SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A, No. 2
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
Amending Items 6, 7, 10 and 13
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.
(Name of business issuer in its charter)
Delaware 23-2257354
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, $.0001 Par Value
------------------
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the last 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
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
The Company's gross revenues for calendar year 1994 were
$844,025.
As of April 7, 1995, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was approximately
$12,787,860.(1)
As of April 7, 1995, there were 12,445,749 shares of Common
Stock outstanding.
Transitional Small Business Disclosure Format
YES NO X
- -----------------------
(1) Calculated by excluding all shares held by owners of
5% or more of the stock.
JUDICATE, INC.
Index Page
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 4
ITEM 7. FINANCIAL STATEMENTS 8
PART III
ITEM 10. EXECUTIVE COMPENSATION 9
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 14
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Fiscal 1994 compared with 1993 and 1992
The Company's fee income for the period ended December 31,
1994 was $844,025 compared to $2,576,598 for the year ended
December 31, 1993 and compared to $4,558,725 for the year ended
December 31, 1992. This represents a decrease of 67% and 81%
respectively. The Company attributes the decreases primarily to
its determination to restructure and downsize its operations. The
expenses necessary to maintain an augmented sales force did not
make it feasible to continue this program based on sales yield per
sales person. Furthermore, due to increased competition, the sales
price of the Company's services were reduced by about twenty (20%)
percent each year. The Mandatory Binding Mediation Program for
cases under $50,000 through the Philadelphia County Court System
has also substantially impacted revenue for the Philadelphia
location. An additional factor in the sales decline is the
nationwide consolidation of insurance company locations.
The Company's losses from operations for the year ended
December 31, 1994 was $641,081 compared to a loss of $2,370,444 for
the year ended December 31, 1993 and a loss of 2,879,749 for the
year ended December 31, 1992. The reduced loss from continuing
operations is primarily the result of the Company's restructuring
and implementation of its cost containment program during the
latter part of 1992 and continued and expanded in calendar year
1993 and 1994. Continual staff reductions were made and agreements
with vendors for equipment rental and lease of premises were
renegotiated.
The following table sets forth (i) operating costs and
expenses of the Company, and (ii) such operating costs and expenses
of the Company expressed as a percentage of sales of the Company:
<TABLE>
<CAPTION>
1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Cost of Service Sales & General & Admin Cost of Sales & General & Admin
Marketing and Provision Service Marketing and Provision
for Doubtful for Doubtful
Accounts Accounts
<S> <C> <C> <C> <C> <C>
$272,660 $330,018 $882,428 $780,715 $1,127,188 $3,039,139*
<CAPTION>
1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Cost of Service Sales & General & Admin Cost of Sales & General & Admin
Marketing and Provision Service Marketing and Provision
for Doubtful for Doubtful
Accounts Accounts
<S> <C> <C> <C> <C> <C>
32% 39% 105% 30% 44% 117%*
</TABLE>
4
<TABLE>
<CAPTION>
1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
Cost of Service Sales & General & Admin Cost of Sales & General & Admin
Marketing and Provision Service Marketing and Provision
for Doubtful for Doubtful
Accounts Accounts
<S> <C> <C> <C> <C> <C>
$780,715 $1,127,188 $3,039,139* $1,051,075 $1,940,487 $4,446,912
<CAPTION>
1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
Cost of Service Sales & General & Admin Cost of Sales & General & Admin
Marketing and Provision Service Marketing and Provision
for Doubtful for Doubtful
Accounts Accounts
<S> <C> <C> <C> <C> <C>
30% 44% 117%* 23% 43% 98%
</TABLE>
- ----------------
*Includes financial consultation and other management services.
The Company's cost of service as a percentage of fee income shows
a continual increase from 1992 through 1994, primarily due to the
Company's agreement with judges. In order to attract and retain
quality judges, the Company contracted to pay certain judges
monthly minimum guarantees and hourly stipends in excess of the
published hourly rates. Such costs are not billable to our client
base, therefore the cost of service category was negatively
impacted.
The Company's sales and marketing expenses as a percentage of fee
income increased slightly from 1992 to 1993 and decreased for 1994.
Consistent with management's strategy to reduce such expenses,
while at the same time reacting to a highly competitive
environment, a substantial amount of marketing expenses compared to
fee income had to be maintained during 1993. In 1994 with a
telemarketing program in effect and developing sales leads by the
use of mailing lists, these expenses were reduced.
The Company's general and administrative expense as a percentage of
sales increased from 1992 to 1993 and decreased in 1994. This is
a result of the combined factors of management's cost reduction
program in effect during this period and the decreased level of
sales compared to fixed costs.
The Company had other income of $48 for the year ended December 31,
1994 as compared to other income of $9,347 for the year ended
December 31, 1993 and other income of $16,660 for the year ended
December 31, 1992.
5
Liquidity and Capital Resources
As of December 31, 1994, the Company had $1,520,730 in cash
and short term investments, as compared with $643,029 in cash and
short term investments as of December 31, 1993. As of December 31,
1994, the Company had working capital of $1,439,105, compared with
working capital of $543,234 as of December 31, 1993. The increase
in working capital results from the purchase of the Company's
securities resulting from its exchange offer of Series II for
Series I Warrants and a private placement of its securities which
produced aggregate net proceeds of $1,371,082. Cash used in
operations during 1994 was $383,901. In addition, the Company
advanced $109,480 to Quest Electronic Hardware, Inc. to be used for
the purchase of computer equipment. Quest became a subsidiary of
the Company on March 31, 1995.
In the period from March to May of 1994, the Company received
$449,190 from Series II Warrant holders who exchanged their Series
I Warrants pursuant to the Exchange Offer of February 28, 1994.
