-----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, PV9R+aTAXJawfKktBgvcCjHanyj3+4NzJkXzazaGC59M1zTAcVVxX9nShaSBLTGf KE48ccWahVq8DbtkvZ3HXg== 0000950144-01-505980.txt : 20010816 0000950144-01-505980.hdr.sgml : 20010816 ACCESSION NUMBER: 0000950144-01-505980 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUESTRON TECHNOLOGY INC CENTRAL INDEX KEY: 0000732152 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRICAL APPARATUS & EQUIPMENT, WIRING SUPPLIES [5063] IRS NUMBER: 232257354 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13324 FILM NUMBER: 1714210 BUSINESS ADDRESS: STREET 1: 6400 CONGRESS AVENUE STREET 2: SUITE 200A CITY: BOCA RATON STATE: FL ZIP: 33487 BUSINESS PHONE: 4072415251 MAIL ADDRESS: STREET 1: 6400 CONGRESS AVENUE STREET 2: SUITE 200A CITY: BOCA RATON STATE: FL ZIP: 33487 FORMER COMPANY: FORMER CONFORMED NAME: JUDICATE INC DATE OF NAME CHANGE: 19920703 10-Q 1 g71257e10-q.txt QUESTRON TECHNOLOGY,INC. - FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from ___________________ to ________________ Commission File Number 0-13324 QUESTRON TECHNOLOGY, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 23-2257354 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification Number) 6400 Congress Avenue, Suite 2000, Boca Raton, FL 33487 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (561) 241-5251 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 9, 2001, there were 9,206,162 shares of the Registrant's common stock outstanding. 2 QUESTRON TECHNOLOGY, INC. INDEX THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY. EACH FORWARD-LOOKING STATEMENT THAT THE COMPANY BELIEVES IS MATERIAL IS ACCOMPANIED BY A CAUTIONARY STATEMENT OR STATEMENTS IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENT. IN THE CONTEXT OF FORWARD-LOOKING INFORMATION PROVIDED IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN OTHER REPORTS, PLEASE REFER TO THE DISCUSSION OF RISK FACTORS DETAILED IN, AS WELL AS THE OTHER INFORMATION CONTAINED IN, THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION DURING THE PAST 12 MONTHS.
Page No. -------- PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheet - At June 30, 2001 (unaudited) and December 31, 2000 3 Consolidated Statement of Operations (unaudited) - Three Months and Six Months Ended June 30, 2001 and 2000 4 Consolidated Statement of Cash Flows (unaudited) - Six Months Ended June 30, 2001 and 2000 5 Notes to Consolidated Financial Statements 6 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 12 Item 3. Quantitative and Qualitative Disclosure About Market Risk 12 PART II. Other Information 13 - 14 Signature Page 15
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, 2001 (unaudited) AND DECEMBER 31, 2000 (Dollars in thousands)
June 30, December 31, 2001 2000 --------- ------------ ASSETS Current assets: Cash $ 732 $ 358 Accounts receivable, less allowances for doubtful accounts of $199 in 2001 and $281 in 2000 24,159 25,560 Other receivables 248 347 Inventories 64,955 60,726 Other current assets 942 1,356 --------- --------- Total current assets 91,036 88,347 Property and equipment - net 5,876 4,562 Cost in excess of net assets of businesses acquired, less accumulated amortization of $5,454 in 2001 and $4,522 in 2000 75,298 76,138 Deferred income taxes 4,256 4,342 Other assets 5,810 5,642 --------- --------- Total assets $ 182,276 $ 179,031 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,746 $ 16,671 Accrued expenses 2,368 2,313 Income taxes payable 1,558 1,780 Current portion of long-term debt 10,069 5,385 --------- --------- Total current liabilities 24,741 26,149 Deferred income taxes payable 1,158 1,158 Long-term debt 105,051 100,749 --------- --------- Total liabilities 130,950 128,056 --------- --------- Commitments and contingencies: Common stock subject to put option agreement 121 337 Series C convertible preferred stock 750 -- Stockholders' equity: Preferred stock, $.01 par value; authorized 10,000,000 shares -- -- Common stock, $.001 par value; authorized 20,000,000 shares; issued 9,206,162 shares in 2001 and 9,226,013 in 2000 9 9 Additional paid-in capital 56,031 56,031 Accumulated deficit (5,585) (5,402) --------- --------- Total stockholders' equity 50,455 50,638 --------- --------- Total liabilities and stockholders' equity $ 182,276 $ 179,031 ========= =========
See Notes to Consolidated Financial Statements. 3 4 QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (Unaudited) (In thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Sales $ 36,015 $ 41,226 $ 75,816 $ 77,705 Cost of goods sold 23,112 25,417 47,138 47,178 ----------- ----------- ----------- ----------- Gross Profit 12,903 15,809 28,678 30,527 Selling, general & administrative expenses 9,454 9,666 19,753 18,744 Depreciation and amortization 717 621 1,409 1,242 ----------- ----------- ----------- ----------- Total operating expenses 10,171 10,287 21,162 19,986 ----------- ----------- ----------- ----------- Operating income 2,732 5,522 7,516 10,541 Interest expense 3,980 2,940 7,838 5,799 ----------- ----------- ----------- ----------- (Loss) income before income taxes and extraordinary items (1,248) 2,582 (321) 4,742 (Benefit) provision for income taxes (528) 1,072 (138) 1,968 ----------- ----------- ----------- ----------- (Loss) income before extraordinary items (720) 1,510 (183) 2,774 Extraordinary gain in connection with the early extinguishment of debt (less applicable income taxes of $326 in 2000) -- -- -- 460 ----------- ----------- ----------- ----------- Net (loss) income $ (720) $ 1,510 $ (183) $ 3,234 =========== =========== =========== =========== PER COMMON SHARE: (Loss) income before extraordinary items $ (.08) $ .18 $ (.02) $ .34 Extraordinary gain -- -- -- .06 ----------- ----------- ----------- ----------- Net (loss) income $ (.08) $ .18 $ (.02) $ .40 =========== =========== =========== =========== PER DILUTED COMMON SHARE: (Loss) income before extraordinary items $ (.08) $ .16 $ (.02) $ .27 Extraordinary gain -- -- -- .05 ----------- ----------- ----------- ----------- Net (loss) income $ (.08) $ .16 $ (.02) $ .32 =========== =========== =========== =========== Average number of common shares outstanding 9,188,117 8,418,268 9,188,117 8,089,844 =========== =========== =========== =========== Average number of diluted common shares outstanding 9,188,117 9,718,250 9,188,117 10,261,125 =========== =========== =========== ===========
See Notes to Consolidated Financial Statements. 4 5 QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (In thousands)
June 30, June 30, 2001 2000 ------- ------- Cash flows from operating activities: Net (loss) income $ (183) $ 3,234 Adjustments to reconcile net income to net cash used in operating activities: Amortization of cost in excess of net assets of businesses acquired 932 864 Depreciation of property and equipment 463 378 Amortization of original issue discount 243 99 Non-cash interest expense 1,083 594 Deferred income taxes 86 131 Extraordinary gain in connection with the early extinguishment of debt (less applicable income taxes of $326) -- (460) Change in assets and liabilities: Decrease (increase) in accounts receivable 1,410 (7,702) Decrease (increase) in other receivables 90 (104) Increase in inventories (4,229) (7,963) Decrease (increase) in other current assets 414 (243) (Decrease) increase in accounts payable (5,925) 6,669 Increase (decrease) in accrued expenses 54 (602) (Decrease) increase in income taxes payable (223) 1,250 (Increase) decrease in other assets (255) 86 ------- ------- Net cash used in operating activities (6,040) (3,769) ------- ------- Cash flows from investing activities: Net cash consideration paid for acquired business (91) (238) Acquisition of property and equipment (1,591) (1,036) ------- ------- Net cash used for investing activities (1,682) (1,274) ------- ------- Cash flows from financing activities: Proceeds from borrowings under revolving facility 8,512 4,733 Proceeds from long-term debt financing -- -- Repayment of long-term debt (3) (249) Fees and expenses associated with long-term debt financing -- (233) Extraordinary gain (charge) in connection with the early extinguishment of debt (less applicable income taxes of $326,214 in 2000 and $1,451,516 in 1999) -- 460 Proceeds from exercise of options and warrants -- 520 Payments on capital leases (153) (40) Payments in respect of exercise of put options (216) -- Payments on note issued for acquired business (43) (203) ------- ------- Net cash provided by financing activities 8,097 4,987 ------- ------- Increase in cash and cash equivalents 375 (56) Cash and cash equivalents at beginning of period 357 111 ------- ------- Cash and cash equivalents at end of period $ 702 $ 55 ======= =======
See Notes to Consolidated Financial Statements. 5 6 QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2001 AND 2000 NOTE 1. BASIS OF PRESENTATION. The accompanying unaudited consolidated financial statements include the accounts of Questron Technology, Inc. (the "Company") and its subsidiaries. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the Securities and Exchange Commission's instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Management believes that all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The consolidated balance sheet as of December 31, 2000 reflects the audited balance sheet at that date. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. NOTE 2. EARNINGS PER SHARE. The following table sets forth the calculation of net income per common share and net income per diluted common share (in thousands except share data):
Three months ended June 30, Six months ended June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Numerator: (Loss) income before extraordinary items $ (720) $ 1,510 $ (183) $ 2,774 Denominator: Denominator for (loss) income before extraordinary items per common share Weighted-average shares 9,188,117 8,418,268 9,188,117 8,089,844 ----------- ----------- ----------- ----------- Effect of dilutive securities: Options -- 805,656 -- 1,141,735 Warrants -- 494,326 -- 1,029,546 ----------- ----------- ----------- ----------- Dilutive potential common shares -- 1,299,982 -- 2,171,281 ----------- ----------- ----------- ----------- Denominator for (loss) income before extraordinary items per diluted common share 9,188,117 9,718,250 9,188,117 10,261,125 =========== =========== =========== =========== (Loss) income before extraordinary items per common share $ (.08) $ .18 $ (.02) $ .34 =========== =========== =========== =========== (Loss) income before extraordinary items per diluted common share $ (.08) $ .16 $ (.02) $ .27 =========== =========== =========== ===========
