PART I
ITEM 1. BUSINESS.
GENERAL
Questron Technology, Inc. (the "Company" or "Questron") provides supply chain management solutions and inventory logistics management services for small parts commonly referred to as C inventory items (fasteners and related products) focused on the needs of original equipment manufacturers ("OEMs") through its wholly owned subsidiary, Questron Distribution Logistics, Inc. ("QDL"). The Company is also a master distributor of fasteners through its wholly owned subsidiary Integrated Material Systems, Inc. ("IMS") and a distributor of lithium batteries through its wholly owned subsidiary Power Components, Inc. ("PCI"). Effective March 31, 2000, QDL acquired 100% of the stock of R.S.D. Sales Co. Inc., a privately owned distributor located in Franklin Square, New York, specializing in providing aerospace-related C inventory items and value-added services to OEMs located primarily in Europe.
BUSINESS
QDL provides its customers with supply chain management solutions and inventory logistics management services, such as bin-stock replenishment and other just-in-time inventory management programs, and is the outsourced materials management function for many of its customers, providing complete supply chain management solutions from procurement to deployment of the products managed. QDL serves more than 6,000 diversified customers in industries such as industrial products, military aerospace, commercial aerospace, consumer products, transportation, furniture, telecommunications, semiconductor fabrication equipment, contract manufacturing, computers and networking, and medical electronics.
Small parts, commonly referred to as C inventory items, are typically low unit cost, high volume parts that are: (i) complex due to the multiplicity of items; (ii) consume large amounts of
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administrative resources; and (iii) are labor intensive in preparation for the production line. C items include, but are not limited to, screws, bolts, nuts, washers, pins, rings, fittings, springs, spacers, standoffs, plastic components, cable ties and accessories, drawer slides, connectors and other similar parts. The Company believes that the supply chain management solutions and inventory logistics management services industry is in the early stages of consolidation, and the Company plans to participate in the consolidation of the industry. The Company believes that its broad selection of C inventory items, high quality services, professional management team, and strong competitive position will allow it to be one of the leading consolidators.
C inventory items constitute a majority of the total number of parts needed by an OEM to manufacture its products, but represent only a small fraction of the total materials cost. The cost for an OEM to internally manage its inventory of C items is relatively high due to: (i) the large number of C items in inventory; (ii) the inability of an OEM to achieve scale economies that QDL is able to derive from servicing multiple customers; (iii) the risk of interruptions for just-in-time ("J-I-T") manufacturing operations; and (iv) the need to perform quality assurance testing of the fasteners and other C inventory items. The Company believes that OEMs are increasingly outsourcing their C item inventory procurement and management needs to specialists like the Company in order to focus on their key competency, their core manufacturing businesses, thereby reducing costs. To further reduce costs, many manufacturers are seeking to consolidate the number of suppliers they use and are selecting companies with extensive product lines who can also provide inventory-related services. To capitalize on these trends, the Company offers a broad array of C items, and provides a variety of related procurement and inventory management services, including inventory management information systems and reports, J-I-T delivery programs, quality assurance, advisory engineering services, component kit production and delivery, and electronic data interchange ("EDI") applications.
The Company's combined net sales have increased at a compound annual rate of approximately 16% per year over the five years ended December 31, 2000, adjusted for acquisitions completed from 1997 through 2000 to reflect true internal growth. The Company has generated such growth primarily by expanding its supply chain management solutions and inventory logistics management services, as well as the breadth of its product offerings and value-added services, which has allowed the Company to increase its sales to existing customers and to attract new customers.
INDUSTRY OVERVIEW
Companies operating in the supply chain management solutions and inventory logistics management services business can generally be characterized by the end-users they serve, which are comprised broadly of OEMs, MROs and construction companies. The traditional C item distribution market is similar to most industrial distribution markets. C items are purchased from both domestic and overseas manufacturers and sold to both domestic and overseas customers. The majority of these C items are sold to OEM and MRO clients on a purchase order basis. Some smaller distributors specialize along industry lines because of the uniqueness of customer requirements. Other smaller distributors provide a wide range of C items used for general assembly. The Company provides a wide range of C items to meet the specialized needs of its OEM customers.