Each Series I Warrant holder receiving an offer to exchange
warrants for Series II Warrants which were exercisable for the
purchase of three shares of Common Stock at an aggregate purchase
price of $1.875. A total of 239,568 Series II Warrants were
exercised and 718,704 shares of Common Stock of the Company were
issued. At the present time, there are still 25,760 Series I
Warrants outstanding and there are no Series II Warrants
outstanding.
In November 1994, a private placement yielded $700,000 through
the sale of 2,000,000 shares of the Common Stock of the Company at
$.35 per share. At the same time, the purchasers received an equal
amount of warrants to purchase shares of Common Stock of the
Company at an exercise price of $.35. Biltmore Securities, Inc.
acted as placement agent and received a commission of 200,000
shares of Common Stock and 200,000 Warrants to purchase Common
Stock of the Company at $.35 per share. Legal expenses in
connection with the Exchange Offer of Series II Warrants and
Private Placement were $35,568.
Stephanie Holdings, Inc., an affiliate of Biltmore Securities,
Inc., purchased 515,200 shares of the Common Stock of the Company
at a purchase price of $.50 per share. Concurrent with this
purchase, Stephanie Holdings returned 103,040 Series I Warrants to
the Company which had been purchased from the Warrant holders.
These 103,040 Series I Warrants were cancelled upon receipt by the
Company.
On March 31, 1995, a private placement was completed for which
Biltmore Securities, Inc. acted as placement agent. 1,160,000
shares were sold at $1.50 per share. The Company has agreed to pay
to Biltmore Securities, Inc. a cash payment of $217,500 which
represents a 10% placement fee and a 2.5% non-accountable expense
6
allowance based on the total proceeds of $1,740,000. These
amounts were paid from the proceeds of the private placement and
available cash. In addition, the Company granted 116,000 options
to purchase one share of the Common Stock of the Company at an
exercise price of $3.50. These options expire March 31, 2000.
Since its formation, the Company has suffered substantial cash
flow deficits and operating losses. In recent months, the level of
the Company's cash flow deficits has been reduced. During calendar
year 1994, the Company had a cash loss of $383,901 from operating
activities and realized $1,371,082 from exercise of warrants and a
private placement of its securities. Note 2 of Notes to
Consolidated Financial Statements disclosed that (i) the Company
incurred a loss for the year ended December 31, 1994 and
experienced negative cash flows from operations and (ii) the
Company's ability to meet its obligations was dependent upon its
ability to obtain additional financing and expansion of its
operations into new lines of business. As described in Note 14 of
Notes to Consolidated Financial Statements, the Company has
completed the private placement of securities and the acquisition
of Quest Electronic Hardware, Inc. as of the close of business on
March 31, 1995. Based on these recent events, management believes
that its working capital, funds available under its credit
agreement, and additional funds generated from operations will be
sufficient to meet its obligations through 1996, exclusive of any
cash requirements which may come about as a result of other
business acquisitions.
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
March 31, 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. 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 1996, exclusive of any cash
requirements which may come about as a result of other business
acquisitions.
Various office equipment, computer equipment and furniture and
fixtures previously used in operations have been segregated and
included in other assets at the lower of their cost or market value
at December 31, 1994. Specifically, equipment held for lease and
idle equipment having an aggregate book value of $161,335
(aggregate cost of $340,153 net of accumulated depreciation of
$178,818) at December 31, 1994, was determined to have a net
realizable value of $25,000 at that date. As a result, general and
administrative expenses shown in the statement of operations for
the year ended December 31, 1994 include a charge of $136,335 to
7
reflect this write-down. The lease for the leased equipment
commenced in December 1993. However, as the Company received no
lease payments during 1994, and as it estimated the costs to
repossess the equipment to be prohibitive, it determined at the end
of that year that the value of such leased equipment had diminished
significantly. Idle equipment was written-down to net realizable
value at the end of 1994, based upon management's updated
assessment of the projected need for the equipment in ongoing
operations and its inability, during the year, to otherwise dispose
of the equipment.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Revised Financial Statements and supplementary financial
information follow Item 13 herein.
8
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation of the named
executives for the periods indicated. No executive officer had total annual
salary and bonus equal to or greater than $100,000.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted Securities All other
Name and Other Annual Stock Underlying LTIP Compen-
Principal Position Year Salary($) Bonus($) Compensation($) Awards(s)($) Options/SARs(#) Payouts($) sation($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen J. Drescher 1994 52,000 - - - 250,000
Chairman, Chief Executive 1993 19,000 - - - - - -
Officer and President 1992 - - - - - - -
</TABLE>
9
No grants of stock options were made during 1993 to any
executive named in the above table.
The following table sets forth information relating to
individual grants of stock options made during 1994 to each
executive officer named in the above table:
Option/SAR Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Expiration
Name Granted Fiscal Year Base Price Date
<S> <C> <C> <C> <C>
Stephen J. Drescher 250,000(1) 55.5% $0.625 1/27/04
</TABLE>
(1) These options were granted on January 27, 1994 and became
exercisable on July 28, 1994.
The following table sets forth information relating to outstanding
stock options held by each executive officer named in the compensation
table.
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End(#) at FY-End(#)
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Stephen J. Drescher -0- -$0- 250,000 $531,250
(exercisable)
</TABLE>
No awards to any named executive officer were made during 1994 under
a long-term incentive plan. Except as described below, the Company had no
standard arrangements with respect to the compensation of its directors during
1993 and 1994.
THE 1994 DIRECTOR NON-QUALIFIED STOCK OPTION PLAN
On January 26, 1994, the Board of Directors (the "Board")
adopted the above captioned plan (the "1994 Plan"). Pursuant to
the terms of the 1994 Plan, options for an aggregate of 300,000
shares of the Company's Common Stock may be granted.
All non-employee directors shall receive an option to purchase
15,000 shares of the Common Stock of the Company on the first
Monday of February in each calendar year at an exercise price equal
10
to the fair market value per share of the Common Stock on that
date. Such options shall be exercisable immediately for a period
of 10 years from date of grant unless terminated earlier pursuant
to the terms of the plan. Subject to shareholder approval, 120,000
options have been granted to date at exercise prices of $1.125 per
share and $2.406 per share.
