10-Q 1 g69447qe10-q.txt QUESTRON TECHNOLOGY, INC. FORM 10-Q 03/31/01 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 March 31, 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 May 9, 2001, there were 9,214,019 shares of the issuer's Common Stock outstanding. 2 QUESTRON TECHNOLOGY, INC. INDEX CERTAIN INFORMATION CONTAINED IN THIS QUARTERLY REPORT INCLUDES "FORWARD :LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THIS INFORMATION CAN BE IDENTIFIED BY THE USE OF WORDS LIKE "EXPECTS," "WILL," "SHOULD," "BELIEVES," "INTENDS" OR "ESTIMATES" OR SIMILAR EXPRESSIONS, AND INCLUDES THE STATEMENTS WITH RESPECT TO EXPECTED 2001 FINANCIAL AND OPERATING RESULTS. SUCH STATEMENTS REPRESENT THE COMPANY'S JUDGMENT AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN THE FORWARD LOOKING STATEMENTS. SUCH RISKS, UNCERTAINTIES AND OTHER FACTORS INCLUDE, BUT ARE NOT LIMITED TO, FLUCTUATIONS IN DEMAND FROM THE COMPANY'S CUSTOMERS, WHETHER DUE TO ECONOMIC CONDITIONS, THE DEMANDS OF THEIR CUSTOMERS OR OTHER FACTORS, THE CYCLICALITY OF THE MARKET FOR THE COMPANY'S PRODUCTS AND ITS CUSTOMERS' PRODUCTS, THE CONCENTRATION OF A SIGNIFICANT PART OF THE COMPANY'S BUSINESS IN A LIMITED NUMBER OF CUSTOMERS, THE ABILITY TO OBTAIN NEW CUSTOMERS, THE ABILITY TO INTEGRATE ACQUIRED BUSINESSES, CHANGES IN GENERAL ECONOMIC CONDITIONS, LEVELS OF COMPETITION, THE AVAILABILITY OF CAPITAL, CHANGES IN INTEREST RATES AND OTHER FACTORS WHICH MAY ADVERSELY AFFECT THE COMPANY'S OPERATING RESULTS, INCLUDING THE MATTERS ADDRESSED IN THE "RISK FACTORS" PROVIDED IN ITEM 1 OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO THESE FORWARD LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT UNANTICIPATED EVENTS OR DEVELOPMENTS.

2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31, 2001 (UNAUDITED) AND DECEMBER 31, 2000 (DOLLARS IN THOUSANDS)

See Notes to Consolidated Financial Statements. 3 4 QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)

See Notes to Consolidated Financial Statements. 4 5 QUESTRON TECHNOLOGY, INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (IN THOUSANDS)

See Notes to Consolidated Financial Statements. 5 6 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS ENDED MARCH 31, 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 three-month period ended March 31, 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 per share data):

6 7 QUESTRON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS ENDED MARCH 31, 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. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001. The Company's results of operations through March 31, 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 months ended March 31, 2001 amounted to $39.8 million, compared with $36.5 million for the three months ended March 31, 2000. The growth in the Company's revenues is due to the growth of QDL, which had revenues of $37.6 million during the three months ended March 31, 2001, compared with $33.8 million for the prior year period. The growth in QDL's revenues for the period ended March 31, 2001 is a result of growth of its recently signed inventory logistics management ("ILM") programs, offset in part by continued weakness in its mature ILM programs. The Company continued to enter into new ILM programs with large OEMs in the first 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 $4.8 million for the three months ended March 31, 2001, compared with operating income of $5.0 million for the prior year period. Operating income as a percentage of sales for the three months ended March 31, 2001 amounted to 12.0% compared with 13.8% for the comparable prior year period. The decline in operating income as a percentage of sales 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. Interest expense amounted to $3.9 million for the three months ended March 31, 2001, compared with $2.9 million for the comparable prior year period. 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 months ended March 31, 2001 reflects an effective income tax rate of 42.0%, compared with 41.5% for the comparable prior year period. Net income for the three months ended March 31, 2001 was $537 thousand, compared with income before extraordinary gain of $1.3 million for the comparable prior year period. 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 8 9 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 months ended March 31, 2000 amounted to $1.7 million. The decline in net income for the three months ended March 31, 2001 as compared with income before extraordinary gain for the three months ended March 31, 2000 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 March 31, 2001, as well as increased interest expense. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2001, the Company had $377 thousand in cash, compared to $358 thousand as of December 31, 2000. As of March 31, 2001, the Company had working capital of $65.3 million, compared with working capital of $62.2 million as of December 31, 2000. For the three months ended March 31, 2001, the net cash used by the Company's operating activities amounted to $3.4 million, principally reflecting an increase in inventories and a decrease in accounts payable, offset in part by profits of the Company and decreases in accounts receivable. For the three months ended March 31, 2001, the net cash used in the Company's investing activities amounted to $831 thousand, including $91 thousand of additional net cash consideration paid for RSD Sales Company, Inc. and $740 thousand 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 $2 million associated with these software tools, the Company does not have significant commitments for capital expenditures as of March 31, 2001 and no significant commitments are anticipated for the remainder of 2001. For the three months ended March 31, 2001, the net cash provided by the Company's financing activities amounted to $4.2 million, consisting principally of $4.4 million of bank borrowings under the Company's revolving credit facility. 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. Management believes that its working capital, funds available under its credit agreement, and funds generated from operations will be sufficient to meet its obligations through 2001, exclusive of cash requirements associated with any business acquisitions. 9 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has significant amounts outstanding under various credit agreements, a substantial portion of which bears interest at variable rates. As a result, the Company's interest expense is sensitive to changes in the general level of interest rates. The Company may, from time to time, enter into interest rate swap arrangements to manage its interest cost and mitigate its exposure to fluctuating interest rates. There were no such swap arrangements outstanding at March 31, 2001. 10 11 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. 11 12 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. Principal Executive Officer: Date: May 15, 2001 /s/ Dominic A. Polimeni ------------------------------------- Dominic A. Polimeni Chairman and Chief Executive Officer Principal Financial and Accounting Officer: Date: May 15, 2001 /s/ Robert V. Gubitosi ------------------------------------- Robert V. Gubitosi President and Chief Financial Officer 12

QUESTRON TECHNOLOGY INC 10-Q