-IN SHARES AMOUNTS SHARES AMOUNTS CAPITAL ------ ----------- ------ ----------- ----------- BALANCE - JANUARY 1, 1994 880,000 $ 8,800 1,758,077 $ 177 $ 15,882,537 Issuance of shares: Conversion of preferred stock into common stock (740,000) (7,400) 1,480,000 148 7,252 Exercise of warrants -- -- 718,704 71 413,411 To placement agent in lieu of fees in connection with exercise of warrants -- -- 61,824 6 -- Private placement -- -- 2,515,200 251 957,349 To Placement Agent in Lieu of Fees in connection with Private Placement -- -- 200,000 20 -- Net Loss for the Year -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ BALANCE - DECEMBER 31, 1994 - FORWARD 140,000 $ 1,400 6,733,805 $ 673 $ 17,260,549
(RESTUBBED TABLE CONTINUED FROM ABOVE).
TOTAL ACCUMULATED TREASURY SHAREHOLDERS' DEFICIT STOCK EQUITY ----------- --------- ---------- BALANCE - JANUARY 1, 1994 $(15,067,213) $ -- $ 824,301 Issuance of shares: Conversion of preferred stock into common stock -- -- -- Exercise of warrants -- -- 413,482 To placement agent in lieu of fees in connection with exercise of warrants -- -- 6 Private placement -- -- 957,600 To Placement Agent in Lieu of Fees in connection with Private Placement -- -- 20 Net Loss for the Year (641,033) -- (641,033) ------------ ------------ ------------ BALANCE - DECEMBER 31, 1994 - FORWARD $(15,708,246) $ -- $ 1,554,376
F-5 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ADDITIONAL PREFERRED STOCK COMMON STOCK PAID-IN SHARES AMOUNTS SHARES AMOUNTS CAPITAL -------- ----------- -------- ----------- ----------- BALANCE - DECEMBER 31, 1994 140,000 $ 1,400 6,733,805 $ 673 $ 17,260,549 - FORWARDED Issuance of Shares: Conversion of Preferred Stock into Common Stock (140,000) (1,400) 280,000 28 1,372 Private Placement -- -- 1,160,000 116 1,468,786 Exercise of Warrants -- -- 2,786,956 279 851,314 Exercise of Options -- -- 550,000 55 343,695 In connection with the acquisition of Quest Electronic Hardware, Inc. -- -- 3,962,574 396 3,962,178 Shares received by the Company in satisfaction of certain obligations of former officers and directors -- -- -- -- -- Net Income for the Year -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ BALANCE - DECEMBER 31, 1995 -- -- 15,473,335 1,547 23,887,894 Net Income for the nine months ended -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ BALANCE - SEPTEMBER 30, 1996 (UNAUDITED) -- $ -- 15,473,335 $ 1,547 $ 23,887,894 ============ ============ ============ ============ ============
(RESTUBBED TABLE CONTINUED FROM ABOVE)
TOTAL ACCUMULATED TREASURY SHAREHOLDERS' DEFICIT STOCK EQUITY ---------- --------- ---------- BALANCE - DECEMBER 31, 1994 $(15,708,246) $ -- $ 1,554,376 - FORWARDED Issuance of Shares: Conversion of Preferred Stock into Common Stock -- -- -- Private Placement -- -- 1,468,902 Exercise of Warrants -- -- 851,593 Exercise of Options -- -- 343,750 In connection with the acquisition of Quest Electronic Hardware, Inc. -- -- 3,962,574 Shares received by the Company in satisfaction of certain obligations of former officers and directors -- (355,478) (355,478) Net Income for the Year 352,187 -- 352,187 ------------ ------------ ------------ BALANCE - DECEMBER 31, 1995 (15,356,059) (355,478) 8,177,904 Net Income for the nine months ended 389,501 -- 389,501 ------------ ------------ ------------ BALANCE - SEPTEMBER 30, 1996 (UNAUDITED) $(14,966,558) $ (355,478) $ 8,567,405 ============ ============ ============
See Notes to Consolidated Financial Statements. F-6 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ------------------------- ------------------------ 1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4 ----------- ----------- ----------- --------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 389,501 $ 229,117 $ 352,187 $ (641,033) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 193,529 119,916 199,932 58,412 Write-down of assets -- -- 40,553 136,335 Provision for doubtful accounts 6,975 -- 25,162 50,918 Loss on sale of fixed assets 2,184 -- -- -- Change in assets and liabilities: Decrease (increase) in: Accounts receivable 73,250 (722,907) (467,176) (19,091) Other receivables 36,955 -- 56,672 (109,480) Inventories 210,190 (154,861) (1,583,507) -- Prepaid expenses and other assets (236,168) 24,170 (33,509) 44,334 Increase (decrease) in accounts payable and accrued expenses (332,957) 147,538 566,581 (13,776) ----------- ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES - FORWARD 343,459 (357,027) (843,105) (493,381) ----------- ----------- ----------- -----------
F-7 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, --------------------------- ------------------------- 1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4 ----------- ----------- ----------- --------- (UNAUDITED) (UNAUDITED) NET CASH - OPERATING ACTIVITIES - FORWARDED $ 343,459 $ (357,027) $ (843,105) $ (493,381) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net cash consideration paid for acquired business -- (5,229,847) (5,262,268) -- Proceeds from sale of fixed assets 280 -- -- -- Acquisition of property and equipment (47,862) (138,692) (419,766) -- ----------- ----------- ----------- ----------- NET CASH USED FOR INVESTING ACTIVITIES (47,582) (5,368,539) (5,682,034) -- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings -- 300,000 300,000 -- Proceeds from borrowings under revolving facility 437,500 216,000 947,500 -- Proceeds from borrowings under term loan facility -- 2,200,000 2,200,000 -- Proceeds from private placement -- 1,740,000 1,740,000 957,600 Costs associated with private placement -- (238,039) (271,098) -- Proceeds from exercise of stock options -- 281,250 343,750 -- Proceeds from exercise of warrants -- -- 911,578 413,482 Costs associated with exercise of warrants -- -- (59,985) -- Treasury shares received in satisfaction of obligations -- -- (355,478) -- Repayment of short-term debt -- -- (300,000) -- Repayment of long-term debt (412,500) (275,000) (412,500) -- ----------- ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 25,000 4,224,211 5,043,767 1,371,082 ----------- ----------- ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - FORWARD 320,877 (1,501,355) (1,481,372) 877,701 ----------- ----------- ----------- -----------
F-8 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ----------------------------- ---------------------------- 1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4 ----------- ----------- ---------- --------- (UNAUDITED) (UNAUDITED) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - FORWARDED $320,877 $(1,501,355) $(1,481,372) $ 877,701 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIODS 39,358 1,520,730 1,520,730 643,029 --------- ------------ ------------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIODS $360,235 $ 19,375 $ 39,358 $1,520,730 ======== ============ ============= ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the periods for: Interest $ 234,631 $ 130,502 $ 182,970 $ 34,222 Income taxes $ 45,000 $ -- $ -- $ --
See Notes to Consolidated Financial Statements. F-9 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: In 1995 and 1994, the Company adjusted property and equipment to estimated fair value as follows: 1 9 9 5 1 9 9 4 ------- ------- Cost of Property Written Down $ 668,176 $ 340,153 Accumulated Depreciation (627,623) (178,818) --------- --------- Net Book Value 40,553 161,335 Estimated Fair Value -- 25,000 --------- --------- Adjustment for Write-Down $ 40,553 $ 136,335 ========= ========= During 1995, the Company issued 3,962,574 shares of common stock in connection the acquisition of a subsidiary and issued 280,000 shares of common stock upon the conversion of 140,000 preferred shares. During 1994, 200,000 shares of common stock were issued to a placement agent in lieu of fees in connection with a private placement. Additionally, 250,000 shares of common stock for consulting services and 61,824 shares of common stock in lieu of fees in connection with the exercise of warrants were issued to the same placement agent. The Company also issued 1,480,000 shares of common stock upon conversion of 740,000 preferred shares during 1994. See Notes to Consolidated Financial Statements. F-10 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS On April 2, 1996, the shareholders of the Company voted to change the name of the Company from Judicate, Inc. to Questron Technology, Inc. ("Questron" or the "Company"). Questron, through its subsidiary Quest Electronic Hardware, Inc. ("Quest"), is a specialized distributor of fasteners and electronic hardware sold to electronic equipment manufacturers and, through its subsidiary Judicate of Philadelphia, Inc. ("Judicate"), a supplier of alternate dispute resolution ("ADR") services. Quest was formed on October 13, 1994. On March 31, 1995, Quest purchased the fasteners distribution business from Arrow Electronics, Inc. ("Arrow"). Prior to this business acquisition, Quest had no operating activities of its own, accordingly, the consolidated results of operations for the year ended December 31, 1995 include only 9 months of operating activities for Quest. Simultaneously with this business acquisition, the then shareholders of Quest completed a common stock exchange with Questron, in which Quest became a 100% owned subsidiary of Questron (see Note 2 of Notes to Consolidated Financial Statements). SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements include the accounts of the Company and all its majority owned subsidiaries. All significant intercompany transactions are eliminated. Cash and Cash Equivalents The Company considers certain highly liquid investments with original maturities of three months or less to be cash equivalents. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. F-11 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) Concentration of Credit Risk The Company extends credit to its customers which results in accounts receivable arising from its normal business activities. The Company does not require collateral from its customers, but routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, believes that its receivable credit risk exposure is limited. Such estimate of the financial strength of such customers may be subject to change in the near term. During the year ended December 31, 1995, sales to one customer of Quest amounted to approximately $1,000,000 or approximately 14% of revenue. Accounts receivable from this customer amounted to approximately $273,000. Inventories Inventories, which consist solely of finished products, are stated at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) method. Property and Equipment Property and equipment are recorded at cost. Expenditures for normal repairs and maintenance are charged to earnings as incurred. When assets are retired or otherwise disposed, their costs and related accumulated depreciation are removed from the accounts and the resulting gains or losses are included in operations. Depreciation and amortization are recorded using the straight-line method over the shorter of the estimated lives of the related asset or the remaining lease term. Estimated useful lives are as follows: Office Equipment 5 Years Computer Equipment 5 Years Furniture and Fixtures 7 Years Leasehold Improvements 5 Years F-12 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) Cost in Excess of Net Assets of Business Acquired The cost in excess of net assets of business acquired is being amortized on a straight line basis over 40 years. The Company has concluded that the cost in excess of net assets of business acquired has an indeterminable life based on historic, current and projected operating results of the business acquired (see Note 2 of notes to consolidated financial statements). The Company's policy is to record an impairment loss against the balance of the net unamortized cost in excess of net assets of business acquired in the period when it is determined that the carrying amount of the asset may not be recoverable. At each balance sheet date, the Company evaluates the realizability of the asset for each business acquired having a material change. This determination is based on an evaluation of such factors as the occurrence of a significant event, a significant change in the environment in which the business operates, or if the expected future non-discounted cash flow of the business would become less than the carrying value of the asset. The Company's historic recurring losses and negative cash flows from operations have been abated and, accordingly, management believes these factors will not negatively impact the profits and cash flows of the business acquired. Net Income (Loss) Per Common Share Net income (loss) per common share is based on the weighted average number of common shares and common share equivalents outstanding. Common share equivalents amounted to 45,004 for the nine months ended September 30, 1996 and 2,262,565 for the year ended December 31, 1995. The weighted average number of common shares outstanding for 1994 does not include common share equivalents since the inclusion of such share equivalents would be anti-dilutive. Net income per common share on a fully diluted basis does not result in material dilution and, accordingly, is not presented. F-13 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 2. ACQUISITION OF ELECTRONIC HARDWARE DISTRIBUTION BUSINESS As of the close of business on March 31, 1995, the Company acquired 100% of the stock of Quest, a privately owned company, in exchange for a 25% interest in the Company on a fully diluted basis. Such acquisition was effected pursuant to a share acquisition agreement, under which the Company issued 3,962,574 newly issued, fully-paid and non-assessable shares of common stock of the Company, in exchange for all of the issued and outstanding shares of common stock of Quest. Simultaneously with the foregoing events, Quest purchased the fasteners distribution business of Arrow for $4,850,000 in cash, pursuant to a Purchase of Assets Agreement, dated as of November 29, 1994, by and between Quest and Arrow (the "Purchase Agreement"). The purchase was funded by a capital contribution from Questron of $2,850,000 (see Note 5 of Notes to Consolidated Financial Statements) and borrowings by Quest under a loan and security agreement with a bank (see Note 3 of Notes to Consolidated Financial Statements). Under the Purchase Agreement, Quest acquired the net assets of Arrow used exclusively in connection with Arrow's operations of the fasteners distribution business and assumed all stated liabilities associated with the business. Such assets included all accounts receivable of the business, inventories, and certain furniture and equipment. The stated liabilities assumed were principally trade payables to suppliers of the business. The acquisition has been accounted for as a purchase, effective March 31, 1995. The following summarizes the fair value of the net assets acquired and the related cost thereof: Cash $ 4,500 Accounts receivable 832,913 Inventories 1,970,756 Property and equipment 57,427 ---------- Total assets 2,865,596 Accounts payable 634,762 Net assets acquired 2,230,834 Cost: Purchase price paid to Arrow 4,850,000 Net value of shares issued 3,961,574 Acquisition and integration expenses 416,768 ---------- Total cost 9,228,342 Cost in excess of net assets acquired $6,997,508 ========== The acquisition and integration expenses noted above are principally professional fees associated with the transactions, consulting fees and other expenses associated with the conversion of the business to a new operating system, and other expenses associated with completing the transaction and integrating the business with Quest. F-14 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 3. LONG-TERM DEBT Long-term debt at September 30, 1996 and December 31, 1995 consisted of the following:
1996 1995 ---- ---- (unaudited) ----------- Term loan, due in equal quarterly installments through March 31, 1999, with interest payable monthly at the prime rate plus 2.0% for 1995 and the prime rate plus 1.5% for 1996 $1,375,500 $1,787,500 Revolving facility, due on March 31, 1998, with interest payable monthly at the prime rate plus 1.5% for 1995 and the prime rate plus 1.0% for 1996 1,385,000 947,500 ---------- ---------- 2,760,000 2,735,000 Less installments due within one year 550,000 550,000 ---------- ---------- $2,210,000 $2,185,000 ========== ==========
Pursuant to a Loan and Security Agreement, as amended (the "Loan Agreement"), dated March 31, 1995, with a bank, Quest borrowed $2.2 million under a term loan facility to partially fund the acquisition of the fasteners distribution business. The Loan Agreement also provides for Quest to be able to borrow for working capital purposes under an annually renewable two-year revolving facility, which provides for loans of up to $1,500,000. The Loan Agreement contains a provision for the calculation of a borrowing base, which determines the amount of borrowings available under the revolving facility. At September 30, 1996 and December 31, 1995, Quest had unused borrowing capacity of $115,000 and $527,500, respectively under the Loan Agreement. F-15 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) In order to secure the obligations of Quest under the Loan Agreement, Questron entered into a Stock Pledge Agreement, dated as of March 31, 1995, with the bank, under which the Company pledged to the bank the shares of capital stock of Quest which the Company held at such date and in which the Company may thereafter acquire an interest. In addition, Quest granted a security interest in substantially all of its assets to the bank and a major shareholder of Questron (see Note 11 of Notes to Consolidated Financial Statements) guaranteed the obligations of Quest under the Loan agreement. The Loan Agreement restricts the payment of cash dividends by Quest to the Company and certain other payments, limits long-term and short-term borrowings of Quest, and requires that debt service coverage, net worth, tangible net worth, the ratio of debt to net worth, and the ratio of quick assets (cash and accounts receivable) to current liabilities be maintained at certain designated levels by Quest. Quest is in compliance with all such requirements of the Loan Agreement. The aggregate annual maturities of long-term debt under the Loan Agreement for each of the five years in the period ending December 31, 2000 are : 1996-$550,000; 1997-$1,497,500; 1998-$550,000; 1999- $137,500; and 2000-$-0-. 4. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1995 consisted of the following: 1 9 9 5 -------- Office equipment $ 55,933 Computer equipment 389,730 Furniture and fixtures 12,583 Leasehold improvements 19,947 -------- 478,193 Less accumulated depreciation and amortization 59,213 -------- $418,980 ======== Depreciation and amortization expense related to property and equipment for the years ended December 31, 1995 and 1994 was $68,729 and $58,412, respectively. At December 31, 1995, all property and equipment represent assets used in the business of Quest. All property and equipment of the ADR business have been written off in connection with the downsizing and restructuring of that business. F-16 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 5. SHAREHOLDERS' EQUITY As of December 31, 1995, the Company was authorized to issue 20,000,000 shares of common stock and 1,000,000 of preferred stock. On April 2, 1996, the shareholders of the Company approved an increase in the number of authorized shares of common stock to 50,000,000 shares and an increase in the number of authorized shares of preferred stock to 10,000,000 shares. The outstanding shares of common stock are fully paid and non-assessable. In 1994, there were outstanding 140,000 shares of Series A Preferred Stock. Each share of Series A Preferred Stock, which was convertible, without further consideration, into two (2) shares of common stock, has been converted. In November 1994, the Company issued 2,515,200 shares of its common stock in a private offering conducted through a placement agent. Net proceeds from the offering amounted to $957,600. As additional consideration for common shares issued, one of the purchasers tendered 103,040 Series I Warrants to the Company for cancellation. Additionally, 200,000 shares of Company common stock were issued to the placement agent in lieu of fees in connection with this transaction. In March and April 1995, the Company, through a placement agent, consummated the sale of fifty-eight units of its securities at a gross sales price of $30,000 per unit. Each unit consisted of 20,000 shares of Company common stock. The net proceeds to the Company, after expenses associated with the placement of $271,098, were $1,468,902. Such net proceeds, together with available cash, were used to make a capital contribution to Quest at March 31, 1995, in order to provide Quest with the balance of the funds necessary to complete the acquisition of the fasteners distribution business from Arrow. In connection with this sale of securities, the placement agent also received a portion of its fee in the form of 116,000 options to purchase Company common stock at an exercise price of $3.50 per share. These options expire March 31, 2000. The Company has issued various series of warrants to purchase shares of its common stock. Each Series I Warrant entities the registered holder to purchase 1.629 shares of common stock at a price of $1.80 per share on or before June 30, 1996. Any warrant not exercised by that date will be null and void. At December 31, 1995, there were 64,657 Series I Warrants outstanding. In March 1994, as an inducement to raise capital, the Company offered holders of the Series I Warrants the right to exchange each warrant for three Series II Warrants which were exercisable at $ .625 per share. The exchange offer expired on April 30, 1994. Pursuant to the exchange offer, the Company received net proceeds of $413,482 upon the issuance of 718,704 shares of its common stock. Additionally, the Company issued 61,824 shares of its common stock to a placement agent in lieu of fees in connection with this transaction. At December 31, 1994, all Series II Warrants had been exercised. In connection with the November 1994 private placement, 2,200,000 Series III Warrants were issued. Each Series III Warrant entitles the registered holder to purchase one share of common stock at an exercise price of $.35 per share. The warrants expire November 14, 2004, and any warrant not exercised by that date will be null and void. At December 31, 1995, there were 40,000 Series III Warrants outstanding. In December 1995, in connection with certain obligations amounting to $355,478 owed to the Company by two of its former officers and directors, the Company received 118,493 shares of its common stock in full satisfaction of such amounts owed. F-17 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 6. STOCK OPTIONS Under the terms of various stock option plans, the Company may grant options to purchase shares of the Company's common stock to key executives and management of the Company. Transactions under the various stock option and incentive plans during the years ended December 31, 1995 and 1994 were as follows:
1 9 9 5 1 9 9 4 -------------------------- -------------------------- Incentive Non-Incentive Incentive Non-Incentive --------- ------------- --------- ------------- Outstanding - beginning of year 554,469 513,593 17,829 46,835 Options granted 46,835 229,363 550,000 466,758 Options exercised (550,000) (626,956) -- -- Options canceled and terminated -- -- (13,360) -- -------- -------- -------- -------- Outstanding - end of year (1) 51,304 116,000 554,469 513,593 ======== ======== ======== ========
(1) With exercise prices ranging from $7.95 to $33.75 per share, giving effect to the one-for-fifteen reverse stock split, which occurred on December 22, 1993. In addition to the above, on April 2, 1996, the shareholders approved the adoption of the 1994 Director Non-qualified Stock Option Plan (the "Plan"), under which options to purchase shares of the Company's common stock may be granted to non-executive directors of the Company. Under the Plan options are to be granted to each eligible director at the rate of 15,000 per year. Awards under the Plan had been made previously, subject to shareholder approval. Transactions under the Plan during the years ended December 31, 1995 and 1994 were as follows:
1 9 9 5 1 9 9 4 ------- ------- Outstanding - beginning of year 60,000 -- Options granted 45,000 60,000 Options exercised -- -- Options canceled and terminated -- -- ------- ------- Outstanding - end of year 105,000 60,000 ======= =======
In February 1996, in accordance with the provisions of the Plan, 30,000 options to purchase shares of the Company's common stock were granted to qualified directors. F-18 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 7. RETIREMENT PLAN Quest has a defined contribution plan for eligible employees, which qualifies under Section 401(k) of the Internal Revenue Code. Quest's contribution to the plan, which is based on a specified percentage of employee contributions, amounted to $24,820 in 1995. 8. LEASE COMMITMENTS The Company leases certain office and warehouse space under non-cancelable operating leases expiring at various dates through 2000. Rental expenses of all non-cancelable operating leases amounting to $112,249 and $65,070 was charged to operations for the years ended December 31, 1995 and 1994, respectively. Aggregate minimum rental commitments under all non-cancelable operating leases approximate $535,000 as of December 31, 1995. Such commitments on annual basis are as follows: Years ending December 31, 1996 $ 184,712 1997 184,812 1998 83,198 1999 42,120 2000 40,365 ------------- $ 535,207 ============= 9. INCOME TAXES The provision for income taxes included in the consolidated statement of income is for state income taxes to which the Company and its subsidiaries are subject. No provision for federal income taxes is required, as the Company has no federal tax liability for 1995 as a result of the availability of net operating loss income tax carryforwards of approximately $13.1 million as of December 31, 1995, expiring in the years 2000 through 2009. Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which was adopted by the Company on January 1, 1993, requires the establishment of a deferred tax asset for all deductible temporary differences and operating loss carryforwards. Because the generation of future taxable income is not assured, however, any deferred tax asset established for utilization of the Company's tax loss carryforwards would correspondingly require a valuation allowance of the same amount pursuant to SFAS No. 109. Accordingly, no deferred tax asset is reflected in the consolidated financial statements. F-19 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 9. INCOME TAXES (CONTINUED) As of December 31, 1995, the approximate amount of the net operating loss income tax carryforwards and their expiration dates are as follows: Expiring in Years Ending Net Operating Loss December 31, Carryforwards ------------------ 2000 $ 460,000 2001 1,243,000 2002 1,414,000 2003 1,574,000 2004 1,100,000 2005 579,000 2006 782,000 2007 2,945,000 2008 2,336,000 2009 670,000 ------------ $ 13,103,000 ============ 10. FAIR VALUE OF FINANCIAL INSTRUMENTS Effective December 31, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments," which requires disclosing fair value, to the extent practicable, for financial instruments which are recognized or unrecognized in the balance sheet. Fair value of the financial instruments disclosed in the balance sheet is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. The following table summarizes financial instruments by individual balance sheet accounts as of December 31, 1995: Carrying Amount Fair Value --------------- ---------- Cash and cash equivalents $ 39,358 $ 39,358 Accounts receivable 1,399,936 1,399,936 Accounts payable and accrued expenses 1,520,094 1,520,094 Current portion of long-term debt 550,000 550,000 Long-term debt 2,185,000 2,185,000 F-20 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) For certain financial instruments, including cash and cash equivalents, trade receivables and payables, and short-term debt, it was assumed that the carrying amount approximated fair value because of the near term maturities of such obligations. The fair value of long-term debt was determined based on current rates at which the Company could borrow funds with similar remaining maturities, which amount approximates its carrying value. 11. RELATED PARTY TRANSACTIONS The Company has entered into a five-year management advisory and consulting agreement with Gulfstream Financial Group, Inc. ("Gulfstream"), a company in which the Chairman, President and Chief Executive Officer of Questron, who is also the Chairman and Chief Executive Officer of Quest, is a 50% owner. Under the terms of such agreement, Gulfstream acts as an advisor and consultant to the Company and Quest, and also provides certain administrative services to the companies. Such advisory and consulting services are directed principally at the expansion of Quest's business through the identification of new marketing opportunities and potential acquisitions, the procurement of financing as needed by the Company and Quest, and maximizing the Company's and Quest's profitability. For such services Gulfstream is paid a fee of $150,000 per year. In addition, upon the attainment of certain earnings targets for Quest, Gulfstream may be entitled to be awarded as incentive compensation, warrants, subject to certain conditions and restrictions, to purchase at a price of $.10 per share, a number of shares of common stock of the Company, such that the number of shares so purchased represents up to 10% of the outstanding common stock of the Company at March 31, 1995. For these purposes, the calculation of the shares of the common stock of the Company outstanding at March 31, 1995 assumes that all warrants, options and preferred stock are converted to common stock of the Company. Gulfstream presently owns 16.9% of the Company's common stock outstanding and has guaranteed the obligations of Quest under its Loan Agreement. 12. LONG-TERM EMPLOYMENT AGREEMENTS WITH EXECUTIVES Quest has entered into a five-year employment agreement with its Chairman and Chief Executive Officer. Under the terms of such employment agreement, Quest has agreed to compensate this individual with regular salary at the rate of $100,000 per year. There are no other bonus compensation arrangements currently in effect for this individual. Quest has also entered into a five-year employment agreement with its President and Chief Operating Officer. Under the terms of such employment agreement, Quest has agreed to compensate this individual with regular salary at the rate of $100,000 per year, plus bonus compensation based on the attainment of certain operating goals at the rate of $15,000 per quarter. In addition, upon the attainment of certain earnings targets for Quest, this individual may be entitled to be awarded as incentive compensation, warrants, subject to certain conditions and restrictions, to purchase at a price of $.10 per share, a number of shares of common stock of the Company, such that the number of shares so purchased represents up to 5% of the outstanding common stock of the Company at March 31, 1995. For these purposes, the calculation of the shares of the common stock of the Company outstanding at March 31, 1995 assumes that all warrants, options and preferred stock are converted to common stock of the Company. This individual presently owns 8.8% of the Company's common stock outstanding and has agreed with Gulfstream to participate in its guarantee of the obligations of Quest under its Loan Agreement, however, only to the extent of his stock holdings in the Company. F-21 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 13. NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENT The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of," in March of 1995. SFAS No. 121 established accounting standards for the impairment of long-lived assets and certain identifiable intangibles to be disposed of. SFAS No. 121 is effective for financial statements issued for fiscal years beginning after December 15, 1995. Adoption of SFAS No. 121 is not expected to have a material impact on the Company's financial statements. The FASB has also issued SFAS No. 123, "Accounting for Stock-Based Compensation," in October 1995. SFAS No. 123 uses a fair value based method of accounting for stock options and similar equity instruments as contrasted to the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has not decided if it will adopt SFAS No. 123 or continue to apply APB Opinion No. 25 for financial reporting purposes. SFAS No. 123 will have to be adopted for financial note disclosure purposes in any event. The accounting requirements of SFAS No. 123 are effective for transactions entered into in fiscal years beginning after December 15, 1995; the disclosure requirements of SFAS No. 123 are effective for financial statements for fiscal years beginning after December 31, 1995. 14. LITIGATION In July 1994, the Company was served with a complaint that charges the Company with breach of contract by exceeding its ADR authority in granting an arbitration award and seeks compensatory, consequential and punitive damages of an amount in excess of $100,000. The Company answered the complaint, denying the plaintiff's allegations. The Company believes that there is no basis for such action and that any consequences of such complaint will not have a material adverse effect on the Company's consolidated financial statements. F-22 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 15. SEGMENT INFORMATION As of March 31, 1995, the Company is engaged in two business segments. Through its subsidiary, Quest, it is a specialized distributor of fasteners and electronic hardware sold to electronic equipment manufacturers and, through its subsidiary, Judicate, it is a supplier of alternate dispute resolution ("ADR") services. The operating results and identifiable assets of each of these business segments, and corporate, at December 31, 1995 and for the year then ended is as follows:
Quest (1) Judicate Corporate (2) Consolidated ---------- -------- ------------- ------------ Revenue $6,982,902 $276,253 $ -- $ 7,259,155 ---------- ---------- ----------- ----------- Operating income (loss) 962,102 (25,255) (351,941) 584,906 Interest expense 201,096 -- 4,459 205,555 Provision for income taxes 27,164 -- -- 27,164 ----------- ---------- ----------- ----------- Net income (loss) $ 733,842 $(25,255) $(356,400) $ 352,187 ========== ========== =========== =========== Depreciation and amortization $ 112,871 $ 9,516 $ 77,545 $ 199,932 ========== ========== =========== =========== Capital expenditures $ 420,766 $ (1,000) $ -- $ 419,766 ========== ========== =========== =========== Identifiable Assets $8,306,721 $ 79,034 $4,047,243 $12,432,998 ========== ========== =========== ===========
(1) The operating results for Quest are for the nine months ended December 31, 1995. (2) Corporate expenses include non-recurring charges $146,867, principally associated with the downsizing and restructuring of the Company's ADR business. 16. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF THE INDEPENDENT AUDITORS (UNAUDITED) PROPOSED PUBLIC OFFERING The Company is pursuing a public offering of 1,000,000 Units of its securities at a price of $6.00 per unit ("Unit"). Each Unit will consist of one share of the Company's Series B Convertible Preferred Stock, par value $.01 per share, and one redeemable Series IV Common Stock Purchase Warrant. The Company anticipates net proceeds of $4,820,000 from the Offering. F-23 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 16. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF THE INDEPENDENT AUDITORS (UNAUDITED) (CONTINUED) BUSINESS COMBINATION The Company has entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") dated as of December 16, 1996 with the stockholders of Webb to acquire all of the issued and outstanding stock of Webb, in a business combination to be accounted for as a purchase. Under the Stock Purchase Agreement, the stockholders of Webb have agreed to exchange their shares of Webb for $3,250,000 in cash, 1,500,000 Series IV Common Stock Purchase Warrants and two notes (the "Notes") in the aggregate amount of $750,000 (each for $375,000). Note A shall mature eighteen months from the effective date of the proposed public offering and bear interest at 10% per annum. Note B shall mature in equal monthly installments over a five year period from the same date and bear interest at 10% per annum. At the time of the signing of the Stock Purchase Agreement, the Company delivered to the Webb stockholders the 1,500,000 Series IV Warrants as a deposit on account of the purchase price under said agreement. The Company has valued these Series IV Warrants at $.25 per Warrant. These Series IV Warrants will be cancelled if the Webb acquisition does not close. Any proceeds received by the Webb stockholders from a sale of their Series IV Warrants in excess of 375,000 shall reduce the Company's obligations under the Notes. The amount of the purchase price ($4,375,000) in excess of the estimated fair value of the net assets acquired will be recorded as "cost in excess of net assets acquired" and amortized over forty years. PROPOSED STOCK SPLIT The Board of Directors has proposed a one-for-ten reverse split of the issued and outstanding Common Stock of the Company. The proposal is subject to the approval of the Company's stockholders at the annual meeting of stockholders scheduled for December 27, 1996. 17. UNAUDITED INTERIM STATEMENTS The financial statements for the nine months ended September 30, 1996 and 1995 are unaudited; however, in the opinion of management all adjustments which are necessary in order to make the interim financial statements not misleading have been made. The results for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. F-24 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Comp Ware, Inc. d/b/a Webb Distribution We have audited the accompanying balance sheets of Comp Ware, Inc. d/b/a Webb Distribution as of December 31, 1995 and 1994, and the related statements of operations and retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Comp Ware, Inc. d/b/a Webb Distribution as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ESTABROOK & CO., INC. Certified Public Accountants Winchester, Massachusetts February 5, 1996 F-25 COMP WARE, INC. D/B/A WEBB DISTRIBUTION BALANCE SHEET
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) ASSETS: Current assets: Cash $ 1,716 $ 500 Accounts receivable - trade, less allowance for doubtful accounts of $70,000 and $67,000, respectively 1,094,890 1,048,278 Inventory 1,715,137 1,726,497 Deferred income taxes 115,839 115,839 Other current assets 20,445 36,493 ---------- ---------- Total current assets 2,948,027 2,927,607 Property and equipment, at cost, less accumulated depreciation and amortization (Note 3) 109,931 126,898 Other assets 135,855 204,011 ---------- ---------- Total assets $3,193,813 $3,258,516 ========== ==========
See Notes to Financial Statements. F-26 COMP WARE, INC. D/B/A WEBB DISTRIBUTION BALANCE SHEET
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Cash overdraft $ -- $ 37,848 Notes payable 588,218 796,685 Current maturities of obligations under capital leases (Note 11) 22,448 22,157 Current maturities of long-term debt (Note 7) -- 150,000 Current maturities of note payable-stockholder 61,904 -- Accounts payable and accrued expenses 1,095,941 1,051,210 ----------- ----------- Total current liabilities 1,768,511 2,057,900 ----------- ----------- Long-term liabilities: Obligations under capital leases, less current maturities (Note 11) 57,567 73,082 Long-term debt, less current maturities (Note 7) 500,000 500,000 Notes payable-stockholder-net of current portion 30,954 -- Deferred income taxes (Note 9) 22,216 22,216 ----------- ----------- Total long-term liabilities: 610,737 595,298 ---------- ---------- Stockholders' equity (Note 8): Common stock, $.01 par value authorized 1,000,000 issued and outstanding 651,162 shares 6,512 6,512 Additional paid-in capital 340,857 340,857 Retained earnings 467,196 257,949 ----------- ----------- Total stockholders' equity 814,565 605,318 ----------- ----------- Total liabilities and stockholders' equity $ 3,193,813 $ 3,258,516 =========== ===========
See Notes to Financial Statements. F-27 COMP WARE, INC. D/B/A WEBB DISTRIBUTION STATEMENT OF OPERATIONS AND RETAINED EARNINGS
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ------------------------------- --------------------------------- 1996 1995 1995 1994 ------ ------ ------ ------ (UNAUDITED) (UNAUDITED) Net sales $ 6,088,946 $ 5,673,325 $ 7,793,179 $ 8,880,742 ------------ ------------ ------------ ------------ Operating expenses: Cost of sales 4,122,619 3,907,641 5,557,984 6,980,213 Selling expenses 1,003,091 927,439 1,085,445 952,645 General and administrative expenses 473,152 460,106 672,491 592,467 ------------ ------------- ------------- ------------- Total operating costs and expenses 5,598,862 5,295,186 7,315,920 8,525,325 ------------ ------------- ------------- --------- Operating income 490,084 378,139 477,259 355,417 ------------ ------------- ------------- ------------- Other income (expenses): Interest income -- -- 2,601 1,875 Interest expense (109,537) (122,544) (164,146) (127,113) Other (Note 10) -- -- -- 7,506 --------------- --------------- ---------------- -------------- Total other income (expense) (109,537) (122,544) (161,545) (117,732) ------------ ------------ ------------ ------------ Income before provision for income taxes 380,547 255,595 315,714 237,685 Provision for income taxes (Note 9) 171,300 115,040 113,681 63,129 ------------ ------------ ------------ ------------ Net income $ 209,247 $ 140,555 $ 202,033 $ 174,556 ============ ============ ============ =============
See Notes to Financial Statements. F-28 COMP WARE, INC. D/B/A WEBB DISTRIBUTION STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TOTAL --------------------------- PAID-IN RETAINED STOCKHOLDERS' SHARES AMOUNTS CAPITAL EARNINGS EQUITY ------ ------- ------- -------- ------ BALANCE - DECEMBER 31, 1993 -- $ -- $289,026 $(118,640) $170,386 Net income for the year -- -- -- 174,556 174,556 ---------- ------- -------- --------- -------- BALANCE - DECEMBER 31, 1994 -- -- 289,026 55,916 344,942 Exchange of stock 560,000 5,600 (5,600) -- -- Issuance of stock 91,162 912 57,431 -- 58,343 Net income for the year -- -- -- 202,033 202,033 ---------- ------- -------- --------- -------- BALANCE - DECEMBER 31, 1995 651,162 6,512 340,857 257,949 605,318 Net income for the nine months -- -- -- 209,247 209,247 ---------- ------- -------- --------- -------- BALANCE - SEPTEMBER 30, 1996 (UNAUDITED) 651,162 $ 6,512 $340,857 $ 467,196 $814,565 ======= ======= ======== ========= ========
See Notes to Financial Statements. F-29 COMP WARE, INC. D/B/A WEBB DISTRIBUTION STATEMENT OF CASH FLOWS
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ------------------------ ------------------------- 1996 1995 1995 1994 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES: Net income $209,247 $140,555 $202,033 $174,556 -------- -------- -------- -------- Adjustments to reconcile net income to net cash provided by (used in) Operating activities: Depreciation and amortization 38,989 36,716 50,424 44,184 Deferred income taxes -- (25,914) (41,672) (51,951) Stock issued for services -- -- 58,343 -- Changes in assets and liabilities: Decrease (increase) in: Accounts receivable - trade 46,592 (172,869) (242,284) (124,993) Inventory 11,360 (123,119) (78,704) 47,372 Other current assets 6,780 (6,381) 17,539 (15,176) Increase (decrease) in accounts payable and accrued expenses 44,781 4,457 (90,985) (59,882) -------- --------- -------- -------- Total adjustments 148,502 (287,110) (327,339) (160,446) -------- --------- -------- -------- NET CASH - OPERATING ACTIVITIES - FORWARD 357,749 (146,555) (125,306) 14,110 -------- --------- -------- --------
F-30 COMP WARE, INC. D/B/A WEBB DISTRIBUTION STATEMENT OF CASH FLOWS
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ------------------------ ------------------------- 1996 1995 1995 1994 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) INVESTING ACTIVITIES: Interest earned on certificate of deposit $ -- $ -- $ -- $ (338) Certificate of deposit returned -- 9,225 9,225 -- Deposits (27) -- (654) 2,219 Capital expenditures (15,345) (25,109) (30,189) (13,293) Loans to stockholders -- (11,407) (14,047) (8,140) Collections on stockholder loans -- -- 2,640 -- Loans to employees (31,452) (11,558) (11,558) -- Collections on loans to employees 8,972 3,650 4,600 -- Proceeds on sale of investments -- -- -- 70,000 -------- -------- -------- -------- NET CASH - INVESTING ACTIVITIES - FORWARD (37,852) (35,199) (39,983) 50,448 -------- -------- -------- --------
F-31 COMP WARE, INC. D/B/A WEBB DISTRIBUTION STATEMENT OF CASH FLOWS
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ------------------------ ------------------------- 1996 1995 1995 1994 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) NET CASH - OPERATING ACTIVITIES - FORWARDED $357,749 $(146,555) $(125,306) $ 14,110 --------- ---------- --------- -------- NET CASH - INVESTING ACTIVITIES - FORWARDED (37,852) (35,199) (39,983) 50,448 ---------- ---------- --------- -------- FINANCING ACTIVITIES: Cash overdraft (37,848) -- 37,848 (4,167) Net borrowings (repayments) under loan agreement with bank (207,261) 253,609 199,461 8,335 Repayments of long-term debt (57,142) (50,000) (50,000) (50,000) Repayments of obligations under capital leases (16,430) (19,359) (23,638) (17,108) ---------- --------- --------- -------- NET CASH - FINANCING ACTIVITIES (318,681) 184,250 163,671 (62,940) ---------- --------- --------- -------- NET (DECREASE) INCREASE IN CASH 1,216 2,496 (1,618) 1,618 CASH - BEGINNING OF PERIODS 500 2,118 2,118 500 --------- --------- ---------- -------- CASH - END OF PERIODS $ 1,716 $ 4,614 $ 500 $ 2,118 ========= ========= ========== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the periods for: Interest $109,536 $122,545 $165,291 $127,113 Income taxes $162,954 $123,536 $126,736 $103,550
F-32 COMP WARE, INC. D/B/A WEBB DISTRIBUTION STATEMENT OF CASH FLOWS SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: 1995 The Company incurred debt obligations of $28,015 in connection with the acquisition of certain equipment. The Company issued 91,162 shares of common stock for services. The shares were valued at $58,343. 1994 The Company incurred debt obligations of $63,469 in connection with the acquisition of certain equipment ($50,378) and the amendment of a certain lease agreement ($13,091). See Notes to Financial Statements. F-33 COMP WARE, INC. D/B/A WEBB DISTRIBUTION NOTES TO FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Comp Ware, Inc. d/b/a Webb Distribution (the "Company") is a distributor of electronic hardware, fasteners and components. SIGNIFICANT ACCOUNTING POLICIES Inventory Inventories consist of electronic hardware, fasteners and components purchased for resale and are stated at the lower of FIFO cost or market. Market is defined as replacement cost. Property and Equipment Depreciation and amortization is provided on a straight-line basis over the estimated useful lives of the assets as follows: Furniture, Fixtures and Computer Equipment 3-5 Years Machinery and Equipment 5 Years Leasehold Improvements Lease Term Goodwill The excess of the purchase price over the original valuation of the net assets acquired is being amortized on a straight-line basis over 10 years. Customer Lists Customer lists are being amortized on a straight-line basis over 7 years. Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of accounts receivable, inventory, property and equipment, and goodwill for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of these differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future income taxes. F-34 COMP WARE, INC. D/B/A WEBB DISTRIBUTION NOTES TO FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) Statement of Cash Flows For purposes of this statement the Company does not consider any of its assets to meet the definition of cash equivalent. Reclassification Certain reclassifications have been made to the 1994 financial statements to conform to the 1995 presentation. 2. INVESTMENTS Investments consist of 46,832 shares of common stock of Alliance Electronics, Inc. at cost. The fair value of these securities is not readily determinable as there is no public market for these securities. During 1996, the Company expects to convert the investment in Alliance Electronics, Inc. $(70,248) together with commissions receivable from this same company $(61,506) into a note receivable with repayment terms of twenty-four to thirty-six months. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 1995: 1995 ---- Furniture, Fixtures and Computer Equipment $ 303,912 Machinery and Equipment 23,470 Leasehold Improvements 14,523 ----------- 341,905 Less: Accumulated Depreciation and Amortization 215,007 ----------- $ 126,898 =========== Depreciation and amortization expense charged to operations was $41,522 and $32,102 in 1995 and 1994, respectively. 4. CERTIFICATE OF DEPOSIT Under the terms of a lease agreement with IBM Credit Corporation, the Company was required to purchase a Certificate of Deposit for $7,977 as a security deposit. The deposit will be returned, together with interest earned thereon, if certain criteria are met (principally satisfactory payments under the lease). The deposit $(9,225) was returned during 1995. F-35 COMP WARE, INC. D/B/A WEBB DISTRIBUTION NOTES TO FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 5. GOODWILL Goodwill of $50,000 is included in the accompanying balance sheet net of accumulated amortization of $30,000 in 1995. Amortization expense charged to operations was $5,000 in 1995 and 1994. 6. CUSTOMER LISTS Customer lists costs of $27,314 are included in the accompanying balance sheet net of accumulated amortization of $23,737 in 1995. Amortization expense charged to operations was $3,902 in 1995 and 1994. 7. INDEBTEDNESS At September 30 1996 and December 31, 1995, indebtedness consisted of the following:
1996 1995 ------- ------- Note Payable - Borrowings under a loan agreement with US Trust that provides for a maximum loan limit of $900,000, payable on demand, secured by all accounts receivable, inventory and equipment with interest at the bank's base lending rate plus 1.50% (10.00% at December 31, 1995 and September 30, 1996). $588,218 $796,685 ======== ======== Long-Term Debt - $500,000 commercial installment note payable to US Trust; interest only at the bank's base lending rate plus 1.50% (10.00% at December 31, 1995 and September 30, 1996), through January 1, 1997 at which time the entire principal balance is due, secured by accounts receivable, inventory and equipment. The majority stockholder of the $500,000 $500,000 Company has executed a limited guaranty of $500,000. Notes payable to certain former stockholders of the Company in connection with the repurchase of their stock. Payable in semi-annual installments of $50,000 together with interest at US Trust's base lending rate (8.50% at December 31, 1995) commencing on July 1, 1994. These notes are subordinate to existing borrowings from US Trust. Further, the Company is only permitted to make payments of principal and interest if they comply with certain financial covenants that involve minimum cash flow and the ratio of senior debt to capital base. Certain stockholders of the Company have guaranteed the payments under the note and a life insurance policy (face amount of $250,000) on the life of one stockholder has been assigned to the former stockholders. -- 150,000 -------- ------- Total 500,000 650,000 Less current maturities of long-term debt -- 150,000 -------- ------- Long-term debt, less current maturities $500,000 $500,000 ======== ========
F-36 COMP WARE, INC. D/B/A WEBB DISTRIBUTION NOTES TO FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) Long-Term debt matures as follows: 1996 $150,000 1997 500,000 --------- $650,000 The loan agreement and commercial installment note with the bank require conformance to certain covenants, restrict the payment of dividends and the merging or consolidating with any other corporation, and limit the amount of expenditures for property and equipment, annual increases to certain officers' salaries and the making of certain loans and investments. 8. STOCKHOLDERS' EQUITY On February 15, 1995 the Company was merged into Comp Ware, Inc., a newly-created Delaware corporation, in a so-called migratory merger. As part of the merger, each share of common stock of Webb Distribution outstanding prior to the merger was exchanged for 35,000 shares of Comp Ware, Inc. Comp Ware, Inc. has the authority to issue up to 1,000,000 shares of common stock, par value $.01 per share. On February 15, 1995 the Company issued 91,162 shares of common stock to certain employees of the Company. After giving effect to the exchange referred to above and the issuance of the 91,162 shares, the total number of shares issued and outstanding is 651,162. The 91,162 shares were issued pursuant to a certain stockholders' agreement that provides for restrictions on transfer, put rights and purchase options. Shares held by certain other stockholders are not subject to the stockholders' agreement referred to above. Those certain employees whose shares are subject to the stockholders' agreement will hereinafter be referred to as the "covered employees." The covered employees may not transfer their stock without first offering it to the Company for a price per share equal to, for offers prior to December 9, 2000, the per share book value, and for offers after December 9, 2000, the greater of the per share book value and $1.91 per share. The purchase price is payable 25% in cash and 75% in accordance with a subordinated note providing for monthly payments of interest only at an annual rate of 8%, and three equal annual payments of principal commencing one year after the closing. The Company's purchase option, whose items are stated above, could be exercised if a covered employee ceases for any reason to be employed by the Company. If the Company does not exercise the Company purchase option, a covered employee may seek third party offers for this stock, and the employee must provide notice of any third party offer to all remaining Company stockholders who shall have a right of first refusal to purchase such covered employee's stock on the same terms and conditions as the third party offer. F-37 COMP WARE, INC. D/B/A WEBB DISTRIBUTION NOTES TO FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 8. STOCKHOLDERS' EQUITY (CONTINUED) The stockholders' agreement further provides for a put right for the benefit of the covered employees whereby the covered employee (1) after April 1, 1997, (2) upon the employee ceasing for any reason to be employed by the Company and (3) the Company not exercising the Company purchase option triggered by the end of employment, may require that the Company purchase the stock at the price and upon the identical terms set forth in the Company purchase option. The Company is required to grant to the covered employees, if they remain employed by the Company on April 1, 1997, non-qualified stock options to acquire stock then representing 14% of the outstanding stock of the Company, at an exercise price of $1.00 per share, but subject to vesting over 5 years at the annual rate of 20% per year. 9. PROVISION FOR INCOME TAXES The provision for income taxes consists of the following:
1995 1994 ------- ------- Federal: Current $ 114,643 $ 83,126 Deferred (33,927) (10,738) Adjustment due to change in tax status -- (29,867) -------- ---------- Totals 80,716 42,521 -------- ---------- State: Current 40,710 31,954 Deferred (7,745) (3,001) Adjustment due to change in tax status -- (8,345) -------- ---------- Totals 32,965 20,608 -------- ---------- $113,681 $ 63,129 ======== ==========
The provision for income taxes in 1995 and 1994 differs from the amounts computed by applying the U.S. statutory federal income tax rate of 35% principally because of state income taxes, the surtax exemption and amortization of goodwill. F-38 COMP WARE, INC. D/B/A WEBB DISTRIBUTION NOTES TO FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 9. PROVISION FOR INCOME TAXES (CONTINUED) During 1994, the Company's tax status changed from an S Corporation to a C Corporation; accordingly, the Company adopted Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109") which requires a change from an income statement to a balance sheet approach for accounting for income taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized based upon temporary differences between financial statement and tax basis of assets and liabilities using current statutory rates. SFAS No. 109 also requires a valuation reserve against net deferred tax assets if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The following table shows the December 31, 1995 amounts of deferred tax assets and liabilities:
1995 ----------------------------------- Long-Term Current Assets Liabilities ---------------- --------------- Inventory $ 68,752 $ -- Accounts receivable 29,145 -- Charitable contributions 17,942 -- Goodwill -- 6,800 Property and equipment -- 15,416 ------------- ----------- $ 115,839 $ 22,216 ============= ===========
10. RELATED PARTY TRANSACTIONS Notes Receivable Amounts receivable from majority stockholder. This note bears interest at the rate of 6%. $ 40,476 =============
Cost Reimbursement and Commission The Company entered into an agreement with Alliance Electronics, Inc. ("Alliance") whereby Alliance would open and operate an office on the premises currently leased by the Company. Employees of Alliance operate the office but are included on the payroll of the Company. Alliance reimburses the Company for personnel and other operating costs. In addition, the Company receives 25%-50% of the gross profit on certain sales generated for Alliance in the form of commissions. This agreement was terminated in September 1994. F-39 COMP WARE, INC. D/B/A WEBB DISTRIBUTION NOTES TO FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 10. RELATED PARTY TRANSACTIONS (CONTINUED) The Company received $64,000 in the form of commissions during 1994. These amounts are included in other income, net of related expenses $(58,944), in the accompanying statements of operations and retained earnings (deficit). Related expenses consist principally of salaries, commissions and fringe benefits. Also included in other income is $2,450 received in connection with an insurance claim. 11. COMMITMENTS AND CONTINGENCIES Leases The Company leases its facilities under a noncancelable operating lease and certain equipment under capital leases. Future minimum payments are as follows:
Operating Leases Capital Leases ---------------- -------------- 1996 $ 91,875 $ 34,242 1997 94,375 34,242 1998 96,875 27,263 1999 99,375 19,218 2000 25,000 6,847 -------- --------- $407,500 121,812 ======== Amount representing interest 26,573 -------- Present value of net minimum lease payments 95,239 Current maturities of obligations under capital lease 22,157 -------- Obligations under capital leases, less current maturities $ 73,082 ========
Rental expense charged to operations under operating leases was $86,200 and $91,200 in 1995 and 1994, respectively. These amounts are net of sublease rentals of $6,300 in 1995 and 1994. The capital leases are included in furniture, fixtures and computer equipment as follows: Cost $131,369 Accumulated depreciation 53,847 -------- $ 77,522 ========
F-40 COMP WARE, INC. D/B/A WEBB DISTRIBUTION NOTES TO FINANCIAL STATEMENTS (INFORMATION AT SEPTEMBER 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIODS THEN ENDED IS UNAUDITED) 11. COMMITMENTS AND CONTINGENCIES (CONTINUED) Insurance The Company maintains $1,520,000 of insurance on inventories whose value at December 31, 1995 is $1,726,497. The possible loss, which has not been provided for in the accompanying financial statements, is $206,497. 12. MAJOR CUSTOMERS During 1995 and 1994, the Company had a major customer each year whose purchases exceeded 10% of net sales. Sales to this major customer were as follows: 1995 $ 825,000 1994 $2,718,750 13. BENEFIT PLAN The Company maintains an employee savings plan under section 401(k) of the Internal Revenue Code in which substantially all employees are eligible to participate. Employees may make contributions to the plan subject to limitations as provided in current federal income tax law. The Company may make matching contributions in whole or in part, subject to certain limitations, at the Company's discretion. Company contribution expense charged to operations was $10,953 and $8,063 in 1995 and 1994, respectively. 14. FINANCIAL INSTRUMENTS AND SIGNIFICANT CONCENTRATION OF GROUP CREDIT RISK Financial instruments that potentially subject the Company to concentration of credit risk consists principally of trade receivables. Trade receivables are derived from sales to various customers spread across various industries, principally in Massachusetts. Management believes that any risk of accounting loss is significantly reduced due to the diversity of its end customers. The Company performs credit evaluations of its customers' financial condition prior to extending credit whenever deemed necessary, but does not require collateral. 15. UNAUDITED INTERIM STATEMENTS The financial statements for the nine months ended September 30, 1996 and 1995 are unaudited; however, in the opinion of management all adjustments which are necessary in order to make the interim financial statements not misleading have been made. The results for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. F-41 ============================================================================= NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER WOULD BE UNLAWFUL. ANY MATERIAL MODIFICATION OF THE OFFERING WILL BE ACCOMPLISHED BY MEANS OF AN AMENDMENT TO THE REGISTRATION STATEMENT. IN ADDITION, THE RIGHT IS RESERVED BY THE COMPANY TO CANCEL ANY CONFIRMATION OF SALE PRIOR TO THE RELEASE OF FUNDS, IF, IN THE OPINION OF THE COMPANY, COMPLETION OF SUCH SALE WOULD VIOLATE FEDERAL OR STATE SECURITIES LAWS OR A RULE OR POLICY OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., WASHINGTON, D.C. 20006. --------------------------- TABLE OF CONTENTS
Page ---- Note on Forward-Looking Statements........................... 3 Available Information........................................ 3 Prospectus Summary........................................... 4 Risk Factors................................................. 10 Use of Proceeds.............................................. 20 Capitalization.............................................. 22 Price Range of Common Stock and Dividend Policy............................................ 23 Management's Discussion and Analysis of Financial Condition and Plan of Operations................................................. 25 Business..................................................... 34 Management................................................... 41 Certain Transactions......................................... 45 Securities Ownership......................................... 47 Description of Securities.................................... 52 Selling Securityholders...................................... 56 Underwriting................................................. 58 Legal Proceedings............................................ 62 Legal Matters................................................ 62 Experts...................................................... 62 Index to Financial Statements................................ 63 Pro Forma Combined Financial Statements ..................... P-1 Report of Independent Auditors............................... F-1
--------------------------- 1,000,000 UNITS QUESTRON TECHNOLOGY, INC. ---------- PROSPECTUS ---------- BILTMORE SECURITIES, INC. ( ), 1997 ============================================================================== PROSPECTUS (ALTERNATE) Subject to Completion, dated December 19, 1996 2,750,000 SERIES IV WARRANTS 2,750,000 SHARES OF COMMON STOCK UNDERLYING SERIES IV WARRANTS QUESTRON TECHNOLOGY, INC. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. This Prospectus relates to the offering of 2,750,000 Series IV Common Stock Purchase Warrants ("Series IV Warrants") of Questron Technology, Inc., a Delaware corporation (the "Company"), and 2,750,000 shares of Common Stock, par value $.001 per share ("Common Stock") underlying the Series IV Warrants (collectively, the "Securities"). The Securities are being offered by the security holders identified in this Prospectus (the "Selling Securityholders"). The Securities offered hereby may not be transferred for eighteen (18) months from the date hereof, subject to earlier release at the sole discretion of Biltmore Securities, Inc. (the "Underwriter"). The certificates evidencing such securities include a legend with such restrictions. The Underwriter may release the securities held by the Selling Securityholders at any time after all securities subject to the Over-Allotment Option have been sold or such option has expired. In other offerings where the Underwriter has acted as the managing underwriter, it has released similar restrictions applicable to selling securityholders prior to the expiration of the lock-up period and in some cases immediately after the exercise of the Over-Allotment Option or the expiration of the Over-Allotment period. Each Series IV Warrant entitles the holder thereof to purchase one share of Common Stock at a price of $____ per share for a period of four years commencing one year from the date hereof at which time the Series IV Warrants will expire. The Series IV Warrants are redeemable by the Company for $.05 per Warrant, at any time after , 1998, upon thirty (30) days' prior written notice, if the average closing price of the Common Stock, as reported by the Nasdaq SmallCap Market ("Nasdaq") equals or exceeds $_______ per share, for any twenty (20) trading days within a period of thirty (30) days ending within ten (10) days of the notice of redemption. Upon thirty (30) days' written notice to all holders of the Series IV Warrants, the Company shall have the right to reduce the exercise price and/or extend the term of the Series IV Warrants in compliance with the requirements of Rule 13e-4 to the extent applicable. See "Description of Securities" and "Selling Securityholders." The distribution of the Shares offered hereby by the Selling Securityholders may be effected on one or more transactions that may take place on the over-the-counter market, including ordinary broker's transactions, privately-negotiated transactions or through sales to one or more dealers for resale of such securities as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the Selling Securityholders. See "Plan of Distribution." The Selling Securityholders and intermediaries through whom such securities may be sold may be deemed "underwriters" within the meaning of the Securities Act with respect to the securities offered, and any profits realized or commissions received may be deemed underwriting compensation. The Company has agreed to indemnify the Selling Securityholders against certain liabilities, including liabilities under the Securities Act. On the date of this Prospectus, a registration statement, filed under the Securities Act with respect to an underwritten public offering by the Company of 1,000,000 Units, each Unit consisting of one share of Common Stock and one Series IV Warrant and up to 150,000 additional Units to cover over-allotments, if any, was declared effective by the Securities and Exchange Commission (the "Commission"). The Company will receive net proceeds of approximately $4,820,000 from the sale of the Units in the underwritten public offering, and will receive approximately $783,000 in additional net proceeds if the over-allotment option is exercised in full after payment of underwriting discounts and commissions and estimated expenses of the underwritten public offering. Sales of securities by the Selling Securityholders or even the potential of such sales, would likely have an adverse affect on the market price of the Securities. The Company will not receive any of the proceeds from the sale of the securities by the Selling Securityholders. All costs incurred in the registration of the securities of the Selling Securityholders are being borne by the Company. See "Selling Securityholders." Prior to this offering, there has been no public market for the Units, Series B Preferred Stock or Series IV Warrants. The Company is applying for inclusion of the Units, Series B Preferred Stock and Series IV Warrants on the Nasdaq SmallCap Market, under the symbols [QUSTU], [QUSTP] and [QUSTW], respectively, although there can be no assurances that such securities will be accepted for quotation or, if accepted, that an active trading market will develop. In addition, if the Company's securities are accepted for quotation and active trading develops, the Company is required to maintain certain minimum criteria established by Nasdaq and there can be no assurance that the Company will be able to continue to fulfill such criteria. See "Risk Factors." The Common Stock of the Company is listed on the Nasdaq SmallCap Market under the symbol "QUST". On December 16, 1996, the closing price per share of the Common Stock as reported by the Nasdaq SmallCap Market was $3.75, after giving effect to the proposed one-for-ten reverse split of the issued and outstanding Common Stock. See "Price Range for Common Stock and Dividends." For additional information regarding the factors considered in determining the initial public offering price of the Units and the exercise price of the Series IV Warrants, see "Description of Securities" and "Underwriting." AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS," WHICH BEGINS ON PAGE . THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------- The date of this Prospectus is _______, 1997. THE OFFERING* Securities Offered by the Selling Securityholders (1)..................................... 2,750,000 Warrants Use of Net Proceeds..................................... None of the proceeds from the sale of the Series IV Warrants hereunder will go to the Company (2). OUTSTANDING EQUITY SECURITIES IMMEDIATELY PRIOR TO THE OFFERING Shares of Common Stock (2).............................. 1,535,484 OUTSTANDING EQUITY SECURITIES IMMEDIATELY SUBSEQUENT TO THE OFFERING (3) Shares of Common Stock (4).............................. 1,535,484 Shares of Series B Preferred Stock (5).................. 1,000,000 Comparative Shares Ownership After Offering: Present Stockholders........................... 1,535,484 Shares New Investors (4).............................. ((__) Shares) NASDAQ SYMBOLS Common Stock............................................ QUST Units (Proposed)........................................ QUSTU Series B Preferred Stock (Proposed)..................... QUSTP Series IV Warrants (Proposed)........................... QUSTW
- ---------- * ALL FIGURES CONTAINED HEREIN REFLECT THE PROPOSED AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION IN CONJUNCTION WITH THE 1996 ANNUAL MEETING WHEREBY THE BOARD OF DIRECTORS HAS PROPOSED A ONE-FOR-TEN REVERSE SPLIT OF THE ISSUED AND OUTSTANDING COMMON STOCK AS WELL AS A REDUCTION IN THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK AND SERIES B PREFERRED STOCK. (1) The Company is concurrently offering 1,000,000 Units at a price of $6.00 per Unit (the "Concurrent Offering"). Each Unit consists of one share of Series B Preferred Stock and one Series IV Warrant. Each share of Series B Preferred Stock will automatically convert, without any action on the part of the holder thereof or the Company, into ______ shares of Common Stock on the second anniversary of the Effective Date. Each Series IV Warrant entitles the holder to purchase one share of Common Stock at an exercise price of 115% of the closing market price per share of the Common Stock on the day preceding the Effective Date during the four year period commencing one year from the Effective Date. The Series IV Warrants are redeemable upon certain conditions. Should the Series IV Warrants be exercised, of which there is no assurance, the Company will receive the proceeds therefrom aggregating up to an additional $( ). See "Description of Securities." (2) The proceeds from the sale of Series IV Warrants held by the majority stockholder of Comp Ware, Inc. d/b/a Webb Distribution ("Webb") may reduce the obligations under promissory notes to be issued by the Company in connection with the acquisition of Webb. (3) Assumes securities offered under the Concurrent Offering have been sold. (4) Does not include shares of Common Stock issuable (i) upon conversion of the Series B Preferred Stock; (ii) upon the exercise of the Series IV Warrants included in the Units or offered by the Selling Securityholders; (iii) upon the exercise of the Underwriter's Over-Allotment Option to purchase up to 150,000 Units, or (iv) upon exercise of the Underwriter's Unit Purchase Option. (5) These shares of Series B Preferred Stock are convertible into ________ shares of Common Stock. -2- CONCURRENT SALES On the date of this Prospectus, a registration statement under the Securities Act with respect to an underwritten public offering ("Offering") of 1,000,000 Units ("Units") by the Company was declared effective by the Securities and Exchange Commission ("Commission"), Washington, D.C. 20549, and the Company commenced the sale of Units offered thereby. The Units are comprised of one share of Series B Preferred Stock and one Series IV Warrant to purchase a share of Common Stock. Sales of securities under this Prospectus by the Selling Securityholders or even the potential of such sales may have an adverse effect on the market price of the Company's securities. PLAN OF DISTRIBUTION The Securities offered hereby may be sold from time to time directly by the Selling Securityholders. Alternatively, the Selling Securityholders may from time to time offer such securities through underwriters, dealers or agents. The distribution of Securities by the Selling Securityholders may be effected in one or more transactions that may take place on the over-the-counter market, including ordinary broker's transactions, privately-negotiated transactions or through sales to one or more broker-dealers for resale of such Securities as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the Selling Securityholders in connection with such sales of Securities. The Securities offered by the Selling Securityholders may be sold by one or more of the following methods, without limitations: (a) a block trade in which a broker or dealer so engaged will attempt to sell the Securities as agent but may position and resell a portion of the block as principal to facilitate the transaction; and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) ordinary brokerage transactions and transactions in which the broker solicits purchasers, and (d) face-to-face transactions between sellers and purchasers without a broker-dealer. In effecting sales, brokers or dealers engaged by the Selling Securityholders may arrange for other brokers or dealers to participate. The Selling Securityholders and intermediaries through whom such Securities are sold may be deemed "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Securities Act") with respect to the securities offered, and any profits realized or commissions received may be deemed underwriting compensation. In order to comply with the securities laws of certain states, if applicable, the Securities will be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states the securities may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with by the Company and the Selling Securityholders. The Selling Securityholders and any broker-dealers, agents or underwriters that participate with the Selling Securityholders in the distribution of the shares may be deemed to the "underwriters" within the meaning of the Section 2(11) of the Securities Act and any securities purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Under applicable rules and regulations under the Securities Exchange Act of 1934, as amended ("the Exchange Act"), any person engaged in the distribution of the securities may not simultaneously engage in market-making-activities with respect to the securities for a period of two to nine business days prior to the commencement of such distribution. In addition and without limiting the foregoing, each Selling Securityholder will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including without limitation, Rules 10b-6, 10b-6A and 10b-7, which provisions may limit the timing of the purchases and sales of securities by the Selling Securityholders. -3- The Company has agreed to pay all fees and expenses incident to the registration of the Shares, except selling commissions and fees and expenses of counsel or any other professionals or other advisors, if any, to the Selling Securityholders. -4- ============================================================================== NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER WOULD BE UNLAWFUL. ANY MATERIAL MODIFICATION OF THE OFFERING WILL BE ACCOMPLISHED BY MEANS OF AN AMENDMENT TO THE REGISTRATION STATEMENT. IN ADDITION, THE RIGHT IS RESERVED BY THE COMPANY TO CANCEL ANY CONFIRMATION OF SALE PRIOR TO THE RELEASE OF FUNDS, IF, IN THE OPINION OF THE COMPANY, COMPLETION OF SUCH SALE WOULD VIOLATE FEDERAL OR STATE SECURITIES LAWS OR A RULE OR POLICY OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., WASHINGTON, D.C. 20006. ---------- TABLE OF CONTENTS
PAGE ---- Note on Forward-Looking Statements............... Available Information............................ Prospectus Summary............................... Risk Factors..................................... Use of Proceeds.................................. Capitalization.................................. Price Range of Common Stock and Dividend Policy............................ Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... Business......................................... Management....................................... Certain Transactions............................. Securities Ownership............................. Description of Securities........................ Concurrent Sales................................. Selling Securityholders.......................... Plan of Distribution............................. Legal Proceedings................................ Legal Matters.................................... Experts.......................................... Index to Financial Statements.................... Pro Forma Combined Financial Statements..................................... P-1 Report of Independent Auditors................... F-1
2,750,000 SERIES IV WARRANTS 2,750,000 SHARES UNDERLYING SERIES IV WARRANTS QUESTRON TECHNOLOGY, INC. ---------- PROSPECTUS ---------- ________, 1997 ============================================================================== PART TWO INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Certificate of Incorporation and By-laws contain provisions which reduce the potential personal liability of directors for certain monetary damages and provide for indemnity of directors and other persons. The Company is unaware of any pending or threatened litigation against the Company or its directors that would result in any liability for which such director would seek indemnification or similar protection. The provisions affecting personal liability do not abrogate a director's fiduciary duty to the Company and its shareholders, but eliminate personal liability for monetary damages for breach of that duty. The provisions do not, however, eliminate or limit the liability of a director for failing to act in good faith, for engaging in intentional misconduct or knowingly violating a law, for authorizing the illegal payment of a dividend or repurchase of stock, for obtaining an improper personal benefit, for breaching a director's duty of loyalty (which is generally described as the duty not to engage in any transaction which involves a conflict between the interests of the Company and those of the director) or for violations of the federal securities laws. The provisions also limit liability resulting from grossly negligent decisions including grossly negligent business decisions relating to attempts to change control of the Company. The provisions regarding indemnification provide, in essence, that the Company will indemnify its directors against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any action, suit or proceeding arising out of the director's status as a director of the Company, including actions brought by or on behalf of the Company (shareholder derivative actions). In the opinion of the Securities and Exchange Commission, indemnification for liabilities arising under the Securities Act of 1933 is contrary to public policy and, therefore, is unenforceable. The Company also maintains directors and officers liability insurance for the benefit of its officers and directors. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is an itemization of fees and expenses, payable from the net proceeds of the offering, incurred by the Company in connection with the issuance and distribution of the securities of the Company being offered hereby. All fees and expenses are estimated except the SEC, NASD and Nasdaq Registration and Filing Fees. SEC Registration and Filing Fee..................................$7,744 NASD Registration and Filing Fee..................................1,685 Nasdaq Listing and Filing Fee....................................17,000 Financial Printing...............................................60,000 Transfer Agent Fees...............................................3,500 Accounting Fees and Expenses.....................................15,000 Legal Fees and Expenses..........................................60,000 Blue Sky Fees and Expenses.......................................70,000 Underwriter's Nonaccountable Expense Allowance..................180,000 Underwriter's Consulting Fee ...................................100,000 Miscellaneous................................................. 65,071 -------- TOTAL..................................................$580,000 ========
II-1 None of the foregoing expenses are being paid by the Selling Securityholders. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES The following information sets forth all securities of the Company sold by it within the past three (3) years (as adjusted for the proposed one-for-ten reverse split), which securities were not registered under the Securities Act of 1933, as amended: On March 31, 1995, the Company issued 384,409 shares of its Common Stock as consideration for the acquisition of Quest Electronic Hardware, Inc. ("Quest"). The securities were issued to the shareholders of Quest. On March 31, 1995, the Company issued 116,000 shares of its Common Stock pursuant to a private placement financing ("1995 Private Placement"), the proceeds of which were used to partially fund the acquisition of Quest. The securities were issued to: Phillip D. Schwiebert, Lyons Community Property Trust, James F. Kenefick, Ronald Messinger, Dr. Irving Kraut, Irving Kraut Pension, Martin Rothstein, Graco Holdings, Inc., Matthew T. Halton, Steven & Carol Reiss, Shih-Hsiang Lee, Achyut Sahasra, William J. McSherry, Jr., Melvin E. Liston, Gulfstream Financial Group and Robert P. Schmick. On March 31, 1995, the Underwriter, Biltmore Securities, Inc., in partial consideration of its serving as placement agent in connection with the 1995 Private Placement, was granted options to purchase 11,600 shares of Common Stock at $35.00 per share. In November 1994, the Company issued 200,000 units in a private placement financing ("1994 Private Placement"). Each unit consisted of a share of common stock and a Series III common stock purchase warrant ("Series III Warrant") to purchase one share of common stock at $3.50 per share. The securities were issued to: Phillip Barretti, David Beall, James Beckner, Andrew Berg, Harvey Bibicoff, Marc Burg, Robert Denton, Jim Dritz, Howard Goldrich, Jean Goldrich, Steve Goldrich, Bill Holmquist, Neil Kiperman, Ken Koock, Steve Krause, Jon Kraut, Dr. Irving Kraut, Irving Kraut, Jeff Leach, Susan and Howard Lowenstern, Jeffrey Morrison, Alex Moscowicz, Stelio Motti, Sergio Motti, Allen Notowitz, Martin Rinehart, Martin Rothstein, Lee Rough, Matthew Schilowitz, Harvey Schilowitz, Marc Siden and Ken Tripoli. The Underwriter also was issued 20,000 units as compensation for acting as placement agent for the company in connection with the 1994 Private Placements. In February 1994, the Company issued 34,261 Series II Warrants in exchange for previously issued Series I Warrants pursuant to an exchange offer ("1994 Exchange Offer") conducted on a private placement basis. The securities were issued to: J2 Holdings, Inc., Irving Stitsky, Dave Beall, Howard Gelfand, Robert Koch, Richard Miller, Daniel Porush, Steve Sanders, Jordan Shamah, Matt Bloom, Eric Blumen, Ira Boshnack, Neil Kipperman and Joe Teseo. The Underwriter also was issued 6,182 shares as compensation for acting as placement agent for the Company in connection with the 1994 Exchange Offer. Pursuant to a Consulting Agreement dated as of January 1, 1994, the Company issued to the Underwriter 25,000 shares of Common Stock and options which, after the application of anti-dilution provisions, represented the right to purchase 62,696 shares at $2.49 per share. During 1995 and 1996, a total of 25,870 shares of Common Stock were issued upon the exercise of certain of the above warrants and options. These shares were registered for resale by the selling securityholders under Registration Statements on Form S-3 (Nos. 33-63555 and 33-84222). II-2 Except as otherwise noted, the Company has relied on Section 4(2) of the Securities Act of 1933, as amended, for its private placement exemption, such that the sales of the securities were transactions by an issuer not involving any public offering. Reference is also made hereby to "Securities Ownership," "Certain Transactions," "Selling Securityholders" and "Description of Securities" in the Prospectus for more information with respect to the previous issuance and sale of the Company's securities. ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. The following is a list of Exhibits marked with an asterisk (*) filed herewith by the Company as part of the SB-2 Registration Statement and related Prospectus: 1.0 Form of Underwriting Agreement. 1.1 Form of Selected Dealers Agreement. 2.0 Stock Purchase Agreement dated as of December 16, 1996 relating to Webb Distribution, Inc. 3.0 Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3(i) to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1987 (File No. 0-13324). 3.1 Certificate of Amendment, dated March 20, 1985, to Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on March 9, 1995 (File No. 33-44331). 3.2 Certificate of Amendment, dated June 9, 1989, to Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 4.1 to the Registrant's Amendment No. 1 to Registration Statement on Form S-3 filed with the Securities and Exchange Commission dated March 9, 1995 (File No. 33-44331). 3.3 Certificate of Correction, dated May 17, 1991, to Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 4.1 to the Registrant's Amendment No. 1 to Registration Statement on Form S-3 filed with the Securities and Exchange Commission dated March 9, 1995 (File No. 33-44331). 3.4 Certificate of Amendment dated December 20, 1993, to Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3(i) to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1993 (File No. 0-13324). 3.5 Certificate of Amendment, dated December 22, 1993, to Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.3 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1993 (File No. 0-13324). 3.6 Certificate of Correction, dated July 19, 1994, to Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 4.1 to the Registrant's Amendment No. 1 to Registration Statement on Form S-3 filed with the Securities and Exchange Commission dated March 9, 1995 (File No. 33-44331). 3.7 Certificate of Amendment, dated April 2, 1996, to Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.5 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1995 (File No. 0-13324). 3.8 By-Laws of the Registrant, incorporated by reference to Exhibit 3b(ii) to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1987 (File No. 0-13324). 3.9 Amendment to By-Laws of the Registrant, incorporated by reference to Exhibit 3.4 of the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1992 (File No. 0-13324). 4.0 Specimen Common Stock Certificate (a). 4.1 Specimen Preferred Stock Certificate (a). 4.2 Certificate of Designations, Preferences and Rights of the Registrant's Series B Convertible Preferred Stock (a). 4.3 Form of Series IV Warrant Agreement. 4.4 Form of Series III Warrant Agreement, dated as of November 7, 1994, incorporated by reference to Exhibit 10.22 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 4.5 Form of Underwriters' Purchase Option. 4.6 Stock Purchase Warrant Certificate for Purchase of Common Stock of Questron Technology, Inc. 4.7 Certificate of Designation, Preferences and Rights of the Registrant's Series A Cumulative Convertible Preferred Stock, dated August 20, 1990, incorporated by reference to Exhibit 4(c) to the Registrant's Report on Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1989 (File No. 0-13324). 4.8 Certificate of Increase relating to Series A Cumulative Convertible Preferred Stock, dated February 20, 1991, incorporated by reference to Exhibit 4(d) to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1990 (File No. 0-13324). 4.9 Certificate of Designation establishing a series of shares of preferred stock, dated December 22, 1993, incorporated by reference to Exhibit 3.2 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1993 (File No. 0-13324). 5.0 Form of Opinion of Gould & Wilkie. 10.0 Judicate, Inc. 1994 Director Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 10.28 of the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1993 (File No. 0-13324). 10.1 Consulting Agreement, dated as of January 1, 1994, by and between Biltmore Securities, Inc. and the Registrant, incorporated by reference to Exhibit 10.23 of the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1993 (File No. 0-13324) and related stock option certificate and agreement by and between the Registrant and Biltmore Securities, Inc., dated January 1, 1994, incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-KSB filed II-3 with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.2 Employment Agreement, dated November 29, 1994, between Quest Electronic Hardware, Inc. and Dominic A. Polimeni, incorporated by reference to Exhibit 10.24 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.3 Employment Agreement, dated November 29, 1994, between Quest Electronic Hardware, Inc. and Phillip D. Schwiebert, incorporated by reference to Exhibit 10.25 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.4 Management Advisory and Consulting Agreement, dated as of November 29, 1994, between Gulfstream Financial Group, Inc. and the Registrant, incorporated by reference to Exhibit 10.26 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.5 Waiver, dated as of March 31, 1995, by Gulfstream Financial Group, Inc. and Philip D. Schwiebert, incorporated by reference to Exhibit 10.27 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.6 Share Acquisition Agreement, dated as of November 29, 1994, by and among Gulfstream Financial Group, Inc., Philip D. Schwiebert, Quest Electronic Hardware, Inc. and the Registrant, incorporated by reference to Exhibit 10.28 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.7 Purchase of Assets Agreement, dated as of November 29, 1994, between Quest Electronic Hardware, Inc. and Arrow Electronics, Inc., incorporated by reference to Exhibit 10.29 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.8 Loan and Security Agreement, dated as of March 31, 1995, between Silicon Valley Bank and Quest Electronics Hardware, Inc., incorporated by reference to Exhibit 10.30 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.9 Sublease Agreement, dated as of March 31, 1995, between Arrow Electronics, Inc. and Quest Electronic Hardware, Inc. with respect to Dallas, Texas property, incorporated by reference to Exhibit 10.31 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.10 Sublease Agreement, dated as of March 31, 1995, between Arrow Electronics, Inc. and Quest Electronic Hardware, Inc. with respect to Colorado Springs, Colorado property, incorporated by reference to Exhibit 10.32 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.11 Sublease Agreement, dated as of March 31, 1995, between Arrow Electronics, Inc. and Quest Electronic Hardware, Inc. with respect to San Jose, California property, incorporated by reference to Exhibit 10.33 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.12 Third Party Stock Pledge Agreement, dated as of March 31, 1995, between Silicon Valley Bank and the Registrant, incorporated by reference to Exhibit 10.34 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.13 Common Stock Purchase Option, dated as of March 31, 1995, for Biltmore Securities, Inc. incorporated by reference to Exhibit 10.35 to the Registrant's Form 10-KSB filed II-4 with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.14 Amendment No. 1, dated as of May 31, 1995, to the Loan and Security Agreement, dated as of March 31, 1995, between Silicon Valley Bank and Quest Electronics Hardware, Inc. incorporated by reference to Exhibit 10.25 to the Registrant's Form 10- KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1995 (File No. 0-13324). 10.15 Amendment No. 2, dated as of November 16, 1995, to the Loan and Security Agreement, dated as of March 31, 1995 between Silicon Valley Bank and Quest Electronics Hardware, Inc. incorporated by reference to Exhibit 10.26 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1995 (File No. 0-13324). 10.16 Amendment No. 3, dated as of February 23, 1995, to the Loan and Security Agreement, dated as of March 31, 1995, Between Silicon Valley Bank and Quest Electronics Hardware, Inc. incorporated by reference to Exhibit 10.27 to the Registrant's Form 10- KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1995 (File No. 0-13324). 10.17 Letter agreement, dated December 29, 1995, between the Registrant and Stephen J. Drescher incorporated by reference to Exhibit 10.28 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1995 (File No. 0-13324). 10.18 Letter agreement, dated December 29, 1995, between the Registrant and Paul L. Burton incorporated by reference to Exhibit 10.29 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1995 (File No. 0-13324). 10.19 1996 Stock Option Plan. 10.20 Form of Warrant Exercise Fee Agreement, by and among Biltmore Securities, Inc., the Registrant and American Stock Transfer & Trust Company (a). 10.21 Exchange Agreement, dated November 8, 1996 by and among the Registrant, Gulfstream Financial Group, Inc. and Phillip D. Schwiebert. 11.0 Statement Re: Computation of per share earnings for years ended December 31, 1995 and 1994. 22.0 Subsidiaries of the Registrant. 24.0 Consent of Gould & Wilkie (See Exhibit 5.0). 24.1 Consent of Estabrook & Co., Inc., P.C. 24.2 Consent of Moore Stephens, P.C. - ------------ (a) To be filed by amendment. ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to participating broker-dealers, at the closing, certificates in such denominations and registered in such names as required by the participating broker-dealers, to permit prompt delivery to each purchaser. The undersigned Registrant also undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, II-5 individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3 or Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or preceding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Boca Raton, Florida, on December 17, 1996. QUESTRON TECHNOLOGY, INC. By: /s/ DOMINIC A. POLIMENI ------------------------------ Dominic A. Polimeni Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DOMINIC A. POLIMENI Chairman, President, Chief December 17, 1996 - --------------------------- Executive Officer and Director Dominic A. Polimeni (Principal Executive Officer) /s/ MILTON M. ADLER Treasurer, Secretary, Controller and December 17, 1996 - ---------------------------- Director (Principal Financial and Milton M. Adler Accounting Officer) /s/ ROBERT V. GUBITOSI Director December 17, 1996 - ---------------------------- Robert V. Gubitosi /s/ MITCHELL HYMOWITZ Director December 17, 1996 - ---------------------------- Mitchell Hymowitz /s/ WILLIAM J. MCSHERRY, JR. Director December 17, 1996 - ---------------------------- William J. McSherry, Jr.
