<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 September 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
---------
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)
The Bellevue, Suite 800, 200 S. Broad St., Phila., 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 November 10, 1995, the Registrant had 12,495,749 shares of Common
Stock, $.0001 par value, outstanding.
<PAGE>
JUDICATE, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
PART I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet - At 2
September 30, 1995 and December 31, 1994
Consolidated Statement of Operations - Three 3
Month and Nine Month Periods Ended
September 30, 1995 and 1994
Consolidated Statement of Cash Flows - Nine 4
Month Periods Ended September 30, 1995 and 1994
Notes to Consolidated Financial Statements 5 - 6
Item 2. Management's Discussion and Analysis 7 - 10
or Plan of Operation
PART II. Other Information 11
Signature Page 12
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
JUDICATE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
ASSETS
<TABLE>
<CAPTION>
September 30 December 31,
1995 1994
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,375 $ 1,520,730
Accounts receivable trade, net 1,423,979 72,201
Other receivables 293,574 55,445
Inventories 2,406,861 -
Prepaid expenses 85,310 109,480
----------- -----------
Total current assets 4,229,099 1,757,856
Property and equipment, net 409,382 50,069
Cost in excess of net assets
of business acquired 6,432,863 -
Other assets 118,170 65,202
----------- -----------
Total Assets $11,189,514 $ 1,873,127
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 300,000 $ -
Accounts payable and accrued expenses 1,323,167 318,751
Current portion of long-term debt 550,000 -
----------- -----------
Total current liabilities 2,173,167 318,751
Long-term debt 1,591,000 -
---------- -----------
Total liabilities 3,764,167 318,751
---------- -----------
Shareholders' 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 22,902,981 17,260,549
Accumulated Deficit ( 15,479,129) (15,708,246)
------------- -----------
Total shareholders' equity 7,425,347 1,554,376
------------- -----------
Total liabilities and shareholders'
equity $ 11,189,514 $ 1,873,127
============ ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
JUDICATE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Sales $ 2,324,795 -- $ 4,682,402 --
Fee Income 45,991 133,822 226,355 626,612
----------- --------- ----------- ----------
2,370,786 133,822 4,908,757 626,612
----------- --------- ----------- ----------
Operating costs
and expenses:
Cost of products
and services sold 1,344,562 60,226 2,817,002 212,700
Selling, general &
administration
expenses 646,191 205,218 1,567,705 732,751
Depreciation and
amortization 60,514 16,500 119,916 49,500
----------- ---------- ---------- ---------
2,051,267 281,944 4,504,623 994,951
----------- ---------- ---------- -----------
Operating income
(loss) 319,519 (148,122) 404,134 (368,339)
Interest expense 72,526 15,779 130,502 9,492
----------- ---------- --------- -----------
Income (loss) before
income taxes 246,993 (163,901) 273,632 (377,831)
Provision for income
taxes 18,075 -- 44,515 --
---------- ---------- --------- ----------
Net income (loss) $ 228,918 $ (163,901) $ 229,117 $ (377,831)
========== ========== ========= ==========
Net income (loss)
per common share $ .02 $ (.05) $ .02 $ (.15)
========== ========== ========= ==========
Average number of
common shares and
common share
equivalents
outstanding 15,005,822 3,448,605 13,707,612 2,527,666
========== ========= ========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
JUDICATE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 229,117 $ (377,831)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and Amortization 119,916 49,500
Change in assets and liabilities:
(Increase) decrease in accounts receivable (722,907) 74,891
(Increase) in inventories (154,861) -
Decrease in prepaid expenses and other assets 24,170 8,566
Increase (Decrease) in accounts payable and
accrued expenses 147,538 (122,085)
---------- ---------
Net cash used in operating activities (357,027) (366,959)
---------- ---------
Cash flows from investing activities:
Net cash consideration paid for
acquired business (5,229,847) -
Acquisition of property and equipment, net (138,692) -
---------- ---------
Net cash used in investing activities (5,368,539) -
---------- ---------
Cash flows from financing activities:
Proceeds from short-term borrowings 300,000 -
Proceeds from long-term borrowings 2,416,000 -
Proceeds from private placement 1,740,000 -
Proceeds from exercise of stock options 281,250 449,190
Costs Associated with Private Placement (238,039) (28,184)
Repayment of long-term debt (275,000) -
---------- ----------
Net cash provided by financing activities 4,224,211 421,006
---------- ----------
(Decrease) Increase in cash and cash equivalents (1,501,355) 54,047
Cash and cash equivalents at
beginning of period 1,520,730 643,029
---------- ----------
Cash and cash equivalents at end of period $ 19,375 $ 697,076
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
JUDICATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 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 nine month periods ended
September 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 September 30, 1995, $216,000 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.