6 7 QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2001 AND 2000 NOTE 3. EARLY EXTINGUISHMENT OF DEBT. On March 7, 2000, the Company reached agreements with the former shareholders of Action Threaded Products, Inc. ("Action"), Capital Fasteners, Inc. ("Capital") and Olympic Fasteners and Electronic Hardware ("Olympic") whereby notes payable aggregating $5.0 million plus accrued interest were settled in exchange for 450,000 shares of the Company's common stock. As a result, the Company realized an extraordinary gain in an amount equal to the difference between the balance owed and the value of the stock exchanged. NOTE 4. LOAN AMENDMENTS. In connection with amendments to the senior secured credit facility and the senior subordinated debt facility (the "agreements") obtained in June 2001, the lenders waived all defaults arising from the failure to satisfy certain financial covenants at June 30, 2001 and September 30, 2001. In addition, the amendments deferred certain payments due to the lenders under the original agreements. The $5.0 million of principal payments due under the senior Term Note A in $2.5 million installments each on July 1, 2001 and October 1, 2001 have been deferred to December 28, 2001. Quarterly interest payments due to the senior subordinated lenders of $1.2 million per quarter for the quarter ended June 30, 2001 and the quarter ending September 30, 2001 have been deferred until December 31, 2001. Under the agreements, the Company is required to satisfy certain financial covenants at December 31, 2001 and at each subsequent quarter end during the year ending December 31, 2002. The Company believes it will be able to satisfy the financial and other covenants included in the agreements for the year ending December 31, 2001. However, there can be no assurance that the Company will be able to remain in compliance with the financial covenants or, in the event of noncompliance, be able to obtain appropriate amendments or waivers. In connection with the amendment to the senior subordinated debt facility, the Company issued 750,000 shares of its Mandatory Redeemable Series C Convertible Preferred Stock valued at $1.00 per share, or $750,000. This amount will be amortized over the remaining term of the agreements. NOTE 5. NEW ACCOUNTING PRONOUNCEMENTS. In June 2001, the Finanancial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized, but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. 7 8 QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2001 AND 2000 The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $1.1 million ($0.12 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2000. The Company's results of operations through June 30, 2001 include the operating results of the Company's inventory logistics management business, Questron Distribution Logistics, Inc. ("QDL"), its master distribution of fasteners business, Integrated Material Systems, Inc. ("IMS") and its battery distribution business, Power Components, Inc. ("PCI"). The Company's revenues for the three month and six month periods ended June 30, 2001 amounted to $36.0 million and $75.8 million, respectively, compared with $41.2 million and $77.7 million for the comparable prior year periods. This decline in revenues is attributable to current economic conditions and the continued weakness in the Company's mature inventory logistics management ("ILM") programs. The effect of this weakness, however, has been offset in part by the continued maturation of the Company's recently signed ILM contracts. The Company continued to enter into new ILM programs with large OEMs in the second quarter of 2001. The implementation of such newly signed programs, together with the continued implementation of ILM programs entered into in 2000 and modest economic improvement in the second half of 2001, are expected to have a positive impact on the Company's results for 2001. The Company's operating income was $2.7 million and $7.5 million, respectively for the three month and six month periods ended June 30, 2001, compared with operating income of $5.5 million and $10.5 million for the comparable prior year periods. The decline in operating income is due to the increased expense levels to support the recently signed ILM programs at their expected sales levels. While these programs continue to grow, not all have reached their expected sales levels. The Company continues to address staffing levels, consolidate facilities where possible and eliminate all discretionary spending. In addition, the Company has completed all systems integrations and all branch operations are on-line. The Company continues to make progress towards installing its new software tools designed to more accurately predict customer demand and to help the Company more efficiently manage its inventory levels. Interest expense for the three month and six month periods ended June 30, 2001 amounted to $4.0 million and $7.8 million, respectively. For the comparable periods of the prior year, the Company's results include interest expense of $2.9 million and $5.8 million, respectively. The increase in interest expense reflects the cost of incremental borrowings associated with QDL's working capital needs, as well as the effect of the higher cost of the $17.5 million Senior Subordinated Debt incurred in November 2000. The provision for income taxes for the three month and six month periods ended June 30, 2001 reflects an effective income tax rate of 42.3% and 43.0%, respectively, compared with 41.5% for the comparable prior year periods. 9 10 Net loss for the three month and six month periods ended June 30, 2001 was $720 thousand and $183 thousand, compared with income before extraordinary gain of $1.5 million and $2.8 million for the comparable prior year periods. During the first quarter of 2000, the Company entered into an agreement with the former shareholders of Action, Capital and Olympic repaying $5 million of acquisition indebtedness, plus accrued interest, with 450,000 shares of the Company's common stock, valued at $4.5 million. As a result, the Company recognized an extraordinary gain of $460 thousand net of applicable income taxes, for the difference between the balance owed and the value of the stock exchanged. After the extraordinary gain, the net income for the three month and six month periods ended June 30, 2000 amounted to $1.5 million and $3.2 million, respectively. The decline in net income for the three month and six month periods ended June 30, 2001 as compared with income before extraordinary gain for the comparable prior year periods is due to increased operating expenses to support the anticipated higher levels of sales from recently signed ILM programs, which have not reached expected sales levels as of June 30, 2001, as well as increased interest expense. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2001, the Company had $732 thousand in cash, compared to $358 thousand as of December 31, 2000. As of June 30, 2001, the Company had working capital of $66.3 million, compared with working capital of $62.2 million as of December 31, 2000. For the six months ended June 30, 2001, the net cash used in the Company's operating activities amounted to $6.0 million, principally reflecting an increase in inventories and a decrease in accounts payable, offset in part by a decrease in accounts receivable. For the six months ended June 30, 2001, the net cash used in the Company's investing activities amounted to $1.7 million, including $91 thousand of additional net cash consideration paid for RSD Sales Company, Inc. and $1.6 million of capital expenditures for the acquisition of fixed assets, principally for the initial payments on the $2.5 million capital expenditure associated with the implementation of additional supply chain management software tools. Other than the remaining $1.7 million associated with these software tools, the Company does not have significant commitments for capital expenditures as of June 30, 2001 and no significant commitments are anticipated for the remainder of 2001. For the six months ended June 30, 2001, the net cash provided by the Company's financing activities amounted to $8.1 million, consisting principally of $8.5 million of bank borrowings under the Company's revolving credit facility. In connection with amendments to the senior secured credit facility and the senior subordinated debt facility (the "Amendments") obtained as of June 30, 2001, the lenders waived all defaults arising from the failure to satisfy certain financial covenants at June 30, 2001 and September 30, 2001. In addition, the Amendments deferred certain payments due to the lenders under the senior secured credit facility and the senior subordinated debt facility. The $5.0 million of principal payments due under the senior credit facility in $2.5 million installments each on July 1, 2001 and October 1, 2001 have been deferred to December 28, 2001. Quarterly interest payments due to the senior 10 11 subordinated lenders of $1.2 million per quarter for the quarter ended June 30, 2001 and the quarter ending September 30, 2001 have been deferred until December 31, 2001. The amendment to the senior subordinated debt facility provides that if Net Transaction Proceeds from a Transaction sufficient to provide for the Retirement have not been received and applied, on or before December 31, 2001, to the Retirement, then the Company shall pay to each holder of the senior subordinated notes on January 2, 2002 a fee equal to three percent (3%) of the aggregate principal amount of the notes held by such holder on December 31, 2001. For the purposes of this provision, "Retirement" means the full and final payment in full in cash, and retirement, of: (a) all obligations on the senior secured credit facility, and any and all expenses or disbursements related thereto or any other obligations owing to the holders thereof; (b) the principal, interest, premium, if any, and any other obligations whatsoever to the holders of any other senior debt; and (c) all the obligations on the senior subordinated debt facility, and any and all expenses or disbursements related thereto or any other obligations owing to the holders thereof. In addition, "Transaction" means any sale of the Company or a subsidiary (whether structured in the form of a sale of stock held by the existing holders of the Common Stock, a sale of all or substantially all of the property of the Company or a subsidiary or a merger or consolidation of any of the Company or a subsidiary with any other person), any recapitalization or refinancing or any other transaction which, if consummated, would result in Net Transaction Proceeds becoming available to fully consummate the Retirement on or prior to December 31, 2001. Under the Amendments, the Company is required to satisfy certain financial covenants at December 31, 2001 and at each subsequent quarter end during the year ending December 31, 2002. The Company believes it will be able to satisfy the financial and other covenants included in the senior secured credit facility and the senior subordinated debt facility, as amended, for the year ending December 31, 2001. However, there can be no assurance that the Company will be able to remain in compliance with the financial covenants or, in the event of noncompliance, be able to obtain appropriate amendments or waivers. In connection with the amendment to the senior subordinated debt facility, the Company issued 750,000 shares of its Mandatory Redeemable Series C Convertible Preferred Stock valued at $1.00 per share, or $750,000. This amount will be amortized over the remaining term of the agreement. Promptly following the closing of a Transaction (as that term is defined in the Amendment with respect to the Company's 14.5% Senior Subordinated Notes) resulting in the Retirement (as such term is defined in such Amendment), the Company shall, to the extent it may lawfully do so, redeem all, but not part, of the then outstanding Series C Preferred Stock by paying in cash therefor $1.00 per share. See Part II, Item 2, "Changes in Securities and Use of Proceeds" for a description of the terms of the Series C Convertible Preferred Stock. 