INDEX TO EXHIBITS 1.0 Form of Underwriting Agreement. 1.1 Form of Selected Dealers Agreement. 2.0 Stock Purchase Agreement dated as of December 16, 1996 relating to Webb Distribution, Inc. 3.0 Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3(i) to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1987 (File No. 0-13324). 3.1 Certificate of Amendment, dated March 20, 1985, to Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on March 9, 1995 (File No. 33-44331). 3.2 Certificate of Amendment, dated June 9, 1989, to Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 4.1 to the Registrant's Amendment No. 1 to Registration Statement on Form S-3 filed with the Securities and Exchange Commission dated March 9, 1995 (File No. 33-44331). 3.3 Certificate of Correction, dated May 17, 1991, to Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 4.1 to the Registrant's Amendment No. 1 to Registration Statement on Form S-3 filed with the Securities and Exchange Commission dated March 9, 1995 (File No. 33-44331). 3.4 Certificate of Amendment dated December 20, 1993, to Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3(i) to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1993 (File No. 0-13324). 3.5 Certificate of Amendment, dated December 22, 1993, to Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.3 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1993 (File No. 0-13324). 3.6 Certificate of Correction, dated July 19, 1994, to Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 4.1 to the Registrant's Amendment No. 1 to Registration Statement on Form S-3 filed with the Securities and Exchange Commission dated March 9, 1995 (File No. 33-44331). 3.7 Certificate of Amendment, dated April 2, 1996, to Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.5 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1995 (File No. 0-13324). 3.8 By-Laws of the Registrant, incorporated by reference to Exhibit 3b(ii) to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1987 (File No. 0-13324). 3.9 Amendment to By-Laws of the Registrant, incorporated by reference to Exhibit 3.4 of the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1992 (File No. 0-13324). 4.0 Specimen Common Stock Certificate (a). 4.1 Specimen Preferred Stock Certificate (a). 4.2 Certificate of Designations, Preferences and Rights of the Registrant's Series B Convertible Preferred Stock (a). 4.3 Form of Series IV Warrant Agreement. 4.4 Form of Series III Warrant Agreement, dated as of November 7, 1994, incorporated by reference to Exhibit 10.22 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 4.5 Form of Underwriters' Purchase Option. 4.6 Stock Purchase Warrant Certificate for Purchase of Common Stock of Questron Technology, Inc. 4.7 Certificate of Designation, Preferences and Rights of the Registrant's Series A Cumulative Convertible Preferred Stock, dated August 20, 1990, incorporated by reference to Exhibit 4(c) to the Registrant's Report on Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1989 (File No. 0-13324). 4.8 Certificate of Increase relating to Series A Cumulative Convertible Preferred Stock, dated February 20, 1991, incorporated by reference to Exhibit 4(d) to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1990 (File No. 0-13324). 4.9 Certificate of Designation establishing a series of shares of preferred stock, dated December 22, 1993, incorporated by reference to Exhibit 3.2 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1993 (File No. 0-13324). 5.0 Form of Opinion of Gould & Wilkie. 10.0 Judicate, Inc. 1994 Director Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 10.28 of the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1993 (File No. 0-13324). 10.1 Consulting Agreement, dated as of January 1, 1994, by and between Biltmore Securities, Inc. and the Registrant, incorporated by reference to Exhibit 10.23 of the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1993 (File No. 0-13324) and related stock option certificate and agreement by and between the Registrant and Biltmore Securities, Inc., dated January 1, 1994, incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.2 Employment Agreement, dated November 29, 1994, between Quest Electronic Hardware, Inc. and Dominic A. Polimeni, incorporated by reference to Exhibit 10.24 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.3 Employment Agreement, dated November 29, 1994, between Quest Electronic Hardware, Inc. and Phillip D. Schwiebert, incorporated by reference to Exhibit 10.25 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.4 Management Advisory and Consulting Agreement, dated as of November 29, 1994, between Gulfstream Financial Group, Inc. and the Registrant, incorporated by reference to Exhibit 10.26 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.5 Waiver, dated as of March 31, 1995, by Gulfstream Financial Group, Inc. and Philip D. Schwiebert, incorporated by reference to Exhibit 10.27 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.6 Share Acquisition Agreement, dated as of November 29, 1994, by and among Gulfstream Financial Group, Inc., Philip D. Schwiebert, Quest Electronic Hardware, Inc. and the Registrant, incorporated by reference to Exhibit 10.28 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.7 Purchase of Assets Agreement, dated as of November 29, 1994, between Quest Electronic Hardware, Inc. and Arrow Electronics, Inc., incorporated by reference to Exhibit 10.29 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.8 Loan and Security Agreement, dated as of March 31, 1995, between Silicon Valley Bank and Quest Electronics Hardware, Inc., incorporated by reference to Exhibit 10.30 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.9 Sublease Agreement, dated as of March 31, 1995, between Arrow Electronics, Inc. and Quest Electronic Hardware, Inc. with respect to Dallas, Texas property, incorporated by reference to Exhibit 10.31 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.10 Sublease Agreement, dated as of March 31, 1995, between Arrow Electronics, Inc. and Quest Electronic Hardware, Inc. with respect to Colorado Springs, Colorado property, incorporated by reference to Exhibit 10.32 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.11 Sublease Agreement, dated as of March 31, 1995, between Arrow Electronics, Inc. and Quest Electronic Hardware, Inc. with respect to San Jose, California property, incorporated by reference to Exhibit 10.33 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.12 Third Party Stock Pledge Agreement, dated as of March 31, 1995, between Silicon Valley Bank and the Registrant, incorporated by reference to Exhibit 10.34 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.13 Common Stock Purchase Option, dated as of March 31, 1995, for Biltmore Securities, Inc. incorporated by reference to Exhibit 10.35 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1994 (File No. 0-13324). 10.14 Amendment No. 1, dated as of May 31, 1995, to the Loan and Security Agreement, dated as of March 31, 1995, between Silicon Valley Bank and Quest Electronics Hardware, Inc. incorporated by reference to Exhibit 10.25 to the Registrant's Form 10- KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1995 (File No. 0-13324). 10.15 Amendment No. 2, dated as of November 16, 1995, to the Loan and Security Agreement, dated as of March 31, 1995 between Silicon Valley Bank and Quest Electronics Hardware, Inc. incorporated by reference to Exhibit 10.26 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1995 (File No. 0-13324). 10.16 Amendment No. 3, dated as of February 23, 1995, to the Loan and Security Agreement, dated as of March 31, 1995, Between Silicon Valley Bank and Quest Electronics Hardware, Inc. incorporated by reference to Exhibit 10.27 to the Registrant's Form 10- KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1995 (File No. 0-13324). 10.17 Letter agreement, dated December 29, 1995, between the Registrant and Stephen J. Drescher incorporated by reference to Exhibit 10.28 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1995 (File No. 0-13324). 10.18 Letter agreement, dated December 29, 1995, between the Registrant and Paul L. Burton incorporated by reference to Exhibit 10.29 to the Registrant's Form 10-KSB filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1995 (File No. 0-13324). 10.19 1996 Stock Option Plan. 10.20 Form of Warrant Exercise Fee Agreement, by and among Biltmore Securities, Inc., the Registrant and American Stock Transfer & Trust Company (a). 10.21 Exchange Agreement, dated November 8, 1996 by and among the Registrant, Gulfstream Financial Group, Inc. and Phillip D. Schwiebert. 11.0 Statement Re: Computation of per share earnings for years ended December 31, 1995 and 1994. 22.0 Subsidiaries of the Registrant. 24.0 Consent of Gould & Wilkie (See Exhibit 5.0). 24.1 Consent of Estabrook & Co., Inc., P.C. 24.2 Consent of Moore Stephens, P.C. - ------------ (a) To be filed by amendment. EX-1.0 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.0 1,000,000 Units, each Unit consisting of one (1) Share of Series B Convertible Preferred Stock, par value $.01 per share and one (1) Series IV Redeemable Common Stock Purchase Warrant Questron Technology, Inc. UNDERWRITING AGREEMENT ---------------------- New York, New York ___________, 1997 Biltmore Securities, Inc. 6700 North Andrews Avenue Suite 500 Fort Lauderdale, FL 33309 Questron Technology, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to you (the "Underwriter"), an aggregate of 1,000,000 Units, each consisting of one (1) share of Series B Convertible Preferred Stock, par value $.01 per share ("Preferred Stock") and one (1) Series IV Redeemable Common Stock Purchase Warrant ("Warrant"). The Units may be referred to hereinafter as the "Securities". Each Warrant entitles the registered holder thereof to purchase one (1) share of Common Stock, par value $.001 per share ("Common Stock") at an exercise price of 115% of the closing market price per share of the Common Stock on the day immediately preceding the proposed offering of the Preferred Stock for a period of four (4) years, commencing ______________ 1998, one (1) year from the effective date of the public offering ("Effective Date") through ______________, 2002. The Warrants are subject to redemption by the Company at any time commencing ______________, 1998 (twelve (12) months from the Effective Date) at $.05 per warrant, if the closing bid price per share of Common Stock has equaled or exceeded 170% of the closing bid price of the Common Stock on the Effective Date for any 20 consecutive trading days ending within 10 days of the written notice of redemption. In addition, the Company proposes to grant to the Underwriter the option referred to in Section 2(b) to purchase all or any part of an aggregate of 150,000 additional Units. You have advised the Company that you desire to purchase the Securities. The Company confirms the agreements made by it with respect to the purchase of the Securities by the Underwriter as follows: 1. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with you that: (a) A registration statement (File No. _____) on Form SB-2 relating to the public offering of the Securities, including a form of prospectus subject to completion, copies of which have heretofore been delivered to you, has been prepared in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission under the Act and one or more amendments to such registration statement may have been so filed. After the execution of this Agreement, the Company will file with the Commission either (i) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed in such registration statement), with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act and as have been provided to and approved by you prior to the execution of this Agreement, or (ii) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by you prior to the execution of this Agreement. As used in this Agreement, the term "Company" means Questron Technology, Inc. and/or each of its subsidiaries ("Subsidiaries"); the term "Registration Statement" means such registration statement, as amended at the time when it was or is declared effective, including all financial schedules and exhibits thereto and including any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined); the term "Preliminary Prospectus" means each prospectus subject to completion filed with such registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time it was or is declared effective); and the term "Prospectus" means the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act, or, if no prospectus is required to be filed pursuant to said Rule 424(b), such term means the prospectus included in the Registration Statement; except that if such registration statement or prospectus is amended or such prospectus is supplemented, after the effective date of such registration statement and prior to the Option Closing Date (as hereinafter defined), the terms "Registration Statement" and "Prospectus" shall include such registration statement and prospectus as so amended, and the term "Prospectus" shall include the prospectus as so supplemented, or both, as the case may be. 2 (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. At the time the Registration Statement becomes effective and at all times subsequent thereto up to and on the First Closing Date (as hereinafter defined) or the Option Closing Date, as the case may be, (i) the Registration Statement and Prospectus will in all respects conform to the requirements of the Act and the Rules and Regulations; and (ii) neither the Registration Statement nor the Prospectus will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make statements therein not misleading; provided, however, that the Company makes no representations, warranties or agreements as to information contained in or omitted from the Registration Statement or Prospectus in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of the Underwriter specifically for use in the preparation thereof. It is understood that the statements set forth in the Prospectus with respect to stabilization, under the heading "Underwriting", the Risk Factor entitled "Litigation Involving Underwriter May Affect Securities" and the identity of counsel to the Underwriter under the heading "Legal Matters" constitute for purposes of this Section and Section 6(b) the only information furnished in writing by or on behalf of the Underwriter for inclusion in the Registration Statement and Prospectus, as the case may be. (c) The Company and its Subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation with full corporate power and authority to own their properties and conduct their business as described in the Prospectus and are duly qualified or licensed to do business as foreign corporations and are in good standing in each other jurisdiction in which the nature of their business or the character or location of their properties require such qualification, except where the failure to so qualify will not materially adversely affect the Company's or Subsidiaries' business, properties or financial condition. (d) The authorized, issued and outstanding capital stock of the Company and its Subsidiaries, including the predecessors of the Company, is as set forth in the Company's financial statements contained in the Registration Statement; the shares of issued and outstanding capital stock of the Company and its Subsidiaries set forth therein have been duly authorized, validly issued and are fully paid and nonassessable; except as set forth in the Prospectus, no options, warrants, or other rights to purchase, agreements or other obligations to issue, or agreements or other rights to convert any obligation into, any shares of capital stock of the Company or its Subsidiaries have been granted or entered into by the Company or its Subsidiaries; and the capital stock conforms to all statements relating thereto contained in the Registration Statement and Prospectus. (e) The shares of Preferred Stock underlying the Units, when paid for, issued and delivered pursuant to this Agreement, will have been duly authorized, issued and delivered and will constitute valid and legally binding obligations of the Company enforceable in 3 accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or other laws affecting the right of creditors generally or by general equitable principles, and entitled to the rights and preferences provided by the Certificate of Incorporation, which will be in the form filed as an exhibit to the Registration Statement. The terms of the Preferred Stock conform to the description thereof in the Registration Statement and Prospectus. The Warrants when paid for, issued and delivered pursuant to this Agreement, will have been duly authorized, issued and delivered and will constitute valid and legally binding obligations of the Company enforceable in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or other laws affecting the right of creditors generally or by general equitable principles, and entitled to the benefits provided by the warrant agreement pursuant to which such Warrants are to be issued (the "Warrant Agreement"), which will be substantially in the form filed as an exhibit to the Registration Statement. The shares of Common Stock issuable upon exercise of the Warrants have been reserved for issuance upon the exercise of the Warrants and when issued in accordance with the terms of the Warrants and Warrant Agreement, will be duly and validly authorized validly issued, fully paid and non-assessable and free of preemptive rights. The Warrant Agreement has been duly authorized and, when executed and delivered pursuant to this Agreement, assuming due authorization, execution and delivery by the transfer agent, will have been duly executed and delivered and will constitute the valid and legally binding obligation of the Company enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other laws affecting the rights of creditors generally or by general equitable principles. The Warrants and Warrant Agreement conform to the respective descriptions thereof in the Registration Statement and Prospectus. The Purchase Option (as defined in the Registration Statement), when paid for, issued and delivered pursuant to this Agreement will constitute valid and legally binding obligations of the Company enforceable in accordance with its terms and entitled to the benefits provided by the Purchase Option, except as enforceability may be limited by bankruptcy, insolvency or other laws affecting the rights of creditors generally or by general equitable principles. The Securities issuable upon exercise of the Purchase Option (and the shares of Common Stock issuable upon exercise of the Warrants) when issued and paid for in accordance with this Agreement, the Purchase Option and the Warrant Agreement, will be duly authorized, validly issued, fully paid and non-assessable and free of preemptive rights. (f) This Agreement has been duly and validly authorized, executed and delivered by the Company. The Company has full power and authority to authorize, issue and sell the Securities to be sold by it hereunder on the terms and conditions set forth herein, and no consent, approval, authorization or other order of any governmental authority is required in connection with such authorization, execution and delivery or in connection with the 4 authorization, issuance and sale of the Securities or the Purchase Option, except such as may be required under the Act or state securities laws. (g) Except as described in the Prospectus, or which would not have a material adverse effect on the condition (financial or otherwise), business prospects, net worth or properties of the Company and the Subsidiaries taken as a whole (a "Material Adverse Effect"), the Company and its Subsidiaries are not in violation, breach or default of or under, and consummation of the transactions herein contemplated and the fulfillment of the terms of this Agreement will not conflict with, or result in a breach or violation of, any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the property or assets of the Company or its Subsidiaries pursuant to the terms of any material indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or its Subsidiaries is a party or by which the Company or its Subsidiaries may be bound or to which any of the property or assets of the Company or its Subsidiaries is subject, nor will such action result in any violation of the provisions of the certificate of incorporation or the by-laws of the Company or its Subsidiaries, as amended, or any statute or any order, rule or regulation applicable to the Company or its Subsidiaries of any court or of any regulatory authority or other governmental body having jurisdiction over the Company or its Subsidiaries. (h) Subject to the qualifications stated in the Prospectus, the Company and its Subsidiaries have good and marketable title to all properties and assets described in the Prospectus as owned by them, free and clear of all liens, charges, encumbrances or restrictions, except such as are not materially significant or important in relation to their business; all of the material leases and subleases under which the Company or its Subsidiaries is the lessor or sublessor of properties or assets or under which the Company and its Subsidiaries holds properties or assets as lessee or sublessee as described in the Prospectus are in full force and effect, and, except as described in the Prospectus, the Company and its Subsidiaries are not in default in any material respect with respect to any of the terms or provisions of any of such leases or subleases, and, to the best knowledge of the Company, no claim has been asserted by anyone adverse to rights of the Company or its Subsidiaries as lessor, sublessor, lessee or sublessee under any of the leases or subleases mentioned above, or affecting or questioning the right of the Company or its Subsidiaries to continued possession of the leased or subleased premises or assets under any such lease or sublease except as described or referred to in the Prospectus; and the Company and its Subsidiaries own or lease all such properties described in the Prospectus as are necessary to their operations as now conducted and, except as otherwise stated in the Prospectus, as proposed to be conducted as set forth in the Prospectus. (i) Moore Stephens, P.C., which has given its report on certain financial statements filed with the Commission as a part of the Registration Statement, is with respect to 5 the Company, independent public accountants as required by the Act and the Rules and Regulations. (j) The financial statements, and schedules together with related notes, set forth in the Prospectus or the Registration Statement present fairly the financial position and results of operations and changes in cash flow position of the Company and its Subsidiaries on the basis stated in the Registration Statement, at the respective dates and for the respective periods to which they apply. Said statements and schedules and related notes have been prepared in accordance with generally accepted accounting principles applied on a basis which is consistent during the periods involved except as disclosed in the Prospectus and Registration Statement. (k) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus and except as otherwise disclosed or contemplated therein, the Company and its Subsidiaries have not incurred any liabilities or obligations, direct or contingent, not in the ordinary course of business, or entered into any transaction not in the ordinary course of business, which would have a Material Adverse Effect, and there has not been any change in the capital stock of, or any incurrence of short-term or long-term debt by, the Company or its Subsidiaries or any issuance of options, warrants or other rights to purchase the capital stock of the Company or its Subsidiaries or any material adverse change or any development involving, so far as the Company or its Subsidiaries can now reasonably foresee a prospective adverse change in the condition (financial or otherwise), net worth, results of operations, business, key personnel or properties of it which would have a Material Adverse Effect. (l) Except as set forth in the Prospectus, there is not now pending or, to the knowledge of the Company, threatened, any action, suit or proceeding to which the Company or its Subsidiaries is a party before or by any court or governmental agency or body, which might result in any material adverse change in the financial condition, business prospects, net worth, or properties of the Company or its Subsidiaries, nor are there any actions, suits or proceedings related to environmental matters or related to discrimination on the basis of age, sex, religion or race; and no labor disputes involving the employees of the Company or its Subsidiaries exist or to the knowledge of the Company, are threatened which might be expected to have a Material Adverse Effect. (m) Except as disclosed in the Prospectus, the Company and its Subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns required to be filed as of the date hereof and have paid all taxes shown as due thereon; and there is no tax deficiency which has been, or to the knowledge of the party, may be asserted against the Company or its Subsidiaries. 6 (n) Except as disclosed in the Registration Statement or Prospectus, the Company and its Subsidiaries have sufficient licenses, permits and other governmental authorizations currently necessary for the conduct of their business or the ownership of their properties as described in the Prospectus and is in all material respects complying therewith and owns or possesses adequate rights to use all material patents, patent applications, trademarks, service marks, trade-names, trademark registrations, service mark registrations, copyrights and licenses necessary for the conduct of such businesses and have not received any notice of conflict with the asserted rights of others in respect thereof. To the best knowledge of the Company, none of the activities or business of the Company and its Subsidiaries are in violation of, or cause the Company or its Subsidiaries to violate, any law, rule, regulation or order of the United States, any state, county or locality, or of any agency or body of the United States or of any state, county or locality, the violation of which would have a Material Adverse Effect. (o) The Company and its Subsidiaries have not, directly or indirectly, at any time (i) made any contributions to any candidate for political office, or failed to disclose fully any such contribution in violation of law or (ii) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments or contributions required or allowed by applicable law. The Company's and Subsidiaries' internal accounting controls and procedures are sufficient to cause the Company and its Subsidiaries to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended. (p) On the Closing Dates (hereinafter defined) all transfer or other taxes, (including franchise, capital stock or other tax, other than income taxes, imposed by any jurisdiction) if any, which are required to be paid in connection with the sale and transfer of the Securities to the Underwriter hereunder will have been fully paid or provided for by the Company and all laws imposing such taxes will have been complied with in all material respects. (q) All contracts and other documents of the Company which are, under the Rules and Regulations, required to be filed as exhibits to the Registration Statement have been so filed. (r) Except as disclosed in the Registration Statement, the Company has no Subsidiaries. (s) Except as disclosed in the Registration Statement, the Company has not entered into any agreement pursuant to which any person is entitled either directly or indirectly to compensation from the Company for services as a finder in connection with the proposed public offering. 7 (t) Except as previously disclosed in writing by the Company to the Underwriter or as disclosed in the Registration Statement, no officer, director or stockholder of the Company has any National Association of Securities Dealers, Inc. (the "NASD") affiliation. (u) No other firm, corporation or person has any rights to underwrite an offering of any of the Company's securities. 2. Purchase, Delivery and Sale of the Securities. (a) Subject to the terms and conditions of this Agreement, and upon the basis of the representations, warranties, and agreements herein contained, the Company agrees to issue and sell to the Underwriter and the Underwriter agrees to buy from the Company at $5.40 per Unit, at the place and time hereinafter specified, 1,000,000 Units (the "First Securities"). Delivery of the First Securities against payment therefor shall take place at the offices of Bernstein & Wasserman, LLP, 950 Third Avenue, New York, New York (or at such other place as may be designated by agreement between the Underwriter and the Company) at 10:00 a.m., New York time, on , 1997, such time and date of payment and delivery for the First Securities being herein called the "First Closing Date." (b) In addition, subject to the terms and conditions of this Agreement, and upon the basis of the representations, warranties and agreements herein contained, the Company hereby grants an option to the Underwriter (the "Over-Allotment Option") to purchase all or any part of an aggregate of an additional 150,000 Units to cover over allotments at the same price per Unit as the Underwriter shall pay for the First Securities being sold pursuant to the provisions of subsection (a) of this Section 2 (such additional Securities being referred to herein as the "Option Securities"). This option may be exercised within 30 days after the effective date of the Registration Statement upon written notice by the Underwriter to the Company advising as to the amount of Option Securities as to which the option is being exercised, the names and denominations in which the certificates for such Option Securities are to be registered and the time and date when such certificates are to be delivered. Such time and date shall be determined by the Underwriter but shall not be earlier than four nor later than ten full business days after the exercise of said option (but in no event more than 40 days after the First Closing Date), nor in any event prior to the First Closing Date, and such time and date is referred to herein as the "Option Closing Date." Delivery of the Option Securities against payment therefor shall take place at the offices of Bernstein & Wasserman, LLP, 950 Third Avenue, New York, NY 10022 (or at such other place as may be designated by agreement between the Underwriter and the Company). The option granted hereunder may be exercised only to cover over-allotments in the sale by the Underwriter of First Securities referred to in subsection (a) above. No Option Securities shall be delivered unless all First Securities shall have been delivered to the Underwriter as provided herein. 8 (c) The Company will make the certificates for the Securities to be purchased by the Underwriter hereunder available to you for checking at least two full business days prior to the First Closing Date or the Option Closing Date (which are collectively referred to herein as the "Closing Dates"). The certificates shall be in such names and denominations as you may request, at least three full business days prior to the Closing Dates. Delivery of the certificates at the time and place specified in this Agreement is a further condition to the obligations of the Underwriter. Definitive certificates in negotiable form for the Securities to be purchased by the Underwriter hereunder will be delivered by the Company to you for the account of the Underwriter against payment of the respective purchase prices by the Underwriter, by wire transfer or certified or bank cashier's checks in New York Clearing House funds, payable to the order of the Company. In addition, in the event the Underwriter exercises the option to purchase from the Company all or any portion of the Option Securities pursuant to the provisions of subsection (b) above, payment for such Securities shall be made to or upon the order of the Company by wire transfer or certified or bank cashier's checks payable in New York Clearing House funds at the offices of Bernstein & Wasserman, LLP, 950 Third Avenue, New York, N.Y., at the time and date of delivery of such Securities as required by the provisions of subsection (b) above, against receipt of the certificates for such Securities by you for your account registered in such names and in such denominations as you may reasonably request. It is understood that the Underwriter proposes to offer the Securities to be purchased hereunder to the public upon the terms and conditions set forth in the Registration Statement, after the Registration Statement becomes effective. 3. Covenants of the Company. The Company covenants and agrees with the Underwriter that: (a) The Company will use its best efforts to cause the Registration Statement to become effective. If required, the Company will file the Prospectus and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rule 424(b) under the Act. Upon notification from the Commission that the Registration Statement has become effective, the Company will so advise you and will not at any time, whether before or after the effective date, file any amendment to the Registration Statement or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you or your counsel shall have reasonably objected in writing or which is not in compliance with the Act and the Rules and Regulations. At any time prior to the later of (A) the completion by the Underwriter of the distribution of the Securities contemplated hereby (but in no event more than nine months after the date on which the Registration 9 Statement shall have become or been declared effective) and (B) 25 days after the date on which the Registration Statement shall have become or been declared effective, the Company will prepare and file with the Commission, promptly upon your request, any amendments or supplements to the Registration Statement or Prospectus which, in the opinion of counsel to the Company and the Underwriter, may be reasonably necessary or advisable in connection with the distribution of the Securities. As soon as the Company is advised thereof, the Company will advise you, and provide you copies of any written advice, of the receipt of any comments of the Commission, of the effectiveness of any post-effective amendment to the Registration Statement, of the filing of any supplement to the Prospectus or any amended Prospectus, of any request made by the Commission for an amendment of the Registration Statement or for supplementing of the Prospectus or for additional information with respect thereto, of the issuance by the Commission or any state or regulatory body of any stop order or other order or threat thereof suspending the effectiveness of the Registration Statement or any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering in any jurisdiction, or of the institution of any proceedings for any of such purposes, and will use its best efforts to prevent the issuance of any such order, and, if issued, to obtain as soon as possible the lifting thereof. The Company has caused to be delivered to you copies of each Preliminary Prospectus, and the Company has consented and hereby consents to the use of such copies for the purposes permitted by the Act. The Company authorizes the Underwriter and dealers to use the Prospectus in connection with the sale of the Securities for such period as in the opinion of counsel to the Underwriter and the Company the use thereof is required to comply with the applicable provisions of the Act and the Rules and Regulations. In case of the happening, at any time within such period as a Prospectus is required under the Act to be delivered in connection with sales by the Underwriter or dealer of any event of which the Company has knowledge and which materially affects the Company or the securities of the Company, or which in the opinion of counsel for the Company and counsel for the Underwriter should be set forth in an amendment of the Registration Statement or a supplement to the Prospectus in order to make the statements therein not then misleading, in light of the circumstances existing at the time the Prospectus is required to be delivered to a purchaser of the Securities or in case it shall be necessary to amend or supplement the Prospectus to comply with law or with the Rules and Regulations, the Company will notify you promptly and forthwith prepare and furnish to you copies of such amended Prospectus or of such supplement to be attached to the Prospectus, in such quantities as you may reasonably request, in order that the Prospectus, as so amended or supplemented, will not contain any untrue statement of a material fact or omit to state any material facts necessary in order to make the statements in the Prospectus, in the light of the circumstances under which they are made, not misleading. The preparation and furnishing of any such amendment or supplement to the Registration Statement or amended Prospectus or 10 supplement to be attached to the Prospectus shall be without expense to the Underwriter, except that in case the Representative is required, in connection with the sale of the Securities to deliver a Prospectus nine months or more after the effective date of the Registration Statement, the Company will upon request of and at the expense of the Underwriter, amend or supplement the Registration Statement and Prospectus and furnish the Underwriter with reasonable quantities of prospectuses complying with Section 10(a)(3) of the Act. The Company will comply with the Act, the Rules and Regulations and the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and regulations thereunder in connection with the offering and issuance of the Securities. (b) The Company will furnish such information as may be required and to otherwise cooperate and use its best efforts to qualify or register the Securities for sale under the securities or "blue sky" laws of such jurisdictions as you may designate and will make such applications and furnish such information as may be required for that purpose and to comply with such laws, provided the Company shall not be required to qualify as a foreign corporation or a dealer in securities or to execute a general consent of service of process in any jurisdiction in any action other than one arising out of the offering or sale of the Securities. The Company will, from time to time, prepare and file such statements and reports as are or may be required to continue such qualification in effect for so long a period as the counsel to the Company and the Underwriter deem reasonably necessary. (c) If the sale of the Securities provided for herein is not consummated as a result of the Company not performing its obligations hereunder in all material respects, the Company shall pay all costs and expenses incurred by it which are incident to the performance of the Company's obligations hereunder, including but not limited to, all of the expenses itemized in Section 8, including the accountable expenses of the Underwriter, up to $100,000 (including the reasonable fees and expenses of counsel to the Underwriter). (d) The Company will use its best efforts to (i) cause a registration statement under the Exchange Act to be declared effective concurrently with the completion of this offering and will notify you in writing immediately upon the effectiveness of such registration statement, and (ii) to obtain and keep current a listing in the Standard & Poors or Moody's OTC Industrial Manual. (e) For so long as the Company is a reporting company under either Section 12(g) or 15(d) of the Exchange Act, the Company, at its expense, will furnish to its stockholders an annual report (including financial statements audited by independent public accountants), in reasonable detail and at its expense, will furnish to you during the period ending five (5) years from the date hereof, (i) as soon as practicable after the end of each fiscal year, but no earlier than the filing of such information with the Commission a balance sheet of the Company and any 11 of its Subsidiaries as at the end of such fiscal year, together with statements of income, surplus and cash flow of the Company and any Subsidiaries for such fiscal year, all in reasonable detail and accompanied by a copy of the certificate or report thereon of independent accountants; (ii) as soon as practicable after the end of each of the first three fiscal quarters of each fiscal year, but no earlier than the filing of such information with the Commission, consolidated summary financial information of the Company for such quarter in reasonable detail; (iii) as soon as they are publicly available, a copy of all reports (financial or other) mailed to security holders; (iv) as soon as they are available, a copy of all non-confidential reports and financial statements furnished to or filed with the Commission or any securities exchange or automated quotation system on which any class of securities of the Company is listed; and (v) such other information as you may from time to time reasonably request. (f) In the event the Company has an active subsidiary or Subsidiaries, such financial statements referred to in subsection (e) above will be on a consolidated basis to the extent the accounts of the Company and its subsidiary or Subsidiaries are consolidated in reports furnished to its stockholders generally. (g) The Company will deliver to you at or before the First Closing Date two signed copies of the Registration Statement including all financial statements and exhibits filed therewith, and of all amendments thereto, and will deliver to the Underwriter such number of conformed copies of the Registration Statement, including such financial statements but without exhibits, and of all amendments thereto, as the Underwriter may reasonably request. The Company will deliver to or upon your order, from time to time until the effective date of the Registration Statement, as many copies of any Preliminary Prospectus filed with the Commission prior to the effective date of the Registration Statement as you may reasonably request. The Company will deliver to the Underwriter on the effective date of the Registration Statement and thereafter for so long as a Prospectus is required to be delivered under the Act, from time to time, as many copies of the Prospectus, in final form, or as thereafter amended or supplemented, as the Underwriter may from time to time reasonably request. (h) The Company will make generally available to its security holders and to the registered holders of its Warrants and deliver to you as soon as it is practicable to do so but in no event later than 90 days after the end of twelve months after its current fiscal quarter, an earnings statement (which need not be audited) covering a period of at least twelve consecutive months beginning after the effective date of the Registration Statement, which shall satisfy the requirements of Section 11(a) of the Act. (i) The Company will apply the net proceeds from the sale of the Securities substantially for the purposes set forth under "Use of Proceeds" in the Prospectus. 12 (j) The Company will promptly prepare and file with the Commission any amendments or supplements to the Registration Statement, Preliminary Prospectus or Prospectus and take any other action, which in the opinion of counsel to the Underwriter and counsel to the Company, may be reasonably necessary or advisable in connection with the distribution of the Securities, and will use its best efforts to cause the same to become effective as promptly as possible. (k) The Company will reserve and keep available the maximum number of its authorized but unissued securities which are issuable upon exercise of the Purchase Option outstanding from time to time. (l) Upon completion of this offering, the Company will make all filings required, including registration under the Exchange Act, to obtain the listing of the Units, Preferred Stock and the Warrants in the NASDAQ SmallCap Market system, and will use its best efforts to effect and maintain such listing for at least five years from the date of this Agreement. (m) Except for the transactions contemplated by this Agreement and as disclosed in the Prospectus, the Company represents that it has not taken and agrees that it will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of any of the Securities. (n) On the First Closing Date and simultaneously with the delivery of the Securities, the Company shall execute and deliver to you the Purchase Option. The Purchase Option will be substantially in the form filed as an Exhibit to the Registration Statement. (o) On the First Closing Date, the Company will complete the acquisition of Comp Ware Inc. d/b/a Webb Distribution, Inc."Webb"), a Delaware corporation, the principals of Webb receiving $3,250,000 and 1,500,000 Series IV Warrants. Such Warrants, which will be included in the Registration Statement, are subject to an eighteen (18) month (p) So long as any Warrants are outstanding and the exercise price of the Warrants is less than the market price of the Common Stock, the Company shall use its best efforts to cause post-effective amendments to the Registration Statement to become effective in compliance with the Act and without any lapse of time between the effectiveness of any such post-effective amendments and cause a copy of each Prospectus, as then amended, to be delivered to each holder of record of a Warrant and to furnish to the Underwriter as many copies of each such Prospectus as such Underwriter or dealer may reasonably request. The Company shall not call for redemption of any of the Warrants unless a registration statement covering the 13 securities underlying the Warrants has been declared effective by the Commission and remains current at least until the date fixed for redemption. (q) For a period of five (5) years from the Effective Date, the Company, at its expense, shall cause its regularly engaged independent certified public accountants to review (but not audit) the Company's financial statements for each of the first three (3) fiscal quarters prior to the announcement of quarterly financial information, the filing of the Company's 10-Q quarterly report and the mailing of quarterly financial information to Securityholders, provided that the Company shall not be required to file a report of such accountants relating to such review with the Commission. (r) The Company agrees to pay the Underwriter a warrant solicitation fee of 4.0% of the exercise price of any of the Warrants exercised beginning one (1) year after the Effective Date (not including warrants exercised by the Underwriter) if (a) the market price of the Company's Common Stock on the date the Warrant is exercised is greater than the exercise price of the Warrant, (b) the exercise of the Warrant was solicited by the Underwriter and the holder of the warrant designates the Underwriter in writing as having solicited such Warrant, (c) the Warrant is not held in a discretionary account, (d) disclosure of the compensation arrangement is made upon the sale and exercise of the Warrants, (e) soliciting the exercise is not in violation of Rule 10b-6 under the Securities Exchange Act of 1934, and (f) solicitation of the exercise is in compliance with the NASD Notice to Members 81-38 (September 22, 1981). (s) For a period of three years from the Effective Date, at the request of the Underwriter, the Company shall provide promptly, at the expense of the Company, copies of the Company's daily transfer sheets furnished to it by its transfer agent and copies of the securities position listings provided to it by the Depository Trust Company. (t) The Company hereby agrees that: (i) The Company will pay a finder's fee to the Underwriter, equal to five percent (5%) of the first $3,000,000 of the consideration involved in any transaction, 4% of the next $3,000,000 of consideration involved in the transaction, 3% of the next $2,000,000, 2% of the next $2,000,000 and 1% of the excess, if any, over $10,000,000, for future consummated transactions, if any, introduced by the Underwriter (including mergers, acquisitions, joint ventures, and any other business for the Company introduced by the Underwriter) consummated by the Company (an "Introduced Consummated Transaction"), in which the Underwriter introduced the other party to the Company during a period ending five years following the First Closing Date; and 14 (ii) That any such finder's fee due hereunder will be paid in cash or other consideration that is acceptable to the Underwriter, at the closing of the particular Introduced Consummated Transaction for which the finder's fee is due. (v) Intentionally omitted. (w) For a period of five (5) years following the Effective Date the Company, at its expense, shall cause its regularly engaged independent certified public accountants to review (but not audit) the Company's financial statements for each of the first three (3) fiscal quarters prior to the announcement of quarterly financial information, the filing of the Company's 10-Q quarterly report and the mailing of quarterly financial information to stockholders, provided that the Company shall not be required to file a report of such accountants relating to such review with the Commission. The Company will retain its present legal counsel and independent certified public accountants for at least one year from the Closing Date. (x) For the three (3) year period commencing on the First Closing Date, the Underwriter shall have the right to nominate a member of the Company's Board of Directors. If the Underwriter does not exercise this right, it may appoint an advisor who will be able to attend all meetings of the Board of Directors. However, if the Board of Directors determines that confidential information is to be discussed during any part of any meeting attended by such advisor, it shall have the right to exclude the advisor from the meeting during such discussion. The Underwriter shall also have the right to obtain copies of the minutes, if requested, from all Board of Directors meetings for three (3) years following the Effective Date of the Registration Statement, whether or not a nominee of the Underwriter attends or participates in any such Board meeting. The Company agrees to reimburse the Underwriter immediately upon the Underwriter's request therefor of any reasonable travel and lodging expenses directly incurred by the Underwriter in connection with its representative attending Company Board meetings on the same basis for other Board members. 4. Conditions of Underwriter's Obligation. The obligations of the Underwriter to purchase and pay for the Securities which it has agreed to purchase hereunder, are subject to the accuracy (as of the date hereof, and as of the Closing Dates) of and compliance with the representations and warranties of the Company herein, to the performance by the Company of its obligations hereunder, and to the following conditions: (a) The Registration Statement shall have become effective and you shall have received notice thereof not later than 10:00 A.M., New York time, on the day following the date of this Agreement, or at such later time or on such later date as to which you may agree in writing; on or prior to the Closing Dates no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that or a similar purpose shall have been instituted or shall be pending or, to your knowledge or to the knowledge of the 15 Company, shall be contemplated by the Commission; any request on the part of the Commission for additional information shall have been complied with to the satisfaction of the Commission; and no stop order shall be in effect denying or suspending effectiveness of such qualification nor shall any stop order proceedings with respect thereto be instituted or pending or threatened. If required, the Prospectus shall have been filed with the Commission in the manner and within the time period required by Rule 424(b) under the Act. (b) At the First Closing Date, you shall have received the opinion, dated as of the First Closing Date, of Gould & Wilkie, LLP, counsel for the Company, in form and substance satisfactory to counsel for the Underwriter, to the effect that: (i) the Company and its Subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of organization, with all requisite corporate power and authority to own their properties and conduct their business as described in the Registration Statement and Prospectus and are duly qualified or licensed to do business as foreign corporations and are in good standing in each other jurisdiction in which the ownership or leasing of their properties or conduct of their business requires such qualification except where the failure to qualify or be licensed will not have a Material Adverse Effect; (ii) the authorized capitalization of the Company as of May 31, 1996 is as set forth in the Registration Statement; the Securities as set forth in the Registration Statement have been duly authorized and upon payment of consideration therefor, will be validly issued, fully paid and non-assessable and conform in all material respects to the description thereof contained in the Prospectus; to such counsel's knowledge the outstanding shares of capital stock of the Company and its Subsidiaries have not been issued in violation of the preemptive rights of any shareholder and to such counsel's knowledge the shareholders of the Company do not have any preemptive rights or other rights to subscribe for or to purchase, nor are there any restrictions upon the voting or transfer of any of the capital stock except as provided in the Prospectus or as required by law. The Securities, the Purchase Option and the Warrant Agreement conform in all material respects to the respective descriptions thereof contained in the Prospectus; the shares of Common Stock underlying the Units, and the shares of Common Stock issuable upon exercise of Warrants, the Purchase Option, and the Warrant Agreement will have been duly authorized and, when issued and delivered in accordance with their respective terms, will be duly and validly issued, fully paid, non-assessable, free of preemptive rights to the best of their knowledge; to the best of their knowledge, all prior sales by the Company of the Company's securities, have been made in compliance with or under an exemption from registration under the Act and applicable state securities laws; a sufficient number of shares of Common Stock has been reserved for issuance upon exercise of the Warrants and Common Stock has been reserved for issuance upon exercise of the Warrants contained in the Purchase Option and to the best of such counsel's knowledge, neither the filing of the Registration Statement nor 16 the offering or sale of the Securities as contemplated by this Agreement gives rise to any registration rights other than those which have been waived or satisfied for or relating to the registration of any shares of Common Stock; (iii) this Agreement, the Purchase Option, and the Warrant Agreement have been duly and validly authorized, executed and delivered by the Company; (iv) the certificates evidencing the Securities as described in the Registration Statement comply in all material respects with the descriptions set forth therein, and comply with the Delaware General Corporation Law, as in effect on the date hereof; each Warrant will be exercisable for one share of the Common Stock of the Company, respectively, and at the prices provided for in the Warrant Agreement; (v) except as otherwise disclosed in the Registration Statement, such counsel knows of no pending or threatened legal or governmental proceedings to which the Company or its Subsidiaries are a party which would materially adversely affect the business, property, financial condition or operations of the Company or its Subsidiaries; or which question the validity of the Securities, this Agreement, the Warrant Agreement or the Purchase Option, or of any action taken or to be taken by the Company pursuant to this Agreement, the Warrant Agreement or the Purchase Option; to such counsel's knowledge there are no governmental proceedings or regulations required to be described or referred to in the Registration Statement which are not so described or referred to; (vi) the execution and delivery of this Agreement, the Purchase Option or the Warrant Agreement and the incurrence of the obligations herein and therein set forth and the consummation of the transactions herein or therein contemplated, will not result in a breach or violation of, or constitute a default under the certificate of incorporation or by-laws of the Company or its Subsidiaries, or to the best knowledge of counsel after due inquiry, in the performance or observance of any material obligations, agreement, covenant or condition contained in any bond, debenture, note or other evidence of indebtedness or in any material contract, indenture, mortgage, loan agreement, lease, joint venture or other agreement or instrument to which the Company or its Subsidiaries is a party or by which they or any of their properties is bound or in violation of any order, rule, regulation, writ, injunction, or decree of any government, governmental instrumentality or court, domestic or foreign the result of which would have a Material Adverse Effect; (vii) the Registration Statement has become effective under the Act, and to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for that purpose have been instituted or are pending before, or threatened by, the Commission; the Registration Statement and the Prospectus (except for the financial statements and other financial data contained therein, or 17 omitted therefrom, as to which such counsel need express no opinion) as of the Effective Date comply as to form in all material respects with the applicable requirements of the Act and the Rules and Regulations; (viii) in the course of preparation of the Registration Statement and the Prospectus such counsel has participated in conferences with the President of the Company with respect to the Registration Statement and Prospectus and such discussions did not disclose to such counsel any information which gives such counsel reason to believe that the Registration Statement or any amendment thereto at the time it became effective contained any untrue statement of a material fact required to be stated therein or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any supplement thereto contains any untrue statement of a material fact or omits to state a material fact necessary in order to make statements therein, in light of the circumstances under which they were made, not misleading (except, in the case of both the Registration Statement and any amendment thereto and the Prospectus and any supplement thereto, for the financial statements, notes thereto and other financial information (including without limitation, the pro forma financial information) and schedules contained therein, as to which such counsel need express no opinion); (ix) all descriptions in the Registration Statement and the Prospectus, and any amendment or supplement thereto, of contracts and other agreements to which the Company or its Subsidiaries is a party are accurate and fairly present in all material respects the information required to be shown, and such counsel is familiar with all contracts and other agreements referred to in the Registration Statement and the Prospectus and any such amendment or supplement or filed as exhibits to the Registration Statement, and such counsel does not know of any contracts or agreements to which the Company or its Subsidiaries is a party of a character required to be summarized or described therein or to be filed as exhibits thereto which are not so summarized, described or filed; (x) no authorization, approval, consent, or license of any governmental or regulatory authority or agency is necessary in connection with the authorization, issuance, transfer, sale or delivery of the Securities by the Company, in connection with the execution, delivery and performance of this Agreement by the Company or in connection with the taking of any action contemplated herein, or the issuance of the Purchase Option or the Securities underlying the Purchase Option, other than registrations or qualifications of the Securities under applicable state or foreign securities or Blue Sky laws and registration under the Act; and (xi) the Units, shares of Common Stock and the Warrants have been duly authorized for quotation on the NASDAQ SmallCap Market System ("NASDAQ"). 