<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 nine
month period ended September 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 relocated 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.
Note 5. Subsequent event.
On November 13, 1995, Quest signed a three-year Master Purchase Order
and Sales Agreement with Applied Materials, under which Quest will provide
Applied Materials with fasteners and electronic hardware at one of its
manufacturing facilities located in Austin, Texas. The Master Purchase Order and
Sales Agreement has an estimated total contact value of $2,500,000 per year. The
actual level of sales under the agreement will be dependent upon a number of
factors which could result in sales under the agreement being higher or lower
than estimated. In November 1995, Quest also opened a new sales and stocking
branch in Austin in order to support the Applied Materials program. The branch
is commencing operations in a newly constructed 9,000 square foot leased
facility.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
For the three and nine month periods ended September 30, 1995.
The results of operations through September 30, 1995 include the
results of the Company's alternative dispute resolution ("ADR") business and,
from April 1, 1995, the operating results of the fasteners and 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 nine month periods ended September
30, 1995:
<TABLE>
<CAPTION>
Three months ended September 30, 1995
-------------------------------------
Quest ADR Total
----- --- -----
<S> <C> <C> <C>
Revenue $2,324,795 $ 45,991 $2,370,786
Costs and expenses 1,977,231 74,036 2,051,267
---------- --------- ----------
Operating income 347,564 (28,045) 319,519
Interest expense 64,203 8,323 72,526
--------- -------- ----------
Income (loss) before taxes 283,361 (36,368) 246,993
Tax provision 18,075 - 18,075
---------- --------- ----------
Net income (loss) $ 265,286 $ (36,368) $ 228,918
========== ========= ==========
Nine months ended September 30, 1995
-------------------------------------
Quest ADR Total
----- --- -----
Revenue $4,682,402 $ 226,355 $4,908,757
Costs and expenses 3,990,399 514,224 4,504,623
---------- --------- ----------
Operating income (loss) 692,003 (287,869) 404,134
Interest expense 129,905 597 130,502
---------- --------- ---------
Income (loss) before taxes 562,098 (288,466) 273,632
Tax provision 44,515 - 44,515
---------- --------- ----------
Net income (loss) $ 517,583 $(288,466) $ 229,117
========== ========= ==========
</TABLE>
<PAGE>
The significant growth in the Company's revenues for both the three
month and nine month periods ended September 30, 1995 over the comparable 1994
periods is due to the acquisition of Quest. Revenues for Quest in the quarter
were slightly behind the record level of quarterly sales recorded last quarter,
as the summer months are cyclically a slower sales period. Revenues of the ADR
business declined by $87,831 and $400,257 for the three month and nine month
periods ended September 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, with a loss of
$36,368 in the current quarter resulting from a further sales decline.
The Company's operating income was $319,519 for the quarter ended
September 30, 1995 compared with an operating loss of $148,122 for the prior
year quarter. For the nine month period ended September 30, 1995, operating
income was $404,134 compared with an operating loss of $368,339 for the
comparable prior year period. These improvements are due to the operating income
achieved by Quest of $692,003 since its acquisition on March 31, 1995, as well
as the significant reductions in costs and expenses of the ADR business. Such
expenses were $74,036 for the quarter ended September 30, 1995 compared with
$281,944 in the prior year quarter. For the nine month periods, such expenses
were $514,224 in 1995 compared with $994,951 in 1994. Expenses for the 1995 nine
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 $347,564 for
the quarter represents 15% of its revenues, a relationship which is consistent
with the historical performance of the business.