1985 INCENTIVE STOCK OPTION PLAN
All full time employees of the Company are eligible to
participate in the 1985 Incentive Stock Option Plan (the "1985
plan"). There are outstanding 533 options under the 1985 Plan at
an exercise price of $9.90 with an expiration date of October 3,
1995. On June 3, 1985, the Board approved the plan with
shareholder approval granted on December 12, 1985.
1992 STOCK OPTION PLAN
In June 1992, the Board unanimously approved the adoption of
the "1992 Plan" which was approved by the shareholders of the
Company on January 8, 1993. Under the 1992 Plan, both incentive
stock options ("ISOs") and non-qualified stock options ("Non-
Qualified Options") may be granted (together, the "Options"). Each
Option is to be specifically designated at the time of its grant as
an ISO (within the meaning of Section 422 of the Internal Revenue
Code of 1986) (the "Code"), or a Non-Qualified Option. All non-
management employees are eligible to receive ISOs under the 1992
Plan. All non-management employees and non-employee consultants
and Company Judges are eligible to receive Non-Qualified Options
under the 1992 Plan.
The aggregate maximum number of options issuable under the
1992 Plan to purchase shares of the Company's Common Stock is
1,900,000 options.
The following table sets forth, since the inception of the
1992 Plan, the persons who have received options and their
respective exercise prices:
<TABLE>
<CAPTION>
No. Of Exercise Expiration
Group Options Price Dates
<S> <C> <C> <C>
Employees 6,666 $12.75 12/10/97
Consultants 15,000 $28.65 7/8/97
Judges 3,333 $ 7.95 1/2/96
9,846 $15.00 2/1/98
9,330 $17.85 7/28/96
1,666 $19.65 11/13/96
666 $22.50 6/3/97
2,332 $26.25 1/9/97
666 $33.75 9/1/97
</TABLE>
11
The Company will not grant additional options under the 1985
Incentive Stock Option Plan and the 1992 Stock Option Plan.
THE 1992 AMENDED AND RESTATED MANAGEMENT INCENTIVE OPTION PLAN
In December 1991, the Board approved the Company's 1992
Management Incentive Option Plan (the "Incentive Plan"). In
September and October 1992, effective as of the date of the
original plan, the Board approved certain amendments to the
original plan which was ratified by the Shareholders of the Company
on January 8, 1993. Pursuant to the terms of the Incentive Plans
non-qualified options to purchase up to 533,333 shares of the
Company's Common Stock may be granted to officers, directors, key
employees and consultants of the Company.
As of March 31, 1995, the following options were outstanding
under this plan:
<TABLE>
<CAPTION>
No. Of Exercise Expiration
Group Options Price Date
<S> <C> <C> <C>
Stephen J. Drescher 250,000 $.625 1/27/04
Paul L. Burton 200,000 $.625 6/24/04
<CAPTION>
In addition, the following options are outstanding:
No. Of Exercise Expiration
Group Options Price Date
<S> <C> <C> <C>
Biltmore 626,956 $.249 12/31/98
Victor Wang 100,000 $.625 1/13/96
</TABLE>
All other options previously outstanding have been canceled due to
the termination of the option holders association with the Company.
All options and exercise prices have been restated to give effect
to the reverse stock split approved by the shareholders of the
Company on December 22, 1993.
WARRANTS
2,000,000 Units, each consisting of a share of common stock
and a warrant to purchase a share of common stock at $.35 per
share, were sold in a November 1994 Private Placement for a price
of $.35 per unit. Biltmore Securities, Inc. acted as placement
agent for this transaction and received a fee equal to 200,000
shares of Common Stock and 200,000 warrants to purchase common
stock at $.35 per share. This fee represented 10% of the number of
units sold in the private offering. These warrants expire November
7, 2004. The $.35 valuation placed on the warrants reflected what
12
was determined by the Company to be the then current market price
based upon the following factors:
(i) the price per share in the private placement was
determined based on the culmination of protracted negotiations
between the Company and the purchasers. During negotiations,
(from September to November 1994) the bid price of the stock
ranged between $.875 and $1.125;
(ii) the trading volume of the stock during the three months
prior to the November 14, 1994 issuance averaged approximately
155,000 per month. Such volume could not support the shares
and options to be issued at the above referenced quoted bid
prices;
(iii) the Company had suffered significant losses since its
inception. The book value per common share of its stock was
approximately $.25 at September 30, 1994. Upon taking the
2,000,000 shares to be issued in the private placement into
consideration that amount would drop to approximately $.16 per
share;
(iv) the shares underlying the options were restricted as to
their ability to be sold;
(v) the culmination of the negotiations related to the
November private placement resulted in the sale of Company
Common Stock at $.35 per share. The options issued were
valued with reference to that price.
Assuming a fair market value of $.35 per unit, the 200,000 units
paid as a placement agent fee would be valued at $70,000.
There are 25,760 Series I Warrants outstanding, each for the
purchase of 2.511 shares of Common Stock of the Company at an
exercise price of $1.80. These warrants expire June 30, 1996.
On March 31, 1995 Biltmore Securities, Inc., in partial
consideration of its serving as Placement Agent, was granted
103,000 options to purchase a like number of shares of the Common
Stock of the Company at $3.50 per share. Such options expire March
31, 2000. Additional options to acquire 13,000 shares on identical
terms were granted to Biltmore in respect of additional
compensation due to Biltmore for its services as Placement Agent.
Said 116,000 options represented an amount equal to 10% of the
shares sold in the private offering.
13
PART IV
Item 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements, Financial Statement Schedules and
Exhibits.
1. Financial Statements and Financial Statement Schedules -
See the index to the financial statements on page F-1.