Customer demand for supply chain management solutions and inventory logistics management services including electronic data interchange has required industry participants to invest in the development and utilization of sophisticated computer systems in order to remain
competitive. Automated inventory picking, component kit assembly and quality control procedures also require investments in personnel and equipment. In addition, many customers are seeking to reduce their operating costs by decreasing the number of suppliers with whom they do business, often eliminating those suppliers offering limited ranges of products and services. QDL believes that these trends have placed a substantial number of small, owner-operated fastener distributors at a competitive disadvantage because of their limited product lines and inventory systems. In addition, many of these smaller distributors have limited access to the capital resources necessary to provide working capital needed to provide a full range of services to their customers.
BUSINESS STRATEGY
The Company believes that it is one of the premier national providers of supply chain management solutions and inventory logistics management services for C inventory items focused on the needs of OEMs. QDL seeks to develop and supply inventory-related services designed to reduce its customers' operating costs. Quality assurance, J-I-T delivery programs and component kit production are examples of such services currently provided by QDL to its customers. By supplying such services, QDL strives to become integrated into its customers' internal manufacturing processes and be able to anticipate its customers' needs, which the Company believes results in improved profitability and customer retention.
OEMs and other customers choose suppliers based, in significant part, on the quality of the service supplied. QDL believes that its superior customer service depends on its well-trained, technically competent workforce and its belief that its workforce provides an advantage over other distributors of C inventory items. QDL continually reviews its training and operating practices to insure the highest standards of quality and customer service are maintained throughout its operations. As part of its commitment to superior quality and customer service, the Company is SSQA compliant (SEMATECH Quality Standard) and ISO 9002 (International Standards Organization) certified or compliant, becoming certified as required by its customers on a branch location basis.
One of the primary goals of the Company is to accelerate internal growth both by expanding the range of products and services provided to existing customers and by aggressively pursuing new customers. The Company believes that it will be able to expand sales to existing customers by capitalizing on: (i) diverse product offerings and marketing expertise; (ii) cross-selling opportunities across the Company's customer base; and (iii) access to financial resources that are necessary to support the demands of its customers. The Company intends to broaden its geographic coverage, which will present opportunities to capture new business as well as additional business from existing customers that operate nationwide.
The Company has centralized appropriate administrative functions and used its increased purchasing power to improve contractual relationships and gain volume discounts from its suppliers. The Company has also improved productivity through enhanced inventory management procedures, standardization of its quality procedures, and the consolidation of its information systems and employee benefit plans. All of the acquired businesses operate through an on-line, real-time computer system, except for its aerospace business facilities in located Fort Worth, San Antonio and Franklin Square and its industrial business facility located in Chicago. The Company intends to complete the integration of these businesses in 2001.
The Company pursued an aggressive acquisition program from 1997 through 2000, having completed 12 acquisitions during that period. As described above, the Company believes that the supply chain management solutions and inventory logistics management services business for C inventory items is highly fragmented and in the early stages of consolidation. The Company intends to acquire other businesses focused on C inventory items in order to enter new industries and markets, increase sales in certain industries it currently serves, develop new customer relationships with major OEMs, expand the geographical reach of the Company, and expand its range of products and services. Potential acquisition candidates will be evaluated on the strength of management, profitability, quality of customer base and service, and industry orientation. The Company believes it will continue to be regarded by acquisition candidates as an attractive acquirer because of: (i) its ability to create professionally managed supply chain management solutions and inventory logistics management services for C inventory items focused on the needs of original equipment manufacturers; (ii) its ability to acquire businesses with a combination of cash and publicly traded stock; (iii) the Company's access to financial resources as a public company to support growth; and (iv) the potential for increased profitability of the acquired company due to purchasing economies, centralization of administrative functions, enhanced systems capabilities and access to increased marketing resources.
