<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- --------------------------------
Commission File Number 0-13324
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JUDICATE, INC.
- -------------------------------------------------------------------------------
(Exact name of small business registrant
as specified in its charter)
Delaware 23-2257354
- ---------------------------- -------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
1500 Walnut Street, Suite 1300, Philadelphia, PA 19102
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(215) 546-6200
- -------------------------------------------------------------------------------
(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 preceding 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 10, 1995, the Registrant had 12,445,749 shares of Common
Stock, $.0001 par value, outstanding.
<PAGE>
JUDICATE, INC.
INDEX
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet - 2
June 30, 1995 and December 31, 1994
Consolidated Statement of Operations - 3
Three Month and Six Month Periods Ended
June 30, 1995 and 1994
Consolidated Statement of Cash Flows - 4
Six Month Period Ended June 30, 1995 and 1994
Notes to Consolidated Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis 7 - 9
or Plan of Operation
PART II. Other Information 10
Signature Page 11
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
JUDICATE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1995 1994
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 58,010 $ 1,520,730
Accounts receivable trade, net 1,352,774 72,201
Other receivables 289,874 55,445
Inventories 2,159,277 -
Prepaid expenses 16,118 109,480
---------- ----------
Total current assets 3,876,053 1,757,856
---------- ----------
Property and equipment, net 386,958 50,069
Cost in excess of net assets
of business acquired 6,463,304
Other assets 90,238 65,202
---------- ----------
Total Assets $10,816,553 $ 1,873,127
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 300,000 $ -
Accounts payable and accrued expenses 1,157,613 318,751
Current portion of long-term debt 550,000 -
---------- ----------
Total current liabilities 2,007,613 318,751
Long-term debt 1,612,500 -
---------- ----------
Total liabilities 3,620,113 318,751
---------- ----------
Shareholder's equity:
Preferred Stock $.01 par value;
authorized 1,000,000 shares;
issued and outstanding 25,000 shares
in 1995 and 140,000 shares in 1994 250 1,400
Common Stock $.0001 par value;
authorized 20,000,000 shares;
issued and outstanding 12,445,749
shares in 1995 and 6,733,805 shares
in 1994 1,245 673
Additional paid-in capital 22,902,992 17,260,549
Accumulated Deficit ( 15,708,047) (15,708,246)
---------- ----------
Total shareholders' equity 7,196,440 1,554,376
---------- ----------
Total liabilities and shareholders'
equity $10,816,553 $ 1,873,127
========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
JUDICATE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Sales $ 2,357,607 $ - $ 2,357,607 $ -
Fee Income 73,273 210,475 180,364 492,790
----------- ----------- ----------- -----------
2,430,880 210,475 2,537,971 492,790
----------- ----------- ----------- -----------
Operating costs and
expenses:
Cost of products
and services sold 1,403,105 73,595 1,472,440 152,474
Selling, general
and administration
expenses 620,645 77,438 911,998 209,011
Depreciation and
amortization 57,918 172,296 68,918 351,522
----------- ----------- ----------- -----------
2,081,668 323,329 2,453,356 713,007
----------- ----------- ----------- -----------
Operating income
(loss) 349,212 (112,854) 84,615 (220,217)
Interest expense
(income) 72,808 (3,866) 57,976 (6,287)
----------- ----------- ----------- -----------
Income (loss) before
income taxes 276,404 (108,988) 26,639 (213,930)
Provision for income
taxes 26,440 - 26,440 -
----------- ----------- ----------- -----------
Net income (loss) $ 249,964 $ (108,988) $ 199 $ (213,930)
=========== =========== =========== ===========
Net income (loss)
per common share $ .02 $ (.05) $ .00 $ (.10)
=========== =========== =========== ===========
Average number of
common shares and
common share
equivalents
outstanding 15,005,822 2,376,317 13,058,507 2,067,197
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
JUDICATE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTH PERIOD ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 199 $ (213,930)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and Amortization 68,918 33,000
Change in assets and liabilities:
(Increase) decrease in accounts receivable (648,002) 47,359
Decrease in inventories 92,723 -
Decrease in prepaid expenses and other assets 85,979 75,774
(Decrease) in accounts payable and
accrued expenses (13,131) (193,446)
----------- -----------
Net cash used in operating activities (413,314) (251,243)
----------- -----------
Cash flows from investing activities:
Net cash consideration paid for
acquired business (5,229,847) -
Acquisition of property and equipment, net (65,270) -
----------- -----------
Net cash used in investing activities (5,295,117) -
----------- -----------
Cash flows from financing activities:
Proceeds from short-term borrowings 300,000 900,000
Proceeds from long-term borrowings 2,300,000 449,190
Proceeds from private placement 1,740,000 -
Proceeds from exercise of stock options 281,250 -
Costs Associated with Private Placement (238,039) (27,466)
Repayment of long-term debt (137,500) -
----------- -----------
Net cash provided by financing activities 4,245,711 1,321,724
----------- -----------
(Decrease) Increase in cash and cash equivalents (1,462,720) 1,070,481
Cash and cash equivalents at
beginning of period 1,520,730 643,029
----------- -----------
Cash and cash equivalents at end of period $ 58,010 $ 1,713,510
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
JUDICATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 1995 AND 1994
Note 1. Basis of presentation.