2. The following financial statement schedules are included
in this report:
(i) Schedule V - Property, Plant and Equipment.
(ii) Schedule VI - Accumulated depreciation, depletion
and amortization of property, plant and equipment.
All other schedules are not included because they are
either not applicable or the required information is
included in the financial statements or notes thereto.
3. See Index to Exhibits on page E-1.
(b) Report on Form 8-K.
The following reports on Form 8-K (the "FORM") were filed
during the last quarter of 1994 through the date hereof:
(1) Form 8-K dated November 28, 1994 containing
information responsive to Item 4 of the Form.
(2) Form 8-K dated November 29, 1994 containing
information responsive to Item 5 of the Form.
(3) Form 8-K dated March 31, 1995 containing
information responsive to Items 1, 2 and 7 of the
Form, as amended by Form 8-K/A, No.1 dated March
31, 1995.
14
JUDICATE, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page to Page
<S> <C>
Pro Forma:
Pro Forma Condensed Combined Financial Statements [Unaudited]................................... F-3.......F-4
Pro Forma Condensed Combined Balance Sheet as of
December 31, 1994 [Unaudited]................................................................... F-5.......F-6
Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1994 [Unaudited]........................................................ F-7
Adjustments to Pro Forma Condensed Combined Financial
Statements [Unaudited].......................................................................... F-8.......F-10
Financial Statements:
Report of Independent Auditors.................................................................. F-11
Consolidated Balance Sheet as of December 31, 1994.............................................. F-12
Consolidated Statement of Operations for the year ended December 31, 1994....................... F-13
Consolidated Statement of Changes in Stockholders' Equity for the year
ended December 31, 1994......................................................................... F-14
Consolidated Statement of Cash Flows for the year ended December 31, 1994....................... F-15......F-16
Notes to Consolidated Financial Statements...................................................... F-17......F-26
Independent Auditors' Report.................................................................... *
Balance Sheets - December 31, 1993 and December 31, 1992........................................ *
Statements of Operations for the year ended December 31, 1993 and 1992.......................... *
Statements of Changes in Shareholders' Equity for the years ended
December 31, 1993 and 1992...................................................................... *
Statements of Cash Flows for the years ended December 31, 1993 and 1992......................... *
Notes to Financial Statements................................................................... *
Financial Statement Schedules:
Schedule V - Property, Plant and Equipment for the years ended
December 31, 1993 and 1992...................................................................... *
</TABLE>
F-1
<TABLE>
<S> <C>
Schedule VI - Accumulated Depreciation , Depletion and Amortization
of Property, Plant and Equipment for the years ended December 31, 1993
and 1992........................................................................................ *
</TABLE>
All other schedules not listed above have been omitted as not applicable or
because the required information is included in the Consolidated Financial
Statements or in the notes thereto. Columns omitted from schedules filed have
been omitted because the information is not applicable.
*Previously Filed
F-2
JUDICATE, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
[UNAUDITED]
- -------------------------------------------------------------------------------
The following pro forma condensed combined balance sheet as of December 31,
1994 and the combined statement of operations for the year then ended give
effect to Judicate, Inc. ["Judicate" or the "Company"] completing the following
transactions:
(i) In March and April 1995, the Company consummated a private placement of
its securities. Fifty-eight units of Company securities [each unit consisting of
20,000 shares of Company common stock] were sold through a placement agent. The
net proceeds to the Company from the placement of these securities was
approximately $1,523,000, after deducting placement agent fees of approximately
$217,000. The placement agent also received a portion of its fee in the form of
116,000 options to purchase Company common stock at an exercise price of $3.50
per share. These options expire March 31, 2000.
(ii) As of the close of business on March 31, 1995, the Company acquired
100% of the stock of Quest Electronic Hardware, Inc. ["Quest"], a privately
owned Company, in exchange for a 25% interest in Judicate, Inc. on a fully
diluted basis. Such acquisition was effected pursuant to a share acquisition
agreement, dated as of November 29, 1994. Pursuant to the Share Agreement, the
Company issued, at the closing of the transaction, 3,871,944 newly issued,
fully-paid and non-assessable shares of common stock of the Company, in exchange
for all of the issued and outstanding shares of common stock of Quest. As
required by the Share Agreement, this number represented 25% of the outstanding
Common Stock of the Company on a fully diluted basis. The Company will account
for such acquisition using purchase method of accounting.
(ii) Simultaneously with the foregoing events, Quest acquired the fasteners
distribution business [the "Fasteners Business"] of Arrow Electronics, Inc., a
New York corporation ["Arrow"]. Such acquisition was effected pursuant to a
Purchase of Assets Agreement, dated as of November29, 1994, by and between
Quest and Arrow [the "Purchase Agreement"]. Under the Purchase Agreement, Quest
acquired the assets of Arrow used exclusively in connection with Arrow's
operations of the Fasteners Business. Such assets include, but are not limited
to, machinery, equipment, furniture, motor vehicles and other personal property,
inventories, rights [including accounts receivable] under contracts, agreements,
leases, permits and licenses [to the extent assignable], expensed items, price
lists and other documents. The Company intends to use the acquired assets to
continue the business of the Fasteners Business.
The purchase for the acquisition of the Fasteners Business was a negotiated
fixed price. The price consisted of a cash payment of approximately $5 million
plus the assumption of certain liabilities of the Fasteners Business. As more
fully described below, the purchase price was funded through a combination of
proceeds of borrowings under a Loan and Security Agreement [as defined below],
the proceeds from the
F-3
JUDICATE, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
[UNAUDITED]
- -------------------------------------------------------------------------------
sale of the Company's securities under a private placement and available
cash.