To date, management of the companies acquired has been instrumental in identifying future acquisition candidates. Several of the principals of such acquired companies have held leadership roles in industry trade associations, which has enabled these individuals to develop relationships with the owners of numerous acquisition candidates across the country. The Company expects that the visibility of these individuals and the Company within the industry will increase the awareness and interest of acquisition candidates in the Company and its acquisition program. The Company has engaged in preliminary discussions with a number of potential acquisition candidates. Such discussions are in various stages and none have as yet resulted in any binding agreements, understandings, arrangements or commitments with respect to any such potential acquisitions. As consideration for future acquisitions, the Company primarily intends to use various combinations of cash and its common stock. The consideration for each future acquisition will vary on a case-by-case basis, with the major factors in establishing the purchase price being historical operating results, future prospects of the acquisition candidate and the ability of the candidate to provide entry to new markets or OEM customers.
PRODUCTS
The Company stocks over 125,000 different C inventory items, generally denoted by a unique standard identifier known as a Stock-keeping Unit ("SKU"). The SKUs fall into two general categories: fasteners and other C inventory items.
Fasteners sold by QDL include screws, bolts, nuts, washers, rings, pins, rivets and staples. These items come in a variety of materials, sizes, plantings, and shapes. The item sold is driven by the end-use requirement or specification of the fastener, such as strength, resistance to corrosion, reusability, and many other factors. QDL's sales and purchasing departments have extensive knowledge of the available products offered by fastener manufacturers and play an important role in assisting OEMs in selecting the appropriate fastener for a given application.
QDL also distributes other C inventory items used by OEMs to manufacture their products. These items include spacers, standoffs, inserts, clamps, springs, brackets, connectors, small molded parts, cable ties, plugs, hoses, fittings and other products. Like fasteners, these
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parts come in many shapes, sizes and materials depending upon the designated end-use. OEMs are increasingly requesting that the Company provide these parts because they are often used during the manufacturing or assembly process in conjunction with the fasteners supplied by QDL.
SERVICES
In connection with its supply chain management solutions and inventory logistics management services, the Company provides a wide range of value-added services including purchasing, quality assurance, inventory management information systems and reports, J-I-T delivery programs, advisory engineering services, component kit production and delivery, consolidated billing, and electronic data interchange applications to OEMs. The OEMs' demand for these services is driven by the reduction in costs achievable through the outsourcing of such functions. Such cost reductions are achievable as a result of the Company's ability to derive economies of scale by providing such services to many customers, which economies the OEM is unable to achieve on its own. These value-added services also benefit the Company by further integrating the Company into its customers' internal manufacturing process.
Increasingly, manufacturers are outsourcing their inventory management needs to companies like QDL. These services range from installing a simple inventory bin card system to developing a complete turnkey inventory management system with full-time staff. These inventory systems are designed to meet the specific needs of QDL's customers. They range in sophistication from helping the OEM set appropriate order quantities and frequencies to delivering the correct C items to the assembly floor on a J-I-T basis. In some cases, the Company utilizes computer systems deployed at the OEM's sites to facilitate the management of the C item inventories. Inventory replenishment services and product consolidation services decrease the number of invoices and vendors, lower inventory carrying cost, and allow customers to focus on their key competency, manufacturing.
OEMs have reduced their operating costs by reducing the number of suppliers they use. QDL provides a wide array of C inventory items and will, upon a customer's request, stock additional parts. As a result, QDL's customers are able to reduce the number of suppliers, distributors as well as manufacturers, which they utilize.
Often OEMs request that QDL package several parts into a package or "kit." A common use of this service is to supply fastener kits included with products the retail consumer is required to assemble. The use of kits has also expanded into the manufacturing environment. Manufacturers frequently desire to have several related fasteners or components arrive at the assembly line in a single package; this ensures that all of the parts arrive at the same time and that no part will be missed in the manufacturing process. This "kit" process aids the manufacturer by decreasing the number of suppliers needed and improves productivity by having the fasteners delivered to the assembly line with the other related parts. Kit services improve the efficiency and effectiveness of the manufacturing line and decrease the number of stockouts and subsequent manufacturing line stoppages.
Quality assurance services provided by QDL involve the testing of fasteners to ensure they meet the specifications required by the OEM customer and stated by the manufacturer. Many OEMs require strict quality control with respect to fasteners. QDL has installed specialized equipment and hired trained technicians to perform quality control tests on some of its fastener products. QDL is SSQA compliant (SEMATECH Quality Standard) and ISO 9002
certified or compliant (International Standards Organization), becoming certified as required by its customers on a branch location basis.