11 12 The Company intends to continue to identify and evaluate potential merger and acquisition candidates engaged in businesses complementary to its business. While certain of such additional potential acquisition opportunities are at various stages of consideration and evaluation, none is at any definitive stage at this time. The Company believes that its working capital, funds available under its senior secured credit facility, and funds generated from operations will be sufficient to meet its obligations through 2001, including the amounts due under the senior secured credit facility and the senior subordinated debt facility due on December 31, 2001, but excluding cash requirements associated with any business acquisitions. However, there can be no assurance that the Company will be able to make all of the payments due under the senior secured credit facility and the senior subordinated debt facility on December 31, 2001 or, if it is unable to do so, be able to obtain appropriate amendments or waivers. The Company continues to work with Credit Suisse First Boston exploring strategic alternatives that the Company hopes will aid the Company in realizing its potential for growth and in maximizing value for its stockholders. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's interest expense is sensitive to changes in the general level of U.S. interest rates. In this regard, changes in the U.S. rates may effect the interest paid on a portion of its debt. The Company does not enter into derivative financial instruments. 12 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In connection with amendments to the senior secured credit facility obtained as of June 30, 2001, the Company issued 750,000 shares of its Mandatory Redeemable Series C Convertible Preferred Stock ("Series C Preferred Stock"), with a liquidation value of $1.00 per share (the "Series C Liquidation Amount"), to the lenders under the senior secured credit facility. Promptly following the closing of a Transaction (as that term is defined in the Amendment with respect to the Company's 14.5% Senior Subordinated Notes) resulting in the Retirement (as such term is defined in such Amendment), the Company shall, to the extent it may lawfully do so, redeem all, but not part, of the then outstanding Series C Preferred Stock by paying in cash therefore $1.00 per share plus any dividends declared and payable to the Series C Preferred Stock but not yet paid. Beginning on July 1, 2002, each share of the Series C Preferred Stock shall be convertible into that number of shares of Common Stock equal to the Series C Liquidation Amount divided by the average of the closing price per share of Common Stock as reported by the Nasdaq National Market (or if transactions in the Common Stock are not then reported by the Nasdaq National Market, as reported by such exchange or automatic quotation system then reporting transactions in such shares) for the 30 trading days immediately preceding the date of delivery of the notice of conversion. The conversion rate is subject to customary anti-dilution provisions. In lieu of completing any such conversion, the Company may instead redeem Series C Preferred Stock submitted for conversion by paying the Series C Liquidation Amount in cash with respect to such Series C Preferred Stock. Any such redemption, however, would be subject to the provisions of the Company's debt obligations restricting the redemption of the Company's capital stock. The holders of the Series C Preferred Stock shall have no right to vote on matters submitted to the stockholders except that the Company shall not, without the affirmative vote or consent of the holders of shares representing at least a majority of the shares of Series C Preferred Stock then outstanding, acting as a separate class: (i) in any manner authorize or create any class of capital stock ranking, either as to payment of dividends, distribution of assets or redemption, prior to or on a parity with the Series C Preferred Stock; or (ii) in any manner alter or change the designations, powers, preferences or rights or the qualifications, limitations or restrictions of the Series C Preferred Stock. The issuance of the Series C Preferred Stock was exempt from registration under the Securities Act of 1933, as amended, as an issuance not involving any public offering. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. 13 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's annual meeting of the stockholders held on June 14, 2001, the following directors were elected to the Board of Directors: Name Affirmative Votes Negative Votes - ---- ----------------- -------------- Dominic A. Polimeni 6,257,891 (97.7%) 148,751 (2.3%) Robert V. Gubitosi 6,252,891 (97.6%) 153,751 (2.4%) Douglas D. Zadow 6,257,891 (97.7%) 148,751 (2.3%) Milton M. Adler 6,257,891 (97.7%) 148,751 (2.3%) William J. Coscioni 6,257,891 (97.7%) 148,751 (2.3%) Paul A. Leonard 6,257,891 (97.7%) 148,751 (2.3%) William J. McSherry, Jr. 6,257,891 (97.7%) 148,751 (2.3%) In addition, the stockholders approved a resolution ratifying the selection of Ernst & Young LLP as the Company's Independent Public Accountants for the fiscal year 2001 with 6,377,767 votes in favor (representing 99.6% of voting shares), 21,514 votes opposed (representing 0.3% of voting shares) and 7,361 votes abstained (0.1% of voting shares). ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: 1. Certificate of Designation for Series C Preferred Stock 2. Waiver and Amendment to Amended and Restated Loan and Security Agreement dated as of June 30, 2001 3. Second Combined Amendment Agreement dated as of June 30, 2001 b) Reports on Form 8-K: None. 14 15 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUESTRON TECHNOLOGY, INC. (1) Principal Executive Officer: Date: August 14, 2001 /s/ Dominic A. Polimeni ----------------------------------- Dominic A. Polimeni Chairman and Chief Executive Officer (2) Principal Financial and Accounting Officer: Date: August 14, 2001 /s/ Robert V. Gubitosi ----------------------------------- Robert V. Gubitosi President and Chief Financial Officer 15 EX-1 3 g71257ex1.txt QUESTRON - CERTIFICATE FOR SERIES C STOCK 1 Exhibit 1 CERTIFICATE OF DESIGNATION ESTABLISHING A SERIES OF PREFERRED STOCK OF QUESTRON TECHNOLOGY, INC. To the Secretary of State of the State of Delaware: QUESTRON TECHNOLOGY, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify that: pursuant to the provisions of Sections 151(a) and 151(g) of the General Corporation Law of the State of Delaware, the following resolution establishing and designating a series of shares of preferred stock and fixing and determining the relative rights and preferences thereof was duly adopted by the Board of Directors of the Corporation on July __, 2001. "RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of this Corporation in accordance with the provisions of its Certificate of Incorporation as amended, a series of preferred stock, $.01 par value per share, of the Corporation be established and given the distinctive designation of "Series C Preferred Stock" (the "Series C Preferred Stock"). The number of shares of the Series C Preferred Stock authorized to be issued by the Corporation shall be 750,000 shares. The rights, preferences, privileges and restrictions granted to and imposed upon the Series C Preferred Stock are as set forth on the attached Exhibit I." IN WITNESS WHEREOF, Questron Technology, Inc. has caused this Certificate to be signed by its President and attested by its Secretary, this ___ day of July, 2001. QUESTRON TECHNOLOGY, INC. By: __________________________ President ATTEST: By: __________________________ Secretary 2 EXHIBIT I 1. Voting (a) Except as provided in Section 1(b), the holders of the Series C Preferred Stock shall have no right to vote on matters submitted to the stockholders of the Corporation. (b) The Corporation shall not, without the affirmative vote or consent of the holders of shares representing at least a majority of the shares of Series C Preferred Stock then outstanding, acting as a separate class: (i) in any manner authorize or create any class of capital stock ranking, either as to payment of dividends, distribution of assets or redemption, prior to or on a parity with the Series C Preferred Stock; or (ii) in any manner alter or change the designations, powers, preferences or rights or the qualifications, limitations or restrictions of the Series C Preferred Stock; provided, however, that, except as otherwise provided by law, any such vote or consent by the holders of the Series C Preferred Stock shall be sufficient authorization, insofar as the need to obtain approval of the Series C Preferred Stock is concerned, for any such action, and when such action is effected upon such vote or consent of the Series C Preferred Stock, holders of shares of the Series C Preferred Stock dissenting from such action shall not have any rights to payment for their shares by reason of this provision. 2. Rights on Liquidation, Dissolution or Winding Up In the event of any liquidation, dissolution or winding up of the Corporation, the holders of shares of the Series C Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any payment shall be made to the holders of shares of any other class or series of the capital stock of the Corporation, $1.00 per share of Series C Preferred Stock together with any declared but unpaid dividends to the date of payment (the "Series C Liquidation Amount"). If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of the Series C Preferred Stock the full amounts to which they respectively shall be entitled, the holders of shares of the Series C Preferred Stock shall share ratably in any distribution of assets in proportion of their respective ownership of Series C Preferred Stock. In the event of any liquidation, dissolution or winding up of the Corporation, after payment shall have been made to the holders of shares of the Series C Preferred Stock of the full amount to which they shall be entitled as aforesaid, the holders of shares of all other classes and series of the capital stock of the Corporation, to the exclusion of the holders of shares of the Series C Preferred Stock, shall be entitled to share, according to their respective rights and preferences, in all remaining assets of the Corporation available for distribution to its stockholders. The consolidation or merger of the Corporation with or into any other corporation or corporations shall not be deemed to be a liquidation, dissolution or winding up of the Corporation unless the effect thereof shall be to cause a distribution of assets among its stockholders. 3 3. Dividends Holders of the Series C Preferred Stock will be entitled to dividends, when, as and if declared by the Board of Directors. No dividends shall be paid or set apart in respect of the Common Stock or any other class of securities which ranks junior to the Series C Preferred Stock (except a dividend payable in Common Stock in respect of the Common Stock or a dividend payable in such other class of securities in respect of such other class of securities) unless and until there also shall be declared an equal dividend per share payable to the holders of Series C Preferred Stock. 