Under a Loan and Security Agreement, dated as of March 31, 1995, by and
between Quest and Silicon Valley Bank [the "Loan Agreement"], Quest borrowed
$2.2 million to partially fund the acquisition of the Fasteners Business. In
order to secure the obligations of Quest under the Loan Agreement, the Company
entered into a Stock Pledge Agreement, dated as of March 31, 1995, with Silicon
Valley Bank [the "Bank"]. Under the terms of said agreement, the Company pledged
to the Bank the shares of capital stock of Quest which the Company held at such
date and in which the Company may thereafter acquire an interest. In addition,
Quest granted a security interest in substantially all of its assets to the
Bank.
An additional portion of the funds for the purchase price for the Fasteners
Business [approximately $1.5 million] was provided from the proceeds of the
private placement of noted in (i) above. The balance of the cash portion of the
purchase price for the Fasteners Business was provided by available cash.
(iv) In March and April 1995, the Company received the proceeds of
short-term financing in the amount of $300,000.
The pro forma information is based on the historical financial statements
of the Company, giving effect to the transactions under the purchase method of
accounting and assumptions and adjustments in the accompanying notes to the pro
forma financial statements. The pro forma balance sheet assumes that the
transactions occurred as of the balance sheet date.
The pro forma statements of operations give effect to these transactions as
if they had occurred at the beginning of the fiscal years presented [i.e.
January 1, 1994] and were carried forward through the interim periods presented.
The historical statements of operations will reflect the effects of these
transactions from the date on which they occurred.
The pro forma combined statements have been prepared by the Company's
management based upon the historical financial statements of the Company and
these pro forma statements may not be indicative of the results that actually
would have occurred if the combinations had been in effect on the dates
indicated or which may be obtained in the future. The pro forma financial
statements should be read in conjunction with the financial statements and notes
of the Company as contained in annual report Form 10-KSB filed with Securities
and Exchange Commission.
F-4
JUDICATE, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF DECEMBER 31, 1994. [IN
THOUSANDS] [UNAUDITED]
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fasteners Pro Forma Pro Forma
Judicate Quest Business Adjustments Combined
<S> <C> <C> <C> <C> <C>
Assets:
Current Assets:
Cash $ 1,521 $ 1 $ 5 $ 1,523 [1] $ 550
2,200 [3]
(5,000) [4]
300 [6]
Accounts Receivable - Net 72 -- 763 -- 835
Inventories -- -- 2,042 -- 2,042
Other Current Assets 56 15 -- -- 71
Other Receivables 109 -- -- (109) [5] --
Due from Related Parties -- -- 850 (850) [4] --
----------- ---------- ---------- ---------- ----------
Total Current Assets 1,758 16 3,660 (1,936) 3,498
Property and Equipment - Net 50 109 60 40 [4] 249
(10) [4]
Goodwill -- -- -- 3,871 [2] 6,509
2,638 [4]
Other Assets 65 -- -- -- 65
----------- ---------- ---------- ---------- ----------
Total Assets $ 1,873 $ 125 $ 3,720 $ 4,603 $ 10,321
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
</TABLE>
F-5
JUDICATE, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF DECEMBER 31, 1994.
[IN THOUSANDS] [UNAUDITED]
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fasteners Pro Forma Pro Forma
Judicate Quest Business Adjustments Combined
<S> <C> <C> <C> <C> <C>
Liabilities, Stockholders' Equity
and Net Worth:
Current Liabilities:
Accounts Payable $ 270 $ -- $ 384 $ -- $ 654
Accrued Expenses 18 -- 154 -- 172
Loans Payable - Financial
Institution -- -- -- 550 [3] 550
Short-Term Financing -- -- -- 300 [6] 300
Other Payable -- 15 -- -- 15
Other Current Liabilities 31 109 -- (109)[5] 31
----------- ---------- ---------- ---------- ----------
Total Current Liabilities 319 124 538 741 1,722
----------- ---------- ---------- ---------- ----------
Long-Term Debt -- -- -- 1,650[3] 1,650
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Stockholders' Equity:
Preferred Stock 1 -- -- -- 1
Common Stock 1 1 -- (1) [2] 1
Additional Paid-in Capital 17,260 -- -- 1,523 [1] 22,655
3,872 [2]
Accumulated Deficit (15,708) -- -- -- (15,708)
----------- ---------- ---------- ---------- ----------
Total Stockholders' Equity 1,554 1 -- 5,394 6,949
----------- ---------- ---------- ---------- ----------
Net Worth -- -- 3,182 (3,182) --
----------- ---------- ---------- ---------- ----------
Total Liabilities, Stockholders'
Equity and Net Worth $ 1,873 $ 125 $ 3,720 $ 4,603 $ 10,321
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
</TABLE>
F-6
JUDICATE, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1994.
[IN THOUSANDS] [UNAUDITED]
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fasteners Pro Forma Pro Forma
Judicate Quest Business Adjustments Combined
<S> <C> <C> <C> <C> <C>
Sales $ 844 $ -- $ 7,699 $ -- $ 8,543
Cost of Sales 273 -- 4,453 -- 4,726
-------- -------- ---------- --------- -----------
Gross Profit 571 -- 3,246 -- 3,817
Selling, General and
Administrative Expenses 1,212 -- 1,763 9 [A] 3,231
163 [B]
84 [E]
-------- -------- ---------- --------- -----------
Operating [Loss] Income (641) -- 1,483 (256) 586
Interest Expense -- -- -- 199 [C] 226
27 [D]
-------- -------- ---------- --------- -----------
[Loss] Income Before
Income Taxes (641) -- 1,483 (482) 360
Income Taxes -- -- 572 (572) [F] --
-------- -------- ---------- --------- -----------
Net [Loss] Income $ (641) $ -- $ 911 $ 90 $ 360
-------- -------- ---------- --------- -----------
-------- -------- ---------- --------- -----------
[Loss] Income Per Common
Share:
Primary $ (.23) $ .05
-------- -----------
-------- -----------
Fully Diluted N/A $ .03
-------- -----------
-------- -----------
</TABLE>
F-7
JUDICATE, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
ADJUSTMENTS TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
[IN THOUSANDS] [UNAUDITED]
- -------------------------------------------------------------------------------
Balance Sheet Adjustments:
[1] To reflect the private placement of Judicate securities through the
April 3, 1995 closing.