In order to meet the exacting requirements of customers, QDL maintains relationships with vendors that provide plating, galvanizing and coating services. These services are used to meet the specific requirements of its OEM and other customers.
COMPETITION
The Company is engaged in a highly fragmented and competitive industry. Competition is based primarily on service, quality and geographic proximity. The Company competes with a large number of fastener distributors on a regional and local basis, some of which may have greater financial resources than the Company and some of which are also public companies or divisions of public companies. The Company may also face competition for acquisitions from these companies, some of which have acquired fastener distribution businesses during the past decade. Other smaller fastener distributors may also seek acquisitions from time to time.
The Company believes that it will be able to compete effectively because of its strategically situated locations, geographic diversity, knowledgeable and trained sales force, integrated computer system, modern equipment, broad-based product line, long-term customer relationships, combined purchasing volume, operational economies of scale, and expertise in acquiring and integrating businesses. The Company believes that it differentiates itself from its competition in terms of service and quality, and by offering a broad range of products and services.
SALES AND MARKETING
QDL utilizes a sales force comprised of both inside and outside sales people. QDL markets its products and services primarily to OEMs. QDL generally targets those OEMs that could achieve significant cost savings from the products and services offered by QDL. These would include OEMs that: (i) maintain substantial inventories of fasteners and other C inventory items; (ii) utilize multiple suppliers and wish to reduce that number; (iii) experience a significant number of stockouts; (iv) desire to improve the quality and reliability of their products; or (v) desire to improve the efficiency and effectiveness of the manufacturing process. QDL believes that its commitment to consistent quality and service has enabled it to develop and maintain long-term relationships with existing customers, while expanding its market penetration through the use of its sales and marketing program.
CUSTOMERS
QDL sells C inventory items to more than 6,000 customers. These customers include leading industrial products, military aerospace, commercial aerospace, consumer products, transportation, furniture, telecommunications, semiconductor fabrication equipment, contract manufacturing, computer and computer networking, and medical electronics manufacturing companies. QDL's contracts with its customers for the supply of C items vary in length up to five years and may be cancelled by either party with proper notice. QDL accepts returns of C items and issues a credit in exchange for such returns. Historically, returns have not been of an amount to materially affect the Company's business. For the year ended December 31, 2000, the
Company had reported net sales of $161.6 million. The ten largest customers accounted for approximately 37% of QDL's sales in 2000, with no one customer contributing more than 9%.
SUPPLIERS
Over 1,000 suppliers located in the United States and abroad manufacture the C items sold by QDL. QDL purchases C items directly from manufacturers or, to a lesser degree, from authorized distributors. QDL's decision to purchase from a specific source is based on product specifications, quality, reliability of delivery, production lead times and price. In addition, the Company purchases products from foreign suppliers when favorable pricing is available (approximately 11% of purchases for 2000 were from foreign suppliers).
QDL routinely reviews its supplier base and believes that it is able to purchase C items in sufficient volumes necessary to achieve improved service and pricing. QDL believes that it is not materially dependent on any single supplier and that it currently maintains good relationships with all of its suppliers. The ten largest suppliers accounted for approximately 19% of QDL's purchases in 2000, with the largest supplier accounting for approximately 3%.
PATENT, TRADEMARK, COPYRIGHT AND PROPRIETARY RIGHTS
The Company received registrations from the United States Patent and Trademark Office in 1997 for the marks "Questron Technology, Inc.(R)" and "Quest Electronic Hardware, Inc.(R)" relating to certain of the Company's services. The Company does not have any patent or copyright applications pending.