18 Such opinion shall also cover such matters incident to the transactions contemplated hereby as the Underwriter or counsel for the Underwriter shall reasonably request. In rendering such opinion, such counsel may rely upon certificates of any officer of the Company or public officials as to matters of fact; and may rely as to all matters of law other than the law of the United States or of the State of New York or Delaware upon opinions of counsel satisfactory to you, in which case the opinion shall state that they have no reason to believe that you and they are not entitled to so rely. (c) Intentionally Omitted. (d) All corporate proceedings and other legal matters relating to this Agreement, the Registration Statement, the Prospectus and other related matters shall be satisfactory to or approved by Bernstein & Wasserman, LLP, counsel to the Underwriter. (e) You shall have received a letter prior to the Effective Date and again on and as of the First Closing Date from Moore Stephens, PC independent public accountants for the Company, substantially in the form reasonably acceptable to you, providing you with such "cold comfort" as you may reasonably require. (f) At the Closing Dates, (i) the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects with the same effect as if made on and as of the Closing Dates taking into account for the Option Closing Dates the effect of the transactions contemplated hereby and the Company or its Subsidiaries shall have performed all of its obligations hereunder and satisfied all the conditions on its part to be satisfied at or prior to such Closing Date; (ii) the Registration Statement and the Prospectus and any amendments or supplements thereto shall contain all statements which are required to be stated therein in accordance with the Act and the Rules and Regulations, and shall in all material respects conform to the requirements thereof, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (iii) there shall have been, since the respective dates as of which information is given, no material adverse change, or to the Company or its Subsidiaries's knowledge, any development involving a prospective material adverse change, in the business, properties, condition (financial or otherwise), results of operations, capital stock, long-term or short-term debt or general affairs of the Company or its Subsidiaries from that set forth in the Registration Statement and the Prospectus, except changes which the Registration Statement and Prospectus indicate might occur after the effective date of the Registration Statement, and the Company or its Subsidiaries shall not have incurred any material liabilities or entered into any material agreement not in the ordinary course of business other than as referred to in the Registration Statement and Prospectus; (iv) except as set forth in the Prospectus, no action, suit or proceeding at law or in equity shall be pending or threatened against the Company or its 19 Subsidiaries which would be required to be set forth in the Registration Statement, and no proceedings shall be pending or threatened against the Company or its Subsidiaries before or by any commission, board or administrative agency in the United States or elsewhere, wherein an unfavorable decision, ruling or finding would materially and adversely affect the business, property, condition (financial or otherwise), results of operations or general affairs of the Company or its Subsidiaries, and (v) you shall have received, at the First Closing Date, a certificate signed by each of the President and the principal operating officer of the Company or its Subsidiaries, dated as of the First Closing Date, evidencing compliance with the provisions of this subsection (f). (g) Upon exercise of the Over-Allotment Option provided for in Section 2(b) hereof, the obligations of the Underwriter to purchase and pay for the Option Securities referred to therein will be subject (as of the date hereof and as of the Option Closing Date) to the following additional conditions: (i) The Registration Statement shall remain effective at the Option Closing Date, and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending, or, to your knowledge or the knowledge of the Company, shall be contemplated by the Commission, and any reasonable request on the part of the Commission for additional information shall have been complied with to the satisfaction of the Commission. (ii) At the Option Closing Date there shall have been delivered to you the signed opinion of Gould & Wilkie, LLP, counsel to the Company, dated as of the Option Closing Date, in form and substance reasonably satisfactory to Bernstein & Wasserman, LLP, counsel to the Underwriter, which opinion shall be substantially the same in scope and substance as the opinion furnished to you at the First Closing Date pursuant to Sections 4(b) hereof, except that such opinion, where appropriate, shall cover the Option Securities. (iii) At the Option Closing Date there shall have be delivered to you a certificate of the President and the principal operating officer of the Company, dated the Option Closing Date, in form and substance reasonably satisfactory to Bernstein & Wasserman, LLP, counsel to the Underwriter, substantially the same in scope and substance as the certificate furnished to you at the First Closing Date pursuant to Section 4(f) hereof. (iv) At the Option Closing Date there shall have been delivered to you a letter in form and substance satisfactory to you from Moore Stephens, dated the Option Closing Date and addressed to the Underwriter confirming the information in their letter referred to in Section 4(e) hereof and stating that nothing has come to their attention during the period from the ending date of their review referred to in said letter to a date not more than five business days 20 prior to the Option Closing Date, which would require any change in said letter if it were required to be dated the Option Closing Date. (v) All proceedings taken at or prior to the Option Closing Date in connection with the sale and issuance of the Option Securities shall be reasonably satisfactory in form and substance to you, and you and Bernstein & Wasserman, LLP, counsel to the Underwriter, shall have been furnished with all such documents, certificates, and opinions as you may reasonably request in connection with this transaction in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company or its compliance with any of the covenants or conditions contained herein. (h) No action shall have been taken by the Commission or the NASD the effect of which would make it improper, at any time prior to the Closing Date, for members of the NASD to execute transactions (as principal or agent) in the Securities and no proceedings for the taking of such action shall have been instituted or shall be pending, or, to the knowledge of the Underwriter or the Company, shall be contemplated by the Commission or the NASD. The Company and the Underwriter represent that at the date hereof each has no knowledge that any such action is in fact contemplated against it by the Commission or the NASD. (i) If any of the conditions herein provided for in this Section shall not have been fulfilled in all material respects as of the date indicated, this Agreement and all obligations of the Underwriter under this Agreement may be canceled at, or at any time prior to, each Closing Date by the Underwriter notifying the Company of such cancellation in writing or by telegram at or prior to the applicable Closing Date. Any such cancellation shall be without liability of the Underwriter to the Company. 5. Conditions of the Obligations of the Company, The obligation of the Company to sell and deliver the Securities is subject to the following conditions: (a) The Registration Statement shall have become effective not later than 10:00 A.M. New York time, on the day following the date of this Agreement, or on such later date as the Company and the Underwriter may agree in writing. (b) At the Closing Dates, no stop orders suspending the effectiveness of the Registration Statement shall have been issued under the Act or any proceedings therefor initiated or threatened by the Commission. If the conditions to the obligations of the Company provided for in this Section have been fulfilled on the First Closing Date but are not fulfilled after the First Closing Date and prior to the Option Closing Date, then only the obligation of the Company to sell and deliver the 21 Securities on exercise of the Over-Allotment Option provided for in Section 2(b) hereof shall be affected. 6. Indemnification. (a) The Company agrees (i) to indemnify and hold harmless the Underwriter and each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all reasonable costs of defense and investigation and all reasonable attorneys' fees), to which such Underwriter or such controlling person may become subject, under the Act or otherwise, and (ii) to reimburse, as incurred, the Underwriter and such controlling persons for any legal or other expenses reasonably incurred in connection with investigating, defending against or appearing as a third party witness in connection with any losses, claims, damages or liabilities; insofar as such losses, claims, damages or liabilities (or actions in respect thereof) relating to (i) and (ii) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, (B) any blue sky application or other document executed by the Company specifically for that purpose containing written information specifically furnished by the Company and filed in any state or other jurisdiction in order to qualify any or all of the Securities under the securities laws thereof (any such application, document or information being hereinafter called a "Blue Sky Application"), or arise out of or are based upon the omission or alleged omission to state in the Registration Statement, any Preliminary Prospectus, Prospectus, or any amendment or supplement thereto, or in any Blue Sky Application, a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be required to indemnify the Underwriter and any controlling person or be liable in any such case to the extent, but only to the extent, that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Underwriter specifically for use in the preparation of the Registration Statement or any such amendment or supplement thereof or any such Blue Sky Application or any such preliminary Prospectus or the Prospectus or any such amendment or supplement thereto, provided, further that the indemnity with respect to any Preliminary Prospectus shall not be applicable on account of any losses, claims, damages, liabilities or litigation arising from the sale of Securities to any person if a copy of the Prospectus was not delivered to such person at or prior to the written confirmation of the sale to such person. This indemnity will be in addition to any liability which the Company may otherwise have. (b) The Underwriter will indemnify and hold harmless the Company, each of its directors, each nominee (if any) for director named in the Prospectus, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within 22 the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and reasonable attorneys' fees) to which the Company or any such director, nominee, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or any Blue Sky Application in reliance upon and in conformity with written information furnished to the Company by the Underwriter specifically for use in the preparation thereof and for any violation by the Underwriter in the sale of such Securities of any applicable state or federal law or any rule, regulation or instruction thereunder relating to violations based on unauthorized statements by Underwriter or its representative; provided that such violation is not based upon any violation of such law, rule or regulation or instruction by the party claiming indemnification or inaccurate or misleading information furnished by the Company or its representatives, including information furnished to the Underwriter as contemplated herein. This indemnity agreement will be in addition to any liability which the Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify in writing the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, subject to the provisions herein stated, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that the reasonable fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been 23 specifically authorized in writing by the indemnifying party or (ii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party and in the reasonable judgment of the counsel to the indemnified party, it is advisable for the indemnified party to be represented by separate counsel (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party, it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys for the indemnified party, which firm shall be designated in writing by the indemnified party). No settlement of any action against an indemnified party shall be made without the consent of the indemnified party, which shall not be unreasonably withheld in light of all factors of importance to such indemnified party. If it is ultimately determined that indemnification is not permitted, then an indemnified party will return all monies advanced to the indemnifying party. 7. Contribution. In order to provide for just and equitable contribution under the Act in any case in which the indemnification provided in Section 6 hereof is requested but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that the express provisions of Section 6 provide for indemnification in such case, then the Company and each person who controls the Company, in the aggregate, and the Underwriter shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all reasonable costs of defense and investigation and all reasonable attorneys' fees) (after contribution from others) in such proportions that the Underwriter is responsible in the aggregate for that portion of such losses, claims, damages or liabilities represented by the percentage that the underwriting discount for each of the Securities appearing on the cover page of the Prospectus bears to the public offering price appearing thereon and the Company shall be responsible for the remaining portion; provided, however, that if such allocation is not permitted by applicable law then allocated in such proportion as is appropriate to reflect relative benefits but also the relative fault of the Company and the Underwriter and controlling persons, in the aggregate, in connection with the statements or omissions which resulted in such damages and other relevant equitable considerations shall also be considered. The relative fault shall be determined by reference to, among other things, whether in the case of an untrue statement of a material fact or the omission to state a material fact, such statement or omission relates to information supplied by the Company or the Underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company and the Underwriter agree that it would not be just and equitable if the respective obligations of the Company and the Underwriter to contribute pursuant 24 to this Section 7 were to be determined by pro rata or per capita allocation of the aggregate damages or by any other method of allocation that does not take account of the equitable considerations referred to in this Section 7. No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. As used in this paragraph, the word "Company" includes any officer, director, or person who controls the Company within the meaning of Section 15 of the Act. If the full amount of the contribution specified in this paragraph is not permitted by law, then the Underwriter and each person who controls the Underwriter shall be entitled to contribution from the Company, its officers, directors and controlling persons, and the Company, its officers, directors and controlling persons shall be entitled to contribution from the Underwriter to the full extent permitted by law. The foregoing contribution agreement shall in no way affect the contribution liabilities of any persons having liability under Section 11 of the Act other than the Company and the Underwriter. No contribution shall be requested with regard to the settlement of any matter from any party who did not consent to the settlement; provided, however, that such consent shall not be unreasonably withheld in light of all factors of importance to such party. 8. Costs and Expenses. (a) Whether or not this Agreement becomes effective or the sale of the Securities to the Underwriter is consummated, the Company will pay all costs and expenses incident to the performance of this Agreement by the Company including, but not limited to, the fees and expenses of counsel to the Company and of the Company's accountants; the costs and expenses incident to the preparation, printing, filing and distribution under the Act of the Registration Statement (including the financial statements therein and all amendments and exhibits thereto), Preliminary Prospectus and the Prospectus, as amended or supplemented, the fee of the NASD in connection with the filing required by the NASD relating to the offering of the Securities contemplated hereby; all expenses, including reasonable fees and disbursements of counsel to the Underwriter, in connection with the qualification of the Securities under the state securities or blue sky laws which the Underwriter shall designate; the cost of printing and furnishing to the Underwriter copies of the Registration Statement, each Preliminary Prospectus, the Prospectus, this Agreement, and the Blue Sky Memorandum, any fees relating to the listing of the Common Stock and Warrants on NASDAQ or any other securities exchange, the cost of printing the certificates representing the Securities; fees for bound volumes and prospectus memorabilia and the fees of the transfer agent and warrant agent. The Company shall pay any and all taxes (including any transfer, franchise, capital stock or other tax imposed by any jurisdiction) on sales to the Underwriter hereunder. The Company will also pay all costs and expenses incident to the furnishing of any amended Prospectus or of any supplement to be attached to the Prospectus as called for in Section 3(a) of this Agreement except as otherwise set forth in said Section. 25 (b) In addition to the foregoing expenses, the Company shall at the First Closing Date pay to the Underwriter a non-accountable expense allowance of $180,000. In the event the overallotment option is exercised, the Company shall pay to the Underwriter at the Option Closing Date an additional amount in the aggregate equal to 3% of the gross proceeds received upon exercise of the overallotment option. In the event the transactions contemplated hereby are not consummated by reason of any action by the Underwriter (except if such prevention is based upon a breach by the Company of any covenant, representation or warranty contained herein or because any other condition to the Underwriter's obligations hereunder required to be fulfilled by the Company is not fulfilled) the Company shall not be liable for any expenses of the Underwriter, including the Underwriter's legal fees. In the event the transactions contemplated hereby are not consummated by reason of the Company being unable to perform its obligations hereunder in all material respects, the Company shall be liable for the actual accountable out-of-pocket expenses of the Underwriter, including reasonable legal fees, not to exceed in the aggregate $100,000. (c) Except as disclosed in the Registration Statement, no person is entitled either directly or indirectly to compensation from the Company, from the Underwriter or from any other person for services as a finder in connection with the proposed offering, and the Company agrees to indemnify and hold harmless the Underwriter, against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all reasonable attorneys' fees), to which the Underwriter or person may become subject insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon the claim of any person (other than an employee of the party claiming indemnity) or entity that he or it is entitled to a finder's fee in connection with the proposed offering by reason of such person's or entity's influence or prior contact with the indemnifying party. 9. Effective Date. The Agreement shall become effective upon its execution except that you may, at your option, delay its effectiveness until 11:00 A.M., New York time on the first full business day following the effective date of the Registration Statement, or at such earlier time on such business day after the effective date of the Registration Statement as you in your discretion shall first commence the public offering of the Securities. The time of the initial public offering shall mean the time of release by you of the first newspaper advertisement with respect to the Securities, or the time when the Securities are first generally offered by you to dealers by letter or telegram, whichever shall first occur. This Agreement may be terminated by you at any time before it becomes effective as provided above, except that Sections 3(c), 6, 7, 8, 12, 13, 14 and 15 shall remain in effect notwithstanding such termination. 10. Termination. 26 (a) After this Agreement becomes effective, this Agreement, except for Sections 3(c), 6, 7, 8, 12, 13, 14 and 15 hereof, may be terminated at any time prior to the First Closing Date, by you if in your judgment (i) the Company has sustained a material loss, whether or not insured, by reason of fire, earthquake, flood, accident or other calamity, or from any labor dispute or court or government action, order or decree, (ii) trading in securities on the New York Stock Exchange or the American Stock Exchange having been suspended or limited, (iii) material governmental restrictions have been imposed on trading in securities generally (not in force and effect on the date hereof), (iv) a banking moratorium has been declared by federal or New York state authorities, (v) an outbreak of major international hostilities involving the United States or other substantial national or international calamity has occurred, (vi) a pending or threatened legal or governmental proceeding or action relating generally to the Company's business, or a notification has been received by the Company of the threat of any such proceeding or action, which would materially adversely affect the Company; (vii) except as contemplated by the Prospectus, the Company is merged or consolidated into or acquired by another company or group or there exists a binding legal commitment for the foregoing or any other material change of ownership or control occurs; (viii) the passage by the Congress of the United States or by any state legislative body of similar impact, of any act or measure, or the adoption of any orders, rules or regulations by any governmental body or any authoritative accounting institute or board, or any governmental executive, which is reasonably believed likely by the Underwriter to have a material adverse impact on the business, financial condition or financial statements of the Company; (ix) any material adverse change in the financial or securities markets beyond normal market fluctuations having occurred since the date of this Agreement, or (x) any material adverse change having occurred, since the respective dates of which information is given in the Registration Statement and Prospectus, in the earnings, business prospects or general condition of the Company, financial or otherwise, whether or not arising in the ordinary course of business. (b) If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 10, the Company shall be promptly notified by you, by telephone or telegram, confirmed by letter. 11. Purchase Option. At or before the First Closing Date, the Company will sell the Underwriter or its designees for a consideration of $100, and upon the terms and conditions set forth in the form of Purchase Option annexed as an exhibit to the Registration Statement, a Purchase Option to purchase an aggregate of 100,000 Units, each Unit consisting of one (1) share of Series B Convertible Preferred Stock, par value $.01 per share and one (1) Series IV Redeemable Common Stock Purchase Warrant. In the event of conflict in the terms of this Agreement and the Purchase Option with respect to language relating to the Purchase Option, the language of the Purchase Option shall control. 27 12. Representations and Warranties of the Underwriter. The Underwriter represents and warrants to the Company that it is registered as a broker-dealer in all jurisdictions in which it is offering the Securities and that it will comply with all applicable state or federal laws relating to the sale of the Securities, including but not limited to, violations based on unauthorized statements by the Underwriter or its representatives. 13. Representations, Warranties and Agreements to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company and the Underwriter and the undertakings set forth in or made pursuant to this Agreement will remain in full force and effect until three years from the date of this Agreement, regardless of any investigation made by or on behalf of the Underwriter, the Company or any of its officers or directors or any controlling person and will survive delivery of and payment of the Securities and the termination of this Agreement. 14. Notice. Any communications specifically required hereunder to be in writing, if sent to the Representative, will be mailed, delivered or telecopied and confirmed to them at Biltmore Securities, Inc., 6700 North Andrews Avenue, Suite 500, Fort Lauderdale, FL 33309, with a copy sent to Bernstein & Wasserman, LLP, 950 Third Avenue, New York, New York 10022, Attention: Steven F. Wasserman, or if sent to the Company, will be mailed, delivered or telecopied and confirmed to it at 6400 Congress Avenue, Suite 200, Boca Raton, Florida 33487, with a copy sent to Frederick W. London, Gould & Wilkie, One Chase Manhattan Plaza, New York, NY 10005-1401. Notice shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. 15. Parties in Interest. The Agreement herein set forth is made solely for the benefit of the Underwriter, the Company, any person controlling the Company or the Underwriter, and directors of the Company, nominees for directors (if any) named in the Prospectus, its officers who have signed the Registration Statement, and their respective executors, administrators, successors, assigns and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser, as such purchaser, from the Underwriter of the Securities. 16. Applicable Law. 28 This Agreement will be governed by, and construed in accordance with, of the laws of the State of New York applicable to agreements made and to be entirely performed within New York. 17. Counterparts. This agreement may be executed in one or more counterparts each of which shall be deemed to constitute an original and shall become effective when one or more counterparts have been signed by each of the parties hereto and delivered to the other parties (including by fax, followed by original copies by overnight mail). 18. Entire Agreement; Amendments. This Agreement constitutes the entire agreement of the parties hereto and supersedes all prior written or oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may not be amended except in writing, signed by the Underwriter and the Company. If the foregoing is in accordance with your understanding of our agreement, kindly sign and return this agreement, whereupon it will become a binding agreement between the Company and the Underwriter in accordance with its terms. Very truly yours, QUESTRON TECHNOLOGY, INC. By: --------------------------- Name: Dominic A. Polimeni Title: President 29 The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. BILTMORE SECURITIES, INC. By: ----------------------------- Name: Title: The undersigned agree to be bound by the provisions of Section 3 (1) hereof: -------------------------------- Dominic A. Polimeni -------------------------------- Milton M. Adler -------------------------------- Robert V. Gubitosi -------------------------------- Mitchell Hymowitz -------------------------------- William J. McSherry, Jr. Gould & Wilkie By: ----------------------------- Name: Title: 30 EX-1.1 3 FORM OF SELECTED DEALERS AGREEMENT EXHIBIT 1.1 A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. NO OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE, AND ANY SUCH OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND, AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE. QUESTRON TECHNOLOGY, INC. 1,000,000 UNITS CONSISTING OF 1,000,000 SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE AND 1,000,000 SERIES IV REDEEMABLE COMMON STOCK PURCHASE WARRANTS SELECTED DEALERS AGREEMENT _______ __, 1997 Dear Sirs: 1. Biltmore Securities, Inc. (the "Underwriter"), has agreed to offer on a firm commitment basis, subject to the terms and conditions and execution of the Underwriting Agreement, 1,000,000 Units, each consisting of one (1) share of Series B Convertible Preferred Stock, $.01 par value per share ("Preferred Stock") of Questron Technology, Inc. (the "Company") and one (1) Series IV Redeemable Common Stock Purchase Warrant ("Warrants"), (hereinafter, referred to as the "Securities"; including any Units offered pursuant to an over-allotment option, the "Firm Securities"). Each Warrant is exercisable to purchase one (1) share of Common Stock of the Company, $.001 par value per share. The Firm Securities are more particularly described in the enclosed Preliminary Prospectus, additional copies of which, as well as the Prospectus (after effective date), will be supplied in reasonable quantities upon request. 2. The Underwriter is soliciting offers to buy Securities, upon the terms and conditions hereof, from Selected Dealers, who are to act as principals, including you, who are (i) registered with the Securities and Exchange Commission ("the Commission") as broker-dealers under the Securities Exchange Act of 1934, as amended ("the 1934 Act"), and members in good standing with the National Association of Securities Dealers, Inc. ("the NASD"), or (ii) dealers of institutions with their principal place of business located outside the United States, its territories and possessions and not registered under the 1934 Act who agree to make no sales within the United States, its territories and possessions or to persons who are nationals thereof or residents therein and, in making sales, to comply with the NASD's interpretation with respect to free-riding and withholding. The Securities are to be offered to the public at a price of $6.00 per Unit. Selected Dealers will be allowed a concession of not less than __% of the aggregate offering price. You will be notified of the precise amount of such concession prior to the effective date of the Registration Statement. The offer is solicited subject to the issuance and delivery of the Securities and their acceptance by the Underwriter, to the approval of legal matters by counsel and to the terms and conditions as herein set forth. 3. Your offer to purchase may be revoked in whole or in part without obligation or commitment of any kind by you any time prior to acceptance and no offer may be accepted by us and no sale can be made until after the registration statement covering the Securities has become effective with the Commission. Subject to the foregoing, upon execution by you of the Offer to Purchase below and the return of same to us, you shall be deemed to have offered to purchase the number of Securities set forth in your offer on the basis set forth in paragraph 2 above. Any oral notice by us of acceptance of your offer shall be immediately followed by written or telegraphic confirmation preceded or accompanied by a copy of the Prospectus. If a contractual commitment arises hereunder, all the terms of this Selected Dealers Agreement shall be applicable. We may also make available to you an allotment to purchase Securities, but such allotment shall be subject to modification or termination upon notice from us any time prior to an exchange of confirmations reflecting completed transactions. All references hereafter in this Agreement to the purchase and sale of the Securities assume and are applicable only if contractual commitments to purchase are completed in accordance with the foregoing. 4. You agree that in re-offering the Securities, if your offer is accepted after the Effective Date, you will make a bona fide public distribution of same. You will advise us upon request of the Securities purchased by you remaining unsold, and we shall have the right to repurchase such Securities upon demand at the public offering price less the concession as set forth in paragraph 2 above. Any of the Securities purchased by you pursuant to this Agreement are to be re-offered by you to the public at the public offering price, subject to the terms hereof and shall not be offered or sold by you below the public offering price before the termination of this Agreement. 5. Payment for Securities which you purchase hereunder shall be made by you on such date as we may determine by certified or bank cashier's check payable in New York Clearinghouse funds to Biltmore Securities, Inc. Certificates for the Securities shall be delivered as soon as practicable at the offices of Biltmore Securities, Inc., 6700 North 2 Andrews Avenue, Suite 500, Fort Lauderdale, FL 33309. Unless specifically authorized by us, payment by you may not be deferred until delivery of certificates to you. 6. A registration statement covering the offering has been filed with the Commission in respect to the Securities. You will be promptly advised when the registration statement becomes effective. Each Selected Dealer in selling the Securities pursuant hereto agrees (which agreement shall also be for the benefit of the Company) that it will comply with the applicable requirements of the Securities Act of 1933 and of the 1934 Act and any applicable rules and regulations issued under said Acts. No person is authorized by the Company or by the Underwriter to give any information or to make any representations other than those contained in the Prospectus in connection with the sale of the Securities. Nothing contained herein shall render the Selected Dealers a member of the underwriting group or partners with the Underwriter or with one another. 7. You will be informed by us as to the states in which we have been advised by counsel the Securities have been qualified for sale or are exempt under the respective securities or blue sky laws of such states, but we have not assumed and will not assume any obligation or responsibility as to the right of any Selected Dealer to sell Securities in any state. 8. The Underwriter shall have full authority to take such action as we may deem advisable in respect of all matters pertaining to the offering or arising thereunder. The Underwriter shall not be under any liability to you, except such as may be incurred under the Securities Act of 1933 and the rules and regulations thereunder, except for lack of good faith and except for obligations assumed by us in this Agreement, and no obligation on our part shall be implied or inferred herefrom. 9. Selected Dealers will be governed by the conditions herein set forth until this Agreement is terminated. This Agreement will terminate when the offering is completed. Nothing herein contained shall be deemed a commitment on our part to sell you any Securities; such contractual commitment can only be made in accordance with the provisions of paragraph 3 hereof. 10. You represent that you are a member in good standing of the National Association of Securities Dealers, Inc. ("Association") and registered as a broker-dealer or are not eligible for membership under Section I of the By-Laws of the Association who agree to make no sales within the United States, its territories or possessions or to persons who are nationals thereof or residents therein and, in making sales, to comply with the NASD's interpretation with respect to free-riding and withholding. Your attention is called to the following: (a) Article III, Sections 1, 8, 24, 25, 26 and 36 of the Rules of Fair Practice of the Association and the interpretations of said Section promulgated by the Board of Governors of such Association including the interpretation with respect to "Free-Riding and Withholding"; (b) Section 10(b) of the 1934 Act and Rules 10b-6 and 10b-10 of the general rules and regulations promulgated under said Act; (c) Securities Act Release #3907; (d) 3 Securities Act Release #4150; and (e) Securities Act Release #4968 requiring the distribution of a Preliminary Prospectus to all persons reasonably expected to be purchasers of Securities from you at least 48 hours prior to the time you expect to mail confirmations. You, if a member of the Association, by signing this Agreement, acknowledge that you are familiar with the cited law, rules and releases, and agree that you will not directly and/or indirectly violate any provisions of applicable law in connection with your participation in the distribution of the Securities. 11. In addition to compliance with the provisions of paragraph 10 hereof, you will not, until advised by us in writing or by wire that the entire offering has been distributed and closed, bid for or purchase Securities or its component securities in the open market or otherwise make a market in such securities or otherwise attempt to induce others to purchase such securities in the open market. Nothing contained in this paragraph 11 shall, however, preclude you from acting as agent in the execution of unsolicited orders of customers in transactions effectuated for them through a market maker. 12. You understand that the Underwriter may in connection with the offering engage in stabilizing transactions. If the Underwriter contracts for or purchases in the open market in connection with such stabilization any Securities sold to you hereunder and not effectively placed by you, the Underwriter may charge you the Selected Dealer's concession originally allowed you on the Securities so purchased, and you agree to pay such amount to us on demand. 13. By submitting an Offer to Purchase you confirm that your net capital is such that you may, in accordance with Rule 15c3-1 adopted under the 1934 Act, agree to purchase the number of Securities you may become obligated to purchase under the provisions of this Agreement. 14. You agree that (i) you shall not recommend to a customer the purchase of Firm Securities unless you shall have reasonable grounds to believe that the recommendation is suitable for such customer on the basis of information furnished by such customer concerning the customer's investment objectives, financial situation and needs, and any other information known to you, (ii) in connection with all such determinations, you shall maintain in your files the basis for such determination, and (iii) you shall not execute any transaction in Firm Securities in a discretionary account without the prior specific written approval of the customer. 4 15. You represent that neither you nor any of your affiliates or associates owns any Common Stock of the Company. 16. All communications from you should be directed to us at the office of Biltmore Securities, Inc., 6700 North Andrews Avenue, Suite 500, Fort Lauderdale, FL 33309. All communications from us to you shall be directed to the address to which this letter is mailed. Very truly yours, BILTMORE SECURITIES, INC. By: ---------------------------- Name: Title: ACCEPTED AND AGREED TO AS OF THE ______ DAY OF ____________, 1997 [Name of Dealer] By: ------------------------------ Its 5 TO: Biltmore Securities, Inc. 6700 North Andrews Avenue Suite 500 Fort Lauderdale, FL 33309 We hereby subscribe for_________Units, each consisting of one (1) share of Series B Convertible Preferred Stock, $.01 par value per share, and one (1) Series IV Redeemable Common Stock Purchase Warrant of Questron Technology, Inc. in accordance with the terms and conditions stated in the foregoing letter. We hereby acknowledge receipt of the Prospectus referred to in the first paragraph thereof relating to said Securities. We further state that in purchasing said Securities we have relied upon said Prospectus and upon no other statement whatsoever, whether written or oral. We confirm that we are a dealer actually engaged in the investment banking or securities business and that we are either (i) a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD") or (ii) a dealer with its principal place of business located outside the United States, its territories and its possessions and not registered as a broker or dealer under the Securities Exchange Act of 1934, as amended, who hereby agrees not to make any sales within the United States, its territories or its possessions or to persons who are nationals thereof or residents therein. We hereby agree to comply with the provisions of Section 24 of Article III of the Rules of Fair Practice of the NASD, and if we are a foreign dealer and not a member of the NASD, we also agree to comply with the NASD's interpretation with respect to free-riding and withholding, to comply, as though we were a member of the NASD, with the provisions of Sections 8 and 36 of Article III thereof as that Section applies to non-member foreign dealers. Name of Dealer: ------------------------------- By: ----------------------- Address: ----------------------- ----------------------- Dated: , 1997 -------------- EX-2.0 4 STOCK PURCHASE AGREEMENT EXHIBIT 2.0 =============================================================================== STOCK PURCHASE AGREEMENT By and Among QUESTRON TECHNOLOGY, INC. and THE SHAREHOLDERS OF COMP WARE, INC. D/B/A WEBB DISTRIBUTION LISTED ON SCHEDULE 1.1 HERETO Dated as of December 16, 1996 =============================================================================== -1- STOCK PURCHASE AGREEMENT dated as of December 16, 1996 (herein, together with the Schedules and Exhibits attached hereto, referred to as the "Agreement") by and among Questron Technology, Inc. a Delaware corporation ("Buyer"), and the shareholders of Comp Ware, Inc. d/b/a Webb Distribution, a Delaware corporation (the "Company"), listed on Schedule 1.1 ("Sellers"). W I T N E S S E T H : WHEREAS, Sellers are the beneficial and record holders of all of the shares of capital stock of the Company (the "Shares"); and WHEREAS, Sellers wish to sell and Buyer wishes to purchase the Shares upon the terms and subject to the conditions contained in this Agreement. NOW, THEREFORE, in reliance upon the representations and warranties made herein and in consideration of the mutual agreements herein contained, the parties agree as follows: ARTICLE 1 SALE AND PURCHASE OF SHARES --------------------------- 1.1 Sale of Shares. At the Closing provided for in Section 2.1, each Seller shall sell to Buyer (or in Buyer's sole discretion, any subsidiary of Buyer) all of the Shares beneficially owned by such Seller as set forth in Schedule 1.1, and Buyer shall purchase the Shares for the aggregate purchase consideration specified in Section 1.2. 1.2 Purchase Consideration and Payment for Shares. At the Closing, Buyer shall (a) deliver to Sellers by wire transfers (or certified checks) for an aggregate amount equal to $3,250,000 (the "Cash Consideration") and (b) deliver to Albert J. Dinicola ("Majority Stockholder") Series IV Warrants (the "Warrants") to purchase 1,500,000 shares of Buyer's common stock, par value $.0001 per share ("Buyer Common Stock") and two notes (the "Notes") from Buyer each for $375,000 in the form of Exhibits A-1 and A-2 hereto. The Cash Consideration shall be allocated among and delivered to Sellers in accordance with Schedule 1.1. One of the Notes shall be payable in eighteen months and bear interest at 10% per annum (in the form of Exhibit A-1) and the second of the Notes shall be payable in equal monthly installments over a five year period and bear interest at 10% per annum (in the form of Exhibit A-2). The Notes shall provide that in the event Majority Shareholder receives net proceeds from the sale of the Warrants in excess of $375,000 (plus any previous principal payments on the Notes), the amount of such excess shall reduce the outstanding amount of the Notes, as more particularly set forth in the Notes. In the event that, during the period of the Lock-up Agreement (as hereinafter defined), Buyer's underwriter releases the Majority Stockholder from the Lock-up Agreement and the Majority Stockholder declines to sell the Warrants within seven business days of Majority Stockholder receiving written notice of such release, then, as more particularly set forth in the Notes, the Notes shall be canceled. In the event of any inconsistency between the provisions of the Notes and the preceding provisions hereof, the provisions of the Notes shall control. 1.3 Transactions on the Closing Date. (a) At the Closing, Sellers will deliver to Buyer the following: (i) stock certificates, in form suitable for transfer, registered in the name of each Seller, evidencing the number of Shares set forth opposite such Seller's name on Schedule 1.1, endorsed in blank or with an executed blank stock transfer power attached, and with any necessary stock transfer tax stamps attached thereto; (ii) all stock certificates, stock books, stock transfer ledgers, minute books and the corporate seals of the Company; (iii) resignations of all of the directors and officers of the Company; and (iv) each of the certificates and documents contemplated by Article 6. (b) At the Closing, Buyer will deliver to Sellers the following: (i) the Cash Consideration and the Notes; and (ii) each of the certificates and documents contemplated by Article 7. 1.4 Deposit. Concurrently with the execution and delivery of this Agreement, Buyer shall deliver to Ricklefs & Company, P.C., counsel to Majority Stockholder certificates representing the Warrants as a deposit. Such Warrants shall, upon the Closing, be subject to no restrictions on transfer, except as contained in the Lock-Up Agreement and security law restrictions. Buyer and Majority Stockholder agree that the Warrants shall be canceled and returned to Buyer in the event this Agreement is terminated. ARTICLE 2 CLOSING AND TERMINATION ----------------------- 2.1 Closing. The closing of the transactions provided for herein (the "Closing") will take place at the offices of Bernstein & Wasserman, counsel to Buyer's underwriters, 950 Third Avenue, New York, N.Y. 10022, at 10:00 A.M. (local time) on or about January 27, 1997 (the "Closing Date") or at such other place, time and date as may be agreed upon by Buyer and the Majority Stockholder. 2.2 Termination. Anything contained in this Agreement other than in this Section 2.2 to the contrary notwithstanding, this Agreement may be terminated in writing at any time on or prior to the Closing: -3- (a) without liability on the part of any party hereto (unless occasioned by reason of a breach by any party hereto of any of its representations, warranties or obligations hereunder) by mutual written consent of Buyer and the Majority Stockholder; (b) without liability on the part of any party hereto (unless occasioned by reason of a breach by any party hereto of any of its representations, warranties or obligations hereunder) by either Buyer or Majority Stockholder, if the Closing shall not have occurred on or before March 31, 1997 (or such later date as may be agreed upon in writing by the parties hereto); (c) by Buyer, if any Seller shall breach any of its representations, warranties or obligations hereunder and such breach shall not have been cured or waived or Sellers shall not have provided reasonable assurance that such breach will be cured on or before the Closing Date; or (d) by the Majority Stockholder, if Buyer shall breach any of its representations, warranties or obligations hereunder and such breach shall not have been cured or waived or Buyer shall not have provided reasonable assurance that such breach will be cured on or before the Closing Date. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLERS ----------------------------------------- Each Seller severally represents and warrants to Buyer, in the case of Sections 3.1, 3.4 and 3.6, and each of Albert J. Dinicola and Douglas J. Dinicola (the "Dinicolas") in the case of the other paragraphs of this Article 3, jointly and severally represents and warrants to Buyer, that: 3.1 Due Execution. This Agreement and the Employment Agreements (as hereinafter defined) (collectively, the "Agreements"), have been, and will be as of the Closing Date, duly executed and delivered by such Seller, and (assuming due execution and delivery by Buyer) this Agreement constitutes, and each of the other Agreements to which such Sellers are a party when executed and delivered will constitute, a valid and binding obligation of such Sellers, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance, moratorium, reorganization or similar laws affecting creditors' rights generally or by general equitable principles. 3.2 Corporate Organization and Authority of Company. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now being conducted and to own its properties and is duly licensed or qualified and in good standing as a foreign corporation in each jurisdiction in which it is required to be so licensed or so qualified, except where the failure to be so licensed or so qualified would not have a material adverse effect on the financial condition, assets, liabilities (contingent or otherwise), results of operations or business (a "Material Adverse Effect") of the Company. The disclosure letter dated -4- the date hereof and delivered by the Dinicolas to Buyer and incorporated herein and made a part hereof (the "Disclosure Letter") sets forth the jurisdictions in which the Company is qualified to do business. Sellers have heretofore delivered to Buyer complete and correct copies of the articles of incorporation and by-laws of the Company as currently in effect. 3.3 Subsidiaries and Equity Investments. Except as set forth in the Disclosure Letter, the Company has no subsidiaries and does not own, directly or indirectly, any investments, capital stock or other equity or ownership interests in any other corporations or business enterprises and is not partner in any partnership or co-venturer in any joint venture or other business enterprise. The term "subsidiary" means any corporation or other entity of which the Company, directly or indirectly, owns or controls capital stock or ownership interests representing either (i) more than fifty percent of the general voting power under ordinary circumstances of such corporation or entity, or (ii) if an entity other than a corporation, more than fifty percent of the economic interest therein. 3.4 Ownership of Shares. Each Seller is the lawful record and beneficial owner of that number of Shares set forth opposite his name on Schedule 1.1. Each Seller owns the Shares set forth opposite his name on Schedule 1.1 free and clear of all pledges, liens, charges, encumbrances, easements, security interests, claims, options and restrictions of every kind ("Encumbrances") except for restrictions on transfer generally applicable under federal and state securities laws and for restrictions set forth in the Shareholders' Agreement dated as of December 9, 1994 by and among the Company and the shareholders named therein (the "Shareholders' Agreement"). Upon the delivery of the Shares in the manner contemplated under Section 1.3, Sellers will transfer to Buyer valid record and beneficial title to such Shares, free and clear of all Encumbrances except for restrictions on transfer generally applicable under federal and state securities laws. 3.5 Capitalization. The authorized capital of the Company consists of 1,000,000 shares of common stock, par value $.01 per share (the "Common Stock"), of which 651,162 shares are issued and outstanding. No other class of capital stock or other ownership interests of the Company is authorized, issued, reserved for issuance or outstanding. All such issued and outstanding shares of Common Stock have been duly authorized and are validly issued, fully paid and nonassessable. No shares of Common Stock (including, without limitation, the Shares), and no options, warrants or other rights, agreements, commitments or arrangements of any kind to acquire Common Stock, were issued in violation of (x) any preemptive or other rights or (y) any provision of any contract, agreement or arrangement of any kind (including, without limitation, the Shareholders' Agreement). Except as set forth on the Disclosure Letter, there are no outstanding options, warrants, subscriptions, unsatisfied preemptive rights, calls or other rights, agreements, commitments or arrangements of any kind to acquire any of the outstanding, authorized but unissued, unauthorized or treasury shares of the capital stock of the Company or any security of any kind convertible into or exchangeable for any such capital stock. Except as set forth in the Disclosure Letter, there are no voting trusts, shareholder agreements, proxies or other agreements relating to the voting, purchase or sale of capital stock (i) between or among the Company and any of its shareholders and (ii) between or among any of the Company's shareholders. There is no outstanding bond, debenture, note or other indebtedness of the Company having the right to vote (or convertible into or exchangeable for securities having the right to vote) on any matter on which shareholders of the Company may vote. -5- 3.6 No Violation. Except as set forth in the Disclosure Letter, neither Sellers nor the Company are subject to or bound by any provision of: (a) any law, statute, rule, regulation or judicial or administrative decision, (b) (in the case of the Company) its articles of incorporation or by-laws, (c) any contract, mortgage, deed of trust, lease, note, shareholders' agreement, proxy, bond, indenture, other instrument or agreement, license, permit, trust, custodianship or other restriction, or (d) any consent, judgment, order, writ, award, injunction or decree of any court, governmental or regulatory body, administrative agency or arbitrator, that would conflict with, prevent or be violated by or that would result in the creation of any Encumbrance as a result of, or under which there would be a default or right of termination, amendment, acceleration, revocation, cancellation or suspension as a result of, the execution, delivery and performance by Seller of the Agreements to which such Seller is a party and the consummation of the transactions contemplated thereby. Except as set forth in the Disclosure Letter, no consent, order, license, permit, approval or authorization of or declaration, notice or filing with any individual, corporation, partnership, limited liability company, trust or unincorporated organization or any government or any agency or political subdivision thereof (a "Person") is required for the valid execution, delivery and performance by Seller of the Agreements to which such Seller is a party and the consummation of the transactions contemplated thereby. 3.7 Litigation. Except as set forth in the Disclosure Letter, there is (i) no outstanding consent, order, judgment, injunction, award or decree of any court, governmental or regulatory body, administrative agency or arbitrator against or involving the Company, any of its officers or directors as such or any Seller in its capacity as a shareholder of the Company, (ii) no action, suit, dispute or governmental, administrative, arbitration or regulatory proceeding pending or, to Sellers' knowledge, threatened against the Company or any Seller in its capacity as a shareholder of the Company and (iii) to Sellers' knowledge, no investigation pending or threatened against or relating to the Company, any of its officers or directors as such or any Seller in its capacity as a shareholder (collectively, "Proceedings"). 