Net Proceeds $ 1,523
-------
-------
[2] To reflect the issuance of 3,872 shares of common stock to effect
the purchase of Quest. Such shares are restricted and are valued
at $1.00 per share, an approximate 50% discount to market price on
March 31, 1995. The total purchase price is $3,872 and $3,871 has
been allocated to goodwill.
Current Long-Term
[3] To reflect bank loans extended to Quest $ 550 $ 1,650
===== =======
The term loan acquisition debt is to be paid-off in quarterly
installments of $137.50.
[4] To allocate the purchase cost of the Fasteners Business to
acquired net assets at fair value and to reflect resulting
goodwill from the acquisition of the Fasteners Business:
<TABLE>
<CAPTION>
Pro Forma Adjustment
<S> <C> <C>
Accounts Receivable - Net $ 763
Inventories 2,042
Property and Equipment 90
Other Assets 5
Goodwill 2,638
Liabilities (538)
----------
Purchase Cost - Cash $ 5,000 $ 5,000
========== =========
</TABLE>
Pro Forma entry [4] reflects the following:
Difference between net book value and fair value of assets
acquired:
<TABLE>
<S> <C> <C>
Property and Equipment:
Per Historicals $ 60
Property Not Acquired 10 $ (10)
------- --------
--------
Net Book Value 50
Fair Market Value 90
-------
Pro Forma Adjustment $ 40
--------
--------
Receivable Not Purchased:
Pro Forma Adjustment $ (850)
--------
--------
Recording of Goodwill $ 2,638
--------
--------
</TABLE>
F-8
JUDICATE, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
ADJUSTMENTS TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
[IN THOUSANDS] [UNAUDITED]
- -------------------------------------------------------------------------------
Balance Sheet Adjustments [Continued]:
The property and equipment is to be depreciated over 10 years under the
straight-line method, and goodwill is to be amortized over forty years
under the straight-line method.
[5] To eliminate intercompany balances $ 109
--------
--------
[6] To reflect short-term financing extended to Judicate $ 300
-------
-------
F-9
JUDICATE, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
ADJUSTMENTS TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
[IN THOUSANDS] [UNAUDITED]
- -------------------------------------------------------------------------------
Income Statement Adjustments:
<TABLE>
<CAPTION>
[A] To reflect additional charges for depreciation:
Annual
<S> <C> <C>
Fasteners business assets purchased at fair market $ 90
--------
Depreciation straight-line for ten years $ 9 $ 9
--------
--------
[B] To reflect additional charges for amortization of
goodwill $ 163
------
------
[C] To record interest on acquisition debt:
The term loan acquisition debt is to be paid off
in quarterly installments of $137.50 $ 199
------
------
The average interest rate expected to be incurred on
the acquisition debt is 10.5%.
[D] To record interest on short-term financing $ 27
------
------
The average interest rate expected to be incurred on
the short-term financing is 9%.
[E] To record net additional G & A charges:
Estimated additional general and
administrative charges related to the Fasteners Business $ 84
------
------
The statement of operations of the Fasteners Business does not include
charges for general and administrative services that were provided by
Arrow, but does include charges for certain costs that are not expected
to be incurred in the future. If The Fasteners Business had been a
stand alone entity as of the beginning of the period presented, it is
estimated that the net amount of such costs would have resulted in
additional charges of approximately $84.
[F] To reflect utilization of net operating loss carryforward: $ 572
------
------
</TABLE>
. . . . . . . . .
F-10
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Judicate, Inc.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheet of Judicate,
Inc. and its subsidiaries as of December 31, 1994, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Judicate, Inc. and its subsidiaries as of December 31, 1994, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
MORTENSON AND ASSOCIATES, P. C.
Certified Public Accountants.
Cranford, New Jersey
April 10, 1995
F-11
JUDICATE, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1994.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Current Assets:
Cash and Cash Equivalents $ 1,520,730
Accounts Receivable - Net of Allowance for Doubtful
Accounts of $208,286 72,201
Other Current Assets 55,445
Other Receivable 109,480
------------
Total Current Assets 1,757,856
------------
Property and Equipment - Net 50,069
------------
Other Assets:
Deposits 40,202
Other Assets 25,000
------------
Total Other Assets 65,202
------------
Total Assets $ 1,873,127
------------
------------
Liabilities and Stockholder's Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 287,954
Other Current Liabilities 30,797
------------
Total Current Liabilities 318,751
------------
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, $.01 Par Value; Authorized 1,000,000 Shares:
Series A Convertible, Authorized 900,000 Shares; Issued and
Outstanding 140,000 Shares; $140,000 Liquidation Value 1,400
Common Stock, $.0001 Par Value; Authorized 20,000,000
Shares, Issued and Outstanding 6,733,805 Shares 673
Additional Paid-in Capital 17,260,549
Accumulated Deficit (15,708,246)
------------
Total Stockholders' Equity 1,554,376
------------
Total Liabilities and Stockholders' Equity $ 1,873,127
------------
------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
JUDICATE, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1994.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Fee Income $ 844,025
-----------
Operating Costs and Expenses:
Cost of Services 272,660
Sales and Marketing Expenses 330,018
General and Administrative Expenses 831,510
Provision for Doubtful Accounts 50,918
-----------
Total Operating Costs and Expenses 1,485,106
-----------
Loss from Operations (641,081)
-----------
Other Income [Expense]:
Interest Expense (34,222)
Interest Income 34,270
-----------
Total Other Income 48
-----------
Net Loss $ (641,033)
-----------
-----------
Loss Per Common Share $ (.23)
-----------
-----------
Weighted Average Number of Common Shares
Outstanding During the Year 2,793,402
-----------
-----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
JUDICATE, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE
YEAR ENDED DECEMBER 31, 1994.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
<S> <C> <C> <C> <C> <C> <C>
Balance -
January 1, 1994 880,000 $ 8,800 1,758,077 $ 177 $ 15,882,538 $(15,067,213)
Issuance of Shares:
Conversion of
Preferred Shares to
Common Stock (740,000) (7,400) 1,480,000 148 7,251 --
Exercise of Warrants -- -- 718,704 71 413,411 --
Common Stock Issued
to Placement Agent in
Lieu of Fees in
Connection with
Exercise of Warrants -- -- 61,824 6 -- --
Shares Issued in Private
Placement -- -- 2,515,200 251 957,349 --
Common Stock Issued
to Placement Agent in
Lieu of Fees in
Connection with
Private Placement -- -- 200,000 20 -- --
Net Loss for the Year -- -- -- -- -- (641,033)
-------- -------- ---------- ------ ------------ ------------
Balance -
December 31, 1994 140,000 $ 1,400 6,733,805 $ 673 $ 17,260,549 $(15,708,246)
-------- -------- ---------- ------ ------------ ------------
-------- -------- ---------- ------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-14
JUDICATE, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
DECEMBER 31, 1994.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Operating Activities:
Net Loss $ (641,033)
-----------
Adjustments to Reconcile Net Loss to Net Cash
Used by Operating Activities:
Depreciation and Amortization 58,412
Write-Down of Assets 136,335
Provision for Doubtful Accounts 50,918
Change in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (19,091)
Other Current Assets 62,518
Deposits (18,184)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 4,374
Other Current Liabilities (18,150)
-----------
Total Adjustments 257,132
-----------
Net Cash - Operating Activities (383,901)
-----------
Investing Activities:
Other Receivable (109,480)
-----------
Financing Activities:
Proceeds from the Issuance of Common Stock 957,600
Proceeds from the Exercise of Warrants 413,482
-----------
Net Cash - Financing Activities 1,371,082
-----------
Net Increase in Cash and Cash Equivalents 877,701
Cash and Cash Equivalents - Beginning of Year 643,029
-----------
Cash and Cash Equivalents - End of Year $ 1,520,730
-----------
-----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 34,222
Income Taxes --
</TABLE>
See Notes to Consolidated Financial Statements.
F-15
JUDICATE, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
DECEMBER 31, 1994.
- -------------------------------------------------------------------------------
Supplemental Schedule of Noncash Investing and Financing Activities:
In 1994, the Company adjusted property and equipment to lower of cost or
market value as follows:
<TABLE>
<S> <C>
Cost of Property Written Down $ 340,153
Accumulated Depreciation (178,818)
---------
Net Book Value 161,335
Estimated Fair Market Value 25,000
---------
Adjustment for Write-Down $ 136,335
---------
---------
</TABLE>
During 1994, the Company issued 200,000 shares of common stock to an
underwriter in lieu of fees in connection with a private placement.
Additionally, 61,824 shares of common stock were issued to the same
underwriter in lieu of fees in connection with the exercise of warrants.
The Company issued 1,480,000 shares of common stock upon conversion of
740,000 preferred shares during the year.
See Notes to Consolidated Financial Statements.
F-16
JUDICATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
[1] Description of Business and Summary of Significant Accounting Policies
Description of Business
Judicate, Inc. ["Judicate" or the "Company"] provides a broad range of
alternate dispute resolution ["ADR"] services, including non-binding
mediations [which consist of judicial settlement conferences and "pure"
mediations] and binding arbitrations, to assist private parties in settling
civil disputes. Arbitration and mediation services are headed by one of the
judges currently on Judicate's judicial panel. The Company has two
wholly-owned subsidiaries which were formed in 1993. Both of these
subsidiaries were inactive during the year and neither of these subsidiaries
had any assets or liabilities.
Summary of Significant Accounting Policies
Consolidation - The financial position and results of operations of all
majority owned subsidiaries are consolidated in these financial statements. As
noted above, the Company's subsidiaries were inactive during the year ended
December 31, 1994, and had no assets or liabilities on that date. Accordingly,
the subsidiaries had no effect on the consolidated financial statements.
Revenue Recognition - Judicate recognizes income when earned. Certain
non-refundable fees, for which the Company is not required to render any
further services, are recognized as income when received as the earnings
process in regard to such fees has been completed. Revenues from proceedings
[arbitrations and mediations] are recognized as income when the proceeding is
conducted. Proceeding fees received prior to the conference are recorded as
deferred revenue. Such deferred revenue amounted to $9,720 at December 31,
1994 and is included in other current liabilities.
Cash and Cash Equivalents - The Company considers certain highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Concentrations of Credit Risk - Financial instruments that potentially subject
the Company to concentration of credit risk consist primarily of temporary
cash investments and trade receivables. The Company's customers are located
throughout the country with concentrations in the Northeast. The Company
performs on-going credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit losses
and such losses have been within managements' expectations.
The Company invests its excess cash in deposits with commercial banks which
are federally insured up to $100,000 per bank. As of December 31, 1994, the
Company had approximately $523,000 of cash deposits in excess of federally
insured limits.
Property and Equipment and Depreciation - Property and equipment are recorded
at cost. Expenditures for normal repairs and maintenance are charged to
earnings as incurred. When assets are retired or otherwise disposed, their
costs and related accumulated depreciation are removed from the accounts and
the resulting gains or losses are included in operations. Depreciation and
amortization are recorded using the straight-line method over the estimated
lives of the related asset or the remaining lease term.