MANAGEMENT INFORMATION SYSTEM
The Company operates a management information system that is used to purchase, monitor and allocate inventory throughout its facilities. The Company believes that its system enables it to manage inventory costs effectively and to achieve appropriate inventory turnover rates. QDL's system includes computerized order entry, sales analysis, inventory status, invoicing and payment, bar-code tracking, and EDI through which the Company offers its customers a paperless electronic process for order entry, shipment tracking, customer billing, remittance processing and other routine matters. The Company's information system operates over a wide-area network. The real-time information system allows each sales and warehouse center to share information and monitor daily progress relating to sales activities, credit approval, inventory levels, stock balancing, vendor returns, order fulfillment, and other measures of performance. In January 2001, the Company began the implementation of additional supply chain management software tools, which it believes will create the opportunity to increase revenues and gross margins, while reducing inventory, costs associated with carrying inventory, and overall operating costs. The Company expects to complete the full implementation of such software tools during 2001.
GOVERNMENT REGULATION
The Fastener Quality Act of 1991, as amended (the "Fastener Act"), was signed into law on November 16, 1990 and was subsequently amended in March 1996, August 1998 and June 1999. The Fastener Act is intended to protect the public safety by deterring the introduction of non-conforming fasteners into commerce and by improving the traceability of fasteners. Generally, the Fastener Act covers fasteners including screws, nuts, bolts or studs with internal
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or external threads and load indicating washers with nominal diameters of greater than approximately one quarter inch, which contain metal or are held out as meeting a standard or specification that requires through-hardening, and are manufactured to standards and specifications that require a grade mark. Fasteners manufactured in accordance with a fastener quality assurance system are not covered by the Fastener Act.
Companies that provide supply chain management solutions and inventory logistics management services that sell fasteners, such as the Company, are subject to the Fastener Act. The Fastener Act prohibits the manufacturer or distributor from knowingly misrepresenting or falsifying: fasteners' physical, mechanical, or performance identification; the record of conformance for fasteners; or the manufacturer's insignia. The Company currently employs quality control personnel at its facilities and has not needed to make any significant investment to comply with the Fastener Act.
The Company's operations are subject to various federal, state and local laws and regulations, including those relating to worker safety and protection of the environment. The Company provides supply chain management solutions and inventory logistics management services and does not engage in manufacturing of C items. As a result, environmental laws generally have a minimal effect on its operations. The Company believes it is in substantial compliance with applicable regulatory requirements.
INTEGRATED MATERIAL SYSTEMS, INC. & POWER COMPONENTS, INC.
IMS, a wholly-owned subsidiary of the Company, is a master distributor of fasteners based in Scottsdale, Arizona. The addition of IMS brought to the Company expertise in sourcing products on a worldwide basis and additional materials management skills. IMS sells to distributors nationwide, one of which contributed approximately 40% of IMS's 2000 sales. IMS purchases fasteners principally from Taiwan and Japan, as well as domestic sources. In 2000, IMS's two largest suppliers accounted for approximately 28% and 23%, respectively, of its total purchases.
PCI, a wholly-owned subsidiary of the Company, is a distributor of lithium batteries and battery packs and assemblies based in Fond du Lac, Wisconsin. PCI sells to distributor and end-user customers nationwide, no one of which contributed more than 8% of its 2000 sales. PCI purchases product from international and domestic manufacturers of batteries, with one such supplier accounting for approximately 65% of its 2000 purchases.
The combined revenues of IMS and PCI represent less than 10% of the Company's consolidated revenues in each of the three years ended December 31, 2000.
EMPLOYEES
At March 20, 2001, the Company had 486 full-time employees. The Company is not a party to any collective bargaining agreements. The Company believes that its relationship with its employees is good.
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EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of each of the executive officers of the Company:
The business experience of each executive officer of the Company is as follows:
DOMINIC A. POLIMENI has been Director of the Company since March 1995 and Chairman and Chief Executive Officer of the Company since February 1996. Previously, Mr. Polimeni was also President of the Company from March 1995 until May 1999. Since September 1997, he has been a director of Nu Horizons, Inc., a publicly held company based in Melville, New York, which is a distributor of electronic components. Mr. Polimeni has been a Managing Director of Gulfstream Financial Group, Inc., a privately held financial consulting and investment banking firm since August 1990. Prior to that he held the position of Chief Financial Officer of Arrow Electronics, Inc. ("Arrow") for four (4) years. He also held several other positions, including general management positions, with Arrow over an eight-year period. Mr. Polimeni also practiced as a Certified Public Accountant for more than 12 years and was a Partner in the New York office of Arthur Young & Company. Mr. Polimeni is the brother-in-law of Mr. Gubitosi.