3.8 Personal Property. (a) The Disclosure Letter sets forth (i) the tangible physical assets of the Company as of the date of this Agreement that do not constitute real property (including machinery, equipment, tools, dies, furniture, furnishings, leasehold improvements, software, vehicles, buildings and fixtures) and that have a book value or replacement value in excess of $50,000 per item or per category of items and the location by address of such items; (ii) individual refundable deposits in excess of $10,000 or $25,000 in the aggregate; and (iii) all outstanding loans or advances made by the Company to any Person in excess of $20,000. (b) Except as set forth in the Disclosure Letter, the Company has good and valid title to all of its material properties and assets that do not constitute real property, free and -6- clear of all Encumbrances. Except as set forth in the Disclosure Letter, the Company owns, has valid leasehold interests (pursuant to leases disclosed in the Disclosure Letter) in or valid contractual rights pursuant to contracts disclosed in the Disclosure Letter (or not required to be disclosed therein due to the dollar thresholds set forth in Section 3.20(a)(i)) to use, all of the material assets, tangible and intangible, currently used by, or necessary for the present conduct of the business of, the Company. 3.9 Real Property. (a) The Disclosure Letter sets forth each and every parcel of real property or interest in real estate held under a lease or used by the Company (the "Real Property"). The Company does not own any real property or interest (other than the leasehold interests referenced in the Disclosure Letter) in real estate. Sellers have heretofore delivered to Buyer complete and correct copies of each and every lease and all documents relating thereto, including any amendments thereto and any assignment thereof. (b) Except as set forth in the Disclosure Letter, with respect to the Real Property designated as "leased property" in the Disclosure Letter, the Company is in peaceful and undisturbed possession of the space and/or estate under each lease under which it is a tenant, and there are no defaults by it as tenant thereunder; and to Seller's knowledge, the Company has good and valid rights of ingress and egress to and from all the Real Property from and to the public street systems. 3.10 Financial Statements. (a) Sellers have heretofore furnished Buyer with copies of the following financial statements of the Company: (i) audited balance sheets as at December 31 for each of the years ended December 31, 1994 and 1995, respectively; (ii) audited statements of operations and retained earnings and audited statements of cash flows for each of the years ended December 31, 1994 and 1995; (iii) an unaudited balance sheet (the "Reference Balance Sheet") as at October 31, 1996 (the "Reference Balance Sheet Date"); and (iv) an unaudited statement of operations and retained earnings (the "Reference Income Statement") and an unaudited statement of cash flows for the ten-month period ended October 31, 1996. Except as noted therein and except for normal year-end adjustments with respect to the unaudited financial statements, all such financial statements are complete and correct, were prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied throughout the periods indicated and present fairly the financial position of the Company at such dates and the results of its operations and cash flows for the periods then ended, subject to such inaccuracies, if any, which are not material in nature or amount. (b) There are no liabilities, debts, obligations or claims against the Company of any nature (accrued, absolute or contingent, unasserted or otherwise), except (i) as and to the extent reflected or reserved against on the Reference Balance Sheet; (ii) specifically described and identified as an exception to this paragraph in any of the Schedules delivered to Buyer pursuant to this Agreement; (iii) incurred since the Reference Balance Sheet Date in the ordinary course of business consistent with prior practice; or (iv) open purchase or sales orders or agreements for delivery of goods and services in the ordinary course of business consistent with prior practice. 3.11 Books and Records. (a) Sellers have made and will make available for inspection by Buyer all the books of account relating to businesses of the Company. Such books -7- of account of the Company reflect all the material transactions and other material matters required to be set forth under GAAP applied on a consistent basis. (b) The minute books of the Company that have been made available to Buyer for its inspection contain true and complete records of all meetings and consents in lieu of meetings of the Board of Directors (and any committees thereof) of the Company, and of the Company's shareholders, since January 1, 1994 and accurately reflect all material transactions referred to in such minutes and consents in lieu of meetings. The stock books that have been made available to Buyer for its inspection are, since January 1, 1994, true and complete in all material respects.. 3.12 Tax Matters. (a) For purposes of this Agreement, (i) "Tax" or "Taxes" shall mean any federal, state, local, foreign or other taxes (including, without limitation, income (net or gross), gross receipts, profits, alternative or add-on minimum, franchise, license, capital, capital stock, intangible, services, premium, mining, transfer, sales, use, ad valorem, payroll, wage, severance, employment, occupation, property (real or personal), windfall profits, import, excise, custom, stamp, withholding or estimated taxes), fees, duties, assessments, withholdings or governmental charges of any kind whatsoever (including interest, penalties, additions to tax or additional amounts with respect to such items) relating to the income, operations or properties of the Company or the ownership thereof (by Sellers); (ii) "Pre-Closing Periods" shall mean all Tax periods commencing on or after January 1, 1994 and ending on or before the Closing Date and, with respect to any Tax period that includes but does not end on the Closing Date, the portion of such period that ends on and includes the Closing Date; (iii) "Returns" shall mean all returns, declarations, reports, estimates, information returns and statements of any nature regarding Taxes for any Pre-Closing Period required to be filed by any Person and relating to the Company; (iv) "Code" shall mean the Internal Revenue Code of 1986, as amended; and (v) the term "Tax deficiency" shall include a reduction in any net operating losses. (b) In respect of the Pre-Closing Periods only, except as set forth in the Disclosure Letter, (i) all Returns have been or will be timely filed when due in accordance with all applicable laws; (ii) all Taxes shown on the Returns have been or will be timely paid when due; -8- (iii) the Returns completely, accurately, and correctly in all material respects reflected the facts regarding the income, properties, operations and status of any entity required to be shown thereon; (iv) the charges, accruals, and reserves for Taxes due, or accrued but not yet due, relating to the income, properties or operations of the Company for any Pre- Closing Period as reflected on the books of the Company are adequate in all material respects to cover such Taxes; (v) there are no agreements or consents currently in effect for the extension or waiver of the time (A) to file any Return or (B) for assessment or collection of any Taxes relating to the Company for any Pre-Closing Period, and no Person has been requested to enter into any such agreement or consent; (vi) all Returns with respect to taxable years ending on or after December 31, 1993 and on or prior to December 31, 1996 have been examined by the relevant taxing authorities and closed, or are Returns with respect to which the applicable statute of limitations, after giving effect to any extensions and waivers, has expired; (vii) all Taxes which the Company is required by law to withhold or collect have been in all material respects duly withheld or collected, and have been timely paid over to the appropriate governmental authorities to the extent due and payable; (viii) there is no action, suit, proceeding, investigation, audit or claim currently pending, or to Sellers' knowledge, threatened, regarding any Taxes relating to the Company for any Pre-Closing Period; (ix) all Tax deficiencies which have been claimed, proposed or asserted against Sellers or, to Sellers' knowledge, any prior shareholder of the Company relating to ownership of stock in the Company or against the Company or any group of which the Company is now or was formerly a member have been fully paid or finally settled; (x) no Person has executed or entered into a closing agreement pursuant to Code Section 7121 (or any comparable provision of state, local or foreign law) that is currently in force and determines the Tax liabilities of the Company; (xi) there is no, and will not be any, agreement or consent made under Code Section 341(f) (or any comparable provision of state, local or foreign law) affecting the Company; (xii) there are no liens for any Tax on the assets of the Company except liens which arise as a matter of law; (xiii) there are no tax sharing agreements to which the Company is now or, to Seller's knowledge, ever has been a party; -9- (xiv) the Company is not a party to any agreement, contract, arrangement or plan that would result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Code Section 280G (or any comparable provision of state, local or foreign law); (xv) the Company has not received any written notice of any reassessment and, to Sellers' knowledge, there are no proposed reassessments of any property owned or leased by the Company or any other proposals that would increase the amount of any Tax for which the Company could be liable; (xvi) the Company has not agreed, and is not required, to make any adjustment under Code Section 481(a) (or any comparable provision of state, local or foreign law) by reason of a change in accounting method or otherwise; (xvii) Seller has received no notice that prior to January 1, 1994, (A) any valid election pursuant to Section 1362 of the Code was not in effect with respect to the Company, (B) valid elections, to the extent required by local and state laws to qualify the Company as an "S corporation", were not in effect with respect to the Company and (C) the Company did not maintain its status as an "S corporation" within the meaning of Section 1361(a) of the Code. Seller has received no notice that the Company's elections to be taxed under the provisions of Subchapter S of the Code for tax years prior to January 1, 1994 and the Company's election to be taxed as a "C corporation" within the meaning of Section 1361(b) of the Code for tax years subsequent to December 31, 1993 were not duly made, proper and effective and in compliance with the applicable requirements of the Code, the Treasury regulations promulgated thereunder, and state and local laws. The Company has not been, and will not be, subject to any Tax under Section 1374 or 1375 of the Code for any taxable year ending on or after January 1, 1994 and on or prior to the Closing Date; and (xviii) no power of attorney is currently in effect, and no Tax ruling has been requested of any governmental authority, with respect to any Tax matter relating to the Company. 3.13 Employee Matters. (a) The Disclosure Letter attached hereto sets forth as of the date hereof the name, current annual compensation rate (including bonus and commissions), title, current base salary rate and accrued bonus of each present employee of the Company; and a list of any employment, managerial, advisory, consulting and severance agreements; employee confidentiality or other agreements protecting proprietary processes, formulae or information; any employee handbook(s); any reports and/or plans prepared or adopted pursuant to the Equal Employment Opportunity Act of 1972, as amended; any affirmative action plans; and each employee benefit or compensation plan, agreement or arrangement covering present employees of the Company, including "employee benefit plans" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), stock purchase, stock option, fringe benefit, change in control, bonus and deferred compensation plans, agreements or funding arrangements (collectively, the "Benefit Plans"), whether sponsored, maintained or contributed to by the Company. -10- (b) For each Benefit Plan, except as set forth on the Disclosure Letter, each of the following is true: (i) if such Benefit Plan is an employee pension benefit plan (as such term is defined in ERISA Section 3(2)) intended to qualify under the Code, since 1992 the Plan has received at least one favorable determination letter as to its qualification under the Code (or such a letter has been or will be applied for prior to expiration of the applicable remedial amendment period), and to Seller's knowledge nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification or which would result in material costs to the Company under the Internal Revenue Service's Closing Agreement Program, Voluntary Compliance Resolution Program or Administrative Policy Regarding Sanctions; (ii) the financial statements of the Company reflect in all material respects all employee liabilities arising under such Benefit Plan in a manner satisfying the applicable requirements (if any) of Statement of Financial Accounting Standards ("SFAS") Nos. 87, 88, 106 and 112; (iii) there are no actions, suits or claims (other than routine claims for benefits in the ordinary course) pending, or to Sellers' knowledge, threatened, and to Sellers' knowledge, there are no facts which could give rise to any such material actions, suits or claims (other than routine claims for benefits in the ordinary course); (iv) neither Sellers, the Company, nor any other party has, with respect to any such Benefit Plan, engaged in a prohibited transaction, as such term is defined in Code Section 4975 or ERISA Section 406, which would subject the Company or Buyer to any Taxes, penalties or other material liabilities resulting from prohibited transactions under Code Section 4975 or under ERISA Sections 409 or 502(i); (v) the reporting and disclosure requirements of ERISA have been complied with in all material respects; (vi) all contributions and insurance premiums required as of the Closing Date have been paid in all material respects; (vii) the execution and delivery of this Agreement by Sellers and the consummation of the transactions contemplated hereunder, will not (pursuant to any "change-of-control provision" or otherwise) result in any additional (or otherwise modify or accelerate any existing or contingent) obligation or liability (with respect to accrued benefits or otherwise) to any such Benefit Plan, to any employee or former employee of the Company; and (viii) Sellers have delivered to Buyer current, accurate and complete copies of such Benefit Plan (including the plan document, trust agreement and other funding or insurance instruments relating thereto) and, to the extent applicable, copies of the most recent: (A) determination letter and any outstanding request for a determination letter; (B) Form 5500 with respect to the plan years ending in calendar years 1994, 1995 or -11- 1996; (C) collective bargaining agreements or other such contracts; and (D) the general notification to employees of their "COBRA" rights under Code Section 4980B and ERISA Sections 601-609 and the form of letter(s) distributed upon the occurrence of a COBRA qualifying event for each Benefit Plan that is a "group health plan" as defined in Code Section 5000(b)(1) and ERISA Section 607(1). (c) The Company does not sponsor or maintain (and has not sponsored or maintained in the calendar years ending 1994, 1995 and 1996) an "employee pension benefit plan" (within the meaning of Section 3(2) of ERISA) that is subject to Title IV of ERISA or to the minimum funding requirements of Section 412 of the Code or Part 3 of Title I of ERISA. (d) The Company does not contribute and is not obligated to contribute (and has not been obligated to contribute in the calendar years ending 1994, 1995 and 1996) to a "multiemployer plan" (within the meaning of Section 4001(a)(3) of ERISA). (e) The Company has no employee welfare benefit plans (within the meaning of ERISA Section 3(1)). (f) With respect to the Company, except as set forth in the Disclosure Letter, each of the following is true in all material respects: (i) the Company is in compliance with all applicable laws and agreements respecting employment and employment practices, terms and conditions of employment and wages and hours and occupational safety and health and, to Sellers' knowledge, is not engaged in any unfair labor practice within the meaning of Section 8 of the National Labor Relations Act, and there is no action, suit or legal, administrative, arbitration, grievance or other proceeding pending or, to Sellers' knowledge, threatened, or, to Sellers' knowledge, any investigation pending or threatened against the Company relating to any thereof, and, to Sellers' knowledge, no basis exists for any such action, suit or legal, administrative, arbitration, grievance or other proceeding or governmental investigation; (ii) there is no labor strike, dispute, slowdown or stoppage actually pending or, to Sellers' knowledge, threatened against the Company; (iii) to Sellers' knowledge, none of the employees of the Company is a member of or represented by any labor union and, there are no attempts of whatever kind and nature being made to organize any of such employees; (iv) without limiting the generality of paragraph (iii) above, no certification or decertification is pending or was filed within the past twelve months respecting the employees of the Company and, to Sellers' knowledge, no certification or decertification petition is being or was circulated among the employees of the Company within the past twelve months; (v) no agreement (including any collective bargaining agreement), arbitration or court decision, decree or order or governmental order which is binding on -12- the Company in any material way limits or restricts the Company from relocating or closing any of its operations; (vi) the Company has not experienced any organized work stoppage in the last five years; and (vii) there are no administrative proceedings or complaints of discrimination (including but not limited to discrimination based upon sex, age, marital status, race, national origin, sexual preference, handicap or veteran status) pending or, to Sellers' knowledge, threatened, or to Sellers' knowledge, any investigation pending or threatened before the Equal Employment Opportunity Commission or any federal, state or local agency or court. Since January 1, 1994 or prior thereto, there have been no audits of the equal employment opportunity practices or affirmative action practices of the Company and, to Sellers' knowledge, no reasonable basis for any claim regarding such practices exists. 3.14 Intellectual Property. The Disclosure Letter sets forth a list of all registered trademarks, trademark registrations and applications therefor, trade names, brand names, all service marks, service mark registrations and applications therefor, all registered trade dress rights, registrations and applications therefor, patents and patent applications, material registered copyrights, and applications therefor (including information as to expiration dates of all the foregoing where applicable) presently owned or used, in whole or in part, by the Company or for which the Company is licensed. Neither Sellers nor the Company are licensors in respect of any patents, trade secrets, inventions, shop rights, copyrights or applications therefor which are used in the business of the Company. 3.15 Accounts Receivable. The accounts receivable appearing on the Reference Balance Sheet and all accounts receivable created since that date through the Closing Date represent in all material respects and will in all material respects represent valid obligations owing to the Company, have arisen from bona fide transactions in the ordinary course of business and, to Seller's knowledge, are fully collectible by the Company in the ordinary course of business, subject to the reserve for doubtful accounts appearing on the Reference Balance Sheet. 3.16 Inventory. Except as set forth in the Disclosure Letter, to Seller's knowledge and in all material respects, the inventories of raw materials, in-process and finished products of the Company are in good condition, conform in all material respects with the Company's applicable specifications and warranties, are not obsolete, and are to Seller's knowledge saleable as of the date hereof at values not less than the book value amounts thereof. Adequate reserves have been provided for inventory obsolescence and the values at which such inventories are carried are in accordance with GAAP consistently applied. 3.17 No Material Change. Since the Reference Balance Sheet Date, there has been no material adverse change in the financial condition, assets, liabilities (contingent or otherwise), results of operations or business of the Company. -13- 3.18 Absence of Change or Event. Except as set forth in the Disclosure Letter, since the Reference Balance Sheet Date, the Company has conducted its business only in the ordinary course consistent with past practice and has not: (a) incurred any obligation or liability, absolute, accrued, contingent or otherwise, whether due or to become due, in excess of $20,000 in the aggregate, except liabilities or obligations incurred in the ordinary course of business and consistent with prior practice; (b) mortgaged, pledged or subjected to lien, restriction or any other Encumbrance any of the property, businesses or assets, tangible or intangible, of the Company, except for purchase money liens; (c) sold, transferred, leased to others or otherwise disposed of any of its assets (or committed to do any of the foregoing), including the payment of any loans owed, or the making of any loans, to any officer, director, shareholder or other affiliate of the Company, except for inventory sold to customers or returned to vendors and payments to any non-affiliates on account of accounts payable or scheduled payments in respect of indebtedness for money borrowed disclosed on the Reference Balance Sheet or in the Schedules, or canceled, waived, released or otherwise compromised any debt or claim other than in the ordinary course of business, or any material right; (d) suffered any damage, destruction or loss (whether or not covered by insurance) in an amount greater than $25,000, excluding losses, damage or destruction arising from the flood of Company's principal place of business on or about October, 1996 (the "Flood Event") which uninsured loss amount is not in excess of $150,000; (e) made or committed to make any capital expenditures or capital additions or betterments in excess of an aggregate of $25,000; (f) instituted or threatened any litigation, action or proceeding before any court, governmental or regulatory body, administrative agency or arbitrator relating to it or its property; (g) issued, authorized for issuance or sold any capital stock, notes, bonds or other securities, or any option, warrant or other right to acquire the same, of the Company, or declared or paid any dividend or made any other payment or distribution in respect of its capital stock, or directly or indirectly redeemed, purchased or otherwise acquired any of its capital stock or any option, warrant or other right to acquire such capital stock; (h) increased the compensation of any officer, director, employee or agent of the Company, directly or indirectly, including by means of any bonus, pension plan, profit sharing, deferred compensation, savings, insurance, retirement, or any other employee benefit plan, except in the case of any employee whose annual base compensation is less than $100,000; -14- (i) materially changed any of its business or accounting accrual practices, including, without limitation, the amount of promotional or advertising expenditures, investments, marketing, pricing, purchasing, production, personnel, sales, returns or budgets, accounts receivable or inventory reserves, or otherwise changed its policies with respect thereto; (j) made or changed any election concerning Taxes or Tax Returns, changed an annual accounting period, adopted or changed any accounting method, filed any amended Return, entered into any closing agreement with respect to Taxes, settled any Tax claim or assessment or surrendered any right to claim a refund of Taxes or obtained or entered into any Tax ruling, agreement, contract, understanding, arrangement or plan; (k) allowed any Permit (as hereinafter defined) relating to the business of the Company to lapse or terminate; (m) materially amended or terminated or received any threat (not subsequently withdrawn) to terminate, any Contract (as hereinafter defined); (n) amended its articles of incorporation or bylaws or merged with or into or consolidated with any Person, subdivided, combined or in any way reclassified any shares of its capital stock, or changed or agreed to change the rights of its capital stock or the character thereof; or (o) engaged in any other material transaction other than in the ordinary course of business. 3.19 Compliance With Law. Except as set forth in the Disclosure Letter, the operations and activities of the Company have complied and are in compliance in all respects with all applicable federal, state, local and foreign laws, statutes, rules, regulations, judicial and administrative decisions and consents, judgments, orders, awards, writs and decrees of any court, governmental or regulatory body, administrative agency or arbitrator, including, without limitation, health and safety statutes and regulations and all environmental laws, including, without limitation, all restrictions, conditions, standards, limitations, prohibitions, requirements, obligations, schedules and timetables contained in the environmental laws or contained in any regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder, the failure of which could have Material Adverse Effect on the Company. 3.20 Contracts and Commitments. (a) The Disclosure Letter sets forth each written contract or agreement involving a liability or obligation of the Company equal to or in excess of $10,000 and outstanding as of the date hereof to which the Company is a party, other than ordinary course of business purchase orders. (b) Except as set forth in the Disclosure Letter: (i) Each of the agreements set forth in the Disclosure Letter (the "Contracts") was entered into in a bona fide transaction in the ordinary course of business, -15- is valid and binding on the Company (assuming due authorization, execution and delivery thereof by the other parties thereto) and to Seller's knowledge is in full force and effect and, upon consummation of the transactions contemplated hereby, to Seller's knowledge will continue in full force and effect without penalty. Sellers have heretofore delivered to Buyer complete and correct copies of the Contracts. There is not under any Contract: (A) any existing material default by the Company or, to Sellers' knowledge, by any other party thereto, or (B) any event which, after notice or lapse of time or both, would constitute a material default by the Company or, to Sellers' knowledge, by any other party, or result in a right to accelerate, suspend or terminate or result in a loss of rights of the Company; (ii) No purchase contracts (other than inventory purchase commitments) of the Company continue for a period of more than 12 months; and (iii) To Seller's knowledge, the Company is not under any material liability or material obligation with respect to the return of inventory or merchandise in the possession of distributors, customers or other Persons. 3.21 Insurance. (a) The Disclosure Letter sets forth (i) the policies of insurance presently in force and, without restricting the generality of the foregoing, those covering the Company's public and product liability and its personnel, properties, buildings, machinery, equipment, furniture, fixtures and operations, specifying with respect to each such policy the name of the insurer, type of coverage, term of policy, limits of liability and annual premium; (ii) the Company's premiums, deductibles and losses in excess of $25,000, by year, by type of coverage, for the calendar years 1994, 1995 and 1996 based on information received from the Company's insurance carrier(s); (iii) all outstanding insurance claims in excess of $10,000 by the Company for damage to or loss of property or income which have been referred to insurers or which Sellers believe to be covered by commercial insurance; (iv) general comprehensive liability policies carried by the Company for the calendar years 1994, 1995 and 1996, including excess liability policies; and (v) any agreements, arrangements or commitments by or relating to the Company under which the Company indemnifies any other Person or is required to carry insurance for the benefit of any other Person. Sellers have heretofore delivered to Buyer complete and correct copies of the policies and agreements set forth in the Disclosure Letter. (b) The insurance policies set forth in the Disclosure Letter are in full force and effect, all premiums which are due with respect thereto covering all periods up to and including the date of the Closing have been paid, and no notice of cancellation or termination has been received with respect to any such policy. To Seller's knowledge, such policies are sufficient for compliance with all requirements of law and all agreements to which the Company is a party; are valid, outstanding and enforceable policies; will remain in full force and effect through the respective dates set forth in the Disclosure Letter; and will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement. To Seller's knowledge the Company has not been refused any insurance with respect to the respective assets or operations of the Company, nor has any such coverage been limited, by any insurance carrier to which the Company has applied for any such insurance or with which the Company has carried insurance during the calendar years 1994, 1995 and 1996. -16- 3.22 Affiliate Interests. (a) No payments other than compensation payments during calendar years 1994, 1995 and 1996 have been made by the Company to any officer, director or shareholder of the Company. (b) Except as set forth in the Disclosure Letter, no shareholder, officer or director of the Company or any affiliate of any Seller (in each case, or any family member thereof) (i) has any interest, directly or indirectly, in any property, real or personal, tangible or intangible, including without limitation, inventions, patents, trademarks or trade names, used in or pertaining to the business of the Company, (ii) owns, directly or indirectly, any interest in (excepting less than 5% stock holdings for investment purposes in securities of companies which are publicly held and traded), or is an officer, director, employee or consultant of, any Person which is, or is engaged in business as, a competitor, lessor, lessee, supplier, distributor, sales agent or customer of the Company or (iii) has any cause of action or other claim whatsoever against, or owes any amount to, the Company, except for claims arising in the ordinary course of business arising from such Person's employment with the Company and indebtedness described in paragraph 6.7 hereof. 3.23 Customers, Suppliers, Distributors, Etc. (a) Except as set forth in the Disclosure Letter and except for the loss of such other customers that will not have a Material Adverse Effect on the Company, since December 31, 1995, no supplier, customer, distributor or sales representative of the Company has canceled or otherwise terminated, or made any written threat to the Company or to any of their affiliates to cancel or otherwise terminate, for any reason, including the consummation of the transactions contemplated hereby, its relationship with the Company. Except as set forth in the Disclosure Letter and except for the loss of such relationship that will not have a Material Adverse Effect on the Company, to Sellers' knowledge no such supplier, customer, distributor or sales representative intends to cancel or otherwise terminate its relationship with the Company. (b) Schedule 3.23 sets forth by dollar volume for the 1996 year to date the 25 largest customers of the Company. 3.24 Absence of Questionable Payments. Neither the Company nor, to Sellers' knowledge, any director, officer, agent, employee or other Person acting on behalf of the Company has used any corporate or other funds for unlawful contributions, payments, gifts, or entertainment, or made any unlawful expenditures relating to political activity to government officials or others or established or maintained any unlawful or unrecorded funds in violation of Section 30A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Neither the Company nor, to Sellers' knowledge, any current director, officer, agent, employee or other Person acting on behalf of the Company has accepted or received any unlawful contributions, payments, gifts or expenditures. 3.25 Disclosure. (a) No representations or warranties by Sellers in this Agreement, including the Exhibits, Schedules and the Disclosure Letter, and no statement contained in any document (including, without limitation, the financial statements, certificates and other writings furnished or to be furnished by Sellers to Buyer or any of its representatives pursuant to the provisions hereof or in connection with the transactions contemplated hereby), contains or will contain any untrue statement of material fact or omits or will omit to state any -17- material fact necessary, in light of the circumstances under which it was made, in order to make the statements herein or therein not misleading. There is no fact known to the Dinicolas which has a Material Adverse Effect on the Company which has not been set forth in this Agreement, including any Exhibit or Schedule or the Disclosure Letter, the financial statements referred to in Section 3.10 (including the footnotes thereto), any schedule, exhibit, or certificate delivered in accordance with the terms hereof or any document or statement in writing which has been supplied by or on behalf of Sellers or the Company in connection with the transactions contemplated by this Agreement. (b) Sellers have furnished or caused to be furnished to Buyer complete and correct copies of all agreements, instruments and documents set forth on the Disclosure Letter. Each of the Schedules and the Disclosure Letter is complete and correct. 3.26 Information in Registration Statement. None of the information supplied or to be supplied by Majority Stockholder for the express purpose of inclusion or incorporation by reference in (a) the Registration Statement and (b) any other documents to be filed with the Securities and Exchange Commission (the "SEC") in connection with the transactions contemplated hereby will, at the respective times such documents are filed, and, in the case of the Registration Statement, when it becomes effective, cause the Registration Statement to contain any untrue statement of a material fact, or omit to state any material fact necessary in order to make the statements therein in light of the circumstances under which they were made not misleading. 3.27 Sellers' Knowledge. The term "Sellers' knowledge" shall mean the actual knowledge of any of the Dinicolas. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER --------------------------------------- Buyer represents and warrants to Sellers that: 4.1 Organization. Buyer is a corporation duly organized and validly existing and in good standing under the laws of the State of Delaware. 4.2 Corporate Authority. Buyer has full corporate power and authority to enter into the Agreements to which it is party and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by Buyer of the Agreements to which it is party have been duly authorized by all requisite corporate action. This Agreement has been, and each of the other Agreements to which it is party will be as of the Closing Date, duly executed and delivered by Buyer, and (assuming due execution and delivery by Sellers) this Agreement constitutes, and each of the other Agreements when executed and delivered will constitute, a valid and binding obligation of Buyer, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, fraudulent conveyance, reorganization or similar laws affecting creditors' rights generally or by general equitable principles. -18- 4.3 No Violation. Buyer is not subject to or bound by any provision of: (a) any law, statute, rule, regulation or judicial or administrative decision, (b) any articles or certificate of incorporation or by-laws, (c) any mortgage, deed of trust, lease, note, shareholders' agreement, bond, indenture, other instrument or agreement, license, permit, trust, custodianship or other restriction, or (d) any judgment, order, writ, injunction or decree of any court, governmental body, administrative agency or arbitrator, that would prevent or be violated by, or under which there would be a default as a result of, the execution, delivery and performance by Buyer of this Agreement and the consummation of the transactions contemplated hereby. Except in connection with the Offering (as hereinafter defined), no consent, approval or authorization of or declaration or filing with any Person is required for the valid execution, delivery and performance by Buyer of this Agreement and the consummation of the transactions contemplated hereby. 4.4 Investment Intent. Buyer is acquiring the Shares for its own account for investment and not with a view to any distribution thereof. 4.5 Capitalization. The shares of Buyer Common Stock issuable upon exercise of the Warrants, have been adequately reserved and such reservation will be maintained by Buyer so long as the Warrants remain outstanding. 4.6 Registration Statement and Offering. Buyer represents that it intends to file with the SEC as soon as possible after the execution of this Agreement a registration statement for review in connection with an offering of its Convertible Preferred Stock (the "Offering"), intending to comply with the provisions of the Securities Act of 1933 (the "Registration Statement"). Buyer, as of the date hereof, has received no notice from either the SEC or its underwriter that said Registration Statement will not comply with the provisions of applicable securities laws. Buyer, as of the date hereof, has received no notice (verbal or written) from its underwriter that such underwriter is either not willing to proceed with such Offering or that it recommends a delay in such Offering because of (i) market conditions, (ii) the financial or business results or prospects of the Buyer, or (iii) any other reason, and to Buyer's knowledge, its knows of no basis for any such underwriter decision based on the foregoing clause (ii). ARTICLE 5 CERTAIN COVENANTS AND AGREEMENTS OF SELLERS AND BUYER ----------------------------------------------------- 5.1 Conduct of Business Prior to the Closing Date. Sellers agree that, between the date hereof and the Closing Date: -19- (a) Except as contemplated by this Agreement or permitted by written consent of Buyer, Sellers shall cause the Company to operate its business only in the ordinary course consistent with prior practice and not to: (i) take any action of the nature referred to in Section 3.18, except as permitted therein; (ii) change the Company's banking or safe deposit arrangements; (iii) cause or permit indebtedness (which for purposes of this clause (iii) shall be deemed to exclude trade payables consisting of accounts payable, deferred taxes and accrued expenses) of the Company to exceed $25,000 in the aggregate; or (iv) except as my be required by law, take any action to amend or terminate any Employee Benefit Plan or adopt any other plan, program, arrangement or practice providing new benefits or compensation to its employees. (b) Sellers shall use their best efforts to preserve the business organization of the Company intact, to keep available to Buyer the services of the present officers and employees of the Company and to preserve for Buyer the good will of the Company's suppliers, customers, distributors, sales representatives and others having business relations with the Company. (c) Sellers shall cause the Company to maintain in force the insurance policies referred to in Schedule 3.21 or insurance policies providing the same or substantially similar coverage; provided, however, that the Majority Stockholder will notify Buyer prior to the expiration of any of such insurance policies. (d) Except as contemplated by this Agreement or permitted by written consent of Buyer, no plan, fund, or arrangement disclosed or required to be disclosed in Schedule 3.13(a) has been or will be: (i) terminated by the Company other than for expiration of its terms; (ii) except as required by law, amended (except as expressly required by law) in any manner which would directly or indirectly increase the benefits accrued in a material amount, by any participant thereunder; or (iii) except as required by law, amended in any manner which would materially increase the cost to Buyer of maintaining such plan, fund or arrangement. (e) Majority Stockholder shall give Buyer prompt notice of any event, condition or circumstance occurring from the date hereof through the Closing Date that would constitute a violation or breach of any representation or warranty of Sellers of which Majority Stockholder has knowledge, whether made as of the date hereof or as of the Closing Date, or that would constitute a violation or breach of any covenant of Sellers contained in this Agreement. -20- 5.2 Tax Covenants. (a) Sellers shall timely cause to be prepared and filed by the Company all Returns of the Company due prior to the Closing Date (taking into account timely filed extensions) and timely pay, or cause to be paid by the Company, when due all Taxes relating to such Returns except to the extent that the liability for such Taxes is being contested in good faith by the Company and proper reserves for any such liability are established on the books and records of the Company. Prior to the filing of any Return described in the preceding sentence, Sellers shall provide Buyer with a substantially final draft of such Return at least fifteen (15) business days prior to the due date for filing such Return, and Buyer shall have the right to review such Return prior to the filing of such Return. Buyer shall notify the Majority Stockholder of any reasonable objections Buyer may have to any items set forth in such draft Returns, and Buyer and Sellers (acting through the Majority Stockholder) agree to consult and resolve in good faith any such objection and to mutually consent to the filing of such Return provided, however, if Seller and Buyer are unable to agree on any of the items set forth in such draft Return, and the Company would become subject to late fees and penalties if such Return is not filed, then Sellers may file such Return and upon resolution of such disputed items, such Return shall be amended, if necessary. Such Returns shall be prepared or completed in a manner consistent with prior practice of Sellers and the Company with respect to Returns concerning the income, properties or operations of the Company (including elections and accounting methods and conventions), except as otherwise required by law or regulation or otherwise agreed to by Buyer prior to the filing thereof, subject to the proviso of the preceding sentence. (b) Buyer and Majority Stockholder shall cooperate with each other in responding to any audit or proceeding relating to any Returns (including any proceeding relating to the Company for Pre-Closing Periods). Notwithstanding anything to the contrary contained or implied in this Agreement, (i) without the prior written approval of Buyer (which shall not be unreasonably withheld or delayed), neither Sellers nor any affiliate thereof shall agree or consent to compromise or settle, either administratively or after the commencement of litigation, any issue or claim arising in any such audit or proceeding, or otherwise agree or consent to any Tax liability, to the extent that any such compromise, settlement, consent or agreement shall materially affect the Tax liability of Buyer, any of its affiliates or the Company (including, but not limited to, the imposition of Tax deficiencies, the material reduction of asset basis or cost adjustments, the lengthening of any amortization or depreciation periods, the denial of material amortization or depreciation deductions, or the material reduction of loss or credit carry-forwards). (c) Buyer shall promptly notify the Majority Stockholder upon receipt by Buyer, any affiliate of Buyer or the Company of notice of any pending or threatened Tax audits or assessments relating to the income, properties or operations of the Company, in each case for Pre-Closing Periods only, so long as Pre-Closing Periods remain open; provided, however, that failure by Buyer to comply with this Section 5.2(c) shall not affect Buyer's right to indemnification relating to Taxes if such failure does not prejudice the rights of Sellers. Sellers shall promptly notify Buyer upon receipt by any Seller or any affiliate thereof of notice of any pending or threatened Tax audits or assessments relating to the income, properties or operations of the Company, in each case for Pre-Closing Periods only; provided, however, that the failure by Sellers to comply with this Section 5.2(c) shall not affect Sellers' right to indemnification if such failure does not prejudice the rights of Buyer. -21- (d) Neither Sellers nor any affiliate of any Seller shall, without the prior written consent of Buyer, file, or cause to be filed, any amended Tax return or claim for Tax refund, with respect to the Company, to the extent that any such filing shall materially affect the Tax liability of Buyer, any of its affiliates or the Company (including, but not limited to, the imposition of Tax deficiencies, the material reduction of asset basis or cost adjustments, the lengthening of any amortization or depreciation periods, the denial of material amortization or depreciation deductions, or the material reduction of loss or credit carry-forwards). (e) Any and all powers of attorney relating to Tax matters concerning the Company shall be terminated as to the Company on or prior to the Closing Date and shall have no further force or effect. (f) After the Closing Date, Buyer and Sellers shall provide each other, and Buyer shall cause the Company to provide Sellers, with such cooperation and information relating to the Company as either party reasonably may request in (A) filing any Tax return, amended return or claim for refund, (B) determining any Tax liability or a right to refund of Taxes, (C) conducting or defending any audit or other proceeding in respect of Taxes or (D) effectuating the terms of this Agreement. The parties shall retain, and Buyer shall cause the Company to retain, all returns, schedules and work papers, and all material records and other documents relating thereto, until the expiration of the statute of limitation (and, to the extent notified by any party, any extensions thereof) of the taxable years to which such returns and other documents relate and, unless such returns and other documents are offered and delivered to Sellers or Buyer, as applicable, until the final determination of any Tax in respect of such years. Any information obtained under this Section 5.2 shall be kept confidential, except as may be otherwise necessary in connection with filing any Tax return, amended return, or claim for refund, determining any Tax liability or right to refund of Taxes, or in conducting or defending any audit or other proceeding in respect of Taxes. Notwithstanding the foregoing, neither Sellers nor Buyer, nor any of their affiliates, shall be required unreasonably to prepare any document, or determine any information not then in its possession, in response to a request under this Section 5.2(f). (g) Buyer shall have received from each Seller, on or before the Closing Date, an affidavit to the effect that Seller is not a "foreign person" within the meaning of Code Section 1445. If, on or before the Closing Date, Buyer shall not have received such affidavit from any Seller, Buyer may withhold from the Purchase Consideration payable at Closing to such Seller pursuant hereto such sums as are required to be withheld therefrom under Section 1445 of the Code. (h) Sellers shall be liable for, and shall pay when due, (i) any transfer, gains, documentary, sales, use, registration, stamp, value added or other similar Taxes payable by reason of the transactions contemplated by this Agreement or attributable to the sale, transfer or delivery of the Shares hereunder and (ii) other Taxes imposed on Sellers or any former shareholder of the Company for which Buyer or the Company is held liable. Other than in the case of Returns and other documentation that is required to be filed by the Company after the Closing Date, Sellers shall, at their own expense, file all necessary Tax returns and other documentation with respect to all such Taxes. -22- 5.3 Expenses and Finder's Fees. Buyer and Sellers will bear their own expenses in connection with this Agreement and its performance. Sellers, on the one hand, and Buyer, on the other hand, each represent and warrant to the other that the negotiations relative to this Agreement and the transactions contemplated hereby have been carried on in such a manner as not to give rise to any valid claims against the other party or the Company for a brokerage commission, finder's fee or other like payment. 5.4 Access to Information and Confidentiality. Sellers agree that until the Closing, Buyer may conduct such reasonable investigation with respect to the business, business prospects, assets, liabilities (contingent or otherwise), results of operations, employees and financial condition of the Company as will permit Buyer to evaluate the transactions contemplated by this Agreement. Until the Closing, Sellers shall afford Buyer reasonable access to the premises, books, records and business affairs of the Company (and, to the extent directly relating thereto, of Sellers) for purposes of conducting such investigation and, promptly after the end of each month (without demand or notice), shall furnish Buyer with copies of an unaudited balance sheet as of the end of such month and unaudited statements of income and cash flows for such month, in each case prepared consistent with the standards set forth in the second sentence of Section 3.10(a). Each of Sellers and Buyer will hold and will cause their respective representatives to hold in strict confidence, unless compelled to disclose by judicial or administrative process, or, in the opinion of its counsel, by other requirements of law, all documents and information concerning the Company furnished to Buyer and all documents and information concerning Buyer furnished to Sellers in connection with the transactions contemplated by this Agreement, on the terms and subject to the conditions contained in the Confidentiality Agreement dated September 9, 1996 between Buyer and the Company, which shall survive delivery of this Agreement but shall be deemed to be of no further force and effect following the Closing. 5.5 No Solicitation. Sellers shall not, and shall direct the Company and its affiliates, officers, employees, representatives or agents not to, directly or indirectly, encourage, solicit, initiate or engage in discussions or negotiations with, or provide any non-public information to, any Person concerning any merger, sales of substantial assets, sales of shares of capital stock or similar transactions involving the Company or enter into any agreement with respect thereto. Sellers will promptly communicate to Buyer the terms of any proposal which it may receive in respect of all such transactions prohibited by the foregoing. 5.6 Press Releases. Except as required by law or stock exchange regulation, any public announcements regarding the transactions contemplated hereby shall be made only with the mutual consent of the Majority Stockholder and Buyer. 5.7 Transitional Assistance. Sellers shall reasonably cooperate with and assist Buyer in the orderly transfer of the business of the Company after the Closing Date. Such cooperation and assistance shall include but not be limited to the physical transfer of any books, records and computer software of the Company. 5.8 Conditions. Sellers shall use their best efforts to fulfill or cause the fulfillment of the conditions set forth in Article 6. Buyer shall use its best efforts to fulfill or cause the fulfillment of the conditions set forth in Article 7, and Buyer covenants and agrees that, -23- subject to its underwriters requirements, it shall use its reasonable best efforts to cause the Registration Statement to be declared effective by the Closing Date and to complete the Offering by the Closing Date. 5.9 Lock-Up. Majority Stockholder shall execute and deliver to Buyer and Buyer's underwriters a lock-up agreement in the form of Exhibit B hereto (the "Lock-up Agreement"). 5.10 Notice as to Offering. Buyer agrees to provide the Majority Stockholder, between the date hereof and the Closing Date, with immediate notice of any indication of Buyer's underwriter, with respect to the Offering, to Buyer (verbal or written) during such time period, that such underwriter is either not willing to proceed with such Offering or that it recommends a delay in such Offering because of (i) market conditions, (ii) the financial or business results of prospects of the Buyer, or (iii) any other reason. ARTICLE 6 CONDITIONS PRECEDENT OF BUYER Buyer need not consummate the transactions contemplated by this Agreement unless the following conditions shall be fulfilled or waived: 6.1 Representations and Warranties. Except as otherwise contemplated or permitted by this Agreement, (a) the representations and warranties of Sellers contained in this Agreement and in any certificate or document delivered to Buyer pursuant hereto shall be deemed to have been made again at and as of the Closing Date and shall then be true in all material respects, except to the extent that any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true in all material respects as of such date and (b) Sellers shall have performed and complied with all material agreements and conditions required by this Agreement to be performed or complied with by Sellers prior to or on the Closing Date, and Buyer shall have been furnished with a certificate of the Majority Stockholder, dated the Closing Date, certifying to the effect of clauses (a) and (b) of this Section 6.1. 6.2 Opinion of Counsel. Buyer shall have been furnished with an opinion dated the Closing Date of Ricklefs & Company, P.C., counsel for Sellers and the Company, in form and substance reasonably acceptable to Buyer. 6.3 No Actions. No action, suit, or proceeding before any court or governmental or regulatory authority shall be pending, no investigation by any governmental or regulatory authority shall have been commenced, and no action, suit or proceeding by any governmental or regulatory authority shall have been threatened, against Buyer, Sellers, the Company or any of the principals, officers or directors of any of them, seeking to restrain, prevent or change the transactions contemplated hereby or questioning the legality or validity of any such transactions or seeking damages in connection with any such transactions. -24- 6.4 Consents. All consents of third parties, including, without limitation, governmental authorities and non-governmental self-regulatory agencies, and all filings with and notifications of governmental authorities, regulatory agencies (including non-governmental self-regulatory agencies) or other entities which regulate the business of Buyer, Sellers or the Company necessary on the part of Buyer, Sellers or the Company, to the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and to permit the continued operation of the respective businesses of Buyer and the Company in substantially the same manner immediately after the Closing Date as theretofore conducted, other than routine post-closing notifications or filings, shall have been obtained or effected. 6.5 Employment Agreements. Each of Douglas J. Dinicola, Edward G. O'Brien, Diane O'Brien and Robert Kennedy shall have executed and delivered an Employment Agreement substantially in the form attached hereto as Exhibits C-1 through C-3, respectively (together with the exhibits attached thereto, the "Employment Agreements"). 6.6 Termination of Rights under Shareholder Agreements. Buyer shall have received satisfactory evidence that all rights, claims and other interests of any nature of all present shareholders of the Company arising under the Shareholders' Agreement shall have been satisfied and discharged or shall otherwise have terminated or been canceled. 6.7 Outstanding Shareholder Loans. Any outstanding loans from or guarantees by the Company to or for the benefit of any Seller shall have been satisfied and discharged or otherwise have terminated or been canceled, and Sellers and the Company shall have delivered to Buyer satisfactory evidence thereof; provided that, as of the date hereof, the Majority Stockholder is indebted to the Company in the amount of $41,076.25 and the company is indebted to the Majority Stockholder in the amount of approximately $96,000, which such amounts shall be offset at the Closing, and the net balance due the Majority Stockholder by the Company shall be paid on demand of Majority Stockholder following the Closing. 6.8 Effectiveness of Registration Statement. The Registration Statement with respect to the Share Consideration shall be effective under the Securities Act and no stop order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for such purpose shall be pending before or threatened by the SEC. 6.9 Consummation of the Offering. Buyer shall have consummated its public offering of its Convertible Preferred Stock resulting in gross proceeds to Buyer of not less than $5,000,000. 6.10 Termination of Rights to Acquire Options. The Company's obligation to grant non-qualified stock options to employees (as described in Footnote 8 to the Company's Financial Statements) shall be terminated. 