4. Mandatory Redemption (a) Promptly following the closing of a Transaction (as that term is defined in Second Combined Amendment Agreement dated as of June 30, 2001 with respect to the Corporation's 14.5% Senior Subordinated Notes (the "Amendment")) resulting in the Retirement (as such term is defined in the Amendment), the Corporation shall, to the extent it may lawfully do so, redeem all, but not part, of the then outstanding Series C Preferred Stock by paying in cash therefor $1.00 per share plus any dividends declared and payable to the Series C Preferred Stock but not yet paid (such amount being referred to herein as the "Series C Redemption Price"). (b) Written notice shall be mailed, postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series C Preferred Stock, at the address last shown on the records of this Corporation for such holder (or at the address given by the holder to the Corporation for the purpose of notice or if no such address appears or is given at the place where the principal executive office of the Corporation is located), notifying such holder of the redemption to be effected, specifying the redemption date and the place at which payment may be obtained. The notice shall call upon such holder to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). Except as provided in Section 4(c) below, on or after the close of business on the redemption date, each holder of Series C Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice. Thereupon, the Series C Redemption Price of such shares shall be payable in the manner set forth in Section 4(a) to the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. (c) From and after the redemption date, unless there has been a default in payment of the Series C Redemption Price, all rights of the holders of such shares as holders of Series C Preferred Stock (except the right to receive the Series C Redemption Price, upon surrender of their certificate or certificates in the manner set forth in Section 4(b)) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of this Corporation or be deemed to be outstanding for any purpose whatsoever, PROVIDED, HOWEVER, that until the Series C Redemption Price and all declared dividends thereon shall have been paid in full, 2 4 holders of Series C Preferred Stock shall continue to have the informational and inspection rights of shareholders of the Corporation. 5. Conversion; Optional Redemption (a) Beginning on July 1, 2002, each share of the Series C Preferred Stock shall be convertible into that number of shares of Common Stock, par value $.001 per share, of the Corporation ("Common Stock") equal to the Series C Liquidation Amount divided by the average of the closing price per share of Common Stock as reported by the Nasdaq National Market (or if transactions in the Common Stock are not then reported by the Nasdaq National Market, as reported by such exchange or automatic quotation system then reporting transactions in such shares) for the 30 trading days immediately preceding the date of delivery of the Conversion Notice. (b) Before any holder of Series C Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation and shall give written notice to the Corporation at such office that such holder elects to convert the same (the "Conversion Notice"). The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series C Preferred Stock a certificate or certificates for the number of shares of Common Stock to which such holder is entitled. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Series C Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. Alternatively, in lieu of completing any such conversion, the Corporation may instead redeem Series C Preferred Stock submitted for conversion by paying the Series C Liquidation Amount in cash with respect to such Series C Preferred Stock. If the Corporation elects to redeem shares in lieu of conversion, it shall give the holder written notice of such election and shall pay the Series C Liquidation Amount with respect to such Series C Preferred Stock to the holder within five business days of the date of the Conversion Notice. (c) The number of shares of Common Stock to be issued upon the conversion of Series C Preferred Stock or the conversion price calculation shall be subject to proportional adjustment from time to time as follows: (i) If the Corporation shall at any time consolidate or merge with or sell or convey all or substantially all of its assets to any other corporation, partnership or other entity, the shares of the Series C Preferred Stock then outstanding shall be convertible into such number and kind of securities and property as would have been issuable or distributable on account of such consolidation, merger, sale or conveyance upon or with respect to the shares of Common Stock into which the Series C Preferred Stock is convertible. (ii) If the Corporation shall at any time re-classify or change the outstanding Common Stock into a different type of security or securities or other property ("Reclassified Securities"), then each holder of Series C Preferred Stock, at such holder's sole option, shall thereafter be 3 5 entitled to convert any share of Series C Preferred Stock held by such holder into such number of Reclassified Securities as would have been issuable to such holder of Series C Preferred Stock, had such holder converted such share of Series C Preferred Stock into Common Stock immediately prior to the reclassification or change of Common Stock into such Reclassified Securities. (iii) If at any time during the 30 trading day period referred to in Section 5(a), the Corporation shall declare or pay, without consideration, to the holders of the Common Stock a dividend in Common Stock or in any right to acquire Common Stock for no consideration, or shall effect a subdivision of the outstanding Common Stock into a greater number of shares of Common stock (by stock split, or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock), or if the outstanding shares of Common Stock shall be combined or consolidated by reclassification or otherwise, into a lesser number of shares of Common Stock, the per share closing price of the Common Stock reported for trading days prior to the effective date of such dividend, subdivision, combination or consolidation shall be proportionately increased or decreased, as the case may be, effective as of the effective date of such dividend, subdivision, combination or consolidation. (d) The Corporation shall undertake to have authorized and thereafter reserve and keep available out of its authorized but unissued shares of Common Stock or its treasury shares, solely for the purpose of issuing upon the conversion of the shares of the Series C Preferred Stock, such number of shares of Common Stock as shall then be issuable upon the conversion of all of the then outstanding shares of the Series C Preferred Stock. 6. No Reissuance of Series C Preferred Stock No share or shares of the Series C Preferred Stock acquired by the Corporation by reason of purchase, conversion or otherwise shall be reissued, and all such shares shall be cancelled, retired and eliminated from the shares which the Corporation shall be authorized to issue. 7. Notices Any notice or other communication under the provisions of this Certificate shall be in writing, and shall be given by postage prepaid, first class mail, receipt requested, by hand delivery with an acknowledgement copy, or by any reputable service which guarantees over night delivery ("Over Night Mail"), directed to the Corporation at 6400 Congress Avenue, Suite 200, Boca Raton, Florida 33487, and to the holders at their respective addresses as set forth in the records of the Corporation, or to any new address of which the Corporation or any holder shall have informed the others by the giving of notice in the manner provided herein. Such notice or communication shall be effective, if sent by mail, three (3) days after it is mailed within the continental United States; if sent by Over Night Mail, one day after it is mailed; or by hand delivery, upon receipt. 4 EX-2 4 g71257ex2.txt QUESTRON - AMENDMENT TO LOAN AGREEMENT 06/30/01 1 Exhibit 2 WAIVER AND AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS WAIVER AND AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this "Amendment") is entered into as of June 29, 2001, by and among QUESTRON TECHNOLOGY, INC., a Delaware corporation ("Questron"), certain of the direct and indirect Subsidiaries of Questron identified in the Loan Agreement (as defined below) (individually and collectively, and jointly and severally, the "Obligors"), each of the Lenders signatory hereto, CONGRESS FINANCIAL CORPORATION (Florida), a Florida corporation, as administrative agent for the Lenders ("Administrative Agent"), and ABLECO FINANCE LLC, a Delaware limited liability company, as collateral agent for the Lender Group ("Collateral Agent"), in light of the following: WHEREAS, the signatories hereto entered into that certain Amended and Restated Loan and Security Agreement, dated as of June 29, 1999 (as amended, restated, supplemented, or modified from time to time, the "Loan Agreement"); and WHEREAS, the Obligors have requested that the Lenders waive and amend certain terms of the Loan Agreement and the Lenders have agreed, under certain conditions, to waive and amend such terms. NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants hereinafter set forth, the parties agree as follows: 1. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. In addition, the following term as used herein has the meaning set forth below: EXTRAORDINARY TRANSACTION PROCEEDS - means net proceeds, excluding all fees, costs and out-of-pocket expenses in connection therewith (including, without limitation, success fees, break-up fees and other fees of, and costs, expenses and disbursements of, brokers, finders or investment bankers, attorneys, accountants, consultants and other professionals relating thereto) and net of any and all income taxes payable by any Obligor in respect thereof, disbursed to Questron relating to any extraordinary event including, but not limited to, the acquisition of funds through the sale of debt or equity, or the entering into, modification or cancellation of any material contract. 2. WAIVER OF CERTAIN COVENANTS. The financial covenants contained in Sections 8.3.1 (Total Funded Debt Coverage Ratio), 8.3.2 (Minimum EBITDA), 8.3.3 (Senior Debt Coverage Ratio), 8.3.4 (Minimum Interest Coverage) and for the quarters ended June 30, 2001 and September 30, 2001 and Section 8.3.5 (Inventory Coverage) for each month from the date hereof until September 30, 2001 are, subject to completion of the conditions set forth in Section 9 below, hereby waived. Such waiver is specific in time and in intent and does not constitute, nor should it be construed as constituting, except to the extent expressly set forth herein, a waiver or modification of any term of, or right, power, or privilege under, the Loan Agreement, the other Loan Documents, or any agreement, contract, indenture, document, or instrument mentioned therein. 1 2 3. AMENDMENT OF PAYMENT OBLIGATIONS. (a) Upon the effectiveness of this Amendment, Section 3.2 of the Loan Agreement is amended to read as follows: "3.2 PAYMENTS. (a) The principal due and payable quarterly under the Term Loans shall be repaid pro rata to the holders of the Term Notes in installments on the following dates and in the following amounts:
======================================================= ================================================== Date Quarterly Installment ======================================================= ================================================== December 28, 2001 $5,000,000 - ------------------------------------------------------- -------------------------------------------------- January 1, 2002 $2,500,000 - ------------------------------------------------------- -------------------------------------------------- April 1, 2002 $2,500,000 - ------------------------------------------------------- -------------------------------------------------- July 1, 2002 $3,750,000 - ------------------------------------------------------- -------------------------------------------------- October 1, 2002 $3,750,000 - ------------------------------------------------------- -------------------------------------------------- January 1, 2003 $3,750,000 - ------------------------------------------------------- -------------------------------------------------- April 1, 2003 $3,750,000 ======================================================= ==================================================