ROBERT V. GUBITOSI has been a Director of the Company since February 1996, and President and Chief Financial Officer since May 1999. Mr. Gubitosi has been a Managing Director of Gulfstream Financial Group, Inc., a privately held financial consulting and investment banking firm since August 1990. Prior to that he held the position of General Partner and Chief Financial Officer of the Securities Groups, a New York investment banking firm and primary dealer of U.S. government securities, with responsibility for the investment banking activities of the firm. In addition, Mr. Gubitosi has held managerial positions at Goldman Sachs & Company and Oppenheimer & Company, and specialized in brokerage accounting and auditing at Haskins & Sells and Touche Ross & Company. Mr. Gubitosi is the brother-in-law of Mr. Polimeni.
DOUGLAS D. ZADOW has been a Director of the Company since September 1999, an Executive Vice President of the Company since February 2001 (previously a Vice President of the Company since May 1998), President of QDL since May 1998 and President of Calfast, now a wholly owned subsidiary of the Company, since May 1995. Calfast became a part of the Company as of September 1997. From 1987 to 1996, he served as President of All-Spec, Inc., a manufacturers representative of fastener products. In 1986, Mr. Zadow served as President of the Southwest Fastener Association.
PHILLIP D. SCHWIEBERT has been a Vice President of the Company since May 1998 and Western Region Executive Vice President of QDL since February 2001 (previously Northwest and South Central Regional Vice President of QDL since May 1998). From March 1995 to May 1998, he was President of Quest Electronic Hardware, Inc., which is now QDL. From 1991 to
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1995, Mr. Schwiebert served as the Vice President and General Manager of the Fastener Division of Arrow Electronics, Inc. Prior to that, he held the position of Vice President of Connector Marketing for Arrow and Vice President of Marketing for Amphenol, a division of Allied Corporation.
MALCOLM A. TALLMON has been a Vice President of the Company responsible for Aerospace Business Development since August 1999 and President of Fortune, now a wholly owned subsidiary of the Company since its inception in March 1964. Fortune became a part of the Company as of July 1998.
JAMES W. TAYLOR has been a Vice President of the Company since May 1998 and President of IMS, now a wholly owned subsidiary of the Company, since its inception in February 1997. IMS became a part of the Company as of June 1997. From 1971 to 1996, he served as Executive Vice President of Semblex Corporation, a manufacturer of fasteners. From 1992 to 1995, Mr. Taylor served as Chairman of the National Fastener Distributor Association, and from 1994 to 1997, he served as one of nine industry representatives on the Public Law Task Force, a federal government committee for fastener regulation.
RISK FACTORS
LIMITED COMBINED OPERATING HISTORY; RECENT ACQUISITIONS.
The Company has grown significantly in the past four years, primarily as a result of acquisitions. The Company has acquired 12 companies since March 1997. As a result, the Company's historical results of operations are not necessarily indicative of future results. Prior to the acquisition of these companies, they were each private companies with different objectives, management information systems and accounting and other standards. Consequently, there is limited information about the performance of the acquired companies under the Company's management that is available for evaluation.
The acquisitions have been accounted for using the purchase method of accounting and the total purchase prices have been allocated to the assets and liabilities acquired based upon their respective fair values. As a result, the Company has significant non-cash charges for amortization expense related to goodwill. In addition, the Company has substantial indebtedness in connection with the acquisitions for which it will have significant debt service requirements.
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY.
A disciplined acquisition program is part of the Company's business strategy. The success of this program in the future will depend upon finding strategic acquisition candidates that would expand and complement the Company's business at attractive prices. The Company expects to face competition for acquisitions, which may limit the number of acquisition opportunities and lead to higher acquisition prices. The Company cannot ensure that it will be able to identify additional acquisition candidates on terms acceptable to the Company or in a timely manner, enter into acceptable agreements or close any such transactions. In addition, the Company may not be able to integrate newly acquired businesses successfully without unplanned costs, delays or other difficulties and the Company may not be able to achieve its targeted synergies and cost savings.