6.11 Minimum Net Worth. The Company shall have a minimum net worth, as of the last day of the month preceding the Closing, of not less than $825,000. 6.12 Lock-Up Agreement. Buyer shall have received the Lock-up Agreement duly executed by the Majority Stockholder. -25- ARTICLE 7 CONDITIONS PRECEDENT OF SELLERS ------------------------------- Sellers need not consummate the transactions contemplated hereby unless the following conditions shall be fulfilled: 7.1 Representations and Warranties. Except as otherwise contemplated or permitted by this Agreement, (a) the representations and warranties of Buyer contained in this Agreement or in any certificate or document delivered to Sellers pursuant hereto shall be deemed to have been made again at and as of the Closing Date and shall then be true in all material respects and (b) Buyer shall have performed and complied with all material agreements and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date, and the Majority Stockholder shall have been furnished a certificate of an appropriate officer of Buyer, dated the Closing Date, certifying to the effect of clauses (a) and (b) of this Section 7.1. 7.2 Opinion of Buyer's Counsel. The Majority Stockholder shall have been furnished with an opinion dated the Closing Date of counsel for Buyer, in form and substance reasonably acceptable to Majority Stockholder. 7.3 No Actions. No action, suit, or proceeding before any court, governmental or regulatory authority, administrative agency or arbitrator shall be pending, no investigation by any governmental or regulatory authority shall have been commenced, and no action, suit or proceeding by any Person shall have been threatened, against Sellers seeking to restrain, prevent, or change the transactions contemplated hereby or questioning the legality or validity of any such transactions or seeking damages in connection with any such transactions. 7.4 Consents. All consents of third parties including, without limitation, governmental authorities, and non-governmental self-regulatory agencies, and all filings with and notifications of governmental authorities, regulatory agencies (including non-governmental self-regulatory agencies) or other entities which regulate the business of Sellers, necessary on the part of Sellers, to the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, other than routine post-closing notifications or filings, shall have been obtained or effected. 7.5 Employment Agreements. Buyer shall have caused the Employment Agreements to be duly executed and delivered by the Company. 7.6 Effectiveness of Registration Statement. The Registration Statement with respect to the Share Consideration shall be effective under the Securities Act and no stop order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for such purpose shall be pending before or threatened by the SEC. -26- ARTICLE 8 INDEMNIFICATION 8.1 Indemnification by Sellers. Effective only from and upon the occurrence of the Closing, and subject to Section 8.3 below, each of the Dinicolas hereby agrees to jointly and severally defend, indemnify and hold harmless Buyer and the Company and their respective successors, assigns and affiliates (collectively, the "Buyer Indemnitees") from and against any and all losses, deficiencies, liabilities, damages, assessments, judgments, costs and expenses, including reasonable attorneys' fees (both those incurred in connection with the defense or prosecution of the indemnifiable claim and those incurred in connection with the enforcement of this provision), including, without limitation, Environmental Liabilities and Costs (collectively, "Buyer Losses"), caused by, resulting from or arising out of: (a) (i) breaches of representation or warranty under this Agreement on the part of any Seller; and (ii) failures by any of the Dinicolas (whether as Sellers or Majority Shareholder) to perform or otherwise fulfill any undertaking or other agreement or obligation under this Agreement; (b) (i) any and all Taxes imposed on the Company (including, without limitation, Taxes relating to the Tax liability of Sellers to the extent any governmental authority seeks to impose such Taxes on the Company) for, or relating to, periods commencing with January 1, 1994 and subsequent thereto, and prior to the date of the the Closing to the extent the charges, accruals and reserves therefor as reflected on the books of the Company as of the date of the Closing are inadequate to cover such Taxes and (ii) any Tax liability of the Company resulting from the Company's election as of January 1, 1994 to be taxed as a "C corporation" (including, without limitation, any Tax liability resulting from such change in status); and (c) any and all actions, suits, proceedings, claims, demands, incident to any of the foregoing or such indemnification; provided, however, that if any claim, liability, demand, assessment, action, suit or proceeding shall be asserted in respect of which a Buyer Indemnitee proposes to demand indemnification ("Buyer Indemnified Claims"), Buyer or such other Buyer Indemnitee shall promptly notify the Majority Stockholder thereof, provided further, however, that, subject to Section 8.3 below, the failure to so notify the Majority Stockholder shall not reduce or affect Sellers' obligations with respect thereto except to the extent that Sellers are materially prejudiced thereby. Subject to rights of or duties to any insurer or other third Person having liability therefor, the Majority Stockholder shall have the right promptly upon receipt of such notice (after acknowledging responsibility for such Buyer Indemnified Claim) to assume the control of the defense, compromise or settlement of any such Buyer Indemnified Claims (provided that any compromise or settlement must be reasonably approved by Buyer), including, at its own expense, employment of counsel reasonably satisfactory to Buyer; provided, however, that if the Majority Stockholder shall have exercised its right to assume such control, Buyer may, in its sole discretion and at its expense, employ counsel to represent it (in addition to counsel employed by the Majority Stockholder) in any such matter. So long as the Majority Stockholder is contesting any such -27- Buyer Indemnified Claim in good faith, Buyer and each other Buyer Indemnitee shall not pay or settle any such Buyer Indemnified Claim. 8.2 Indemnification by Buyer. Buyer hereby agrees to defend, indemnify and hold harmless Sellers and their respective successors, assigns and affiliates (collectively, "Seller Indemnitees") from and against any and all losses, deficiencies, liabilities, damages, assessments, judgments, costs and expenses, including attorneys' fees (both those incurred in connection with the defense or prosecution of the indemnifiable claim and those incurred in connection with the enforcement of this provision) (collectively, "Seller Losses"), resulting from or arising out of: (a) (i) breaches of representation and warranty hereunder on the part of Buyer and (ii) failures by Buyer to perform or otherwise fulfill any undertaking or agreement or obligation hereunder; and (b) any and all actions, suits, proceedings, claims and demands incident to any of the foregoing or such indemnification; provided, however, that if any claim, liability, demand, assessment, action, suit or proceeding shall be asserted in respect of which a Seller Indemnitee proposes to demand indemnification ("Seller Indemnified Claims"), Seller or such other Seller Indemnitee shall notify Buyer thereof, provided further, however, that the failure to so notify Buyer shall not reduce or affect Buyer's obligations with respect thereto except to the extent that Buyer is materially prejudiced thereby. Subject to rights of or duties to any insurer or other third Person having liability therefor, Buyer shall have the right promptly upon receipt of such notice to assume the control of the defense, compromise or settlement of any such Seller Indemnified Claims (provided that any compromise or settlement must be reasonably approved by Seller) including, at its own expense, employment of counsel reasonably satisfactory to Seller; provided, however, that if Buyer shall have exercised its right to assume such control, Seller may, in its sole discretion and at its expense, employ counsel to represent it (in addition to counsel employed by Buyer) in any such matter. So long as Buyer is contesting any such Seller Indemnified Claim in good faith, Seller or such other Seller Indemnitees shall not pay or settle any such Seller Indemnified Claim. 8.3 Limitation on Liability. The aggregate liability of the Dinicolas under this Article 8 shall be limited as follows: (a) There shall be no liability whatsoever under Section 8.1(a)(i) or under Section 8.1(c) (in respect of matters arising under Section 8.1(a)(i)) on the part of the Dinicolas until the Buyer Losses from the occurrence of Buyer Indemnified Claims arising under Section 8.1(a)(i) or under Section 8.1(c) (in respect of matters arising under Section 8.1(a)(i)) exceed in the aggregate $50,000, in which event the Dinicolas shall be liable for all such amounts exceeding said $50,000, but such liability will be limited in the aggregate (including, without limitation, for costs of defense of Buyer Indemnitees) to $500,000; (b) There shall be no liability whatsoever under Section 8.1(b) or under Section 8.1(c) (in respect of matters arising under Section 8.1(b)) until the Buyer Losses from the occurrence of Buyer Indemnified Claims arising thereunder exceed in the -28- aggregate $115,000, in which event the Dinicolas shall be liable for all such amounts exceeding said $115,000; and (c) No claim for indemnification under Section 8.1(a)(i) for a breach of any representation or warranty or under Section 8.1(c) in respect of such breach shall be made after the date, if any, on which the survival period for such representation or warranty expires in accordance with Section 9.1 hereof, and the liability of the Dinicolas with respect thereto shall then cease, except with respect to claims made on or prior to the applicable date of expiration as set forth in Section 9.1, which claims shall survive such expiration. No claim for indemnification under Section 8.1(b) or under Section 8.1(c) in respect to a claim arising under Section 8.1(b) shall be made after the date one year after the expiration of the applicable statute of limitations for claims of the nature described in Section 8.1(b). ARTICLE 9 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS ----------------------------------------------------- 9.1 Representations, Warranties and Covenants. The covenants contained in this Agreement shall survive the Closing Date without limitation. The representations and warranties contained herein shall survive the Closing Date for a period of one year, except that any representation or warranty of Sellers contained in Sections 3.1, 3.4 and 3.5 shall survive the Closing Date without limitation, and any representation or warranty of Sellers contained in Section 3.12 (Tax Matters) shall survive until the expiration of one year after the expiration of the applicable statute of limitations. ARTICLE 10 NON-COMPETITION BY SELLERS AND NO SOLICITATION ---------------------------------------------- 10.1 Non-Compete. Majority Stockholder shall not, and shall not permit any of their respective affiliates to, for a period of three years from the Closing, compete, directly or indirectly, with the Company. 10.2 Non-Solicitation. Majority Stockholder agrees that he shall not, for a period of three years after the Closing Date, employ any person who was employed by the Company or any of its affiliates or induce such person to accept employment other than with the Company and its affiliates. 10.3 Remedies. Each Seller recognizes that a breach or threatened breach by him of his obligations under this Article 10 would cause irreparable injury to the Company, and the Company shall be entitled to seek preliminary and permanent injunctions enjoining him from violating this Article 10, in addition to any other remedies which may be available. -29- ARTICLE 11 MISCELLANEOUS ------------- 11.1 Cooperation. Each of the parties hereto shall use its reasonable efforts to take or cause to be taken all actions, to cooperate with the other party hereto with respect to all actions, and to do or cause to be done all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement. 11.2 Waiver. Any failure of Sellers to comply with any of their respective obligations or agreements herein contained may be waived only in writing by Buyer. Any failure of Buyer to comply with any of its obligations or agreements herein contained may be waived only in writing by the Majority Stockholder. 11.3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given upon receipt of: hand delivery; certified or registered mail, return receipt requested; or telecopy transmission with confirmation of receipt: (i) If to Sellers, to: Comp Ware, Inc. d/b/a Webb Distribution Two Lowel Avenue Winchester, MA 01890 Telecopier: (617) 729-6839 Telephone: (617) 729-5800 Attention: A.J. Dinicola (with a copy to) Ricklefs & Company, P.C. One Washington Mall Boston, MA 02108 Telecopier: (617) 722-0223 Telephone: (617) 722-0222 Attention: Donald P. Ricklefs, Esq. -30- (ii) If to Buyer, to Questron Technology, Inc. 6400 Congress Avenue Suite 200 Boca Raton, Florida 33487 Telecopier: (407) 241-2866 Telephone: (407) 989-0888 Attention: Dominic A. Polimeni (with a copy to) Winthrop, Stimson, Putnam & Roberts One Battery Park Plaza New York, New York 10004 Telecopier: (212) 858-1500 Telephone: (212) 858-1000 Attention: Howard S. Kelberg, Esq. Such names and addresses may be changed by written notice to each person listed above. 11.4 Governing Law and Consent to Jurisdiction; Dispute Resolution. (a) This Agreement shall be governed by and construed in accordance with the internal substantive laws and not the choice of law rules of the State of Delaware. (b) Any dispute, claim or controversy arising out of or relating to this Agreement, or the interpretation or breach thereof, shall be referred to arbitration under the rules of the American Arbitration Association, to the extent such rules are not inconsistent with this Section 11.4. Judgment upon the award of the arbitrators may be entered in any court having jurisdiction thereof or such court may be asked to judicially confirm the award and order its enforcement, as the case may be. The demand for arbitration shall be made within a reasonable time after the claim, dispute or other matter in question has arisen, and in any event shall not be made after the date when institution of legal or equitable proceedings, based on such claim, dispute or other matter in question, would be barred by the applicable statute of limitations. (c) The arbitration panel shall consist of three arbitrators, one of whom shall be appointed by each party hereto. The two arbitrators thus appointed shall choose the third arbitrator; provided, however, that if the two arbitrators are unable to agree on the appointment of the third arbitrator, either arbitrator may petition the American Arbitration Association to make the appointment. (d) The place of arbitration shall be New York. -31- 11.5 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 11.6 Headings. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 11.7 Entire Agreement. This Agreement, including the Exhibits and Schedules hereto and the documents referred to herein, embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 11.8 Amendment and Modification. This Agreement may be amended or modified only by written agreement of the parties hereto. 11.9 Binding Effect; Benefits. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns; nothing in this Agreement, express or implied, is intended to confer on any Person other than the parties hereto and their respective successors and assigns (and, to the extent provided in Sections 8.1 and 8.2, the other Buyer Indemnitees and Seller Indemnitees) any rights, remedies, obligations or liabilities under or by reason of this Agreement. 11.10 Assignability. This Agreement shall not be assignable by any party hereto without the prior written consent of the other parties provided that Buyer may assign its rights under the Agreement to any affiliate of Buyer, except in the event of any such assignment to an affiliate of Buyer, Buyer shall guarantee the obligations hereunder of "Buyer" and shall be a joint maker on the Notes. -32- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. QUESTRON TECHNOLOGY, INC. By /s/ DOMINIC A. POLIMENI --------------------------------- Name: Dominic A. Polimeni Title: Chairman, President and Chief Executive Officer /s/ ALBERT J. DINICOLA --------------------------------- Albert J. Dinicola /s/ DOUGLAS J. DINICOLA --------------------------------- Douglas J. Dinicola /s/ DONALD PAUL DINICOLA --------------------------------- Donald Paul Dinicola* /s/ DIANE DINICOLA MARSH --------------------------------- Diane Dinicola Marsh* /s/ DEBORAH DINICOLA MADIGAN --------------------------------- Deborah Dinicola Madigan /s/ DIANE O'BRIEN --------------------------------- Diane O'Brien /s/ EDWARD B. O'BRIEN --------------------------------- Edward B. O'Brien /s/ ROBERT KENNEDY --------------------------------- Robert Kennedy * by Power of Attorney -33- Schedule 1.1 COMP WARE, INC. CAPITALIZATION December 16, 1996
Stockholder Name No. Common Stock Shares - ----------------- ----------------------- Albert J. Dinicola 420,000 Douglas J. Dinicola 80,000 Donald Paul Dinicola 20,000 Diane Dinicola Marsh 20,000 Deborah Dinicola Madigan 20,000 Diane O'Brien 32,557.85 Edward G. O'Brien 32,557.85 Robert Kennedy 26,046.30 Total Outstanding 651,162 Total Authorized 1,000,000 (all $.01 par, common stock)
EXHIBIT A-1 FORM OF NOTE A $375,000 January __, 1997 (a) Principal. For value received, Questron Technology, Inc., a Delaware corporation ("Maker"), promises to pay to the order of Albert J. Dinicola ("Holder"), at ______________________, or at such other place as Holder may from time to time designate in writing, the principal sum of three hundred seventy five thousand dollars ($375,000), or so much thereof as shall be outstanding hereunder, together with accrued interest from the date of this Note (this "Note") on the unpaid principal; provided, however, that in the event Holder receives net proceeds("Warrant Proceeds") from the sale of Maker's Series IV Warrants (the "Warrants") received by the Holder pursuant to that certain Stock Purchase Agreement dated as of December __, 1996 by and among Maker and the shareholders of Comp Ware, Inc. D/B/A Webb Distribution (the "Stock Purchase Agreement") that are in excess of $375,000, then such excess shall be applied to reduce the outstanding principal amount of this Note, and, to the extent the Warrant Proceeds, together with any payments of principal received by Holder under this Note are in excess of $750,000, then such excess shall be applied to reduce the outstanding principal amount of that certain Note B of Maker dated the date hereof for $375,000 maturing in 2000. (b) Payment of Principal. The outstanding principal balance hereunder and all accrued interest shall be due and payable on that date eighteen month from the date hereof ("Maturity Date"). (c) Prepayment. Maker may, at any time, and from time to time, prepay the outstanding principal balance under this Note, in whole or in part, so long as such payment is accompanied by payment of all accrued but unpaid interest payable hereunder. Any such prepayment shall be applied, first, to accrued but unpaid interest and, second, to the remaining outstanding principal balance hereof. (d) Interest Rate and Payment. From the date of this Note until payment in full of the principal hereof, the outstanding principal hereunder shall bear interest at the rate of 10% per annum based on a year of 360 days. (e) Lawful Money. #20161954.3 Principal and interest are payable in lawful money of the United States of America. (f) Event of Default. If the Maker shall fail to make payment of principal or interest when due pursuant to the terms hereof; or if the Maker is adjudicated bankrupt or insolvent by a court of competent jurisdiction or makes an assignment for the benefit of creditors; or if the Maker shall petition for any proceedings in bankruptcy or liquidation or for the reorganization or adjustment of indebtedness of the Maker; or if any involuntary petition for any proceedings in bankruptcy or liquidation or for the reorganization or the readjustment of indebtedness of the Maker shall be filed, or any case or proceeding shall be commenced by any person other than the Maker under applicable bankruptcy or insolvency laws now or hereafter existing, against the Maker, and such petition, case or proceeding shall remain undischarged for more than thirty (30) days, whether or not consecutive (each an "Event of Default"); then all principal and accrued interest hereunder will become payable in full, without the need for any further action by the Holder hereof. The Maker agrees to pay all costs and expenses, including all attorneys' fees, for the collection or enforcement of this Note upon an Event of Default. (g) Remedies. Upon the occurrence of an Event of Default, then, at the option of Holder, the entire balance of principal, together with all accrued interest thereon, without demand or notice, shall immediately become due and payable. The Maker hereby absolutely and irrevocably waiver notice of acceptance, presentment, notice of demand, notice of non-payment, protest, notice of protest, suit and all other conditions precedent in connection with the deliver, acceptance, collection and/or enforcement of the Note or any collateral or security therefor. The Maker hereby absolutely and irrevocably consents and submits to the jurisdiction of the courts of the Commonwealth of Massachusetts, and of any Federal court located in the said Commonwealth, in connection with any actions or proceedings by the Holder hereof arising out of or relating of this Note. In any such action or proceeding, the Maker absolutely and irrevocably waives personal service of any summons, complaint, declaration or any other process and hereby absolutely and irrevocably agrees that the service thereof may be made, in addition to other methods permitted by law, by certified, registered or first class mail directed to the Maker at ______________________________, or such other address of which the Maker shall have given notice to the Holder by certified, registered or first class mail. (h) Restriction on Transferability. This Note may not be transferred or assigned in whole or in part without the prior written consent of Maker. (i) Severability. Every provision of this Note is intended to be severable. In the event any term or provision hereof is declared by a court of competent jurisdiction to be illegal or invalid A-2 for any reason whatsoever, such illegality or invalidity shall not affect the balance of the terms and provisions hereof, which terms and provisions shall remain binding and enforceable. (j) Headings. Headings at the beginning of each numbered Section of this Note are intended solely for convenience and are not to be deemed or construed to be a part of this Note. (k) Choice of Law. This Note shall be governed by and construed in accordance with the laws of the State of Delaware. (l) Cancellation of this Note. In the event that, prior to the expiration of the eighteen (18) month period of the Lock-up Agreement (as defined in the Stock Purchase Agreement), Maker's underwriter releases Holder from the Lock-up Agreement in connection with a proposed transaction to sell the Warrants and Holder declines to sell the Warrants in such transaction within seven business days of receipt by Holder of written notice of sail release, then this Note shall be automatically canceled. QUESTRON TECHNOLOGY, INC., a Delaware corporation By: _______________________ Name: Title: A-3 EXHIBIT A-2 FORM OF NOTE B $375,000 January __, 1997 (a) Principal. For value received, Questron Technology, Inc., a Delaware corporation ("Maker"), promises to pay to the order of Albert J. Dinicola ("Holder"), at ______________________, or at such other place as Holder may from time to time designate in writing, the principal sum of three hundred seventy five thousand dollars ($375,000), or so much thereof as shall be outstanding hereunder, together with accrued interest from the date of this Note (this "Note") on the unpaid principal; provided, however, that in the event Holder receives net proceeds ("Warrant Proceeds") from the sale of Maker's Series IV Warrants (the "Warrants") received by the Holder pursuant to that certain Stock Purchase Agreement dated as of December __, 1996 by and among Maker and the shareholders of Comp Ware, Inc. D/B/A Webb Distribution (the "Stock Purchase Agreement"), that are in excess of $375,000, then such excess shall be applied to reduce the outstanding principal amount of that certain Note A of Maker dated the date hereof for $375,000 maturing in 1998 (the "Eighteen Month Note") and to the extent the Warrants Proceeds, together with any payments of principal received by Holder under the Eighteen Month Note are in excess of $750,000, then such excess shall be applied to reduce the outstanding principal amount of this Note. (b) Payment of Principal. The outstanding principal balance hereunder, together with interest at the rate of 10% per annum shall be payable as follows: commencing one month from the date hereof and continuing on the same day of each successive month thereafter, monthly payments of principal and interest on amounts of principal remaining unpaid from time to time shall be due and payable in 60 equal payments of $7,967.64; provided that all outstanding and unpaid principal and accrued interest shall be paid in full on the date five years from the date hereof. (c) Prepayment. Maker may, at any time, and from time to time, prepay the outstanding principal balance under this Note, in whole or in part, so long as such payment is accompanied by payment of all accrued but unpaid interest payable hereunder. Any such prepayment shall be applied, first, to accrued but unpaid interest and, second, to the remaining outstanding principal balance hereof. (d) Interest Rate and Payment. From the date of this Note until payment in full of the principal hereof, the outstanding principal hereunder shall bear interest at the rate of 10% per annum. (e) Lawful Money. Principal and interest are payable in lawful money of the United States of America. (f) Event of Default. If the Maker shall fail to make payment of principal or interest when due pursuant to the terms hereof; or if the Maker is adjudicated bankrupt or insolvent by a court of competent jurisdiction or makes an assignment for the benefit of creditors; or if the Maker shall petition for any proceedings in bankruptcy or liquidation or for the reorganization or adjustment of indebtedness of the Maker; or if any involuntary petition for any proceedings in bankruptcy or liquidation or for the reorganization or the readjustment of indebtedness of the Maker shall be filed, or any case or proceeding shall be commenced by any person other than the Maker under applicable bankruptcy or insolvency laws now or hereafter existing, against the Maker, and such petition, case or proceeding shall remain undischarged for more than thirty (30) days, whether or not consecutive (each an "Event of Default"); then all principal and accrued interest hereunder will become payable in full, without the need for any further action by the Holder hereof. The Maker agrees to pay all costs and expenses, including all attorneys' fees, for the collection or enforcement of this Note upon an Event of Default. (g) Remedies. Upon the occurrence of an Event of Default, then, at the option of Holder, the entire balance of principal, together with all accrued interest thereon, without demand or notice, shall immediately become due and payable. The Maker hereby absolutely and irrevocably waiver notice of acceptance, presentment, notice of demand, notice of non-payment, protest, notice of protest, suit and all other conditions precedent in connection with the deliver, acceptance, collection and/or enforcement of the Note or any collateral or security therefor. The Maker hereby absolutely and irrevocably consents and submits to the jurisdiction of the courts of the Commonwealth of Massachusetts, and of any Federal court located in the said Commonwealth, in connection with any actions or proceedings by the Holder hereof arising out of or relating of this Note. In any such action or proceeding, the Maker absolutely and irrevocably waives personal service of any summons, complaint, declaration or any other process and hereby absolutely and irrevocably agrees that the service thereof may be made, in addition to other methods permitted by law, by certified, registered or first class mail directed to the Maker at ______________________________, or such other address of which the Maker shall have given notice to the Holder by certified, registered or first class mail. (h) Restriction on Transferability. This Note may not be transferred or assigned in whole or in part without the prior written consent of Maker. A-2 (i) Severability. Every provision of this Note is intended to be severable. In the event any term or provision hereof is declared by a court of competent jurisdiction to be illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the balance of the terms and provisions hereof, which terms and provisions shall remain binding and enforceable. (j) Headings. Headings at the beginning of each numbered Section of this Note are intended solely for convenience and are not to be deemed or construed to be a part of this Note. (k) Choice of Law. This Note shall be governed by and construed in accordance with the laws of the State of Delaware. (l) Cancellation of this Note. In the event that, prior to the expiration of the eighteen (18) month period of the Lock-up Agreement (as defined in the Stock Purchase Agreement), Maker's underwriter releases Holder from the Lock-up Agreement in connection with a proposed transaction to sell the Warrants and Holder declines to sell the Warrants in such transaction within seven business days of receipt by Holder of written notice of said release, then this Note shall be automatically canceled. QUESTRON TECHNOLOGY, INC., a Delaware corporation By: ______________________ Name: Title: A-3 EXHIBIT B Biltmore Securities, Inc. 6700 North Andrews Avenue Fort Lauderdale, Florida 33309 RE: QUESTRON TECHNOLOGY, INC. Gentlemen: The undersigned is the beneficial and record holder of 1,500,000 Series IV Warrants to purchase common stock (the "Warrants") of Questron Technology, Inc., a Delaware corporation (the "Company"). In connection with the proposed public offering of securities of the Company (the "Offering"), the undersigned agrees not to directly or indirectly, for a period of eighteen (18) months following the effective date of the Offering, offer, sell (including by effecting any short sale), loan, hypothecate, pledge, grant any option for the sale of, acquire any option to dispose of, transfer or gift (except for estate planning or charitable transfer or other private sales, provided the transferees agree to be bound by the same restrictions on transfer), or otherwise dispose of any Warrants without obtaining your prior written consent (which consent may be withheld or granted in your discretion). The undersigned acknowledges and agrees that in order to enforce the covenants contained in this letter agreement, the Company will impose stop-transfer instructions with respect to the Warrants owned by the undersigned until the end of such eighteen (18) month period for transfers other than those exceptions described above. Date: Signed: ________________________ Albert J. Dinicola EXHIBIT C-1 EMPLOYMENT AGREEMENT Agreement made this day of [1996] between QUESTRON TECHNOLOGY, INC. (herein referred to as the "Company" or the "Employer"), and _____________ [insert name of executive] (the "Executive"). WHEREAS, the Company desires to employ the Executive, and the Executive desires to accept/continue employment with the Company, but only on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Company and the Executive hereby agree as follows: (y) Term. Unless sooner terminated as provided in Section 6 of the Agreement, the term of this Agreement shall be for a three-year period commencing on the date hereof, provided that the parties may agree in writing to extend such term for any additional period. (z) Employment. The Executive shall serve the Company as its _____________ [insert title]. During the term of this Agreement, the Executive shall, except during vacation or sick leave, devote the whole of his time, attention and skill during usual business hours (and outside those hours when reasonably necessary to his duties hereunder) to his duties hereunder; faithfully and diligently perform such duties and exercise such powers as may be from time to time reasonably assigned to or vested in him by the Company's Board of Directors (the "Board") or by any officer of the Company superior to the Executive; and use his best efforts to promote the interests of the Company. The Executive may be required in pursuance of his duties hereunder to perform similar services in a similar capacity at the same location for any company controlling, controlled by or under common control with the Company (such companies hereinafter collectively called "Affiliates"). The Executive shall obey all policies of the Company and applicable policies of its Affiliates to which he has received written notice. (aa) Compensation. During the term of this Agreement, the Company shall pay the Executive a salary at an annual rate of ___________ [insert amount which shall be not less (as to total amount and as to allocation between contingent and non-contingent portions) than the amount equal to the sum of all compensation received by employee from Comp Ware, Inc. for calendar year 1996], which shall be payable biweekly. 4. Benefits. The Executive shall be entitled to such retirement benefits, health and other welfare plan coverage, life insurance, expense accounts, vacation time, sick leave, perquisites of office, fringe benefits, eligibility to immediately participate (and vest, giving full credit for employee's tenure with Comp Ware, Inc., in accordance with the provisions of each of the following plans) in Quest Electronic Hardware, Inc.'s 401(k), and Questron Technology, Inc.'s ESOP and stock option plan, plus any employment benefits as the Company provides to any or all its employees. 5. Nonassignment. The performance by the Executive of his duties under this Agreement is his personal obligation and may not be delegated by him. However, the Executive may delegate duties and responsibilities to other employees or agents of the Company incident to normal and customary management practices. Neither party hereto may assign any rights hereunder. Any purported delegation or assignment shall be void. The foregoing notwithstanding, however, the Company may assign this Agreement to any Affiliate of the Company. 6. Termination. Unless sooner terminated in accordance with the following provisions of this paragraph 6, the Company shall continue to employ the Executive and the Executive shall continue to work for the Company, during the term of this Agreement. (I) 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). (II) In the event of any willful misconduct, active fraud or gross negligence by the Executive in connection with his employment hereunder, the Employer shall have the right to terminate the term of employment by giving the Executive notice in writing of the reason for such proposed termination. If the Executive shall not have corrected such conduct to the satisfaction of the Employer within thirty days after such notice, this Agreement shall terminate and the Employer shall have no further obligation to the Executive hereunder other than as provided by subsection (d) of this Section 6, but the restrictions on the Executive's activities contained in Sections 7 and 8 and the obligations of the Executive contained therein shall continue in effect as provided therein. (III) The Company may terminate the Executive's employment at any time without cause. In the event that the Executive is terminated without cause, the Company shall continue to pay the Executive biweekly at a rate equivalent to his compensation, plus benefits described in paragraph 4 above until the end of the term of this Agreement. Such payments to the Executive by the Company will be in full and complete satisfaction (except as provided in subsection d below) of any and all obligations owing to the Executive pursuant to this Agreement (excluding any common law claims, rather than contractual claims under this Agreement, which may exist in connection with such termination). (IV) Upon termination pursuant to a, b or c above, the Company shall pay the Executive or his estate any salary and other employment benefits earned and unpaid to the date of termination, and any outstanding funds advanced by the Company to or on behalf of the Executive shall become immediately due and payable. 7. Intellectual Property; Confidentiality. (a) 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 related directly or indirectly to the business of Employer or any of its subsidiaries or affiliates, 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. (b) 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 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. 8. Competition. (a) The Executive agrees that during his employment at the Company and for a period of six months after termination of his employment, he will not directly or indirectly, whether or not for compensation and whether or not as an employee, be engaged in or have any financial interest in any business competing with the business of the Company or any of its Affiliates within any state, region or locality in which the Company or such Affiliate is then doing business. For purposes of this Agreement, the Executive shall be deemed to be engaged in or to have a financial interest in such a business if he is an employee, officer, director, or partner, of any person, partnership, corporation, trust or other entity which is engaged in such a business, or if he directly or indirectly performs services for such entity or if he beneficially owns an equity interest, or interest convertible into equity, in any such entity; provided, however, that the foregoing shall not prohibit the Executive from owning, for the purpose of passive investment, less than 5% of any class of securities of a publicly held corporation. (b) The Executive agrees that during his employment at the Company and for a period of six months after the termination of his employment, he will not knowingly interfere with or disrupt, or attempt to interfere with or disrupt, the relationship, contractual or otherwise, between the Company or any of its Affiliates and any customer, supplier or employee of the Company or such Affiliate. (c) The Executive agrees that he shall not, for a period of six months after the termination of his employment, employ any person who was employed by the Company or any of its Affiliates or induce such person to accept employment other than with the Company and its Affiliates. (d) The Executive recognizes that a breach or threatened breach by him of his obligations under this Section 8 would cause irreparable injury to the Company, and the Company shall be entitled to seek preliminary and permanent injunctions enjoining him from violating this Section 8 in addition to any other remedies which may be available. In the event that the Executive is receiving payments pursuant to subsection (c) of Section 6, the obligations under all provisions of this Section 8 shall continue so long as Employer continues to make such payments, but not beyond three years from the date hereof. 9. Addresses. Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and delivered personally or sent by registered or certified mail, postage prepaid, addressed as follows: If to the Company: Questron Technology, Inc. 6400 Congress Avenue Suite 200 Boca Raton, FL 33487 Telephone: (407) 989-0888 Facsimile: (407) 241-2866 Attention: Dominic A. Polimeni If to the Executive: [insert] or to such other address as either party may designate by notice to the other, and shall be deemed to have been given upon receipt. 10. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Massachusetts. 11. Headings. The headings herein are for convenience of reference only and shall not be deemed to be part of the substance of this Agreement. 12. Entire Agreement, Etc. This Agreement constitutes the entire agreement between the parties hereto with respect to the Executive's employment by the Company, and supersedes and is in full substitution for any and all prior understandings or agreements with respect to the Executive's employment. 13. Amendments. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party hereto at any time to require the performance by the other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. 14. Binding Effect. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. 15. Severability. If any provision of this Agreement, or portion thereof, is so broad, in scope or duration, so as to be unenforceable, such provision or portion thereof shall be interpreted to be only so broad as is enforceable. 16. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 17. Survival. The obligations of the Executive set forth in Sections 7, 8 and 10 represent independent covenants by which the Executive is and will remain bound notwithstanding any breach by the Company hereunder, and shall survive the termination of this Agreement. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above. [insert name of Executive] QUESTRON TECHNOLOGY, INC. ______________________________ By: _____________________________ Name: Title: EX-4.3 5 FORM OF SERIES IV WARRANT AGREEMENT EXHIBIT 4.3 WARRANT AGREEMENT AGREEMENT, dated as of this ____ day of _______ 1996, by and between QUESTRON TECHNOLOGY, INC., a Delaware corporation ("Company"), and American Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent"). WITNESSETH: WHEREAS, in connection with (A) a public offering of up to 1,150,000 units, which includes a certain over-allotment option ("Units"), each unit consisting of one (1) share of the Company's Series B Convertible Preferred Stock, $.01 par value ("Preferred Stock") and one (1) Series IV Redeemable Common Stock Purchase Warrant (the "Series IV Warrants") pursuant to an underwriting agreement (the "Underwriting Agreement") dated _______ __, 1996 between the Company and certain of its stockholders and Biltmore Securities, Inc. ("Biltmore"), and (B) the issuance to (i) certain selling securityholders of an aggregate of 2,750,000 Series IV Warrants (the "Selling Securityholder Warrants"), and (ii) Biltmore or its designees of a Purchase Option to purchase 100,000 additional Units (the "Purchase Option"), the Company will issue up to 4,000,000 Warrants; WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange and redemption of the Warrants, the issuance of certificates representing the Warrants, the exercise of the Warrants, and the rights of the holders thereof; NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the holders of certificates representing the Warrants and the Warrant Agent, the parties hereto agree as follows: 1. Definitions. As used herein, the following terms shall have the following meanings, unless the context shall otherwise require: (a) "Common Stock" shall mean the common stock of the Company of which at the date hereof consists of 20,000,000 authorized shares, $.001 par value, and shall also include any capital stock of any class of the Company thereafter authorized which shall not be limited to a fixed sum or percentage in respect to the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Company; provided, however, that the shares issuable upon exercise of the Warrants shall include (i) only shares of such class designated in the Company's Certificate of Incorporation as Common Stock on the date of the original issue of the Warrants, or (ii) in the case of any reclassification, change, consolidation, merger, sale or conveyance of the character referred to in Section 9(c) hereof, the stock, securities or property provided for in such section; or (iii) in the case of any reclassification or change in the outstanding shares of Common Stock issuable upon exercise of the Warrants as a result of a subdivision or combination or a change in par value, or from par value to no par value, or from no par value to par value, such shares of Common Stock as so reclassified or changed. (b) "Corporate Office" shall mean the office of the Warrant Agent (or its successor) at which at any particular time its principal business shall be administered, which office is located at the date hereof at 40 Wall Street, New York, NY 10005. (c) "Exercise Date" shall mean, as to any Warrant, the date on which the Warrant Agent shall have received both (a) the Warrant Certificate representing such Warrant, with the exercise form thereon duly executed by the Registered Holder (as defined below) thereof or his attorney duly authorized in writing, and (b) payment in cash, or by official bank or certified check made payable to the Company, of an amount in lawful money of the United States of America equal to the applicable Purchase Price (as defined below). (d) "Initial Warrant Exercise Date" shall mean _______ __, 1998. (e) "Purchase Price" shall mean the purchase price per share to be paid upon exercise of each Warrant in accordance with the terms hereof, which price shall be 115% of the closing market price per share of the Common Stock on the day immediately preceding the proposed offering of the Preferred Stock, for a four (4) year period commencing one (1) year after the effective date of the public offering (the "Effective Date"), subject to adjustment from time to time pursuant to the provisions of Section 9 hereof, and subject to the Company's right, in its sole discretion, upon thirty (30) days' written notice, to reduce the Purchase Price upon notice to all warrantholders. (f) "Redemption Price" shall mean the price at which the Company may, at its option, redeem the Warrants, in accordance with the terms hereof, which price shall be $0.05 per Warrant. (g) "Registered Holder" shall mean as to any Warrant and as of any particular date, the person in whose name the certificate representing the Warrant shall be registered on that date on the books maintained by the Warrant Agent pursuant to Section 6. (h) "Transfer Agent" shall mean American Stock Transfer & Trust Company, as the Company's transfer agent, or its authorized successor, as such. (i) "Warrant Expiration Date" shall mean 5:00 P.M. (New York time) on _________ __, 2002 or the Redemption Date as defined in Section 8, whichever is earlier; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized or required to close, then 5:00 P.M. (New York time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized or required to close. Upon thirty (30) days' written notice to all warrantholders, the Company shall have the right to extend the warrant expiration date. 2. Warrants and Issuance of Warrant Certificates. (a) A Warrant initially shall entitle the Registered Holder of the Warrant representing such Warrant to purchase one share of Common Stock upon the exercise thereof, in accordance with the terms hereof, subject to modification and adjustment as provided in Section 9. (b) Upon execution of this Agreement, Warrant Certificates representing the number of Warrants sold pursuant to the Underwriting Agreement shall be executed by the Company and delivered to the Warrant Agent. Upon written order of the Company signed by its President or a Vice President and by its Secretary or an Assistant Secretary, the Warrant Certificates shall be countersigned, issued, and delivered by the Warrant Agent. (c) From time to time, up to the Warrant Expiration Date, the Transfer Agent shall countersign and deliver stock certificates in required whole number denominations representing up to an aggregate of 4,000,000 shares of Common Stock, subject to adjustment as described herein, upon the exercise of Warrants in accordance with this Agreement. (d) From time to time, up to the Warrant Expiration Date, the Warrant Agent shall countersign and deliver Warrant Certificates in required whole number denominations to the persons entitled thereto in connection with any transfer or exchange permitted under this Agreement; provided that no Warrant Certificates shall be issued except (i) those initially issued hereunder, (ii) those issued on or after the Initial Warrant Exercise Date, upon the exercise of fewer than all Warrants 3 represented by any Warrant Certificate, to evidence any unexercised warrants held by the exercising Registered Holder, (iii) those issued upon any transfer or exchange pursuant to Section 6; (iv) those issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7; (v) those issued to holders of the Bridge Units; (vi) those issued pursuant to the Purchase Option; and (vii) those issued at the option of the Company, in such form as may be approved by the its Board of Directors, to reflect any adjustment or change in the Purchase Price, the number of shares of Common Stock purchasable upon exercise of the Warrants or the Redemption Price therefor made pursuant to Section 9 hereof. (e) Pursuant to the terms of the Purchase Option, Biltmore may purchase up to 100,000 Units, which include up to 100,000 Series IV Warrants. The Purchase Option shall not be transferred, sold, assigned or hypothecated for a period of one (1) year from the Effective Date, except that it may be transferred to persons who are officers of Biltmore or selling group members in the offering. 3. Form and Execution of Warrant Certificates. (a) The Series IV Warrant Certificates shall be substantially in the forms annexed hereto as Exhibit A (the provisions of which are hereby incorporated herein) and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Warrants may be listed, or to conform to usage or to the requirements of Section 2(b). The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or destroyed Warrant Certificates) and issued in registered form. Series IV Warrant Certificates shall be numbered serially with the letters WIV. (b) Warrant Certificates shall be executed on behalf of the Company by its President, or any Vice President and by its Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon, and shall have imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be an officer of the Company or to hold the particular office referenced in the Warrant Certificate before the date of issuance of the Warrant Certificates or before 4 countersignature by the Warrant Agent and issue and delivery thereof, such Warrant Certificates may nevertheless be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be an officer of the Company or to hold such office. After countersignature by the Warrant Agent, Warrant Certificates shall be delivered by the Warrant Agent to the Registered Holder without further action by the Company, except as otherwise provided by Section 4 hereof. 4. Exercise. Each Warrant may be exercised by the Registered Holder thereof at any time on or after the Initial Warrant Exercise Date, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein and in the applicable Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date and the person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder of those securities upon the exercise of the Warrant as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date, the Warrant Agent shall deposit the proceeds received from the exercise of a Warrant and shall notify the Company in writing of the exercise of the Warrants. Promptly following, and in any event within five (5) business days after the date of such notice from the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to be issued and delivered by the Transfer Agent, to the person or persons entitled to receive the same, a certificate or certificates for the securities deliverable upon such exercise (plus a certificate for any remaining unexercised Warrants of the Registered Holder), unless prior to the date of issuance of such certificates the Company shall instruct the Warrant Agent to refrain from causing such issuance of certificates pending clearance of checks received in payment of the Purchase Price pursuant to such Warrants. Upon the exercise of any Warrant and clearance of the funds received, the Warrant Agent shall promptly remit the payment received for the Warrant (the "Warrant Proceeds") to the Company or as the Company may direct in writing. 5. Reservation of Shares; Listing; Payment of Taxes, etc. (a) The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon exercise of Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all shares of Common Stock which shall be issuable upon exercise of the Warrants shall, at the time of delivery, be duly and validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof (other than those which the Company shall promptly pay or discharge) and that upon 5 issuance such shares shall be listed on each national securities exchange or eligible for inclusion in each automated quotation system, if any, on which the other shares of outstanding Common Stock of the Company are then listed or eligible for inclusion. (b) The Company covenants that if any securities to be reserved for the purpose of exercise of Warrants hereunder require registration with, or approval of, any governmental authority under any federal securities law before such securities may be validly issued or delivered upon such exercise, then the Company will, to the extent the Purchase Price is less than the Market Price (as hereinafter defined), in good faith and as expeditiously as reasonably possible, endeavor to secure such registration or approval and will use its reasonable efforts to obtain appropriate approvals or registrations under state "blue sky" securities laws. With respect to any such securities, however, Warrants may not be exercised by, or shares of Common Stock issued to, any Registered Holder in any state in which such exercise would be unlawful. (c) The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance, or delivery of any shares upon exercise of the Warrants; provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any. (d) The Warrant Agent is hereby irrevocably authorized for such time as it is acting as such to requisition the Company's Transfer Agent from time to time for certificates representing shares of Common Stock issuable upon exercise of the Warrants, and the Company will authorize the Transfer Agent to comply with all such proper requisitions. The Company will file with the Warrant Agent a statement setting forth the name and address of the Transfer Agent of the Company for shares of Common Stock issuable upon exercise of the Warrants. 6. Exchange and Registration of Transfer. (a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants of the same class or may be transferred in whole or in part. Warrant Certificates to be exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and upon satisfaction of the terms and provisions hereof, the Company shall execute and the Warrant Agent shall countersign, issue and deliver in exchange therefor the Warrant Certificate or Certificates which the Registered Holder making the exchange shall be entitled to receive. 6 (b) The Warrant Agent shall keep at its office books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the transfer thereof in accordance with its regular practice. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants. (c) With respect to all Warrant Certificates presented for registration or transfer, or for exchange or exercise, the subscription form on the reverse thereof shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Company and the Warrant Agent, duly executed by the Registered Holder or his attorney-in-fact duly authorized in writing. (d) A service charge may be imposed by the Warrant Agent for any exchange or registration of transfer of Warrant Certificates. In addition, the Company may require payment by such holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. (e) All Warrant Certificates surrendered for exercise or for exchange in case of mutilated Warrant Certificates shall be promptly canceled by the Warrant Agent and thereafter retained by the Warrant Agent until termination of this Agreement or resignation as Warrant Agent, or disposed of or destroyed, at the direction of the Company. (f) Prior to due presentment for registration of transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof and of each Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. The Warrants which are being publicly offered in Units with shares of Common Stock pursuant to the Underwriting Agreement will be immediately detachable from the Common Stock and transferable separately therefrom. 7. Loss or Mutilation. Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership of and loss, theft, destruction or mutilation of any Warrant Certificate and (in case of loss, theft or destruction) of indemnity satisfactory to them, and (in the case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall (in the absence of notice to the Company and/or Warrant Agent that the Warrant Certificate has been acquired by a bona fide purchaser) countersign and deliver to the 7 Registered Holder in lieu thereof a new Warrant Certificate of like tenor representing an equal aggregate number of Warrants. Applicants for a substitute Warrant Certificate shall comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe. 8. Redemption. (a) Subject to the provision of paragraph 2(e) hereof, on not less than thirty (30) days' notice given at any time after the Initial Warrant Exercise Date, the Warrants may be redeemed, at the option of the Company, at a redemption price of $0.05 per Warrant, provided the closing bid for the Common Stock exceeds 170% of the market price of the Company's Common Stock on the Effective Date (the "Series IV Target Price"). No such notice will be given until there is a current Registration Statement and Prospectus on file with the Securities and Exchange Commission at the time such notice is given to Warrant Holders and the notice may not be mailed to Warrant Holders during the aforesaid one-year period from the Effective Date. Market Price for the purpose of this Section 8 shall mean (i) the average closing bid price for any twenty (20) consecutive trading days within a period of thirty (30) consecutive trading days ending within ten (10) days prior to the date of the notice of redemption, which notice shall be mailed no later than five (5) days thereafter, of the Common Stock as reported by the National Association of Securities Dealers, Inc. Automatic Quotation System or (ii) the last reported sale price, for twenty (20) consecutive trading days within a period of thirty (30) consecutive trading days ending within ten (10) days of the date of the notice of redemption, which notice shall be mailed no later than five (5) days thereafter, on the primary exchange on which the Common Stock is traded, if the Common Stock is traded on a national securities exchange. (b) If the conditions set forth in Section 8(a) are met, and the Company desires to exercise its right to redeem the Warrants, it shall mail a notice of redemption to each of the Registered Holders of the Warrants to be redeemed, first class, postage prepaid, not later than the thirtieth day before the date fixed for redemption, at their last address as shall appear on the records maintained pursuant to Section 6(b). Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Registered Holder receives such notice. (c) The notice of redemption shall specify (i) the redemption price, (ii) the date fixed for redemption, (iii) the place where the Warrant Certificates shall be delivered and the redemption price paid, and (iv) that the right to exercise the Warrant shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the date fixed for redemption. 8 The date fixed for the redemption of the Warrant shall be the Redemption Date. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a Registered Holder (a) to whom notice was not mailed or (b) whose notice was defective and then only to the extent that the Registered Holder is prejudiced thereby. An affidavit of the Warrant Agent or of the Secretary or an Assistant Secretary of the Company that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (d) Any right to exercise a Warrant shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the Redemption Date. On and after the Redemption Date, Registered Holders of the Warrants shall have no further rights except to receive, upon surrender of the Warrant, the Redemption Price. (e) From and after the Redemption Date specified for, the Company shall, at the place specified in the notice of redemption, upon presentation and surrender to the Company by or on behalf of the Registered Holder thereof of one or more Warrant Certificates evidencing Warrants to be redeemed, deliver or cause to be delivered to or upon the written order of such Holder a sum in cash equal to the redemption price of each such Warrant. From and after the Redemption Date and upon the deposit or setting aside by the Company of a sum sufficient to redeem all the Warrants called for redemption, such Warrants shall expire and become void and all rights hereunder and under the Warrant Certificates, except the right to receive payment of the redemption price, shall cease. (f) If the shares of the Company's Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, the Series IV Target Price shall be proportionally adjusted by the ratio which the total number of shares of Common Stock outstanding immediately prior to such event bears to the total number of shares of Common Stock to be outstanding immediately after such event. 9. Adjustment of Exercise Price and Number of Shares of Common Stock or Warrants. (a) Subject to the exceptions referred to in Section 9(g) below, in the event the Company shall, at any time or from time to time after the date hereof, sell any shares of Common Stock for a consideration per share less than the Market Price of the Common Stock (as defined in Section 8) on the date of the sale or issue any shares of Common Stock as a stock dividend to the holders of Common Stock, or subdivide or combine the outstanding shares of Common Stock into a greater or lesser number of shares (any such sale, issuance, subdivision or combination being herein called a "Change of Shares"), then, and thereafter upon each further Change 9 of Shares, the Purchase Price in effect immediately prior to such Change of Shares shall be changed to a price (including any applicable fraction of a cent) determined by multiplying the Purchase Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares and the number of shares of Common Stock which the aggregate consideration received (determined as provided in subsection 9(f) below) for the issuance of such additional shares would purchase at such current market price per share of Common Stock, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately after the issuance of such additional shares. Such adjustment shall be made successively whenever such an issuance is made. Upon each adjustment of the Purchase Price pursuant to this Section 9, the total number of shares of Common Stock purchasable upon the exercise of each Warrant shall (subject to the provisions contained in Section 9(b) hereof) be such number of shares (calculated to the nearest tenth) purchasable at the Purchase Price in effect immediately prior to such adjustment multiplied by a fraction, the numerator of which shall be the Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the Purchase Price in effect immediately after such adjustment. (b) The Company may elect, upon any adjustment of the Purchase Price hereunder, to adjust the number of Warrants outstanding, in lieu of the adjustment in the number of shares of Common Stock purchasable upon the exercise of each Warrant as hereinabove provided, so that each Warrant outstanding after such adjustment shall represent the right to purchase one share of Common Stock. Each Warrant held of record prior to such adjustment of the number of Warrants shall become that number of Warrants (calculated to the nearest tenth) determined by multiplying the number one by a fraction, the numerator of which shall be the Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the Purchase Price in effect immediately after such adjustment. Upon each adjustment of the number of Warrants pursuant to this Section 9, the Company shall, as promptly as practicable, cause to be distributed to each Registered Holder of Warrant Certificates on the date of such adjustment Warrant Certificates evidencing, subject to Section 10 hereof, the number of additional Warrants to which such Holder shall be entitled as a result of such adjustment or, at the option of the Company, cause to be distributed to such Holder in substitution and replacement for the Warrant Certificates held by him prior to the date of adjustment (and upon surrender thereof, if required by the Company) new Warrant Certificates evidencing the number of Warrants to which such Holder shall be entitled after such adjustment. 10 (c) In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock, or in case of any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock), or in case of any sale or conveyance to another corporation of the property of the Company as, or substantially as, an entirety (other than a sale/leaseback, mortgage or other financing transaction), the Company shall cause effective provision to be made so that each holder of a warrant then outstanding shall have the right thereafter, by exercising such Warrant, to purchase the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been purchased upon exercise of such Warrant immediately prior to such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 9. The Company shall not effect any such consolidation, merger or sale unless prior to or simultaneously with the consummation thereof the successor (if other than the Company) resulting from such consolidation or merger or the corporation purchasing assets or other appropriate corporation or entity shall assume, by written instrument executed and delivered to the Warrant Agent, the obligation to deliver to the holder of each Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase and the other obligations under this Agreement. The foregoing provisions shall similarly apply to successive reclassification, capital reorganizations and other changes of outstanding shares of Common Stock and to successive consolidations, mergers, sales or conveyances. (d) Irrespective of any adjustments or changes in the Purchase Price or the number of shares of Common Stock purchasable upon exercise of the Warrants, the Warrant Certificates theretofore and thereafter issued shall, unless the Company shall exercise its option to issue new Warrant Certificates pursuant to Section 2(d) hereof, continue to express the Purchase Price per share, the number of shares purchasable thereunder and the Redemption Price therefor as the Purchase Price per share, the number of shares purchasable and the Redemption Price therefor were expressed in the Warrant Certificates when the same were originally issued. (e) After each adjustment of the Purchase Price pursuant to this Section 9, the Company will promptly prepare a certificate signed by the President or a Vice President, and by the Treasurer 11 or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company setting forth: (i) the Purchase Price as so adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of each Warrant after such adjustment, and, if the Company shall have elected to adjust the number of Warrants, the number of Warrants to which the registered holder of each Warrant shall then be entitled, and the adjustment in Redemption Price resulting therefrom, and (iii) a brief statement of the facts accounting for such adjustment. The Company will promptly file such certificate with the Warrant Agent and cause a brief summary thereof to be sent by ordinary first class mail to Biltmore and to each registered holder of Warrants at his last address as it shall appear on the registry books of the Warrant Agent. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity thereof except as to the holder to whom the Company failed to mail such notice, or except as to the holder whose notice was defective. The affidavit of an officer of the Warrant Agent or the Secretary or an Assistant Secretary of the Company that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (f) For purposes of Section 9(a) and 9(b) hereof, the following provisions (i) to (vii) shall also be applicable: (i) The number of shares of Common Stock outstanding at any given time shall include shares of Common Stock owned or held by or for the account of the Company and the sale or issuance of such treasury shares or the distribution of any such treasury shares shall not be considered a Change of Shares for purposes of said sections. (ii) No adjustment of the Purchase Price shall be made unless such adjustment would require an increase or decrease of at least $.10 in such price; provided that any adjustments which by reason of this subsection (ii) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment(s) so carried forward, shall require an increase or decrease of at least $.10 in the Purchase Price then in effect hereunder. (iii) In case of (1) the sale by the Company for cash of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or any securities convertible into or exchangeable for Common Stock without the payment of any further consideration other than cash, if any (such convertible or exchangeable securities being herein called "Convertible Securities"), or (2) the issuance by the Company, without the receipt by the Company of any consideration therefor, of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible 12 Securities, in each case, if (and only if) the consideration payable to the Company upon the exercise of such rights, warrants, or options shall consist of cash, whether or not such rights, warrants or options, or the right to convert or exchange such Convertible Securities, are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the minimum aggregate consideration payable to the Company upon the exercise of such rights, warrants or options, plus the consideration received by the Company for the issuance or sale of such rights, warrants or options, plus, in the case of such Convertible Securities, the minimum aggregate amount of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities issuable upon the exercise of such rights, warrants or options) is less than the fair market value of the Common Stock on the date of the issuance or sale of such rights, warrants or options, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (as of the date of the issuance or sale of such rights, warrants or options) shall be deemed to be outstanding shares of Common Stock for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have been sold for cash in an amount equal to such price per share. (iv) In case of the sale by the Company for cash of any Convertible Securities, whether or not the right of conversion or exchange thereunder is immediately exercisable, and the price per share for which Common Stock is issuable upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount of consideration received by the Company for the sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities) is less than the fair market value of the Common Stock on the date of the sale of such Convertible Securities, then the total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities (as of the date of the sale of such Convertible Securities) shall be deemed to be outstanding shares of Common Stock for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have been sold for cash in an amount equal to such price per share. (v) In case the Company shall modify the rights 13 of conversion, exchange or exercise of any of the securities referred to in subsection (iii) above or any other securities of the Company convertible, exchangeable, or exercisable for shares of Common Stock, for any reason other than an event that would require adjustment to prevent dilution, so that the consideration per share received by the Company after such modification is less than the market price on the date prior to such modification, the Purchase Price to be in effect after such modification shall be determined by multiplying the Purchase Price in effect immediately prior to such event by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding multiplied by the market price on the date prior to the modification plus the number of shares of Common Stock which the aggregate consideration receivable by the Company for the securities affected by the modification would purchase at the market price and of which the denominator shall be the number of shares of Common Stock outstanding on such date plus the number of shares of Common Stock to be issued upon conversion, exchange, or exercise of the modified securities at the modified rate. Such adjustment shall become effective as of the date upon which such modification shall take effect. (vi) On the expiration of any such right, warrant or option or the termination of any such right to convert or exchange any such Convertible Securities, the Purchase Price then in effect hereunder shall forthwith be readjusted to such Purchase Price as would have obtained (a) had the adjustments made upon the issuance or sale of such rights, warrants, options or Convertible Securities been made upon the basis of the issuance of only the number of shares of Common Stock theretofore actually delivered (and the total consideration received therefor) upon the exercise of such rights, warrants, or options or upon the conversion or exchange of such Convertible Securities and (b) had adjustments been made on the basis of the Purchase Price as adjusted under clause (a) for all transactions (which would have affected such adjusted Purchase Price) made after the issuance or sale of such rights, warrants, options or Convertible Securities. (vii) In case of the sale for cash of any shares of Common Stock, any Convertible Securities, any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, the consideration received by the Company therefor shall be deemed to be the gross sales price therefor without deducting therefrom any expense paid or incurred by the Company or any underwriting discounts or commissions or concessions paid or allowed by the Company in connection therewith. (g) No adjustment to the Purchase Price of the Warrants or to the number of shares of Common Stock purchasable upon the exercise of each Warrant will be made, however, 14 (i) upon the sale or exercise of the Warrants, including without limitation, the sale or exercise of any of the Warrants or Common Stock comprising the Purchase Option; or (ii) upon the sale of any shares of Common Stock in the Company's initial public offering, including, without limitation, shares sold upon the exercise of any over-allotment option granted to the Underwriters in connection with such offering; or (iii) upon the issuance or sale of Common Stock or Convertible Securities upon the exercise of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, whether or not such rights, warrants or options were outstanding on the date of the original sale of the Warrants or were thereafter issued or sold; or (iv) upon the issuance or sale of Common Stock upon conversion or exchange of any Convertible Securities, whether or not any adjustment in the Purchase Price was made or required to be made upon the issuance or sale of such Convertible Securities and whether or not such Convertible Securities were outstanding on the date of the original sale of the Warrants or were thereafter issued or sold; or (v) upon the issuance or sale of Common Stock or Convertible Securities in an exempt transaction unless the issuance or sale price is less than 85% of the fair market value of the Common Stock on the date of issuance, in which case the adjustment shall only be for the difference between 85% of the fair market value and the issue or sale price; or (vi) upon the issuance or sale of Common Stock or Convertible Securities to shareholders of any corporation which merges and/or consolidates into or is acquired by the Company or from which the Company acquires assets and some or all of the consideration consists of equity securities of the Company, in proportion to their stock holdings of such corporation immediately prior to the acquisition but only if no adjustment is required pursuant to any other provision of this Section 9. (vii) upon the issuance or exercise of options or upon the issuance or grant of stock awards granted to the Company's directors, employees or consultants under a plan or plans adopted by the Company's Board of Directors and approved by its stockholders (but only to the extent that the aggregate number of shares excluded hereby and issued after the date hereof shall not exceed ten percent (10%) of the Company's Common Stock at the time of issuance). For the purposes of determining whether the consideration received by the Company is less than the Market Price in connection with any issuance of stock to the Company's 15 directors, employees or consultants under plans adopted by the Company's Board of Directors and approved by its stockholders, the consideration received shall be deemed to be the amount of compensation to the director, employee or consultant reported by the Company in connection with such issuances. (viii) upon the issuance of Common Stock to the Company's directors, employees or consultants under a plan or plans which are qualified under the Internal Revenue Code; or (ix) upon the issuance of Common Stock in a bona fide public offering pursuant to a firm commitment underwriting. (h) As used in this Section 9, the term "Common Stock" shall mean and include the Company's Common Stock authorized on the date of the original issue of the Units and shall also include any capital stock of any class of the Company thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Company; provided, however, that the shares issuable upon exercise of the Warrants shall include (i) only shares of such class designated in the Company's Certificate of Incorporation as Common Stock on the date of the original issue of the Units or (ii) in the case of any reclassification, change, consolidation, merger, sale or conveyance of the character referred to in Section 9(c) hereof, the stock, securities or property provided for in such section or (iii) in the case of any reclassification or change in the outstanding shares of Common Stock issuable upon exercise of the Warrants as a result of a subdivision or combination or a change in par value, or from par value to no par value, or from no par value to par value, such shares of Common Stock as so reclassified or changed. (i) Any determination as to whether an adjustment in the Purchase Price in effect hereunder is required pursuant to Section 9, or as to the amount of any such adjustment, if required, shall be binding upon the holders of the Warrants and the Company if made in good faith by the Board of Directors of the Company. (j) If and whenever the Company shall grant to the holders of Common Stock, as such, rights or warrants to subscribe for or to purchase, or any options for the purchase of, Common Stock or securities convertible into or exchangeable for or carrying a right, warrant or option to purchase Common Stock, the Company shall concurrently therewith grant to each Registered Holder as of the record date for such transaction of the Warrants then outstanding, the rights, warrants or options to which each Registered Holder would have been entitled if, on the record date used to determine the stockholders entitled to the rights, warrants or options being granted by the Company, the Registered Holder were 16 the holder of record of the number of whole shares of Common Stock then issuable upon exercise (assuming, for purposes of this Section 9(j), that exercise of Warrants is permissible during periods prior to the Initial Warrant Exercise Date) of his Warrants. Such grant by the Company to the holders of the Warrants shall be in lieu of any adjustment which otherwise might be called for pursuant to this Section 9. 10. Fractional Warrants and Fractional Shares. (a) If the number of shares of Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Section 9 hereof, the Company nevertheless shall not be required to issue fractions of shares, upon exercise of the Warrants or otherwise, or to distribute certificates that evidence fractional shares. In such event, the Company may at its option elect to round up the number of shares to which the Holder is entitled to the nearest whole share or to pay cash in respect of fractional shares in accordance with the following: With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of such fractional share, determined as follows: (i) If the Common Stock is listed on a National Securities Exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the NASDAQ Quotation System, the current value shall be the last reported sale price of the Common Stock on such exchange on the last business day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average of the closing bid and asked prices for such day on such exchange; or (ii) If the Common Stock is not listed or admitted to unlisted trading privileges, the current value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of this Warrant; or (iii) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current value shall be an amount determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. 11. Warrant Holders Not Deemed Stockholders. No holder of Warrants shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of such Warrants for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the holder of Warrants, as such, any of the rights of 17 a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Holder shall have exercised such Warrants and been issued shares of Common Stock in accordance with the provisions hereof. 12. Rights of Action. All rights of action with respect to this Agreement are vested in the respective Registered Holders of the Warrants, and any Registered Holder of a Warrant, without consent of the Warrant Agent or of the holder of any other Warrant, may, in his own behalf and for his own benefit, enforce against the Company his right to exercise his Warrants for the purchase of shares of Common Stock in the manner provided in the Warrant Certificate and this Agreement. 13. Agreement of Warrant Holders. Every holder of a Warrant, by his acceptance thereof, consents and agrees with the Company, the Warrant Agent and every other holder of a Warrant that: (a) The Warrants are transferable only on the registry books of the Warrant Agent by the Registered Holder thereof in person or by his attorney duly authorized in writing and only if the Warrant Certificates representing such Warrants are surrendered at the office of the Warrant Agent, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Warrant Agent and the Company in their mutual discretion, together with payment of any applicable transfer taxes; and (b) The Company and the Warrant Agent may deem and treat the person in whose name the Warrant Certificate is registered as the holder and as the absolute, true and lawful owner of the Warrants represented thereby for all purposes, and neither the Company nor the Warrant Agent shall be affected by any notice or knowledge to the contrary, except as otherwise expressly provided in Section 7 hereof. 14. Cancellation of Warrant Certificates. If the Company shall purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant Certificates evidencing the same shall thereupon be delivered to the Warrant Agent and canceled by it and retired. The Warrant Agent shall also cancel Common Stock following exercise of any or all of the Warrants represented thereby or delivered to it for transfer, split up, combination or exchange. 15. Concerning the Warrant Agent. The Warrant Agent acts 18 hereunder as agent and in a ministerial capacity for the Company, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not, by issuing and delivering Warrant Certificates or by any other act hereunder be deemed to make any representations as to the validity, value or authorization of the Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and nonassessable. The Warrant Agent shall not at any time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Purchase Price or the Redemption Price provided in this Agreement, or to determine whether any fact exists which may require any such adjustments, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. It shall not (i) be liable for any recital or statement of facts contained herein or for any action taken, suffered or omitted by it in reliance on any warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) be responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) be liable for any act or omission in connection with this Agreement except for its own negligence or wilful misconduct. The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. Any notice, statement, instruction, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by its President, any Vice President, its Secretary, or Assistant Secretary, (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand reasonably believed by it to be genuine. The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder; it further agrees to indemnify the Warrant Agent and save it harmless against any and all losses, expenses and liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, 19 expenses and liabilities arising as a result of the Warrant Agent's negligence or wilful misconduct. The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own negligence or wilful misconduct), after giving thirty (30) days' prior written notice to the Company. At least fifteen (15) days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to the Registered Holder of each Warrant Certificate at the Company's expense. Upon such resignation, or any inability of the Warrant Agent to act as such hereunder, the Company shall appoint a new warrant agent in writing. If the Company shall fail to make such appointment within a period of fifteen (15) days after it has been notified in writing of such resignation by the resigning Warrant Agent, then the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction in the State of New York for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court, shall be a bank or trust company having a capital and surplus, as shown by its last published report to its stockholders, of not less than $10,000,000 or a stock transfer company. After acceptance in writing of such appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act or deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the Registered Holder of each Warrant Certificate. Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged or any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party or any corporation succeeding to the trust business of the Warrant Agent shall be a successor warrant agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and to the Registered Holder of each Warrant Certificate. The Warrant Agent, its subsidiaries and affiliates, and 20 any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effects as though it were not the Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company if so authorized by the Company or for any other legal entity. 16. Modification of Agreement. The Warrant Agent and the Company may by supplemental agreement make any changes or corrections in this Agreement (i) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained; or (ii) that they may deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that this Agreement shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the Registered Holders of Warrant Certificates representing not less than fifty percent (50%) of the Warrants then outstanding; and provided, further, that no change in the number or nature of the securities purchasable upon the exercise of any Warrant, or the Purchase Price therefor, or the acceleration of the Warrant Expiration Date, shall be made without the consent in writing of the Registered Holder of the Warrant Certificate representing such Warrant, other than such changes as are specifically prescribed by this Agreement as originally executed or are made in compliance with applicable law. 17. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first class registered or certified mail, postage prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Company, 6400 Congress Avenue, Suite 200, Boca Raton, Florida 33487, or at such other address as may have been furnished to the Warrant Agent in writing by the Company; and if to the Warrant Agent, 6700 North Andrews Avenue, Suite 500, Fort Lauderdale, Florida 33309. 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws. 19. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company and the Warrant Agent, and their respective successors and assigns, and the holders from time to time of Warrant Certificates. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. 21 20. Termination. This Agreement shall terminate at the close of business on the Warrant Expiration Date of all the Warrants or such earlier date upon which all Warrants have been exercised, except that the Warrant Agent shall account to the Company for cash held by it and the provisions of Section 15 hereof shall survive such termination. 21. Counterparts. This Agreement may be executed in several counterparts, which taken together shall constitute a single document. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. QUESTRON TECHNOLOGY, INC. By: --------------------------------- Its AMERICAN STOCK TRANSFER & TRUST COMPANY By: --------------------------------- Its Authorized Officer 22 EXHIBIT A [Form of Face of Series IV Warrant Certificate] No. WIV Series IV Warrants VOID AFTER _______________, 2002 STOCK PURCHASE WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK QUESTRON TECHNOLOGY, INC. THIS CERTIFIES THAT FOR VALUE RECEIVED or registered assigns (the "Registered Holder") is the owner of the number of Series IV Redeemable Common Stock Purchase Warrants ("Warrants") specified above. Each Warrant initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Certificate and the Warrant Agreement (as hereinafter defined), one fully paid and nonassessable share of Common Stock, $.001 par value ("Common Stock"), of QUESTRON TECHNOLOGY, INC., a Delaware corporation (the "Company"), at any time between the Separation Date (as herein defined) and the Expiration Date (as hereinafter defined), upon the presentation and surrender of this Warrant Certificate with the Subscription Form on the reverse hereof duly executed, at the corporate office of American Stock Transfer and Trust Company, as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of 115% of the closing market price per share of the Common Stock on the day immediately preceding the proposed offering of the Preferred Stock (the "Purchase Price") in lawful money of the United States of America in cash or by official bank or certified check made payable to Questron Technology, Inc. This Warrant Certificate and each Warrant represented hereby are issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement") dated , 1997, by and between the Company and the Warrant Agent. In the event of certain contingencies provided for in the Warrant Agreement, the Purchase Price and/or the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modifications or adjustment. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional shares of Common Stock will be issued. In the case of the exercise of less than all the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Warrants. The term "Separation Date" shall mean ___________, 1998. The term "Expiration Date" shall mean 5:00 p.m. (New York time) on ___________, 2002, or such earlier date as the Warrants shall be redeemed. If such date shall in the State of New York be a holiday or a day on which the banks are authorized to close, then the Expiration Date shall mean 5:00 p.m. (New York time) the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. The Company shall not be obligated to deliver any securities pursuant to the exercise of this Warrant unless a registration statement under the Securities Act of 1933, as amended, with respect to such securities is effective. The Company has covenanted and agreed that it will file a registration statement and will use its best efforts to cause the same to become effective and to keep such registration statement current while any of the Warrants are outstanding and the exercise price of the Warrants is less than the market price of the Common Stock. This Warrant shall not be exercisable by a Registered Holder in any state where such exercise would be unlawful. This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon due presentment with any transfer fee in addition to any tax or other governmental charge imposed in connection therewith, for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement. This Warrant may be redeemed at the option of the Company, at a redemption price of $.05 per Warrant, at any time after one (1) year from the Effective Date, provided the Market Price (as defined in the Warrant Agreement) for the Common Stock issuable upon exercise of such Warrant shall equal or exceed 170% of the closing bid price of the Company's Common Stock on the Effective Date (as defined in the Warrant Agreement) for twenty (20) consecutive trading days ending within ten (10) days of the notice of redemption. Notice of redemption shall be given not later than the thirtieth day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after the date fixed for redemption, the Registered Holder 2 shall have no rights with respect to this Warrant except to receive the $.05 per Warrant upon surrender of this Certificate. Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. 3 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile by two of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. QUESTRON TECHNOLOGY, INC. By: -------------------------- Its Date: --------------------------- [Seal] COUNTERSIGNED: AMERICAN STOCK TRANSFER & TRUST COMPANY - --------------------------------------- as Warrant Agent By: ----------------------------- Its Authorized Officer 4 [Form of Reverse of Series IV Warrant Certificate] SUBSCRIPTION FORM To Be Executed by the Registered Holder in Order to Exercise Warrants THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise _____ Warrants represented by this Warrant Certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of -------------------------------------------- (please insert taxpayer identification or other identifying number) and be delivered to -------------------------------------------- -------------------------------------------- -------------------------------------------- -------------------------------------------- (please print or type name and address) and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below: -------------------------------------------- -------------------------------------------- -------------------------------------------- (Address) --------------------------------- (Date) --------------------------------- (Taxpayer Identification Number) SIGNATURE GUARANTEED ASSIGNMENT To Be Executed by the Registered Holder in Order to Assign Warrants FOR VALUE RECEIVED, hereby sells, assigns and transfers unto -------------------------------------------- (please insert taxpayer identification or other identifying number) -------------------------------------------- -------------------------------------------- -------------------------------------------- -------------------------------------------- (please print or type name and address) of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints _________________________________ Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. --------------------------------- (Date) SIGNATURE GUARANTEED THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR MIDWEST STOCK EXCHANGE. 2 EX-4.5 6 PURCHASE OPTION EXHIBIT 4.5 Option to Purchase 100,000 Units QUESTRON TECHNOLOGY, INC. PURCHASE OPTION Dated: ___________, 1997 THIS CERTIFIES that Biltmore Securities, Inc., 6700 North Andrews Avenue, Suite 500, Fort Lauderdale, FL 33309 (hereinafter sometimes referred to as the "Holder"), is entitled to purchase from QUESTRON TECHNOLOGY, INC. (hereinafter referred to as the "Company"), at the prices and during the periods as hereinafter specified, up to 100,000 Units (the "Units") consisting of one (1)share of Series B Convertible Preferred Stock, par value $.01 per share ("Preferred Stock"), and one (1) Series IV Redeemable Common Stock Purchase Warrant ("Warrants"). Each Warrant entitles the registered holder thereof to purchase one (1) share of Common Stock, par value $.001 per share ("Common Stock") at an exercise price of 115% of the closing market price per share of the Common Stock on the day immediately preceding the proposed offering of the Preferred Stock. The Warrants (hereinafter, the "Warrants") are exercisable for a four year period, commencing ________________, 1998 (one (1) year from the Effective Date). Hereinafter, the Units and the securities underlying the Units, shall be referred to as "Option Securities" or "Securities." The Securities have been registered under a Registration Statement on Form SB-2 (File No. 333-_______) declared effective by the Securities and Exchange Commission on ___________ (the "Registration Statement"). This Option (the "Option") to purchase 100,000 Units was originally issued pursuant to an underwriting agreement between the Company and Biltmore Securities, Inc. as underwriter (the "Underwriter"), in connection with a public offering of 1,000,000 Units each consisting of one (1) share of Preferred Stock and one(1) Series IV Warrant (the "Public Securities") through the Underwriter, in consideration of $100.00 received for the Option. Except as specifically otherwise provided herein, the Preferred Stock and the Warrants issued pursuant to this Option shall bear the same terms and conditions as described under the caption "Description of Securities" in the Registration Statement, and the Warrants shall be governed by the terms of the Warrant Agreement dated as of ________________, executed in connection with such public offering (the "Warrant Agreement"), except that the holder shall have registration rights under the Securities Act of 1933, as amended (the "Act"), for the Option, the Units, the Preferred Stock and the Warrants included in the Units, and the shares of Common Stock underlying the Warrants, as more fully described in paragraph 6 of this Option. In the event of any reduction of the exercise price of the Warrants included in the Public Securities, the same changes to the Warrants included in the Option and the components thereof shall be simultaneously effected. 1. The rights represented by this Option shall be exercised at the prices, subject to adjustment in accordance with paragraph 8 of this Option, and during the periods as follows: (a) Between ____________, 1998 (one (1) year from the Effective Date) and ____________, 2002, inclusive, the Holder shall have the option to purchase Units hereunder at an exercise price not less than 120% of the offering price per unit (subject to adjustment pursuant to paragraph 8 hereof) (the "Exercise Price"). (b) After ____________, 2002, the Holder shall have no right to purchase any Option Securities hereunder. 2. The rights represented by this Option may be exercised at any time within the period above specified, in whole or in part, by (i) the surrender of this Option (with the purchase form at the end hereof properly executed) at the principal executive office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company); (ii) payment to the Company of the Exercise Price then in effect for the number of Option Securities specified in the above-mentioned purchase form together with applicable stock transfer taxes, if any; and (iii) delivery to the Company of a duly executed agreement signed by the person(s) designated in the purchase form to the effect that such person(s) agree(s) to be bound by the provisions of paragraph 6 and subparagraphs (b), (c) and (d) of paragraph 7 hereof. This Option shall be deemed to have been exercised, in whole or in part to the extent specified, immediately prior to the close of business on the date this Option is surrendered and payment is made in accordance with the foregoing provisions of this paragraph 2, and the person or persons in whose name or names the certificates for shares of Common Stock and Warrants shall be issuable upon such exercise shall become the holder or holders of record of such Common Stock and Warrants at that time and date. The Common Stock and Warrants and the certificates for the Common Stock and Warrants so purchased shall be delivered to the Holder within a reasonable time, not exceeding ten (10) days, after the rights represented by this Option shall have been so exercised. 3. This Option shall not be transferred, sold, assigned, or hypothecated for a period of one (1) year from the Effective Date, 2 except that it may be transferred to successors of the Holder, and may be assigned in whole or in part to any person who is an officer of the Holder or selling group member of the offering during such period. Any transfer after one (1) year must be accompanied with an immediate exercise of the Option. Any such assignment shall be effected by the Holder (i) executing the form of assignment at the end hereof and (ii) surrendering this Option for cancellation at the office or agency of the Company referred to in paragraph 2 hereof, accompanied by a certificate (signed by an officer of the Holder if the Holder is a corporation), stating that each transferee is a permitted transferee under this paragraph 3 hereof; whereupon the Company shall issue, in the name or names specified by the Holder (including the Holder) a new Option or Options of like tenor and representing in the aggregate rights to purchase the same number of Option Securities as are purchasable hereunder. 4. The Company covenants and agrees that all shares of Preferred Stock which may be issued as part of the Option Securities purchased hereunder and the Common Stock which may be issued upon exercise of the Warrants will, upon issuance, be duly and validly issued, fully paid and nonassessable. The Company further covenants and agrees that during the periods within which this Option may be exercised, the Company will at all times have authorized and reserved a sufficient number of shares of its Preferred Stock to provide for the exercise of this Option and that it will have authorized and reserved a sufficient number of shares of Common Stock for issuance upon exercise of the Warrants included in the Option Securities. 5. This Option shall not entitle the Holder to any voting, dividend, or other rights as a stockholder of the Company. 6. (a) During the period set forth in paragraph l(a) hereof, the Company shall advise the Holder or its transferee, whether the Holder holds the Option or has exercised the Option and holds Option Securities or any of the securities underlying the Option Securities, by written notice at least 30 days prior to the filing of any post-effective amendment to the Registration Statement or of any new registration statement or post-effective amendment thereto under the Act covering any securities of the Company, for its own account or for the account of others (other than a registration statement on Form S-4 or S-8 or any successor forms thereto), and will for a period of five years from the effective date of the Registration Statement, upon the request of the Holder, include in any such post-effective amendment or registration statement, such information as may be required to permit a public offering of the Option, all or any of the Preferred Stock, or Warrants included in the Securities or the Common Stock issuable upon the exercise of the Warrants (the "Registrable Securities"). The Company shall supply prospectuses and such other documents as the Holder may request in order to facilitate the public sale or other disposition of the Registrable Securities, use 3 its best efforts to register and qualify any of the Registrable Securities for sale in such states as such Holder designates provided that the Company shall not be required to qualify as a foreign corporation or a dealer in securities or execute a general consent to service of process in any jurisdiction in any action and do any and all other acts and things which may be reasonably necessary or desirable to enable such Holders to consummate the public sale or other disposition of the Registrable Securities, and furnish indemnification in the manner provided in paragraph 7 hereof. The Holder shall furnish information and indemnification as set forth in paragraph 7 except that the maximum amount which may be recovered from the Holder shall be limited to the amount of proceeds received by the Holder from the sale of the Registrable Securities. The Company shall use its best efforts to cause the managing underwriter or underwriters of a proposed underwritten offering to permit the holders of Registrable Securities requested to be included in the registration to include such securities in such underwritten offering on the same terms and conditions as any similar securities of the Company included therein. Notwithstanding the foregoing, if the managing underwriter or underwriters of such offering advises the holders of Registrable Securities that the total amount of securities which they intend to include in such offering is such as to materially and adversely affect the success of such offering, then the amount of securities to be offered for the accounts of holders of Registrable Securities shall be eliminated, reduced, or limited to the extent necessary to reduce the total amount of securities to be included in such offering to the amount, if any, recommended by such managing underwriter or underwriters (any such reduction or limitation in the total amount of Registrable Securities to be included in such offering to be borne by the holders of Registrable Securities proposed to be included therein pro rata). The Holder will pay its own legal fees and expenses and any underwriting discounts and commissions on the securities sold by such Holder and shall not be responsible for any other expenses of such registration. (b) If any 50% holder (as defined below) shall give notice to the Company at any time during the period set forth in paragraph l(a) hereof to the effect that such holder desires to register under the Act this Option or any of the underlying securities contained in the Option Securities underlying the Option under such circumstances that a public distribution (within the meaning of the Act) of any such securities will be involved then the Company will promptly, but no later than 60 days after receipt of such notice, file a post-effective amendment to the current Registration Statement or a new registration statement pursuant to the Act, to the end that the Option and/or any of the Securities underlying the Option Securities may be publicly sold under the Act as promptly as practicable thereafter and the Company will use its best efforts to cause such registration to become and remain effective for a period of 120 days (including the taking of such steps as are reasonably necessary to obtain the removal of any stop 4 order); provided that such holder shall furnish the Company with appropriate information in connection therewith as the Company may reasonably request in writing. The 50% holder (which for purposes hereof shall mean any direct or indirect transferee of such holder) may, at its option, request the filing of a post-effective amendment to the current Registration Statement or a new registration statement under the Act with respect to the Registrable Securities on only two occasions during the term of this Option. The Holder may at its option request the registration of the Option and/or any of the securities underlying the Option in a registration statement made by the Company as contemplated by Section 6(a) or in connection with a request made pursuant to this Section 6(b) prior to acquisition of the Securities issuable upon exercise of the Option and even though the Holder has not given notice of exercise of the Option. The 50% holder may, at its option, request such post-effective amendment or new registration statement during the described period with respect to the Option or separately as to the Units and/or Warrants included in the Option and/or the Common Stock issuable upon the exercise of the Warrants, and such registration rights may be exercised by the 50% holder prior to or subsequent to the exercise of the Option. Within ten business days after receiving any such notice pursuant to this subsection (b) of paragraph 6, the Company shall give notice to the other holders of the Options, advising that the Company is proceeding with such post-effective amendment or registration statement and offering to include therein the securities underlying the Options of the other holders. Each holder electing to include its Registrable Securities in any such offering shall provide written notice to the Company within twenty (20) days after receipt of notice from the Company. The failure to provide such notice to the Company shall be deemed conclusive evidence of such holder's election not to include its Registrable Securities in such offering. Each holder electing to include its Registrable Securities shall furnish the Company with such appropriate information (relating to the intentions of such holders) in connection therewith as the Company shall reasonably request in writing. All costs and expenses of only one such post-effective amendment or new registration statement shall be borne by the Company, except that the holders shall bear the fees of their own counsel and any underwriting discounts or commissions applicable to any of the securities sold by them. The Company shall be entitled to postpone the filing of any registration statement pursuant to this Section 6(b) otherwise required to be prepared and filed by it if (i) the Company is engaged in a material acquisition, reorganization, or divestiture, (ii) the Company is currently engaged in a self-tender or exchange offer and the filing of a registration statement would cause a violation of Rule 10b-6 under the Securities Exchange Act of 1934, (iii) the Company is engaged in an underwritten offering and the managing underwriter has advised the Company in writing that such a registration statement would have a material adverse 5 effect on the consummation of such offering or (iv) the Company is subject to an underwriter's lock-up as a result of an underwritten public offering and such underwriter has refused in writing, the Company's request to waive such lock-up. In the event of such postponement, the Company shall be required to file the registration statement pursuant to this Section 6(b), within 60 days of the consummation of the event requiring such postponement. The Company will use its best efforts to maintain such registration statement or post-effective amendment current under the Act for a period of at least six months (and for up to an additional three months if requested by the Holder) from the effective date thereof. The Company shall supply prospectuses, and such other documents as the Holder may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities, use its best efforts to register and qualify any of the Registrable Securities for sale in such states as such holder designates, provided that the Company shall not be required to qualify as a foreign corporation or a dealer in securities or execute a general consent to service of process in any jurisdiction in any action and furnish indemnification in the manner provided in paragraph 7 hereof. (c) The term "50% holder" as used in this paragraph 6 shall mean the holder of at least 50% of the Preferred Stock and the Warrants underlying the Option (considered in the aggregate) and shall include any owner or combination of owners of such securities, which ownership shall be calculated by determining the number of shares of Common Stock held by such owner or owners as well as the number of shares then issuable upon exercise of the Warrants. 7. (a) Whenever pursuant to paragraph 6 a registration statement relating to the Option or any shares or warrants issued or issuable upon the exercise of any Options, is filed under the Act, amended or supplemented, the Company will indemnify and hold harmless each holder of the securities covered by such registration statement, amendment, or supplement (such holder being hereinafter called the "Distributing Holder"), and each person, if any, who controls (within the meaning of the Act) the Distributing Holder, and each underwriter (within the meaning of the Act) of such securities and each person, if any, who controls (within the meaning of the Act) any such underwriter, against any losses, claims, damages, or liabilities, joint or several, to which the Distributing Holder, any such controlling person or any such underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such registration statement or any preliminary prospectus or final prospectus constituting a part thereof or any amendment or supplement thereto, or arise out of or are based upon 6 the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse the Distributing Holder and each such controlling person and underwriter for any legal or other expenses reasonably incurred by the Distributing Holder or such controlling person or underwriter in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, said final prospectus, or said amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder or any other Distributing Holder, for use in the preparation thereof. (b) The Distributing Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed said registration statement and such amendments and supplements thereto, each person, if any, who controls the Company (within the meaning of the Act) against any losses, claims, damages, or liabilities, joint and several, to which the Company or any such director, officer, or controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages, or liabilities arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration statement, said preliminary prospectus, said final prospectus, or said amendment or supplement, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, said preliminary prospectus, said final prospectus, or said amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder for use in the preparation thereof; and will reimburse the Company or any such director, officer, or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action. (c) Promptly after receipt by an indemnified party under this paragraph 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party, give the indemnifying party notice of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Paragraph 7. (d) In case any such action is brought against any 7 indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this paragraph 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof. 8. The Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of this Option shall be subject to adjustment from time to time upon the happening of certain events as follows: (a) In case the Company shall (i) declare a dividend or make a distribution on its outstanding shares of Preferred Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Preferred Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Preferred Stock into a smaller number of shares, the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the denominator of which shall be the number of shares of Preferred Stock outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Preferred Stock outstanding immediately prior to such action. Notwithstanding anything to the contrary contained in the Warrant Agreement, in the event an adjustment to the Exercise Price is effected pursuant to this Subsection (a) (and a corresponding adjustment to the number of Option Securities is made pursuant to Subsection (d) below), the exercise price of the Warrants shall be adjusted so that it shall equal the price determined by multiplying the exercise price of the Warrants by a fraction, the denominator of which shall be the number of shares of Common Stock outstanding immediately after giving effect to such action and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action. In such event, there shall be no adjustment to the number of shares of Common Stock or other securities issuable upon exercise of the Warrants. Such adjustment shall be made successively whenever any event listed above shall occur. (b) In case the Company shall fix a record date for the issuance of rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price (the "Subscription Price") (or having a conversion price per share) less 8 than the current market price of the Common Stock (as defined in Subsection (e) below) on the record date mentioned below, the Exercise Price shall be adjusted so that the same shall equal the price determined by multiplying the number of shares then comprising an Option Securities by the product of the Exercise Price in effect immediately prior to the date of such issuance multiplied by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding on the record date mentioned below and the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered (or the aggregate conversion price of the convertible securities so offered) would purchase at such current market price per share of the Common Stock, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding on such record date and the number of additional shares of Common Stock offered for subscription or purchase (or into which the convertible securities so offered are convertible). Such adjustment shall be made successively whenever such rights or warrants are issued and shall become effective immediately after the record date for the determination of shareholders entitled to receive such rights or warrants; and to the extent that shares of Common Stock are not delivered (or securities convertible into Common Stock are not delivered) after the expiration of such rights or warrants the Exercise Price shall be readjusted to the Exercise Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock (or securities convertible into Common Stock) actually delivered. (c) In case the Company shall hereafter distribute to the holders of its Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions and-dividends or distributions referred to in Subsection (a) above) or subscription rights or warrants (excluding those referred to in Subsection (b) above), then in each such case the Exercise Price in effect thereafter shall be determined by multiplying the number of shares then comprising an Option Securities by the product of the Exercise Price in effect immediately prior thereto multiplied by a fraction, the numerator of which shall be the total number of shares of Common Stock outstanding multiplied by the current market price per share of Common Stock (as defined in Subsection (e) below), less the fair market value (as determined by the Company's Board of Directors) of said assets or evidences of indebtedness so distributed or of such rights or warrants, and the denominator of which shall be the total number of shares of Common Stock outstanding multiplied by such current market price per share of Common Stock. Such adjustment shall be made successively whenever such a record date is fixed. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. 9 (d) Whenever the Exercise Price payable upon exercise of this Option is adjusted pursuant to Subsections (a), (b) or (c) above, the number of Option Securities purchasable upon exercise of this Option shall simultaneously be adjusted by multiplying the number of Option Securities initially issuable upon exercise of this Option by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. (e) For the purpose of any computation under Subsections (b) or (c) above, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for 20 consecutive business days before such date. The closing price for each day shall be the last sale price regular way or, in case no such reported sale takes place on such day, the average of the last reported bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on such exchange, the average of the highest reported bid and lowest reported asked prices as reported by NASDAQ, or other similar organization if NASDAQ is no longer reporting such information, or if not so available, the fair market price as determined by the Board of Directors. (f) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least fifteen cents ($0.15) in such price; provided, however, that any adjustments which by reason of this Subsection (i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section 8 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this Section 8 to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the Exercise Price, in addition to those required by this Section 8, as it shall determine, in its sole discretion, to be advisable in order that any dividend or distribution in shares of Common Stock, or any subdivision, reclassification or combination of Common Stock, hereafter made by the Company shall not result in any Federal Income tax liability to the holders of Common Stock or securities convertible into Common Stock (including Warrants issuable upon exercise of this Option). (g) Whenever the Exercise Price is adjusted, as herein provided, the Company shall promptly, but no later than 10 days after any request for such an adjustment by the Holder, cause a notice setting forth the adjusted Exercise Price and adjusted number of Option Securities issuable upon exercise of this Option and, if requested, information describing the transactions giving rise to such adjustments, to be mailed to the Holder, at the address set forth herein, and shall cause a certified copy thereof to be mailed to its transfer agent, if any. The Company may retain 10 a firm of independent certified public accountants selected by the Board of Directors (who may be the regular accountants employed by the Company) to make any computation required by this Section 8, and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. (h) In the event that at any time, as a result of an adjustment made pursuant to Subsection (a) above, the Holder thereafter shall become entitled to receive any shares of the Company, other than Common Stock, thereafter the number of such other shares so receivable upon exercise of this Option shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Subsections (a) to (g), inclusive above. 9. This Agreement shall be governed by and in accordance with the laws of the State of New York. IN WITNESS WHEREOF, Questron Technology, Inc., has caused this Option to be signed by its duly authorized officers under its corporate seal, and this Option to be dated the date first above written. QUESTRON TECHNOLOGY, INC. By: ---------------------------- Dominic A. Polimeni President (Corporate Seal) 11 PURCHASE FORM (To be signed only upon exercise of option) THE UNDERSIGNED, the holder of the foregoing Option, hereby irrevocably elects to exercise the purchase rights represented by such Option for, and to purchase thereunder,_________Units of Questron Technology, Inc., each Unit consisting of one (1) Share of Series B Convertible Preferred Stock, $.01 per value per share, and one (1) Series IV Redeemable Common Stock Purchase Warrant of Questron technology, Inc. herewith makes payment of $______________ therefor, and requests that the certificates for Units be issued in the name(s) of, and delivered to _________________________ whose address(es) is (are) _____________________________________________. Dated: TRANSFER FORM (To be signed only upon transfer of the Option) For value received, the undersigned hereby sells, assigns, and transfers unto _________________________________ the right to purchase Units of Questron Technology, Inc., in the numbers set forth below represented by the foregoing Option to the extent of _____ Units and appoints __________________________ attorney to transfer such rights on the books of Questron Technology, Inc., with full power of substitution in the premises. Dated: By: ------------------------------ Address: ------------------------------ ------------------------------ ------------------------------ In the presence of: EX-4.6 7 STOCK PURCHASE WARRANT EXHIBIT 4.6 No. WIV 001 Series IV Warrants STOCK PURCHASE WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK OF QUESTRON TECHNOLOGY, INC. THIS CERTIFIES THAT FOR VALUE RECEIVED A.J. Dinicola or registered assigns (the "Registered Holder") is the owner of 1,500,000 Series IV Redeemable Common Stock Purchase Warrants ("Warrants"). This Warrant Certificate and each Warrant represented hereby are subject to in all respects the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement") to be entered into by the Company in connection with the public offering (the "Offering") of Units each consisting of one share of Series B Convertible Preferred Stock and one Warrant. By his acceptance of this Certificate, the Registered Holder hereby agrees that he shall accept at the closing of the Offering a certificate evidencing the Warrants in the form issued to the public investors pursuant to the Warrant Agreement ("Public Warrants"). In the event that the Offering is not consummated, the Warrants shall be cancelled and shall be of no further force or effect. QUESTRON TECHNOLOGY, INC. By: /s/ DOMINIC A. POLIMENI ------------------------ Dominic A. Polimeni Chairman, President and Chief Executive Officer Date: December 16, 1996 EX-5 8 FORM OF OPINION OF GOULD & WILKIE EXHIBIT 5.0 __________, 1997 Questron Technology, Inc. 6400 Congress Avenue Suite 200 Boca Raton, FL 33487 Re: QUESTRON TECHNOLOGY, INC. REGISTRATION STATEMENT ON FORM SB-2 ----------------------------------- Gentlemen: Questron Technology, Inc., a Delaware Corporation (the "Company"), has filed with the United States Securities and Exchange Commission (the "Commission") a Registration Statement on Form SB-2 (Registration No. ________), with respect to which this opinion is to be an exhibit, relating to the proposed sale by the Company of: 1. Up to 1,150,000 previously unissued Units ("Units") consisting of: (a) up to 1,150,000 previously unissued shares of its Series B Convertible Preferred Stock, $.01 par value ("Series B Preferred Stock"), which are convertible into _______ shares of Common Stock, par value $.001 per share ("Common Stock") and (b) up to 1,150,000 previously unissued Series IV Warrants ("Series IV Warrants"); 2. Up to 1,150,000 shares of Common Stock underlying the aforementioned Series IV Warrants; 3. A previously unissued underwriter's unit purchase option ("Underwriter's Unit Purchase Option"), representing the option to purchase 100,000 additional Units ("Underwriter's Units") consisting of: (a) 100,000 previously unissued shares of Series B Preferred Stock ("Underwriter's Series B Preferred Stock") which are convertible into _____ shares of Common Stock and (b) 100,000 previously unissued Series IV Warrants ("Underwriter's Series IV Warrants"); 4. 100,000 previously unissued shares of Common Stock underlying the Underwriter's Series IV Warrants; and 5. 2,750,000 previously issued Series IV Warrants which are to be offered by selling securityholders ("Selling Securityholders' Series IV Warrants") and Questron Technology, Inc. - 2 - _________, 1997 2,750,000 previously unissued shares of Common Stock underlying the Selling Securityholders' Series IV Warrants. The Registration Statement, as amended, is herein referred to as the "Registration Statement". We have acted as securities counsel for the Company in connection with the transactions which are the subject matter of the Registration Statement and are familiar with the various corporate proceedings related thereto. In connection with the Registration Statement, we have examined such corporate records of the Company and such other instrument, documents and certificates as we have deemed necessary as a basis for our opinion. For purposes of this opinion, we have assumed (i) the accuracy and completeness of all information supplied by the Company, its officers, directors, or agents, (ii) that the transactions set forth in the Registration Statement are consummated as set forth therein, (iii) that the Commission shall have issued an order under the Securities Act of 1933, as amended, declaring the Registration Statement effective, and (iv) that all requisite authorizations, approvals, consents or exemptions under the securities laws of the various states and other jurisdictions of the United States of America shall have been obtained. Based on the foregoing, we are of the opinion that the Units, the Series B Preferred Stock, the Series IV Warrants, the Underwriter's Unit Purchase Option, the Underwriter's Units, the Underwriter's Series B Preferred Stock, the Underwriter's Series IV Warrants, the Selling Securityholders' Series IV Warrants, and the Common Stock issuable upon conversion of the Series B Preferred Stock and upon exercise of the Series IV Warrants, the Underwriter's Series IV Warrants and the Selling Securityholder's Series IV Warrants to be sold in accordance with the Registration Statement, are duly authorized and upon issuance, delivery and sale thereof, for the consideration specified in the Registration Statement, will be legally issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and as a part of, or an exhibit to, any document which may be filed with respect to the proposed transactions under the securities laws of the various states and other jurisdictions of the United States of America. We also consent to be named in the Registration Statement and in the Prospectus which constitutes a legal part thereof as the counsel that will pass upon certain legal matters for the Company in connection with the sale of the Company's securities. Very truly yours, GOULD & WILKIE Enclosures EX-10.19 9 1996 STOCK OPTION PLAN EXHIBIT 10.19 QUESTRON TECHNOLOGY, INC. 1996 STOCK OPTION PLAN SECTION 1. Purpose. The purpose of the Questron Technology, Inc. 1996 Stock Option Plan is to advance the interests of Questron Technology, Inc. (the "Company") by enabling officers, employees and directors of the Company and its Affiliates to participate in the Company's future and to enable the Company to attract and retain such persons by offering them proprietary interests in the Company. SECTION 2. Definitions. For purposes of the Plan, the following terms are defined as set forth below: a. "Affiliate" means a corporation or other entity controlled directly, or indirectly through one or more intermediaries, by the Company and designated by the Committee as such. b. "Award" means an award granted to a Participant in the form of a Stock Appreciation Right, Stock Option, or Restricted Stock, or any combination of the foregoing. c. "Board" means the Board of Directors of the Company. d. "Cause" shall have the meaning set forth in Section 8. e. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. f. "Commission" means the Securities and Exchange Commission or any successor agency. g. "Committee" means the Committee referred to in Section 5. h. "Common Stock" means common stock, $.001 per share par value, of the Company. i. "Company" means Questron Technology, Inc., a Delaware corporation. j. "Disability" means permanent and total disability as determined under procedures established by the Committee for purposes of the Plan. k. "Non-Employee Director" shall mean a director who qualifies as such under Rule 16b-3(b)(3), as promulgated under the Exchange Act, or as such term is defined under any successor rule adopted by the Commission. l. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. m. "Fair Market Value" means the average, as of any given date, between the highest and lowest reported closing bid and asked prices of the Stock on NASDAQ or the closing sale price as of any given date if the Stock is listed on a national securities exchange or the NASDAQ National Market System. If there is no regular public trading-market for such Stock under circumstances specified above, the Fair Market Value of the Stock shall be determined by the Committee in good faith. n. "Incentive Stock Option" means any Stock Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code. o. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. p. "Normal Retirement" means retirement from active employment with the Company or an Affiliate at or after age 65 or at such other age as may be specified by the Committee. q. "Participant" means an officer, employee or director of the Company or of an Affiliate to whom an Award has been granted which has not terminated, expired or been fully exercised. r. "Plan" means the Questron Technology, Inc. 1996 Stock Option Plan, as set forth herein and as hereinafter amended from time to time. s. "Restricted Period" means the period of time, which may be a single period or multiple periods, during which Restricted Stock awarded to a Participant remains subject to the restrictions imposed on such Stock, as determined by the Committee. t. "Restrictions" means the restrictions and conditions imposed on Restricted Stock awarded to a Participant, as determined by the Committee, which must be satisfied in order for the Restricted Stock to vest, in whole or in part, in the Participant. u. "Restricted Stock" means an Award of Stock on which are imposed Restriction Period(s) and Restrictions whereby the Participant's rights to full enjoyment of the Stock are conditioned upon the future performance of substantial services by any individual or are otherwise subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the Code, as amended. v. "Restricted Stock Agreement" means a written agreement between a Participant and the Company evidencing an award of Restricted Stock. w. "Restricted Stock Award Date" means the date on which the Committee awarded Restricted Shares to the Participant. x. "Retirement" means Normal Retirement or early retirement if a defined benefit or 401(k) retirement plan of the Company provides for same. y. "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission granted under Section 16(b) of the Exchange Act, as amended from time to time. z. "Stock" means the Common Stock. aa. "Stock Appreciation Right" means a right granted under Section 9. -2- bb. "Stock Option" or "Option" means an option granted under Section 8. cc. "Termination of Employment" means the termination of the Participant's employment with the Company and any Affiliate. A Participant employed by an Affiliate shall also be deemed to incur a Termination of Employment if the Affiliate ceases to be an Affiliate and the Participant does not immediately thereafter become an employee of the Company or another Affiliate. In addition, certain other terms used herein have definitions given to them in the first place in which they are used. SECTION 3. Effective Date. The effective date of the Plan shall be the date upon which the Plan is approved by the stockholders of the Company. SECTION 4. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution pursuant to Awards under the Plan shall be 250,000 shares of post one-for-ten reverse split Stock. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares. If any shares of Stock that have been Optioned cease to be subject to a Stock Option, if any shares of Stock that are subject to any Award are forfeited or if any Award otherwise terminates without a distribution being made to the Participant in the form of Stock, such shares shall again be available for distribution in connection with Awards under the Plan. In addition, any stock purchased by a Participant upon exercise of an Option under the Plan which is subsequently repurchased by the Company pursuant to the terms of such Option may again be the subject of an Option under the Plan. In the event of any merger, reorganization, consolidation, recapitalization (including but not limited to the issuance of Stock or any securities convertible into Stock in exchange for securities of the Company), stock dividend, stock split or reverse stock split, extraordinary distribution with respect to the Stock or other similar change in corporate structure affecting the Stock, such substitution or adjustments shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and Option price of shares subject to outstanding Stock Options and Stock Appreciation Rights, and in the number of shares subject to other outstanding Awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion; provided, however, that the number of shares subject to any Award shall always be a whole number and further provided that no adjustment shall be made by reason of the one-for-ten reverse split of the outstanding Stock proposed in the proxy statement relating to the Company's 1996 Annual Meeting of Stockholders. Such adjusted Option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 5. Administration. The Plan shall be administered by the Stock Award Committee ("Committee") of the Board or such other committee of the Board, composed of not less than two directors all of whom shall be Non-Employee Directors unless otherwise determined by the Board. Each member of the Committee shall be appointed by and serve at the pleasure of the -3- Board. If at any time no Committee shall be in place, the functions of the Committee specified in the Plan shall be exercised by the Board. The Committee shall have plenary authority to grant Awards to officers, employees and directors of the Company or an Affiliate. Among other things, the Committee shall have the authority, subject to the terms of the Plan: (a) to select the officers, employees and directors to whom Awards may from time to time be granted; (b) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights and Restricted Stock, or any combination thereof are to be granted hereunder; (c) to determine the number of shares of Stock to be covered by each Award granted hereunder; (d) to determine the terms and conditions of any Award granted hereunder (including, but not limited to, the Option price, any vesting restrictions or limitation, any repurchase rights in favor of the Company and any vesting acceleration or forfeiture waiver regarding any Award and the shares of Stock relating thereto, based on such factors as the Committee shall determine); (e) to adjust the terms and conditions, at any time or from time to time, of any Award, including with respect to performance goals and measurements applicable to performance-based Awards pursuant to the terms of the Plan; (f) to determine under what circumstances an Award may be settled in cash or Stock; (g) if appropriate, to determine Fair Market Value; and (h) to substitute new Stock Options for previously granted Stock Options, including previously granted Stock Options having higher Option prices. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable, to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreement relating thereto) and to otherwise supervise the administration of the Plan. The Committee may act only by a majority of its members then in office, except that the members thereof may authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Committee. Any determination made by the Committee pursuant to the provisions of the Plan with respect to any Award shall be made in its sole discretion at the time of the grant of the Award or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Participants. -4- SECTION 6. Eligibility. Officers, employees and directors of the Company and its Affiliates who are responsible for or contribute to the management, growth and profitability of the business of the Company and its Affiliates are eligible to be granted Awards under the Plan. Any person who files with the Committee, in a form satisfactory to the Committee, a written waiver of eligibility to receive any Award under the Plan shall not be eligible to receive an Award under the Plan for the duration of the waiver. SECTION 7. Duration of the Plan. The Plan shall terminate ten (10) years from the effective date specified in Section 3 of the Plan, unless terminated earlier pursuant to Section 11 hereto, and no Awards may be granted thereafter. SECTION 8. Stock Options. Stock Options granted under the Plan may be of two types: Incentive Stock Options and Non-Qualified Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Committee shall have the authority to grant any optionee Incentive Stock Options, Non-Qualified Stock Options or both types of Stock Options (in each case with or without Stock Appreciation Rights). Incentive Stock Options may be granted only to employees of the Company and its subsidiaries (within the meaning of Section 424(f) of the Code). To the extent that any Stock Option is not designated as an Incentive Stock Option or even if so designated does not qualify as an Incentive Stock Option, it shall constitute a Non- Qualified Stock Option. Stock Options shall be evidenced by Option agreements, the terms and provisions of which may differ. An Option agreement shall indicate on its face whether it is an agreement for an Incentive Stock Option or a Non-Qualified Stock Option. The grant of a Stock Option shall occur on the date the Committee by resolution selects an individual to be a participant in any grant of a Stock Option, determines the number of shares of Stock to be subject to such Stock Option to be granted to such individual and specifies the terms and provisions of the Option agreement. The Company shall notify a Participant of any grant of a Stock Option, and a written Option agreement or agreements shall be duly executed and delivered by the Company to the Participant, which among other things, will make appropriate arrangements with respect to the Company's tax withholding obligations. Such agreement or agreements shall become effective upon execution by the Participant. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered nor shall any discretion or authority granted under the Plan be exercised so as to disqualify the Plan under Section 422 of the Code or, without the consent of the optionee affected, to disqualify any Incentive Stock Option under such Section 422. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Committee shall deem desirable: -5- (a) Option Price. The Option price per share of Stock purchasable under an Option shall be determined by the Committee and set forth in the Option agreement, and shall not be less than the Fair Market Value of the Stock subject to the Option on the date of grant in the case of Incentive Stock Options and not less than 50% of the Fair Market Value of the Stock subject to the Option on the date of grant in the case of Non-Qualified Stock Options. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than 10 years after the date of grant; and no Non-Qualified Stock Option shall be exercisable more than 10 years and one day after the date the Stock Option is granted. (c) Exercisability. Subject to Section 11, Stock Options shall otherwise be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. If the Committee provides that any Stock Option is exercisable only in installments, the Committee may at any time waive such installment exercise provisions, in whole or in part, based on such factors as the Committee may determine. In addition, the Committee may at any time accelerate the exercisability of any Stock Option. (d) Methods of Exercise. Subject to the provisions of this Section 8, Stock Options may be exercised, in whole or in part, at any time during the Option period by giving written notice of exercise to the Company specifying the number of shares of Stock subject to the Stock Option to be purchased. Such notice shall be accompanied by payment in full of the purchase price by certified or bank check or such other instrument as the Company may accept. If approved by the Committee, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee of the same class as the Stock subject to the Stock Option provided, however, that, in the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares of Stock of the same class as the Stock subject to the Stock Option shall be authorized only at the time the Stock Option is granted. An optionee shall have all of the rights of a stockholder of the Company holding the class or series of Stock that is subject to such Stock Option (including, if applicable, the right to vote the shares and the right to receive dividends), when the optionee has given written notice of exercise, and has paid in full for such shares. In the discretion of the Committee, payment for any Stock subject to an option may also be made by delivering a properly executed exercise notice to the Company together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. The value of previously owned Stock exchanged in full or partial payment for the shares purchased upon the exercise of an Option shall be equal to the aggregate Fair Market Value of such shares on the date of the exercise of such Option. (e) Non-transferability of Options. Except as may otherwise be determined by the Committee, no Stock Option shall be transferable by the optionee other than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee or by the guardian or legal representative of the optionee, it being understood that the terms "holder" and "optionee" include the guardian and legal representative of the optionee named in the Option agreement and any person to whom an Option is transferred by will or the laws of descent and distribution. -6- (f) Termination by Death. If an optionee's employment terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised, to the extent then exercisable or on such accelerated basis as the Committee may determine, for a period of one year and one day (or such other period as the Committee may specify) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. (g) Termination by Reason of Disability. If any optionee's employment terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination or on such accelerated basis as the Committee may determine, for a period of one year and one day (or such shorter period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that if the optionee dies within such one year and one day period (or such shorter period ending upon the expiration of the stated term of the Stock Option), any unexercised Stock Option held by such optionee shall, notwithstanding the expiration of such one year and one day period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of one year and one day from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (h) Other Termination. Unless otherwise determined by the Committee, if an optionee incurs a Termination of Employment for any reason other than death or Disability, any Stock Option held by such optionee shall thereupon terminate, except that such Stock Option, to the extent then exercisable, may be exercised for the lesser of three months and one day from the date of such Termination of Employment or the balance of such Stock Option's term if such Termination of Employment of the optionee is involuntary and without Cause. Unless otherwise determined by the Committee, for the purposes of the Plan "Cause" shall have the same meaning as that set forth in any employment or severance agreement in effect between the Company and the Participant. Otherwise, it shall mean (1) the conviction of the optionee for committing a felony under Federal law or the law of the state in which such action occurred, (2) dishonesty in the course of fulfilling the optionee's employment duties or (3) willful and deliberate failure on the part of the optionee to perform his or her employment duties in any material respect. (i) Cashing Out of Option. On receipt of written notice of exercise, the Committee may, in its sole discretion, elect to cash out all or part of any Stock Option to be exercised by paying the optionee an amount, in cash or Stock, equal to the excess of the Fair Market Value of the Stock that is the subject of the Option over the Option price times the number of shares of Stock subject to the option on the effective date of such cash out. SECTION 9. Stock Appreciation Rights. (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non- Qualified Stock Option, such rights may be granted either at or after the time of grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of grant of such Stock Option. A Stock Appreciation Right shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option. -7- A Stock Appreciation Right may be exercised by an optionee in accordance with Section 9(b) by surrendering the applicable portion of the related Stock Option in accordance with procedures established by the Committee. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in Section 9(b). Stock Options which have been so surrendered shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate are exercisable in accordance with the provisions of Section 8 and this Section 9 or as may otherwise be determined by the Committee. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive an amount in cash, shares of Stock or both equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right, in its sole discretion, to determine the form of payment. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under Section 8(e). (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of determining the number of shares of Stock available for issuance under the Plan in accordance with Section 5 of the Plan, but only to the extent of the number of shares resulting from dividing the value of the Stock Appreciation Right at the time of exercise by the Fair Market Value of one share of Stock determined in accordance with this Section 9. SECTION 10. Terms of Restricted Stock Awards. Subject to and consistent with the provisions of the Plan, with respect to each Award of Restricted Stock to a Participant, the Committee shall determine: (a) the terms and conditions of the Restricted Stock Agreement between the Company and the Participant evidencing the Award; (b) the Restricted Period for all or a portion of the Award; (c) the Restrictions applicable to the Award, including, but not limited to, continuous employment with the Company for a specified term or the attainment of specific corporate, divisional or individual performance standards or goals, which Restricted Period and Restrictions may differ with respect to each Participant; (d) whether the Participant shall receive the dividends and other distributions paid with respect to an award of the Restricted Stock as declared and paid to the holders of Stock during the Restricted Period or shall be withheld by the Company for the account of the Participant until the Restricted Periods have expired or the Restrictions have been -8- satisfied, and whether interest shall be paid on such dividends and other distributions withheld, and if so, the rate of interest to be paid; (e) the percentage of the Award which shall vest in the Participant in the event of death, Disability or Retirement prior to the expiration of the Restricted Period or the satisfaction of the Restrictions applicable to an award of Restricted Stock; and (f) notwithstanding the Restricted Period and the Restrictions imposed on the Restricted Shares, as set forth in a Restricted Stock Agreement, whether to shorten the Restricted Period or waive any Restrictions, if the Committee concludes that it is in the best interests of the Company to do so. Upon an award of Restricted Stock to a Participant, the stock certificate representing the Restricted Stock shall be issued and transferred to and in the name of the Participant, whereupon the Participant shall become a stockholder of the Company with respect to such Restricted Stock and shall be entitled to vote the Stock. Such stock certificates shall be held in custody by the Company, together with stock powers executed by the Participant in favor of the Company, until the Restricted Period expires and the Restrictions imposed on the Restricted Stock are satisfied. SECTION 11. Amendments and Termination. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would (i) impair the rights of an Award theretofore granted without the Participant's consent, except such an amendment made to cause the Plan to qualify for the exemption provided by Rule 16b-3, or (ii) disqualify the Plan from the exemption provided by Rule 16b-3. In addition, no such amendment shall be made without the approval of the Company's stockholders to the extent such approval is required by law or agreement. The Committee may amend the terms of any Stock Option or other Award theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any holder without the holder's consent except such an amendment made to cause the Plan or Award to qualify for the exemption provided by Rule 16b-3. The Committee may also substitute new Stock Options for previously granted Stock Options, including previously granted Stock Options having higher option prices. Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in law and tax and accounting rules, as well as other developments and to grant Awards which qualify for beneficial treatment under such rules without shareholder approval. SECTION 12. General Provisions. (a) Nothing contained in the Plan shall prevent the Company or an Affiliate from adopting other or additional compensation arrangements for its employees. (b) The Plan shall not confer upon any employee any right to continued employment nor shall it interfere in any way with the right of the Company or an Affiliate to terminate the employment of any employee at any time. -9- (c) No later than the date as of which an amount first becomes includible in the gross income of the Participant for Federal income tax purposes with respect to any Award under the Plan, the Participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any Federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Company, withholding obligations may be settled with Stock, including Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the participant. (d) The Committee shall establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the participant's death are to be paid. (e) Agreements entered into by the Company and Participants relating to Awards under the Plan, in such form as may be approved by the Committee from time to time, to the extent consistent with or permitted by the Plan shall control with respect to the terms and conditions of the subject Award. If any provisions of the Plan or any agreement entered into pursuant to the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions of the Plan or the subject agreement. (f) The Plan and all Awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware. -10- EX-10.21 10 EXCHANGE AGREEMENT EXCHANGE AGREEMENT Exchange Agreement (this "Agreement") entered into as of the 8th day of November, 1996 by and among Questron Technology, Inc., a Delaware corporation (the "Company"), Gulfstream Financial Group, Inc., a Florida corporation ("Gulfstream"), and Phillip D. Schwiebert, an individual resident in California ("Schwiebert"). W I T N E S S E T H : WHEREAS, the Company and Gulfstream are party to a Management Advisory and Consulting Agreement dated as of November 29, 1994 (the "Management Agreement") pursuant to which Gulfstream will be entitled to acquire warrants to purchase shares of the Company's common stock for $0.10 per share upon the satisfaction of certain performance targets; and WHEREAS, a wholly owned subsidiary of the Company and Schwiebert are party to an Employment Agreement dated as of November 29, 1994 (the "Employment Agreement") pursuant to which Schwiebert will be entitled to acquire warrants to purchase shares of the Company's common stock for $0.10 per share upon the satisfaction of certain performance targets; and WHEREAS, the parties desire to amend the Management Agreement and the Employment Agreement in the manner hereinafter set forth; NOW, THEREFORE, for good and valuable consideration, the adequacy and receipt of which are hereby acknowledged by all of the parties hereto, it is agreed as follows: 1. Amendment of Management Agreement. The Management Agreement is hereby amended by deleting Schedule A thereto in its entirety and substituting the annexed Amended Schedule A to Management Agreement in lieu therefor. 2. Amendment of Employment Agreement. The Employment Agreement is hereby amended by deleting Schedule A thereto in its entirety and substituting the following annexed Amended Schedule A to Employment Agreement in lieu therefor. 3. Option and Warrant Agreements. The Company shall enter appropriate option agreements substantially in the form of Exhibit I annexed hereto with Gulfstream and Schwiebert to evidence the options granted hereunder. In the event that any of the performance options referred to on the aforementioned schedules are earned, the Company shall enter into appropriate option agreements in substantially the same form. The Company shall also enter into temporary warrant agreements substantially in the form of Exhibit II annexed hereto. In the event that the Company consummates the proposed public offering of units consisting of Series B Convertible Preferred Stock ("Series B Preferred Stock") and Series IV Common Stock Purchase Warrants ("Series IV Warrants"), the Company shall substitute Series IV Warrant certificates in the form issued to the public in connection with such public offering for the temporary warrant agreements in the form of Exhibit II. In the event that such public offering is not consummated, the temporary warrant agreements in the form of Exhibit II shall remain in effect until the expiration thereof. 4. Full Force and Effect. This Agreement shall be subject to the consummation of the Company's proposed one-for-ten reverse split of its issued and outstanding Common Stock as soon as practicable following its 1996 Annual Meeting of Stockholders. Except as expressly set forth herein, the Management Agreement and the Employment Agreement shall remain in full force and effect. 5. Entire Agreement. This Agreement, together with the exhibits and schedules hereto and the Management Agreement and the Employment Agreement, shall constitute the entire agreement of the parties relating to the subject matter hereof and thereof and supersedes any prior understandings or agreements relating to such subject matter. No provision of this Agreement may be amended or waived except by a writing signed by the party sought to be charged. IN WITNESS WHEREOF, the parties have executed or caused to be executed on their behalves this Agreement as of the date first above written. QUESTRON TECHNOLOGY, INC. GULFSTREAM FINANCIAL GROUP, INC. By /s/ MILTON M. ADLER By /s/ DOMINIC A. POLIMENI -------------------------- -------------------------- Treasurer President /s/ PHILLIP D. SCHWIEBERT -------------------------- Phillip D. Schwiebert -2- AMENDED SCHEDULE A TO MANAGEMENT AGREEMENT Gulfstream is hereby granted the following options and rights: (a) Options. Options to acquire 120,000 shares of Common Stock for a per share purchase price equal to the average of the closing bid and asked prices of the Common Stock as of November 8, 1996. (b) Warrants. Warrants to acquire 1,000,000 shares of Common Stock. The exercise price of the Warrants is to be the same as for the Series IV Warrants expected to be issued in the proposed public offering of the Company's securities in or about January 1997. If such proposed offering is not consummated, the exercise price shall be 115% of the average of the closing bid and asked prices as November 8, 1996. (c) Performance Options. 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 Shares Pre-tax Income at Least ------ ----------------------- 333,333 $2,500,000 333,333 $3,500,000 333,334 $4,500,000 All share amounts set forth above have been adjusted to reflect the proposed one-for-ten reverse split of the Company's issued and outstanding common stock. No further adjustment to such share amounts will be effected in the event such reverse split is completed. In the event the reverse split is consummated, any exercise prices based upon pre-split prices will be multiplied by a factor of ten. Once a target has been met and the appropriate award has been made, no further award shall be made until one or more of the higher targets has been met. If for any given year, more than one previously unattained target has been met, the award shall be cumulative. The pre-tax income of any businesses acquired by the Company during the relevant period shall be included in the pre-tax income of the Company for the purposes of determining whether the foregoing targets have been equalled or exceeded. AMENDED SCHEDULE A TO EMPLOYMENT AGREEMENT Schwiebert is hereby granted the following options and rights: (a) Options. Options to acquire 30,000 shares of Common Stock for a per share purchase price equal to the average of the closing bid and asked price of the Common Stock as of November 8, 1996. (b) Warrants. Warrants to acquire 250,000 shares of Common Stock. The exercise price of the Warrants is to be the same as for the Series IV Warrants expected to be issued in the proposed public offering of the Company's securities in or about January 1997. If such proposed offering is not consummated, the exercise price shall be 115% of the average of the closing bid and asked prices as of November 8, 1996. (c) Performance Options. 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 Shares Pre-tax Income at Least ------ ----------------------- 166,667 $2,500,000 166,667 $3,500,000 166,666 $4,500,000 All share amounts set forth above have been adjusted to reflect the proposed one-for-ten reverse split of the Company's issued and outstanding common stock. No further adjustment to such share amounts will be effected in the event such reverse split is completed. In the event the reverse split is consummated, any exercise prices based upon pre-split prices will be multiplied by a factor of ten. Once a target has been met and the appropriate award has been made, no further award shall be made until one or more of the higher targets has been met. If for any given year, more than one previously unattained target has been met, the award shall be cumulative. The pre-tax income of any business acquired by the Company during the relevant period shall be included in the pre-tax income of the Company for the purposes of determining whether the foregoing targets have been equalled or exceeded. Exhibit I NO. OF SHARES: _______ QUESTRON TECHNOLOGY, INC. STOCK OPTION GRANT AGREEMENT THIS AGREEMENT, made as of _________________, among QUESTRON TECHNOLOGY, INC., a Delaware corporation ("Company"), with an address of 6400 Congress Avenue, Suite 200, Boca Raton, Florida 33487 and ________________________ ("Optionee"), with an address of . 1. GRANT OF OPTION The Company, effective ________________ ("Date of Grant"), hereby grants to the Optionee the right and the option ("Option") to purchase all or any part of an aggregate of ______ shares of the Company's Common Stock ($.001 per share par value) ("Common Stock") on the terms and conditions herein set forth. Dividends, subscription rights, etc. declared with respect to Common Stock prior to the exercise of the Option are not included in the Option. This Option is granted pursuant to an Exchange Agreement dated as of November 8, 1996 by and among the Company, the Optionee and the other party named therein. 2. PURCHASE PRICE The purchase price of the shares of Common Stock subject to the Option shall be $____ per share subject to the adjustment as provided in Section 5 below. 3. TERMS OF OPTION A. EXPIRATION DATE. Notwithstanding anything herein to the contrary, this option shall be exercisable during the ten (10) years from the date hereof or such shorter time as prescribed herein. B. EXERCISE. This Option shall be exercised, in whole, or, from time to time, in part, by written notice received by the Secretary or Treasurer of the Company not later than 5:00 P.M. prevailing local time, on or prior to the day the Option is to expire, specifying the number of shares of Common Stock to be purchased, and accompanied by full payment by certified or bank check or such other instrument as the Company may accept. Payment in full or in part may also be made in the form of shares of Common Stock owned by the Optionee, which shall be free and clear of all liens, encumbrances and restrictions of any kind whatsoever and Optionee may be requested to represent and warrant to such effect and to take such other steps with respect to this form of payment as the Company shall require. Any such exercise shall also be subject to receipt by the Company of the representation and undertaking set forth in Section 4C hereof. Upon such payment the Company will thereafter deliver or cause to be delivered to the Optionee, at the office of the Company, a certificate or certificates for the number of shares with respect to which this Option is being exercised, registered in the name of the Optionee; provided, however, that if any law or regulation or order of the Securities and Exchange Commission or other body having jurisdiction in the premises shall require the Company or Optionee (or other individual or individuals) to take any action in connection with the shares then being purchased, the delivery of the certificate or certificates for such shares shall be delayed for the period necessary to take and complete such action. C. SECURITIES LAW RESTRICTIONS. The Company is under no obligation to file a registration statement under the Securities Act of 1933 ("Act") with respect to the shares of Common Stock subject to the Option. Unless a registration statement under the Act has been filed and remains effective with respect to such shares, the Company shall require that the offer and sale of such shares be exempt from the registration provisions of the Act. As a condition of such exemption, the Company shall require a representation and undertaking, in form and substance satisfactory to counsel for the Company, that the Optionee is acquiring the shares for the Optionee's own account for investment and not with a view to the distribution or resale thereof and shall otherwise require such representations and impose such conditions as shall establish to the Company's satisfaction that the offer and sale of such shares issuable upon the exercise of the Option will not constitute a violation of the Act or any similar state act affecting the offer and sale. If such shares are issued in an exempt transaction, such shares shall bear the following restrictive legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933 and may not be sold, pledged, or otherwise transferred except pursuant to an effective registration statement under said Act, Rule 144 or an opinion of counsel acceptable to the Company that some other exemption from registration is available." If said shares were registered under the Act, to the extent that Optionee is an "affiliate" of the Company, any reoffers or resales of Common Stock acquired pursuant to the Plan, must be held indefinitely unless (i) distribution of said Stock has been made registered under the Act, (ii) a sale of said Stock is made in conformity with the provisions of Rule 144 issued by the Securities and Exchange Commission under the Act, or (iii) in the opinion of counsel acceptable to the Company some other exemption from registration is available. 4. ADJUSTMENTS In the event of any merger, reorganization, consolidation, recapitalization (including but not limited to the issuance of Common Stock or any securities convertible into Common Stock in exchange for securities of the Company), stock dividend, stock split or reverse stock split, extraordinary distribution with respect to the Common Stock or other similar change in corporate structure affecting the Common Stock, such substitution or adjustments shall be made in the aggregate number of shares of Common Stock then subject to the Option and in the Option price as may be determined to be appropriate by the Board of Directors of the Company, in its sole discretion; provided, however, that the number of shares of Common Stock subject to this Option shall always be a whole number. 5. TAXES The Company's obligation to deliver shares of Common Stock upon exercise of this Option in whole or in part, shall be subject to satisfaction of any applicable federal, state and local tax obligations. -2- 6. ACCEPTANCE OF PROVISIONS The execution of this Agreement by the Optionee shall constitute the Optionee's acceptance of and agreement to all of the terms and conditions of this Agreement. 7. NOTICES All notices and other communications required or permitted under this Agreement shall be in writing and shall be given either by (i) personal delivery or regular mail or, (ii) first class registered or certified mail, return receipt requested. Except as otherwise provided in Section 4B hereof on the exercise, in whole or in part, of the Option, any such communication shall be deemed to have been given on the date of receipt in the cases referred to in clause (i) of the preceding sentence and on the second day after the date of mailing in the cases referred to in clause (ii) of the preceding sentence. All such communications to the Company shall be addressed to it, to the attention of its Secretary or Treasurer, at its the principal office at the address first set forth above, and to the Optionee at its addresses first set forth above, or, in each case, to such other person or address as may be designated by like notice hereunder. 8. SHARES RESERVED The Company shall at all times during the term of this Agreement reserve and keep available such number of shares of its Common Stock as will be sufficient to satisfy the requirements of this Agreement, and shall pay all original issue taxes on the exercise of this Option, and all other fees and expenses necessarily incurred by the Company in connection therewith. 9. SUCCESSORS This Agreement shall be binding upon any successor of the Company. 10. MISCELLANEOUS This Agreement contains a complete statement of all the arrangements between the parties with respect to its subject matter, and this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be performed exclusively in Delaware. The headings in this Agreement are solely for convenience of reference and shall not affect its meaning or interpretation. QUESTRON TECHNOLOGY, INC. OPTIONEE By:________________________________ ______________________ President -3- Exhibit II ---------- No. WIV Series IV Warrants STOCK PURCHASE WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK OF QUESTRON TECHNOLOGY, INC. THIS CERTIFIES THAT FOR VALUE RECEIVED _____________________________ or registered assigns (the "Registered Holder") is the owner of __________ Series IV Redeemable Common Stock Purchase Warrants ("Warrants"). This Warrant Certificate and each Warrant represented hereby are subject to in all respects the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement") to be entered into by the Company in connection with the public offering (the "Offering") of Units each consisting of one share of Series B Convertible Preferred Stock and one Warrant. By his acceptance of this Certificate, the Registered Holder hereby agrees that he shall accept at the closing of the Offering a certificate evidencing the Warrants identical in all respects to the form issued to the public investors pursuant to the Warrant Agreement ("Public Warrants"). In the event that the Offering is not consummated and the Public Warrants are not issued, the Warrants will have an exercise price of $4.3125 per share and the Company agrees to offer the Registered Holder substantially the same terms and conditions as would have been in effect under the Warrant Agreement. QUESTRON TECHNOLOGY, INC. By:__________________________ Date: _____________________, 1996 EX-11 11 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.0
QUESTRON TECHNOLOGY, INC. EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS For the nine months For the years ended ended September 30, December 31, ------------------------- ---------------------- 1996 1995 1995 1994 ---- ---- ---- ---- Average number of shares of common stock outstanding during the period 15,354,842 11,138,217 11,533,067 2,793,402 Assumed conversion of the Series A Preferred -- -- -- 280,000 Stock, as of the beginning of the period Assumed exercise of dilutive stock options and warrants, based on the treasury method of accounting using the period-end market price per share of the Registrant's common stock 19,636 2,097,357 2,309,798 2,774,021 ----------- ----------- ----------- ---------- Fully diluted average number of shares of common stock and common stock equivalents outstanding during the period 15,374,478 13,235,574 13,842,865 5,847,423 ========== ========== ========== =========== Net income (loss) available to common $ 389,501 $ 229,117 $ 352,187 $ (641,033) shareholders ========== ========== ========== =========== Net income (loss) per common share $ .03 $ .02 $ .03 $ (.11) ========== ========== ========== ===========
The calculation for the nine month periods ended September 30, 1996 and 1995, and for the year ended December 31, 1994 is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although it is contrary to Paragraph 40 of APB Opinion No. 15 because it produces an antidilutive result. EX-22.0 12 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 22.0 SUBSIDIARIES ------------ Jurisdiction of Percentage of Name Incorporation Ownership ---- ------------- --------- Quest Electronic Hardware, Inc. Delaware 100% Judicate of Philadelphia, Inc. Delaware 100% Questnet Components, Inc. Delaware 100% EX-24.1 13 CONSENT OF ESTABROOK & CO., INC., P.C. EXHIBIT 24.1 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS We consent to the use in this Registration Statement on Form SB-2 and in the Prospectus forming part of such Registration Statement of our report dated February 5, 1996, on our audits of the financial statements of Comp Ware, Inc. d/b/a/ Webb Distribution. We also consent to the reference to our firm under the caption "Experts." ESTABROOK & CO., INC., P.C. Certified Public Acountants Winchester, Massachusetts December 18, 1996 EX-24.2 14 CONSENT OF MOORE STEPHENS, P.C. EXHIBIT 24.2 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form SB-2 of our report dated April 2, 1996, on our audits of the financial statements of Questron Technology, Inc. We also consent to the referenced to our firm under the caption "Experts." On July 1, 1996, the firm Mortenson and Associates, P.C. changed its name to Moore Stephens, P.C. MOORE STEPHENS, P.C. Certified Public Accountants Cranford, New Jersey December 18, 1996 -----END PRIVACY-ENHANCED MESSAGE-----