Interest expense for the three month and nine month periods ended
September 30, 1995 amounted to $72,526 and $130,502, 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 nine month periods
ended September 30, 1995 principally reflects state income tax provisions for
states in which Quest does business.
Net income for the quarter ended September 30, 1995 amounted to
$228,918 compared with a loss of $163,901 in the comparable prior year quarter.
Net income for the nine month period ended September 30, 1995 was $229,117
compared with a loss of $377,831 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.
<PAGE>
Liquidity and Capital Resources
As of September 30, 1995, the Company had $19,375 in cash and
short-term investments, compared to $1,520,730 as of December 31, 1994. As of
September 30, 1995 the Company had working capital of $1,978,060, compared with
working capital of $1,439,105 as of December 31, 1994. The Company's decrease in
cash and short-term investments at September 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 each of the last two
quarters, for an aggregate of $275,000 of repayments.
For the nine months ended September 30, 1995, the net cash used in the
Company's operating activities amounted to $357,027, principally reflecting
increased accounts receivable associated with the business of Quest. For the
nine months ended September 30, 1994, the net cash used in the Company's
operating activities amounted to $366,959, 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 $216,000 was borrowed and outstanding at September 30, 1995 and
$584,000 is fully available for future working capital needs. Amounts
outstanding under such working capital line of credit shall bear interest at a
rate equal to: (i) 1.5% above the lender's prime rate should Quest's tangible
net worth be less than or equal to $1,750,000; or (ii) 1.0% above the lender's
prime rate should Quest's tangible net worth be in excess of $1,750,000. As of
November 10, 1995, the interest rate on the amount outstanding under the working
capital line of credit was 10.25%. In order to secure the obligations of Quest
under the working capital line of credit and the related term loan from the
lender, the Company entered into a stock pledge agreement with the lender
whereby the Company pledged to the lender the shares of capital stock of Quest
which the Company held at the date of such agreement and any shares of Quest in
which the Company may thereafter acquire an interest. In addition, Quest granted
a security interest in substantially all of its assets to the lender.
In November 1995, Quest signed a three-year Master Purchase Order and
Sales Agreement with a major customer (see Note 5 of Notes to Consolidated
Financial Statements). Management believes that this agreement, together with
other sales opportunities in the Austin market, will result in a material
increase in Quest's annual sales. In view of this increased level of sales and
other potential growth opportunities, Quest is in the process of increasing its
working capital line of credit to $1,500,000, under terms and conditions
generally consistent with those outlined above.
<PAGE>
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.
On May 4, 1995, in consideration of the payment of $3,000 by the
Company to the remaining defendant in a pending matter, a settlement was agreed
to between the Company and such defendant. On May 24, 1995, a stipulation
discontinuing such action, as against the Company and the defendant, was filed
with the Court. It is management's belief that said settlement will not have a
material adverse effect on the liquidity or capital resources of the Company.
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
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
Not applicable.
<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: November 14, 1995 /s/ Dominic A. Polimeni
------------------------------
Dominic A. Polimeni, President
and Chief Operating Officer
Dated: November 14, 1995 /s/ Milton M. Adler
------------------------------
Milton M. Adler, Treasurer
(Principal Financial and
Accounting Officer)
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1995 AND THE CONSOLIDATED BALANCE SHEET FOR THE
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-95
<PERIOD-END> SEP-30-95
<CASH> 19,375
<SECURITIES> 0
<RECEIVABLES> 1,638,973
<ALLOWANCES> (214,994)
<INVENTORY> 2,406,861
<CURRENT-ASSETS> 4,229,099
<PP&E> 447,784
<DEPRECIATION> (38,402)
<TOTAL-ASSETS> 11,189,514
<CURRENT-LIABILITIES> 2,173,167
<BONDS> 0
<COMMON> 1,245
0
250
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,189,514
<SALES> 4,682,402
<TOTAL-REVENUES> 4,908,757
<CGS> 2,817,002
<TOTAL-COSTS> 4,504,623
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 33,913
<INTEREST-EXPENSE> 130,502
<INCOME-PRETAX> 273,632
<INCOME-TAX> 44,515
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 229,117
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.02
</TABLE>
