10-Q 1 g72860e10-q.txt QUESTRON TECHNOLOGY FORM 10-Q 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 September 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)

(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 November 12, 2001, there were 9,202,553 shares of the Registrant's common stock outstanding. 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.

2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2001 (unaudited) AND DECEMBER 31, 2000 (Dollars in thousands)

See Notes to Consolidated Financial Statements 3 QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (Unaudited) (In thousands, except share data)

See Notes to Consolidated Financial Statements. 4 QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (In thousands)

See Notes to Consolidated Financial Statements 5 QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 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 nine-month period ended September 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):

6 QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 NOTE 3. EARLY EXTINGUISHMENT OF DEBT. On March 7, 2000, the Company reached agreements with the former stockholders 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 "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. The Amendments also deferred certain payments due to the lenders under the senior secured credit facility and the senior subordinated debt facility. Under the Amendments, the Company is required to satisfy the specified financial covenants at December 31, 2001 and at each subsequent quarter end during the year ending December 31, 2002. In addition, 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 were deferred to December 28, 2001. Quarterly interest payments due to the senior subordinated lenders of $1.2 million per quarter for the quarters ended June 30, 2001 and September 30, 2001 were deferred until December 31, 2001. In connection with the amendment to the senior 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. The Company continues to work with its investment banker exploring strategic alternatives, including exploring possible sources of investments in the Company, possible refinancing of the Company's indebtedness or a possible sale of the Company or some or all of its assets. Although these explorations are continuing and the Company has received some indications of interest in further discussion concerning these possible transactions, the Company has not received any proposals or entered into any negotiations with respect to possible investments, financings or sales. Further, the possibility of completing any such transaction has been adversely affected by the events which occurred on September 11, 2001 and their continuing impact on financial markets, on the U.S. economy generally and on the Company's business and finances. There can be no assurance that the Company can arrange any investment, refinancing or sale by December 28, 2001 or thereafter or that any such transaction would be sufficient to satisfy the amounts coming due. Further, the terms of any investment, refinancing or sale may not be favorable to the Company or its stockholders, and any investment or refinancing could materially dilute the interests of the existing stockholders. 7 QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 If an investment, refinancing or sale is not completed by the end of December 2001, the Company will not have sufficient funds to make the principal payments due under the senior credit facility on December 28, 2001, the interest payments due to the senior subordinated debt facility on December 31, 2001 and a fee due in certain circumstances to the senior subordinated lenders equal to 3% of the amount outstanding under the senior subordinated debt facility and to continue to meet its other obligations. Further, it is unlikely that the Company would be in compliance with the specified financial covenants. In this event, the Company would be compelled to seek further extensions of the time for making the required payments and complying with the financial covenants. Failure to make the required payments or comply with the financial covenants would result in events of default under the senior secured credit facility and the senior subordinated debt facility, permitting or requiring the acceleration of these obligations. There can be no assurance that the Company can obtain any further extensions from the holders of the senior credit facility or the senior subordinated debt facility. 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. 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 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000. The Company's results of operations through September 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 nine-month periods ended September 30, 2001 amounted to $27.7 million and $103.5 million, respectively, compared with $41.9 million and $119.6 million for the comparable prior year periods. This decline in revenues is attributable to continued weak overall economic conditions, the economic impact of the events which occurred September 11, 2001, and the continued weakness in the business sectors represented in the Company's mature inventory logistics management ("ILM") account base. The effect of this weakness, however, has been offset in part by the startup of the Company's recently signed ILM contracts. The Company has continued to enter into new ILM programs with large OEMs in the third quarter of 2001, however, the implementation and startup periods of these recently signed ILM contracts have been much longer than the implementation and startup periods of those ILM contracts signed in prior years. These longer implementation and startup periods are primarily due to the effect of the current economic conditions on the OEMs' businesses. The Company's operating loss for the three months ended September 30, 2001 was $3.0 million and its operating income for the nine months ended September 30, 2001 was $4.5 million, compared with operating income of $5.8 million and $16.4 million for the comparable prior year periods. The decline in operating income is the result of the decline in revenue, without the ability to as quickly reduce fixed operating expenses, together with non-cash charges to reflect valuation adjustments of $2.1 million for slow moving inventory and $0.4 million for potential bad debts during the third quarter of 2001. In addition, certain expense levels were increased to support the recently signed ILM programs. The Company continues to address staffing levels, consolidate facilities where possible and eliminate all discretionary spending. Immediately after the close of the third quarter of 2001, the Company centralized its purchasing function, eliminating some redundant positions around the country. In addition, the Company is in its final stages of implementing 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 nine-month periods ended September 30, 2001 amounted to $3.8 million and $11.7 million, respectively. For the comparable periods of the prior year, the Company's results include interest expense of $3.2 million and $9.0 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 interest cost of the $17.5 million Senior Subordinated Debt incurred in November 2000. 