The accompanying unaudited consolidated financial statements include the
accounts of 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
instructions for Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three month and six month periods ended June
30, 1995 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1995. The accompanying consolidated balance sheet
as of December 31, 1994 is unaudited, however, it has been derived from the
audited financial statements at that date. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1994.
Note 2. Acquisition of electronic hardware distribution business.
On March 31, 1995, the Company acquired Quest Electronic Hardware, Inc.
("Quest"), a specialized distributor of fasteners and electronic hardware sold
to electronic equipment manufacturers, in exchange for 3,872,000 shares of the
Company's common stock. Simultaneously, the Company contributed to Quest cash of
$2,850,000 as additional paid-in capital and Quest purchased the fasteners
distribution business from Arrow Electronics, Inc. ("Arrow") for net cash
consideration of $5,229,847. In connection with these transactions, the Company
recorded $6,503,837 of cost in excess of net assets of business acquired. The
Company does not expect that Statement of Accounting Financial Standards No.
121, Accounting for the Impairment of Long-Lived Assets, will have any impact on
the Company's Consolidated Financial Statements.
Note 3. Long-term debt.
In connection with the acquisition by Quest of the fasteners distribution
business from Arrow, Quest entered into a loan agreement with a bank which
provided for a $2,200,000 term loan to finance a portion of the purchase price.
In addition, the loan agreement provides for a revolving credit facility of
$800,000, which was fully available to Quest at March 31, 1995. As of June 30,
1995, $100,000 was borrowed and outstanding under the revolving credit facility.
The term loan, which bears interest at the rate of 2.0% above the Prime Rate, is
payable in equal quarterly installments over a four year period. The revolving
credit facility bears interest at the rate of 1.5% above the Prime Rate.
5
<PAGE>
Note 4. Provision for restructuring.
As a result of declining revenues of the Company's ADR business, stemming
in part from increased competition, and the resultant historical losses, the
Company undertook a plan of action to downsize and restructure its ADR business
in order to establish a more acceptable relationship of expenses of that
business to its revenues. The Company's operating results for the six month
period ended June 30, 1995 include a provision for restructuring of $125,000
recorded in the quarter ended March 31, 1995. More than $60,000 of such
provision is attributable to the write-off of fixed assets and idle equipment
associated with the downsizing of the ADR business. The balance of the provision
is associated with lease termination costs, the relocation of the ADR business
to more suitable office space, forfeiture of security deposits, and other costs
associated with the downsizing and restructuring of the ADR business. During
August 1995, the Company will relocate the office of the ADR business to more
suitable space. The Company is evaluating its alternatives with respect to the
future operation of its ADR business, including the possible sale, disposition
or discontinuance of the business.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
For the three and six month periods ended June 30, 1995.
The results of operations through June 30, 1995 include the results of the
Company's alternative dispute resolution ("ADR") business and, from April 1,
1995, the operating results of the electronic hardware distribution ("Quest")
business acquired by the Company on March 31, 1995 (see Note 2 of Notes to
Consolidated Financial Statements.)