The outstanding unpaid principal balance and all accrued and unpaid interest and other amounts due under the Term Loans shall be due and payable on September 30, 2003. In the event provisions regarding principal payment contained in any note or other instrument evidencing the Term Loans (including the Term Notes) conflict with the provisions regarding principal payments set forth above in this Section 3.2, the provisions of this Section 3.2 shall prevail. (b) With respect to Revolving Credit Loans, except where evidenced by notes or other instruments (including the Revolving Notes) issued or made by Borrower to the Lender specifically containing payment provisions which are in conflict with this Section 3.2 (in which event the conflicting provisions of said notes or other instruments shall govern and control), the Obligations shall be payable as follows:". (b) Nothing contained herein shall relieve the Obligors of their interest payment obligations. This Amendment shall modify only the dates on which Term Loan principal payments are due, and shall not be deemed to change or modify any other payment obligation provisions under the Loan Agreement or the Term Notes. After the effectiveness of this Amendment, upon the request of any Obligor, the holders of the Term Notes shall tender their existing Term Notes and receive in exchange replacement Term Notes which evidence the amendment set forth in Section 3(a). 2 3 4. AMENDMENT CONSIDERATION. In order to induce Collateral Agent to enter into this Amendment and for other good and valuable consideration, Questron agrees to grant to Collateral Agent that number of shares of Series C Preferred Stock of Questron, the terms and conditions of which are set forth in the Certificate of Designations attached hereto as EXHIBIT A (the "Preferred Stock"), with a liquidation value equal to $750,000; PROVIDED, HOWEVER, that Questron shall have five (5) Business Days after the date of this Amendment to issue such Preferred Stock to Collateral Agent. Each of the parties hereto agree that the delivery of the Preferred Stock is an integral inducement to Collateral Agent to enter into this Amendment, and failure to deliver such Preferred Stock within five (5) Business Days shall cause this Amendment to be null and void. 5. CERTAIN PAYMENTS OF OBLIGATIONS. (a) EXTRAORDINARY TRANSACTION PROCEEDS. In the event that any of the Obligors receive Extraordinary Transaction Proceeds, the Obligors shall apply the entire Extraordinary Transaction Proceeds: (i) FIRST, to the prepayment of a principal amount of the Term Loans to the extent of principal payments which would have been required to have been made on or prior to the date such Extraordinary Transaction Proceeds are received in respect of the Loan Agreement but for the amendment of the payment terms by the Lenders under the Loan Agreement; (ii) SECOND, to the prepayment of a principal amount of the Term Loans to the extent of principal payments which would have been required to have been made after the date such Extraordinary Transaction Proceeds are received in respect of the Loan Agreement and prior to December 28, 2001, but for the amendment of the payment terms by the lenders under the Loan Agreement; and (iii) THIRD, subject to Section 5(b) of this Amendment, to prepayment of the Revolving Credit Loans; PROVIDED, HOWEVER, that such payments shall not be made unless, after giving effect to such payments, the aggregate unused availability in respect of the Revolving Credit Loans is greater than $4,000,000. (b) PAYMENTS OF INTEREST IN RESPECT OF THE NOTES. In the event that the Obligors shall make any payment of the principal amount of the Term Loans on or prior to December 28, 2001 (whether pursuant to Section 5(a) or otherwise) and, after giving effect to such payment, the aggregate availability in respect of the Revolving Credit Loans is greater than $4,000,000, then, and in each such case, QOC shall pay to the holders of the Notes (as such term is defined in the Subordinated Debt Amendment), substantially contemporaneously with the making of such payment in respect of the Term Loans, an amount equal to the lesser of: 3 4 (i) the aggregate amount of accrued an unpaid interest accrued through the date of such payment in respect of all the Notes (as such term is defined in the Subordinated Debt Amendment); and (ii) the amount by which the aggregate unused availability in respect of the Revolving Credit Loans exceeds $4,000,000. Such amount shall be applied ratably among the Notes (as such term is defined in the Subordinated Debt Amendment) in accordance with the unpaid principal amounts thereof and without respect to whether the Notes are Series A Notes or Series B Notes (as such terms are defined in the Subordinated Debt Amendment). The failure of QOC to make any payment required by this Section 5(b) shall cause the termination of the deferral of interest in respect of the Notes (as such term is defined in the Subordinated Debt Amendment) pursuant to Section 2.1 of the Subordinated Debt Amendment. 6. ACKNOWLEDGEMENT. The Lenders hereby acknowledge and agree with Section 3.2 of the Subordinated Debt Amendment, which shall state as follows (capitalized terms used in the following Section 3.2 shall have the meanings ascribed to them in the Subordinated Debt Amendment): "3.2 REMEDIES STANDSTILL. The Parent and the Company agree that, notwithstanding the further proviso to Section 7.4 of the Existing Note Agreements, the date of the commencement of any Suspension Period in respect of any Intervening Event of Default shall be deemed to have been June 30, 2001, with the effect that the holders of the Notes, on or after January 2, 2002, shall be entitled to exercise any Remedies in respect of any Intervening Event of Default without being subject to any Suspension Period. The foregoing sentence shall not limit or change any requirement to defer the exercise of Remedies in respect of the first proviso to Section 7.4 or pursuant to Section 6.2, and shall not limit the effect of any other subordination provision of the Note Agreements (including, without limitation, Section 7.3)." 7. CONSENT. The Lenders hereby consent to the terms of the Subordinated Debt Amendment, in the form attached hereto as EXHIBIT D. 8. REPRESENTATIONS AND WARRANTIES. The Obligors hereby represent and warrant to the Required Lenders that: 4 5 (a) The execution, delivery, and performance of this Amendment are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its governing documents, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected if the result thereof is reasonably likely to result in a Material Adverse Change; (b) This Amendment constitutes the Obligors' legal, valid, and binding obligation, enforceable against the Obligors in accordance with its terms; (c) There is no litigation or proceeding pending or threatened against or affecting the Obligors, its business, operations, or properties that reasonably could be expected to have a Material Adverse Change; (d) No written information, certification, or report submitted to the Lender Group by the Obligors' pursuant to this Amendment contains any material misstatement of fact or omits to state a material fact or any fact necessary to make the information not false or misleading in any material respect; (e) The reaffirmation and consent of QTI attached hereto as EXHIBIT B constitutes QTI's legal, valid, and binding obligations, enforceable against QTI in accordance with its terms; (f) The reaffirmation and consent of QTI attached hereto as EXHIBIT B has been duly executed and delivered by QTI; (g) The reaffirmation and consent of QFC attached hereto as EXHIBIT C constitutes QFC's legal, valid, and binding obligations, enforceable against QFC in accordance with its terms; and (h) The reaffirmation and consent of QFC attached hereto as EXHIBIT C has been duly executed and delivered by QFC. 9. CONDITIONS PRECEDENT TO WAIVER AND AMENDMENT. The effectiveness of this Amendment shall be conditioned upon: (a) the representations and warranties in the Loan Agreement as amended by this Amendment, and the other Loan Documents being true and correct in all respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) there having been no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein issued and remaining in force by any governmental authority against the Lender Group; 5 6 (c) receipt by Collateral Agent of the Subordinated Debt Amendment under the Subordinated Debt Documents, in the form attached hereto as EXHIBIT D; (d) receipt by Collateral Agent of a Secretary's Certificate with attached certified Certificate of Designations for the Preferred Stock as in effect as of the date hereof; (e) receipt by Collateral Agent of certificates evidencing the Preferred Stock required to be issued under Section 4 above; (f) receipt by Collateral Agent of signature pages from all Lenders as required by Section 12.3.1(b) of the Loan Agreement; (g) receipt by Collateral Agent of the reaffirmation and consent of QTI attached hereto as EXHIBIT B, duly executed and delivered by an authorized official of QTI; (h) receipt by Collateral Agent of the reaffirmation and consent of QFC attached hereto as EXHIBIT C, duly executed and delivered by an authorized official of QFC; and (i) receipt by Collateral Agent of all expenses and costs incurred by Collateral Agent in entering into this Amendment, including attorney's fees. 10. COUNTERPARTS. This Amendment my be executed in one or more counterparts (by original or facsimile signature), each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11. ENTIRE AMENDMENT. This Amendment, and terms and provisions hereof, constitute the entire agreement among the parties pertaining to the subject matter hereof and supersedes any and all prior or contemporaneous amendments relating to the subject matter hereof. Except as expressly amended hereby, the Loan Agreement and other Loan Documents shall remain unchanged and in full force and effect. To the extent any terms or provisions of this Amendment conflict with those of the Loan Agreement or other Loan Documents, the terms and provisions of this Amendment shall control. This Amendment is a Loan Document. 12. GOVERNING LAW. All issues concerning the enforceability, validity and binding effect of this Amendment will be governed by and construed in accordance with the laws of the State of New York without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other state or jurisdiction) that would cause the application of the law of any state or jurisdiction other than the State of New York. Any action involving this Amendment or any dispute hereunder shall only be brought in the state and federal courts residing in New York. 13. AMENDMENTS. This Amendment cannot be altered, amended, changed or modified in any respect or particular unless each such alteration, amendment, change or modification shall 6 7 have been agreed to by each of the parties and reduced to writing in its entirety and signed and delivered by each party. 