The Company may finance future acquisitions through internally generated funds, bank borrowings, public offerings or private placements of equity or debt securities, or a combination of these sources. The Company may not be able to obtain any required additional financing on terms that are acceptable to the Company and the Company may be limited in its ability to issue equity if the Company's common stock does not maintain a sufficient market value or if potential acquisition candidates are unwilling to accept common stock in exchange for the sale of their businesses. The Company's inability to obtain the necessary funds to make such acquisitions may have a material adverse effect on its ability to affect its acquisition strategy and to continue to grow its business.
THE MARKET PRICE FOR THE COMPANY'S COMMON STOCK COULD BE AFFECTED BY SHARES THAT BECOME ELIGIBLE FOR SALE IN THE FUTURE
Shares of the Company's common stock may be sold in the public market, subject in some cases to the volume and other limitations of Rule 144 under the Securities Act of 1933, as amended, including, following their issuance, shares of common stock underlying warrants, options, and issued in the future in connection with the acquisitions by the Company. To fulfill its obligations to certain persons, in May 2000, the Company filed under the Securities Act of 1933, as amended, a registration statement with the Securities and Exchange Commission, registering for sale by these persons, from time to time, approximately 2,340,000 shares of its common stock, including shares underlying options and warrants. The Company is not aware of any obligations of these persons to sell the shares to be registered for sale under the registration statement. The sale, or availability for sale, of substantial amounts of common stock in the public market could adversely affect the prevailing market price of the common stock.
CHALLENGES OF BUSINESS INTEGRATION -- THE COMPANY MAY NOT BE ABLE TO INTEGRATE ITS ACQUIRED BUSINESSES SUCCESSFULLY.
Since March 1997, the Company has acquired 12 businesses. Although all acquisitions are subject to risks, the high number and aggregate size of the acquisitions the Company has completed since March 1997 subject the Company to greater risks than usual. In particular, successful integration of these companies, or any other companies that the Company may acquire in the future, into the Company's business presents the Company with significant challenges. The process of integration could divert management's attention from its daily operation, require the implementation of enhancements to the Company's operational and financial systems, require additional management, operational and financial resources, and place significant demands on the Company's management and infrastructure. Successful integration will also depend on a number of other factors, including the Company's ability to maintain the quality of services it provides to its customers and the recruitment, motivation and retention of qualified personnel. The Company cannot ensure that it will be able to succeed with such integration or effectively manage newly acquired businesses or that such business will perform as expected. In addition, the Company cannot ensure that the acquired companies will not have additional liabilities or contingencies that the Company did not anticipate at the time of the acquisitions.
THE COMPANY FACES THE PRESSURES OF A COMPETITIVE INDUSTRY.
The Company is engaged in a highly fragmented and competitive industry. Competition is based primarily on service, quality and geographic proximity. The Company competes with a large number of other companies, that also provide supply chain management solutions and inventory logistics management services for C inventory items focused on the needs of OEMs,
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on a regional and local basis, some of which have greater financial resources and technical expertise than the Company. In addition, these competitors may have greater established customer relationships with certain customers for whose business the Company competes and may offer lower prices on competing products. Furthermore, the potential growth of the market in which the Company competes may attract new participants, as they perceive opportunities. The Company cannot ensure that it will be able to compete successfully with its existing or future competitors.
THE COMPANY DEPENDS ON SIGNIFICANT CUSTOMERS.
For the year ended December 31, 2000, on a pro forma basis, the Company's ten largest customers accounted for approximately 37% of its sales, with no one customer contributing more than 9%. These sales arrangements are terminable upon short notice and none of these customers is obligated to continue to use the Company's services, or acquire the Company's products, at all or at existing prices. The dependence on significant customers subjects the Company to significant financial risk in the operation of its business. The Company's ability to maintain these customer relationships and build new customer relationships is dependent, among other things, upon the Company's ability to maintain high quality standards and competitive prices. The Company cannot ensure that it will maintain these relationships. The loss of any of these significant customers or any other significant customer for any reason or a reduction in business with a significant customer for any reason could result in a material loss of revenue or otherwise have a material adverse effect on the Company's business. In addition, from time to time, certain of the Company's customers may seek to implement competitive bidding and other procedures designed to reduce prices for C inventory items, which may lower the Company's gross margins on sales to these customers. The Company will seek to mitigate any adverse impact to gross margins in the future through its own cost reduction initiatives and by providing additional services to these customers, however, the Company can not ensure the timing or the extent to which such mitigating efforts will offset lower margins, if at all.