Results of Operations
The following summarizes the results of operations for each of the
Company's businesses for the three month and six month periods ended June 30,
1995:
<TABLE>
<CAPTION>
Three months ended June 30, 1995
-----------------------------------------
Quest ADR Total
---------- ---------- ----------
<S> <C> <C> <C>
Revenue $2,357,607 $ 73,273 $2,430,880
Costs and expenses 2,013,168 68,500 2,081,668
---------- ---------- ----------
Operating income 344,439 4,773 349,212
Interest expense 65,702 7,106 72,808
---------- ---------- ----------
Income (loss) before taxes 278,737 (2,333) 276,404
Tax provision 26,440 - 26,440
---------- ---------- ----------
Net income $ 252,297 $ (2,333) $ 249,964
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1995
-----------------------------------------
Quest ADR Total
---------- ---------- ----------
<S> <C> <C> <C>
Revenue $2,357,607 $ 180,364 $2,537,971
Costs and expenses 2,013,168 440,188 2,453,356
---------- ---------- ----------
Operating income (loss) 344,439 (259,824) 84,615
Interest expense (income) 65,702 (7,726) 57,976
---------- ---------- ----------
Income (loss) before taxes 278,737 (252,098) 26,639
Tax provision 26,440 - 26,440
---------- ---------- ----------
Net income $ 252,297 $ (252,098) $ 199
========== ========== ==========
</TABLE>
7
<PAGE>
The significant growth in the Company's revenues for both the three month
and six month periods ended June 30, 1995 over the comparable 1994 periods is
due to the acquisition of Quest. Revenues for Quest represent a record level of
quarterly sales based on the historical performance of the business when owned
by Arrow Electronics, Inc. Revenues of the ADR business declined by $137,202 and
$312,426 for the three month and six month periods ended June 30, 1995,
respectively, compared with the comparable periods in the prior year. This
decline reflects the Company's continuing program of downsizing and
restructuring in response to increased competition and historical losses. Such
restructuring has resulted in bringing the ADR business to breakeven in the
three month period ended June 30, 1995.
The Company's operating income was $349,212 for the quarter ended June 30,
1995 compared with an operating loss of $112,854 for the prior year quarter. For
the six month period ended June 30, 1995, operating income was $84,615 compared
with an operating loss of $220,217 for the comparable prior year period. These
improvements are due to the operating income achieved by Quest of $344,439 since
its acquisition on March 31, 1995, as well as the significant reductions in
costs and expenses of the ADR business. Such expenses were $68,500 for the
quarter ended June 30, 1995 compared with $323,329 in the prior year quarter.
For the six month periods, such expenses were $440,188 in 1995 compared with
$713,007 in 1994. Expenses for the 1995 six month period include a provision for
restructuring of $125,000 recorded in the quarter ended March 31, 1995 (see Note
4 of Notes to Consolidated Financial Statements). Such provision is attributable
to the write-off of fixed assets and idle equipment associated with the
downsizing of the ADR business, as well as lease termination costs, the
relocation to more suitable office space, forfeiture of security deposits and
other costs associated with the downsizing and restructuring of the ADR
business. Quest's operating income of $344,439 represents 15% of its revenues, a
relationship which is consistent with the historical performance.
Interest expense for the three month and six month periods ended June 30,
1995 amounted to $72,808 and $57,976, respectively, principally reflecting the
cost of borrowings associated with the acquisition of the electronic hardware
distribution business (see Note 3 of Notes to Consolidated Financial
Statements). For the comparable prior year periods, the Company's results
include minor amounts of interest income resulting from the investment of excess
cash.
The provision for income taxes for the three and six month periods ended
June 30, 1995 principally reflects state income tax provisions for states in
which Quest does business.
Net income for the quarter ended June 30, 1995 amounted to $249,964
compared with a loss of $108,988 in the comparable prior year quarter. Net
income for the six month period ended June 30, 1995 was $199 compared with a
loss of $213,930 in the comparable 1994 period. These improvements reflect the
operating income of Quest, partially reduced by interest expense and income
taxes, and the reduction in operating expenses of the ADR business.
8
<PAGE>
Liquidity and Capital Resources
As of June 30, 1995, the Company had $58,010 in cash and short-term
investments, compared to $1,520,730 as of December 31, 1994. As of June 30, 1995
the Company had working capital of $1,868,440, compared with working capital of
$1,439,105 as of December 31, 1994. The Company's decrease in cash and
short-term investments at June 30, 1995 compared to December 31, 1994 is
principally due to the Company's March 31, 1995 acquisition of Quest Electronic
Hardware, Inc. (see Note 2 of Notes to Consolidated Financial Statements). The
net cash consideration paid for the acquired business amounted to $5,229,847,
which was funded by $2,500,000 in borrowings (including $2,200,000 of long-term
bank borrowings), $1,501,961 in net proceeds derived from the private placement
of the Company's common stock, and available cash. In addition, the Company
repaid $137,500 of bank debt during the quarter.