14. MISCELLANEOUS. (a) Upon the effectiveness of this Amendment, each reference in the Loan Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like import referring to the Loan Agreement shall mean and refer to the Loan Agreement as amended by this Amendment. (b) Upon the effectiveness of this Amendment, each reference in the Loan Documents to the "Loan Agreement", "thereunder", "therein", "thereof" or words of like import referring to the Loan Agreement shall mean and refer to the Loan Agreement as amended by this Amendment. [SIGNATURE PAGES TO FOLLOW] 7 8 IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date first above written. QUESTRON TECHNOLOGY, INC., a Delaware corporation QUESTRON DISTRIBUTION LOGISTICS, INC., a Delaware corporation INTEGRATED MATERIAL SYSTEMS, INC., an Arizona corporation POWER COMPONENTS, INC., a Pennsylvania corporation CALIFORNIA FASTENERS, INC., a California corporation COMP WARE, INC., a Delaware corporation FAS-TRONICS, INC., a Texas corporation FORTUNE INDUSTRIES, INC., a Texas corporation QUESTRON OPERATING COMPANY, INC., a Delaware corporation QUESTRON FINANCE CORP., a Delaware corporation ACTION THREADED PRODUCTS, INC., an Illinois corporation ACTION THREADED PRODUCTS OF GEORGIA, INC., a Georgia corporation ACTION THREADED PRODUCTS OF MINNESOTA, INC., a Minnesota corporation CAPITAL FASTENERS, INC., a North Carolina corporation R.S.D. SALES CO. INC., a New York corporation B&G SUPPLY COMPANY, INC., a Texas corporation By: ------------------------------------------- Name: ----------------------------------------- Title: Responsible Officer for each of the above-listed Obligors [signature pages continue] 8 9 ABLECO FINANCE LLC, a Delaware limited liability company, as Collateral Agent and a Lender By: ---------------------------------- Title: ------------------------------- A2 FUNDING LP, as a Lender By: A2 FUND MANAGEMENT LLC, its General Partner By: ---------------------- Title: ------------------ [signature pages continue] 9 10 CONGRESS FINANCIAL CORPORATION (FLORIDA), a Florida corporation, as Administrative Agent and a Lender By: ---------------------------------- Title: ------------------------------- [signature pages continue] 10 11 KZH ING-2 LLC, a Delaware limited liability company, as a Lender By: ---------------------------------------- Title: ------------------------------------- KZH ING-3 LLC, a Delaware limited liability company, as a Lender By: --------------------------------------- Title: ------------------------------------ ING HIGH INCOME PRINCIPAL PRESERVATION FUND HOLDINGS, LDC, as a Lender By: ING Capital Advisors, Inc., as Investment Advisor By__________________________ Its Authorized Signatory [signature pages continue] 11 12 MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, as a Lender By: -------------------------------------- Title: SIMSBURY CLO LIMITED, as a Lender By: Massachusetts Mutual Life Insurance Company, as Collateral Agent By: ------------------------------- Title: 12 13 EXHIBIT A CERTIFICATE OF DESIGNATIONS FOR SERIES C PREFERRED STOCK 13 14 EXHIBIT B REAFFIRMATION AND CONSENT All capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to them in that certain Waiver and Amendment of Loan and Security Agreement, dated as of June __, 2001 (the "Amendment"). The undersigned hereby (a) represents and warrants to the Lender Group that the execution, delivery, and performance of this Reaffirmation and Consent are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any material contract or undertaking to which it is a party or by which any of its properties may be bound or affected; (b) consents to the waiver of certain conditions and payment requirements of the Loan Agreement by the Amendment; (c) acknowledges and reaffirms its obligations owing to the Lender Group under the QTI Guaranty and any other Loan Documents to which it is a party; and (d) agrees that each of the QTI Guaranty and any other Loan Documents to which it is a party is and shall remain in full force and effect in accordance with the terms thereof. Although the undersigned has been informed of the matters set forth herein and has acknowledged and agreed to same, it understands that the Lender Group has no obligations to inform it of such matters in the future or to seek its acknowledgement or agreement to future amendments, and nothing herein shall create such a duty. Delivery of an executed counterpart of this Reaffirmation and Consent by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Reaffirmation and Consent. Any party delivering an executed counterpart of this Reaffirmation and Consent by telefacsimile also shall deliver an original executed counterpart of this Reaffirmation and Consent but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Reaffirmation and Consent. This Reaffirmation and Consent shall be governed by the laws of the State of New York, as more fully set forth in Section 20 of the QTI Guaranty. QUESTRON TECHNOLOGY, INC., a Delaware corporation By:________________________ Title: 14 15 EXHIBIT C REAFFIRMATION AND CONSENT All capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to them in that certain Waiver and Amendment of Loan and Security Agreement, dated as of June __, 2001 (the "Amendment"). The undersigned hereby (a) represents and warrants to the Lender Group that the execution, delivery, and performance of this Reaffirmation and Consent are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any material contract or undertaking to which it is a party or by which any of its properties may be bound or affected; (b) consents to the waiver of certain conditions and payment requirements of the Loan Agreement by the Amendment; (c) acknowledges and reaffirms its obligations owing to the Lender Group under the QFC Guaranty and any other Loan Documents to which it is a party; and (d) agrees that each of the QFC Guaranty and any other Loan Documents to which it is a party is and shall remain in full force and effect in accordance with the terms thereof. Although the undersigned has been informed of the matters set forth herein and has acknowledged and agreed to same, it understands that the Lender Group has no obligations to inform it of such matters in the future or to seek its acknowledgement or agreement to future amendments, and nothing herein shall create such a duty. Delivery of an executed counterpart of this Reaffirmation and Consent by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Reaffirmation and Consent. Any party delivering an executed counterpart of this Reaffirmation and Consent by telefacsimile also shall deliver an original executed counterpart of this Reaffirmation and Consent but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Reaffirmation and Consent. This Reaffirmation and Consent shall be governed by the laws of the State of New York, as more fully set forth in Section 20 of the QFC Guaranty. QUESTRON FINANCE CORP., a Delaware corporation By: ------------------------------------ Title: 15 16 EXHIBIT D FORM OF SUBORDINATED DEBT AMENDMENT 16 EX-3 5 g71257ex3.txt QUESTRON - 2ND AMENDMENT AGREEMENT 06/30/01 1 Exhibit 3 SECOND COMBINED AMENDMENT AGREEMENT SECOND COMBINED AMENDMENT AGREEMENT, dated as of June 30, 2001 (this "AMENDMENT") is made among QUESTRON TECHNOLOGY, INC. (the "PARENT"), QUESTRON OPERATING COMPANY, INC. (the "COMPANY") and ALBION ALLIANCE MEZZANINE FUND, L.P. ("MEZZANINE I"), ALBION ALLIANCE MEZZANINE FUND II, L.P. ("MEZZANINE II"), ALLIANCE INVESTMENT OPPORTUNITIES FUND, LLC ("OPPORTUNITIES"), THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES ("EQUITABLE"), IBJ WHITEHALL BANK & TRUST COMPANY ("IBJ WHITEHALL"), and EXETER CAPITAL PARTNERS IV, L.P. ("EXETER" and, together with Mezzanine, Opportunities, Equitable and IBJ Whitehall, the "PURCHASERS"). WHEREAS, pursuant to that certain Note Agreement, dated as of June 29, 1999 (the "ORIGINAL 1999 NOTE Agreement;" the Original 1999 Note Agreement, as modified by the Omnibus Amendment Agreement, dated as of November 2000, among the Company, the Parent, and the parties named therein and the First Combined Amendment Agreement, dated as of May 7, 2001, among the Company, the Parent and the Purchasers, the "EXISTING 1999 NOTE AGREEMENT;" and the Existing 1999 Note Agreement, as amended by this Amendment, the "1999 NOTE AGREEMENT") among the Company, on the one hand, and Mezzanine I, Opportunities, Equitable and IBJ Whitehall (collectively, the "1999 PURCHASERS,") the Company issued to the 1999 Purchasers its 14.50% Senior Subordinated Notes due June 30, 2005 (the "SERIES A NOTES") in the aggregate principal amount of Twenty Million Dollars ($20,000,000); and WHEREAS, pursuant to that certain Note Agreement, dated as of November 9, 2000, (as amended by the First Combined Amendment Agreement, dated as of May 7, 2001, among the Company, the Parent and the Purchasers, the "EXISTING 2000 NOTE AGREEMENT;" as amended by this Amendment, the "2000 NOTE AGREEMENT;" the Existing 1999 Note Agreement and the Existing 2000 Note Agreement being herein referred to collectively as the "EXISTING NOTE AGREEMENTS;" and the 1999 Note Agreement and the 2000 Note Agreement being herein referred to collectively as the "NOTE AGREEMENTS"), among Mezzanine II, IBJ Whitehall and Exeter (the "2000 PURCHASERS"), the Company issued to the 2000 Purchasers its Series B 14.50% Senior Subordinated Notes due June 30, 2005 (the "SERIES B NOTES;" and, together with the Series A Notes, the "NOTES") in the aggregate principal amount of Seventeen Million Five Hundred Thousand Dollars ($17,500,000); and WHEREAS, each of the Affiliate Guarantors have entered into Unconditional Guaranties (the "SUBORDINATED GUARANTIES") of the obligations of the Company under the Note Agreements and the Notes; and WHEREAS, the Purchasers are the holders of all the outstanding Series A Notes and all the outstanding Series B Notes; and 2 WHEREAS, the Company and the Purchasers desire that the Purchasers waive a certain Events of Default in respect of the Existing 1999 Note Agreement and the 1999 Notes, and certain Events of Default in respect of the Existing 2000 Note Agreement and the 2000 Notes, which might otherwise occur but for their execution and delivery of this Amendment, and desire to amend the Note Agreements and the Notes in certain respects. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiently of which is hereby acknowledged, the parties hereto agree as follows: 1. DEFINED TERMS Capitalized terms used and not defined herein shall have the same meanings given to them in the Note Agreements. In addition, the following terms as used herein have the respective meanings set forth below: EXTRAORDINARY TRANSACTION PROCEEDS - means net proceeds, excluding all fees, costs and out-of-pocket expenses in connection therewith (including, without limitation, success fees, break-up fees and other fees of, and costs, expenses and disbursements of, brokers, finders or investment bankers, attorneys, accountants, consultants and other professionals relating thereto) and net of any and all income taxes payable by the Company, any Subsidiary, Finance or the Parent in respect thereof, disbursed to the Company relating to any extraordinary event including, but not limited to, the acquisition of funds through the sale of debt or equity, or the entering into, modification or cancellation of any material contract. INTERVENING EVENT OF DEFAULT - means any Event of Default which both: (a) occurs during the period commencing on the date of this Agreement and ending on January 2, 2002 (including, without limitation, at any time after December 31, 2001, any Event of Default the occurrence of which is waived pursuant to the provisions of Section 2 hereof through December 31, 2001); and (b) is continuing on January 2, 2002. NET TRANSACTION PROCEEDS - means, with respect to any Transaction, cash proceeds thereof, net of all obligations (other than the Senior Bank Obligations, other obligations in respect of the Senior Debt and the Subordinated Obligations) required to be paid by the Parent, Finance, the Company or any Subsidiary, fees, costs and out-of-pocket expenses in connection therewith (including, without limitation, fees, success fees, break-up fees and other fees of, and costs, expenses and disbursements of, brokers, finders or investment bankers, attorneys, accountants, consultants and other professionals relating thereto) and net of any and all income taxes payable by the Company, any Subsidiary, Finance or the Parent in respect thereof, in each case, after giving effect to the Transaction and all related transactions (other than the Retirement). 