CUSTOMER INDUSTRY RISKS AND CYCLICALITY.
The Company sells a significant number of its products to customers in industries that experience fluctuations in demand because of changes in economic conditions, consumer demand and other factors beyond its or their control. As a result, the Company may not be able to increase or maintain its level of sales in periods of economic stagnation or downturn in the Company's customers' industries. The cyclicality of the industries could adversely affect its sales and therefore potentially have a material adverse effect on the Company's financial condition, liquidity and results of operations.
THE COMPANY DEPENDS ON ITS INFORMATION SYSTEMS.
The Company operates a management information system that is used to purchase, monitor and allocate inventory throughout its facilities. The Company believes that its information system is an integral part of its business and certain growth strategies are contingent upon such system. The Company depends heavily on its management information system to provide real-time information used in monitoring progress relating to sales activities, credit approval, inventory levels, stock balancing, vendor returns and order fulfillment. Any disruption in the operation of the Company's information system could have a material adverse effect on the Company's financial condition, liquidity and results of operations.
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THE COMPANY DEPENDS ON THIRD-PARTY SUPPLIERS AND MANUFACTURERS.
The Company purchases substantially all of its products, principally fasteners and other C inventory items, from third-party suppliers and manufacturers. Although the Company believes there are numerous available sources of supply for most of its products, the Company is subject to the risk of price fluctuations, different product performance and quality, and periodic delays in the delivery of certain specialty fasteners and other products.
THE COMPANY HAS SUBSTANTIAL INDEBTEDNESS.
The Company's high level of debt could interfere with its ability to meet its obligations under its Senior Secured Credit Facility and its Senior Subordinated Notes. At December 31, 2000, the Company had total indebtedness of approximately $106.1 million, representing 67.7% of its total capitalization. In addition, subject to restrictions in the Senior Secured Credit Facility, Questron may incur up to $10.4 million of additional borrowings under the revolving credit portion of the Senior Secured Credit Facility from time to time to finance acquisitions, provide for working capital or capital expenditures, or for other purposes.
The Company's level of indebtedness could increase its vulnerability to general economic and industry conditions, limit its ability to fund capital expenditures, future acquisitions, working capital, and other general corporate requirements, limit its flexibility in planning for, or reacting to, changes in its business and the industry in which it operates, and place the Company at a competitive disadvantage to its competitors that have less debt. The Company currently expects that it will be able to service its debt out of cash flow from operations. If the Company is unable to generate sufficient cash flow to meet its debt service obligations, the Company will have to pursue one or more alternatives, such as reducing or delaying capital expenditures, refinancing debt, selling assets or raising equity capital. Each of these alternatives is dependent upon financial, business and other general economic factors that affect the Company, many of which are beyond its control. The Company cannot make any assurances that any of these alternatives could be accomplished on satisfactory terms or that they would yield sufficient funds to refinance the Senior Secured Credit Facility or the Senior Subordinated Notes.
THE COMPANY DEPENDS ON KEY MANAGEMENT.
The Company's success depends largely upon the efforts, abilities and expertise of its executive officers and other senior managers, including Dominic A. Polimeni, its Chairman, and Chief Executive Officer, as well as the executive management of its operating units. In addition, the Company may depend on the management of any significant business the Company acquires in the future. The loss of the services of one or more of such individuals could have a material adverse effect on the Company's financial condition, liquidity and results of operations.
MANAGEMENT CONTROL.
Management owns approximately 39.3% of the Company's outstanding shares of common stock. Accordingly, management has the ability to direct many of the Company's affairs and actions, including actions requiring stockholder approval.
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