For the six months ended June 30, 1995, the net cash used in the Company's
operating activities amounted to $413,314, principally reflecting increased
accounts receivable associated with the business of Quest. For the six months
ended June 30, 1994, the net cash used in the Company's operating activities
amounted to $251,243, principally reflecting operating losses of the ADR
business. As previously discussed, the Company is evaluating its alternatives
with respect to the future operations of the ADR business and there can be no
assurance that the Company will continue its ADR operations.
In conjunction with the acquisition of the electronic hardware distribution
business, Quest obtained an $800,000 working capital line of credit, of which
$100,000 was borrowed and outstanding at June 30, 1995 and $700,000 is fully
available for future working capital needs. The Company intends to identify and
evaluate potential merger and acquisition candidates engaged in lines of
business complementary to the distribution of fasteners and electronic hardware
business conducted by Quest. While certain of such potential acquisition
opportunities are at various stages of consideration and evaluation, none are at
any definitive stage at this time. Management believes that its working capital,
funds available under its credit agreement, and funds generated from operations
will be sufficient to meets its obligations through 1996, exclusive of any cash
requirements which may come about as a result of other business acquisitions.
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Judicate, Inc. v. Expedite Mediation and Arbitration Services, Inc.,
Andrew Tivoli, Larry Roher and William Gahwyler, New York State
Supreme Court, Nassau County, Index No. 27588/91. In or about October
1991, the Company commenced a lawsuit in the Supreme Court of the
State of New York, County of Nassau against three (3) of its former
employees and their current employer, Expedite Mediation and
Arbitration Services, Inc. ("Expedite"). Expedite provides ADR
services in New York Metropolitan area. The lawsuit alleges that: (i)
the defendants wrongfully took numerous information from the Company;
and (ii) the former employees breached their duty of good faith to the
Company and tortiously interfered with the Company's prospective
contractual and business relations, and (iii) the former employees
engaged in unfair competition. The defendants asserted several
counterclaims alleging that: (i) Company personnel have made false
statements regarding the defendants; and (ii) the Company refused to
pay commissions or other forms of compensation. The defendants sought
damages of approximately $2,000,000, plus additional unspecified
damages and costs.
A partial settlement was made and mutual releases between the Company,
Expedite and Mr. Roher were exchanged on September 7, 1994. A partial
settlement was made and a mutual release between the Company and Mr.
Gahwyler was exchanged on January 9, 1995.
On May 4, 1995, a settlement was agreed to between the Company and Mr.
Tivoli. On May 24, 1995, a stipulation discontinuing the action with
prejudice, as against the Company and Mr. Tivoli, was filed in the
Supreme Court of the State of New York, County of Nassau.
Thomas J. Glacken v. Judicate, Inc., Pennsylvania Human Relations
Division, Docket No. E-65605. On or about August 5, 1993, Thomas J.
Glacken, a former employee of the Company, filed a complaint of
discrimination against the Company with the Pennsylvania Human
Relations Commission. The complaint alleges that Mr. Glacken's
employment with the Company was terminated pursuant to a sexually
discriminatory reduction of the Company's work force. On July 19,
1995, the Company was notified that the Pennsylvania Human Relations
Commission determined that the complaint should be dismissed, and the
complaint was dismissed on such date, because the facts did not
establish that probable cause existed to support the allegations of
unlawful discrimination.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
On June 14, 1995, an amendment to Form 8-K, dated March 31, 1995, was
filed amending Item 7 and including financial statements of the
business acquired and pro forma financial information.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JUDICATE, INC.
Dated: August 10, 1995 /s/ Dominic A. Polimeni
-----------------------
Dominic A. Polimeni, President
and Chief Operating Officer
Dated: August 10, 1995 /s/ Milton M. Adler
-------------------
Milton M. Adler, Treasurer
(Principal Financial and
Accounting Officer)
11
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1995 AND THE
CONSOLIDATED BALANCE SHEET FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 58,010
<SECURITIES> 0
<RECEIVABLES> 1,843,017
<ALLOWANCES> (200,369)
<INVENTORY> 2,159,277
<CURRENT-ASSETS> 3,876,053
<PP&E> 405,827
<DEPRECIATION> (18,869)
<TOTAL-ASSETS> 10,816,553
<CURRENT-LIABILITIES> 2,007,613
<BONDS> 0
<COMMON> 1,245
0
250
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,816,553
<SALES> 2,357,607
<TOTAL-REVENUES> 2,537,971
<CGS> 1,472,440
<TOTAL-COSTS> 2,453,356
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,886
<INTEREST-EXPENSE> 57,976
<INCOME-PRETAX> 26,639
<INCOME-TAX> 26,440
<INCOME-CONTINUING> 199
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 199
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