2 3 RETIREMENT - means the full and final payment in full in cash, and retirement, of: (a) all Senior Bank Obligations, and any and all expenses or disbursements related thereto or any other obligations owing to the holders thereof; (b) the principal, interest, premium, if any, and any other obligations whatsoever to the holders of any other Senior Debt; and (c) all the Subordinated Debt (including, without limitation, any deferred interest remaining unpaid, Prepayment Compensation Amount and any fees), and any and all expenses or disbursements related thereto or any other obligations owing to the holders thereof; and the termination of all of the instruments and obligations relating to the Senior Debt and the Subordinated Debt. SUSPENSION PERIOD - means any period during which the rights of any holder of Subordinated Debt to exercise any Remedies are suspended pursuant to the further proviso to Section 7.4 of the Existing Note Agreements. TRANSACTION - means any sale of the Parent, Finance or the Company (whether structured in the form of a sale of stock held by the existing holders of the Common Stock, a sale of all or substantially all of the Property of the Parent, Finance or the Company or a merger or consolidation of any of the Parent, Finance or the Company with any other Person), any recapitalization or refinancing or any other transaction which, if consummated, would result in Net Transaction Proceeds becoming available to fully consummate the Retirement on or prior to December 31, 2001. 2. AMENDMENTS TO EXISTING NOTE AGREEMENTS 2.1 DEFERRAL OF CERTAIN INTEREST PAYMENTS (a) DEFERRAL. Subject to the provisions of Section 2.1(b) and Section 3.3(b) of this Amendment, each of the 1999 Purchasers, with respect to the Series A Notes, and each of the 2000 Purchasers, with respect to the Series B Notes, waives any Event of Default which may occur by virtue of the failure of the Company or any affiliated Guarantors to make any payment of interest on the Notes in cash at any time prior to December 31, 2001. (b) CONDITIONS TO THE DEFERRAL; AGREEMENTS OF THE COMPANY AND THE PARENT. In consideration of the deferral by the Purchasers pursuant to Section 2.1(a), the Company agrees that: 3 4 (i) the terms of the Series A Notes and the Series B Notes provide that interest accruing on any interest not paid on the date fixed for payment therefor shall accrue at the default rate set forth in the Series A Notes and the Series B Notes, respectively; (ii) to the extent that the Company shall pay, whether or not on any date fixed therefor, any portion of the accrued and unpaid interest in respect of the Notes, prior to December 31, 2001, the Company shall make such payment ratably among the Series A Notes and the Series B Notes in accordance with the respective outstanding principal amounts thereof; (iii) the failure of the Company to pay all accrued and unpaid interest in respect of the Series A Notes or the Series B Notes (including, without limitation, in either case, interest accruing on overdue interest at the default rate) on December 31, 2001, shall constitute an "Event of Default" in respect of the Series A Notes or the Series B Notes, respectively, immediately on December 31, 2001; and, notwithstanding the provisions of Section 6.1(a)(ii) of each of the Note Agreements, no grace period whatsoever shall apply in the event of the failure to pay all such accrued and unpaid interest in respect of both the Series A Notes and the Series B Notes on December 31, 2001; and (iv) the Company shall comply with Section 3.3 of this Amendment. 2.2 WAIVER OF CERTAIN COVENANT DEFAULTS. Each of the 1999 Purchasers, with respect to the Series A Notes, and each of the 2000 Purchasers, in respect of the Series B Notes, waives any Event of Default which may occur pursuant to Section 6.1(b) of the 1999 Note Agreement or the 2000 Note Agreement, as the case may be, as a result of the failure of the Company to comply with: (a) Section 4.2 of the 1999 Note Agreement or the 2000 Note Agreement, as the case may be, with respect to the ratio of Consolidated Senior Secured Funded Debt at any time prior to December 31, 2001, to Pro Forma Combined EBITDA for the period of four (4) full consecutive fiscal quarters of the Company then most recently ended at such time; (b) Section 4.3 of the 1999 Note Agreement or the 2000 Note Agreement, as the case may be, with respect to the ratio of Consolidated Total Funded Debt at any time prior to December 31, 2001, to Pro Forma Combined EBITDA for the period of four (4) full consecutive fiscal quarters of the Company then most recently ended at such time; or (c) Section 4.4 of the 1999 Note Agreement or the 2000 Note Agreement, as the case may be, with respect to the ratio of Pro Forma Combined EBITDA to Pro Forma Combined Interest Expense for either: 4 5 (i) the period of four (4) full consecutive fiscal quarters of the Company ended on June 30, 2001; or (ii) the period of four (4) full consecutive fiscal quarters of the Company ended on September 30, 2001. 2.3 WAIVER OF DEFAULT. Each of the 1999 Purchasers, with respect to the Series A Notes, and each of the 2000 Purchasers, in respect of the Series B Notes, waives any Event of Default which may occur pursuant to Section 6.1(k)(ii) of the 1999 Note Agreement or the 2000 Note Agreement, as the case may be, as a result of the issuance to the holders of the Senior Debt by the Parent of seven hundred fifty thousand (750,000) shares of its Series C Preferred Stock (the "SERIES C PREFERRED STOCK"), par value $.01 per share and having a liquidation preference of One Dollar ($1.00) per share. 2.3 RELIANCE. Each of the 1999 Purchasers has granted the waivers contained in Section 2 of this Amendment in reliance upon the granting by the 2000 Purchasers of the waivers contained in Section 2 of this Amendment. Each of the 2000 Purchasers has granted the waivers contained in Section 2 of this Amendment in reliance upon the granting by the 1999 Purchasers of the waivers contained in Section 2 of this Amendment. 3. AGREEMENTS OF THE COMPANY In consideration of the waivers and deferrals granted by the Purchasers in Section 2, the Parent and the Company hereby agree for the benefit of the holders, from time to time, of the Notes, as follows. 3.1 FEE. In the event that Net Transaction Proceeds from a Transaction sufficient to provide for the Retirement have not been received and applied, on or before December 31, 2001, by the Parent, Finance or the Company to the Retirement, then the Company shall pay to each holder of Notes by federal funds wire transfer of immediately available funds on January 2, 2002 a fee equal to three percent (3%) of the aggregate principal amount of the Notes held by such holder on December 31, 2001. The Company further agrees that any failure of the Company to pay such fee in respect of the Notes on December 31, 2001 shall constitute an "Event of Default" pursuant to Section 6.1(a)(ii) in respect of the Series A Notes or the Series B Notes, respectively, immediately on December 31, 2001 and, notwithstanding the provisions of Section 6.1(a)(ii) of each of the Note Agreements, no grace period whatsoever shall apply in the event of the failure to pay such fee in respect of both the Series A Notes and the Series B 5 6 Notes on December 31, 2001. Interest shall accrue on the unpaid fee or any unpaid portion thereof at the default rate of interest applicable to the Notes. 3.2 REMEDIES STANDSTILL. The Parent and the Company agree that, notwithstanding the further proviso to Section 7.4 of the Existing Note Agreements, the date of the commencement of any Suspension Period in respect of any Intervening Event of Default shall be deemed to have been June 30, 2001, with the effect that the holders of the Notes, on or after January 2, 2002, shall be entitled to exercise any Remedies in respect of any Intervening Event of Default without being subject to any Suspension Period. The foregoing sentence shall not limit or change any requirement to defer the exercise of Remedies in respect of the first proviso to Section 7.4 or pursuant to Section 6.2, and shall not limit the effect of any other subordination provision of the Note Agreements (including, without limitation, Section 7.3). 3.3 CERTAIN PREPAYMENTS OF SENIOR DEBT. (a) EXTRAORDINARY TRANSACTION PROCEEDS. In the event that the Parent, Finance, the Company or any Subsidiary receives Extraordinary Transaction Proceeds, the Company shall apply the entire Extraordinary Transaction Proceeds: (i) FIRST, to the prepayment of a principal amount of the Term Loan Facility in respect of the Senior Credit Agreement to the extent of principal payments which would have been required to have been made on or prior to the date such Extraordinary Transaction Proceeds are received in respect of such Term Loan Facility but for their amendment by the lenders under the Senior Credit Agreement; (ii) SECOND, to the prepayment of a principal amount of the Term Loan Facility in respect of the Senior Credit Agreement to the extent of principal payments which would have been required to have been made after the date such Extraordinary Transaction Proceeds are received in respect of such Term Loan Facility and prior to December 28, 2001, but for their amendment by the lenders under the Senior Credit Agreement; and (iii) THIRD, subject to Section 3.3(b) of this Amendment, to prepayment of the Revolving Credit Facility under the Senior Credit Agreement; PROVIDED, HOWEVER, that such payments shall not be made unless, after giving effect to the such payments, the aggregate unused availability in respect of the Revolving Credit Facility is greater than $4,000,000. (b) PAYMENTS OF INTEREST IN RESPECT OF THE NOTES. In the event that the Company shall make any payment of the principal amount of the Term Loan Facility in respect of the Senior Credit Agreement prior to December 28, 2001 (whether pursuant 6 7 to Section 3.3(a) or otherwise) and, after giving effect to such payment, the aggregate unused availability in respect of the Revolving Credit Facility is greater than $4,000,000, then, and in each such case, the Company shall pay to the holders of the Notes, substantially contemporaneously with the making of such payment in respect of the Term Loan Facility under the Senior Credit Agreement, an amount equal to the lesser of: (i) the aggregate amount of accrued an unpaid interest accrued through the date of such payment in respect of all the Notes; and (ii) the amount by which the aggregate unused availability in respect of the Revolving Credit Facility exceeds $4,000,000. Such amount shall be applied ratably among the Notes in accordance with the unpaid principal amounts thereof and without respect to whether the Notes are Series A Notes or Series B Notes. The failure of the Company to make any payment required by this Section 3.3(b) shall cause the termination of the deferral of interest in respect of the Notes pursuant to Section 2.1. 