9 The benefit for income taxes for the three-month and nine-month periods ended September 30, 2001 reflects an effective income tax rate of 42.3%, compared with the provision for income taxes of 41.5% for the comparable prior year periods. The loss for the three-month and nine-month periods ended September 30, 2001 was $3.9 million and $4.1 million, compared with income before extraordinary gain of $1.6 million and $4.3 million for the comparable prior year periods. During the first quarter of 2000, the Company entered into an agreement with the former stockholders 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 nine-month periods ended September 30, 2000 amounted to $1.6 million and $4.8 million, respectively. The net loss for the three-month and nine-month periods ended September 30, 2001 as compared with income before extraordinary gain for the comparable prior year periods is primarily due to the decline in revenue, without the ability to as quickly reduce fixed operating expenses, together with non-cash charges to reflect valuation adjustments of $2.1 million for slow moving inventory and $0.4 million for potential bad debts during the third quarter of 2001, as well as increased interest expense. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2001, the Company had $1.1 million in cash, compared to $358 thousand as of December 31, 2000. As of September 30, 2001, the Company had working capital of $59.1 million, compared with working capital of $62.2 million as of December 31, 2000. For the nine months ended September 30, 2001, the net cash used in the Company's operating activities amounted to $4.9 million, principally reflecting an increase in inventories and a decrease in accounts payable and income taxes payable, offset in part by a decrease in accounts receivable. The increase in inventories is attributable to inventories held for customers whose business has declined substantially and inventories put in place for new ILM programs. For the nine months ended September 30, 2001, the net cash used in the Company's investing activities amounted to $2.5 million, including $91 thousand of additional net cash consideration paid for RSD Sales Company, Inc. and $2.4 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 $1.0 million associated with these software tools, the Company does not have significant commitments for capital expenditures as of September 30, 2001 and no significant commitments are anticipated for the remainder of 2001. For the nine months ended September 30, 2001, the net cash provided by the Company's financing activities amounted to $8.2 million, consisting principally of bank borrowings under the Company's revolving credit facility. 10 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. The Amendments also deferred certain payments due to the lenders under the senior secured credit facility and the senior subordinated debt facility. Under the Amendments, the Company is required to satisfy the specified financial covenants at December 31, 2001 and at each subsequent quarter end during the year ending December 31, 2002. In addition, 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 were deferred to December 28, 2001. Quarterly interest payments due to the senior subordinated lenders of $1.2 million per quarter for the quarters ended June 30, 2001 and September 30, 2001 were deferred until December 31, 2001. The amendment to the senior subordinated debt facility also 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. The Company continues to work with its investment banker exploring strategic alternatives, including exploring possible sources of investments in the Company, possible refinancing of the Company's indebtedness or a possible sale of the Company or some or all of its assets. Although these explorations are continuing and the Company has received some indications of interest in further discussion concerning these possible transactions, the Company has not received any proposals or entered into any negotiations with respect to possible investments, financings or sales. Further, the possibility of completing any such transaction has been adversely affected by the events which occurred on September 11, 2001 and their continuing impact on financial markets, on the U.S. economy generally and on the Company's business and finances. There can be no assurance that the Company can arrange any investment, refinancing or sale by December 28, 2001 or thereafter or that any such transaction would be sufficient to satisfy the amounts coming due. Further, the terms of any investment, refinancing or sale 11 may not be favorable to the Company or its stockholders, and any investment or refinancing could materially dilute the interests of the existing stockholders. If an investment, refinancing or sale is not completed by the end of December 2001, the Company will not have sufficient funds to make the principal payments due under the senior credit facility on December 28, 2001, the interest payments due to the senior subordinated debt facility on December 31, 2001 and the 3% fee due to the senior subordinated lenders on January 2, 2002 and to continue to meet its other obligations. Further, it is unlikely that the Company would be in compliance with the specified financial covenants. In this event, the Company would be compelled to seek further extensions of the time for making the required payments and complying with the financial covenants. Failure to make the required payments or comply with the financial covenants would result in events of default under the senior secured credit facility and the senior subordinated debt facility, permitting or requiring the acceleration of these obligations. There can be no assurance that the Company can obtain any further extensions from the holders of the senior credit facility or the senior subordinated debt facility. ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's interest expense may be sensitive to changes in the general level of U.S. interest rates, however, the benefits of decreasing interest rates may be mitigated by certain floors on portions of the Company's debt. 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 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: None. b) Reports on Form 8-K: None. 13 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: November 14, 2001 /s/ Dominic A. Polimeni ---------------------------------------- Dominic A. Polimeni Chairman and Chief Executive Officer (2) Principal Financial and Accounting Officer: Date: November 14, 2001 /s/ Robert v. Gubitosi ---------------------------------------- Robert V. Gubitosi President and Chief Financial Officer 14

QUESTRON TECHNOLOGY INC 10-Q