4. REPRESENTATIONS AND WARRANTIES The Company represents and warrants as follows to each holder of Notes as of the date hereof and as of the Effective Date (as defined below). The Company acknowledges and agrees that the representations and warranties of this Section 4 comprise representations and warranties in a written modification to each Existing Note Agreement, as contemplated by Section 6.1(c) of the Note Agreements. 4.1 NO OTHER DEFAULTS No unwaived Default or Event of Default is continuing. 4.2 SENIOR CREDIT AGREEMENT The Senior Credit Agreement (as amended as described in Section 6.4) is the only Senior Credit Facility in existence as of the date hereof. After giving effect to the amendment to the Senior Credit Agreement contemplated by Section 5.3, no default or event of default is continuing in respect of the Senior Credit Agreement. Neither the Parent, Finance, the Company nor any Subsidiary or Affiliate has made any payment whatsoever to any holder of Senior Debt in respect of the principal due in respect of the Senior Credit Agreement on either June 30, 2001 or September 30, 2001. 4.3 OBLIGATIONS REMAIN ENFORCEABLE The execution, delivery and performance by the Company of this Amendment have been duly authorized by all necessary corporate and other action and do not and will not 7 8 require any registration with, consent or approval of, notice to or action by, any person (including any Governmental Authority) in order to be effective and enforceable. Each Note Agreement (as modified by this Amendment) and each of the Notes constitute the legal, valid and binding obligation of the Company, enforceable against Company in accordance with its terms, except that the enforceability thereof may be limited by applicable bankruptcy, reorganization, arrangement, insolvency, moratorium, or other similar laws affecting the enforceability of creditors' rights generally; and subject to the availability of equitable remedies. 4.4 SECURITIES PURCHASE AGREEMENT REPRESENTATIONS All representations and warranties of the Company contained in each of the Securities Purchase Agreements, dated as of even date with each of the Original 1999 Note Agreement and the Existing 2000 Note Agreement (other than representations or warranties expressly made only on and as of the Closing Date or any earlier date) are true and correct as of the date hereof, after taking into account Section 2 above. 4.5 FINANCIAL INFORMATION All financial statements delivered to the Purchasers by the Company pursuant to the provisions of Section 5.1(a), Section 5.1(b) and Section 5.1(c) of the Note Agreements since the Closing Date were, and all information delivered to the Purchasers by the Company pursuant to Section 5.1(e) of the Note Agreements since the Closing Date was true, complete and correct in all material respects as of the respective dates of such information. 5. EFFECTIVENESS This Amendment shall become effective only upon the date of the satisfaction in full of the following conditions precedent (which date shall be the "EFFECTIVE DATE"). 5.1 EXECUTION AND DELIVERY OF THIS AMENDMENT Each Purchaser hall have received a counterpart hereof, duly executed and delivered by the Parent, the Company and each other Purchaser. 5.2 ACKNOWLEDGMENT BY AFFILIATE GUARANTORS Each Affiliate Guarantor shall have duly executed and delivered the form of acknowledgement attached to this Amendment acknowledging its obligations in respect of the Affiliate Guaranties. 8 9 5.3 SENIOR CREDIT AGREEMENT The Company and each of its Affiliates and Subsidiaries as are parties to the Senior Credit Facility shall have entered into an amendment to the Senior Credit Agreement in the form attached hereto as EXHIBIT 5.3. Such amendment shall provide, INTER ALIA, that the Senior Lenders agree: (a) to defer through December 28, 2001 all principal amounts in respect of the Senior Credit Agreement coming due during the period commencing the day before the date hereof and ending on December 28, 2001; and (b) and consent to, the provisions of Section 3.2 of this Amendment. Such amendment shall be enforceable against each holder of Senior Debt and its respective successors and assigns. Any fee payable to the holders of the Senior Debt in connection with the granting of the Amendment shall be paid by virtue of the Parent issuing to the holders of the Senior Debt up to seven hundred fifty thousand (750,000) shares of the Series C Preferred Stock. 5.4 SERIES C PREFERRED STOCK. The Series C Preferred Stock shall have the terms set forth in the Certificate of Designations therefor in substantially the form hereto as EXHIBIT 5.4. 5.5 REPRESENTATIONS AND WARRANTIES The representations and warranties of the Company made in Section 4 of this Amendment shall remain true and correct in all respects as of the Effective Date. 5.6 NO INJUNCTION, ETC. No injunction, writ, restraining order or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any Governmental Authority. 5.7 EXPENSES The Company shall have paid all out-of-pocket expenses of the Purchasers in connection with the execution and delivery of this Amendment, including, without limitation, the fees and disbursements of Shipman & Goodwin LLP, as special counsel to the Required Holders. 9 10 6. MISCELLANEOUS 6.1 SECTION HEADINGS The titles of the Sections of this Amendment appear as a matter of convenience only, do not constitute a part hereof and shall not affect the construction hereof. The words "herein," "hereof," "hereunder" and "hereto" refer to this Amendment as a whole and not to any particular Section or other subdivision. References to Sections are, unless otherwise specified, references to Sections of this Amendment. 6.2 GOVERNING LAW THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. 6.3 SUCCESSORS AND ASSIGNS This Amendment shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. The provisions hereof are intended to be for the benefit of all holders, from time to time, of Notes, and shall be enforceable by any such holder whether or not an express assignment to such holder of rights hereunder all have been made by any Purchaser or its successor or assign. 6.4 EXECUTION IN COUNTERPART This Amendment may be executed in one or more counterparts and shall be effective when at least one counterpart shall have been executed by each party hereto, and each set of counterparts that, collectively, show execution by each party hereto shall constitute one duplicate original. 6.5 NO OTHER MODIFICATIONS; CONFIRMATION All the provisions of the Notes, and, except as expressly waived, modified and supplemented hereby, all the provisions of the Existing Note Agreements, are and shall remain in full force and effect. As of the Effective Date, all references in the Financing Documents to the "Note Agreement" shall be references to the respective Existing Note Agreement, as modified by this Amendment and as hereafter amended, modified or supplemented in accordance with its terms. 10 11 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. QUESTRON TECHNOLOGY, INC., QUESTRON OPERATING COMPANY, INC. By: ------------------------------------- Name: Title: ALBION ALLIANCE MEZZANINE FUND, L.P. By: Albion Alliance LLC, its General Partner By: ------------------------------------- Name: Title: ALBION ALLIANCE MEZZANINE FUND II, L.P. By: AA MEZZ II GP, LLC., its General Partner By: Albion Alliance LLC, its Sole Member By: ------------------------------------- Name: Title: Signature Page 1 to Second Combined Amendment Agreement, dated as of June 30, 2001, among Questron Operating Company, Inc. and the Purchasers named herein 12 ALLIANCE INVESTMENT OPPORTUNITIES FUND, LLC By: Alliance Investment Opportunities Management L.P., its Managing Member By: Alliance Capital Management, L.P., its Managing Member By: Alliance Capital Management Corporation, its General Partner By: ------------------------------------- Name: Title: THE EQUITABE LIFE ASSURANCE SOCIETY OF THE UNITED STATES By: ------------------------------------- Name: Title: IBJ WHITEHALL BANK & TRUST COMPANY By: ------------------------------------- Name: Title: EXETER CAPITAL PARTNERS IV, L.P. By: Exeter IV Advisors, L.P. By: Exeter IV Advisors, Inc. By: ------------------------------------- Name: Title: Signature Page 2 to Second Combined Amendment Agreement, dated as of June 30, 2001, among Questron Operating Company, Inc. and the Purchasers named herein 13 ACKNOWLEDGEMENT BY AFFILIATE GUARANTORS Reference is hereby made to the Second Combined Amendment Agreement (the "AMENDMENT"), dated as of June 30, 2001, among QUESTRON TECHNOLOGY, INC. (the "PARENT"), QUESTRON OPERATING COMPANY, INC. (the "COMPANY") and ALBION ALLIANCE MEZZANINE FUND, L.P. ("MEZZANINE I"), ALBION ALLIANCE MEZZANINE FUND II, L.P. ("MEZZANINE II"), ALLIANCE INVESTMENT OPPORTUNITIES FUND, LLC ("OPPORTUNITIES"), THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES ("EQUITABLE"), IBJ WHITEHALL BANK & TRUST COMPANY ("IBJ WHITEHALL"), and EXETER CAPITAL PARTNERS IV, L.P. ("EXETER" and, together with Mezzanine, Opportunities, Equitable and IBJ Whitehall, the "PURCHASERS"). Capitalized terms used herein, and not defined herein, have the respective meanings ascribed to them in, or pursuant to the terms of, the Amendment. Each of the undersigned is an Affiliate Guarantor of the obligations of the Company pursuant to the Notes and the Note Agreements. Each of the undersigned: (a) acknowledges and reaffirms its obligations under the Affiliate Guaranty or Affiliate Guaranties to which it is a party, and that such obligations extend to all obligations of the Company in respect of the Note Agreements (as modified by the Amendment), notwithstanding the modification thereof pursuant to the terms of the Amendment; (b) acknowledges and reaffirms that all of its obligations in respect of the Affiliate Guaranty or Affiliate Guaranties to which it is a party remain in full force and effect and remain enforceable against it in accordance with their respective terms, notwithstanding the modification thereof pursuant to the terms of the Amendment; and (c) acknowledges that the holders of the Notes are under no obligation to inform it or obtain its consent in respect of the Amendment or any future amendment, modification or supplement to the terms of any Note or Note Agreement. 14 IN WITNESS WHEREOF, we have executed this Acknowledgement of Affiliate Guarantors as of June 30, 2001. QUESTRON TECHNOLOGY, INC. QUESTRON FINANCE CORP. QUESTRON DISTRIBUTION LOGISTICS, INC. COMP WARE, INC. POWER COMPONENTS, INC. INTEGRATED MATERIAL SYSTEMS, INC. CALIFORNIA FASTENERS, INC. FAS-TRONICS, INC. FORTUNE INDUSTRIES, INC. CAPITAL FASTENERS, INC. ACTION THREADED PRODUCTS, INC. ACTION THREADED PRODUCTS OF MINNESOTA, INC. ACTION THREADED PRODUCTS OF GEORGIA, INC. R.S.D. SALES CO., INC. B&G SUPPLY COMPANY, INC. By: ----------------------------------------- Name: Title: Signature Page to the Acknowledgement of Affiliate Guarantors regarding the Second Combined Amendment Agreement, dated as of June 30, 2001, among Questron Operating Company, Inc. and the Purchasers named herein 14 15 EXHIBIT 5.3 AMENDMENT TO SENIOR CREDIT AGREEMENT 16 EXHIBIT 5.4 CERTIFICATE OF DESIGNATIONS FOR SERIES C PREFERED STOCK -----END PRIVACY-ENHANCED MESSAGE-----