F-17
JUDICATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- -------------------------------------------------------------------------------
[1] Description of Business and Summary of Significant Accounting Policies
[Continued]
Estimated useful lives are as follows:
<TABLE>
<S> <C>
Office Equipment 5 Years
Computer Equipment 3 - 5 Years
Furniture and Fixtures 5 Years
Leasehold Improvements 5 Years
</TABLE>
Cost in Excess of Net Assets of Business Acquired- The cost in excess net
assets of business acquired will be amortized on a straight-line basis over 40
years. The Company has concluded that the cost in excess of net assets of
business acquired has an indeterminable life based on historic, current, and
projected operating results of the business acquired. [See Note 14]. The
Company's policy is to record an impairment loss against the balance of the
net unamortized cost in excess of net assets of business acquired in the
period when it is determined that the carrying amount of the assets may not be
recoverable. At each balance sheet date, the Company evaluates the
realizability of the asset for each subsidiary having a material balance. This
determination is based on an evaluation of such factors as the occurrence of a
significant event, a significant change in the environment in which the
business operates or, if the expected future non-discounted cash flow of the
subsidiary would become less than the carrying amount of the asset. The
Company's historic recurring losses and negative cash flows from operations
have been abated and, accordingly, management believes these factors will not
negatively impact the profits and cash flows of the business acquired.
F-18
JUDICATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- -------------------------------------------------------------------------------
[2] Going Concern Considerations
The accompanying consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business.
As shown in the consolidated financial statements, the Company incurred a net
loss of $641,033 and generated negative cash flows from operations of $383,901
for the year ended December 31, 1994, and has accumulated a deficit to that
date of $15,708,246. The continuation of the Company as a going concern was
dependent upon its ability to obtain additional financing and the expansion of
its operations into new lines of business which would generate revenues and
provide cash flow from operations. All of these factors had raised substantial
doubt about the ability of the Company to continue as a going concern.
Such substantial doubt has been alleviated due to the Company's acquisitions
described in Note 14, which will effectuate its expansion of its operations
into new lines of business, which management believes will generate
significant revenues and positive cash flows from operations. The acquisitions
were partially financed by a private placement of Company securities and,
through bank financing, both of which are described in Note. 14.
[3] Other Receivable
Other receivable represents a short-term non-interest bearing advance to
another entity, which the Company subsequently acquired [see Note 14].
[4] Property and Equipment
Property and equipment consisted of the following as of December 31, 1994:
<TABLE>
<CAPTION>
1 9 9 4
<S> <C>
Office Equipment $299,558
Computer Equipment 187,332
Furniture and Fixtures 162,981
Leasehold Improvements 18,305
--------
Total 668,176
Less: Accumulated Depreciation and Amortization 618,107
--------
Total $ 50,069
--------
--------
</TABLE>
Depreciation and amortization expense for the year ended December 31, 1994 was
$58,412.
Additionally, various office equipment, computer equipment and furniture and
fixtures previously used in operations have been segregated and included in
other assets at the lower of their cost or market value at December 31, 1994.
Specifically, equipment held for lease and idle equipment having an aggregate
book value of $161,335 [aggregate cost of $340,153 net of accumulated
depreciation of $178,818] at December 31, 1994, was determined to have a net
realizable value of $25,000 at that date. As a result, general and
administrative expenses shown in the statement of operations for the year ended
December 31, 1994 include a charge of $136,335 to reflect this write-
F-19
JUDICATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- -------------------------------------------------------------------------------
[4] Property and Equipment [Continued]
down. The lease for the leased equipment commenced in December 1993. However,
as the Company received no lease payments during 1994, and as it estimated the
costs to repossess the equipment to be prohibitive, it determined at the end
of that year that the value of such leased equipment had diminished
significantly. Idle equipment was written-down to net realizable value at the
end of 1994, based upon management's updated assessment of the projected need
for the equipment in ongoing operations and its inability, during the year, to
otherwise dispose of the equipment.
[5] Description of Securities
Common Stock - Each share of common stock entitles the holder thereof to one
[1] vote on all matters submitted to stockholders. There are no preemptive,
conversion, redemption or cumulative voting rights applicable to the common
stock. The outstanding shares of the common stock are fully paid and
non-assessable.
Preferred Stock - The Company is authorized to issue 1,000,000 shares of
preferred stock, par value $.01 per share. Of these authorized shares, the
Board of Directors has established a Series A Preferred Stock.
Series A Preferred Stock -The number of shares of Series A Preferred Stock
authorized to be issued is 900,000 shares. 140,000 shares were issued and
outstanding as of December 31, 1994.
Subject to certain exceptions, summarized below, the holders of Series A
Preferred Stock are not entitled to vote on matters submitted to the
stockholders of the Company.
In the event of the liquidation, dissolution or winding up of the Company, the
shares of Series A Preferred Stock are entitled to a liquidation preference
before any distribution to other classes or series of stock of $1. 00 per
share. Each share of Series A Preferred Stock is convertible, without further
consideration, into two [2] shares of common stock. During 1994, 740,000
shares of preferred stock were converted to common stock. Holders of Series A
Preferred Stock will be entitled to dividends when and as declared by the
Board of Directors. However, the Company has not paid any dividends on the
Series A Preferred Stock and does not expect to do so in the foreseeable
future.
F-20
JUDICATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- -------------------------------------------------------------------------------
[6] Stock Options
Under various plans, the Company may grant stock options to key executive,
management and judicial personnel. Transactions under the various stock option
and incentive plans during 1994 were as follows:
<TABLE>
<CAPTION>
Shares Under Option
December 31, 1994
Incentive Non-Incentive
<S> <C> <C>
Outstanding at Beginning of Year 17,829 46,835
Options Granted 550,000 466,758
Options Exercised -- --
Options Cancelled and Terminated (13,360) --
-------- -------
Outstanding [1] 554,469 513,593
-------- -------
-------- -------
</TABLE>
[1] With exercise prices ranging from $.384 to $33.75 per share, giving effect
to the one-for-fifteen reverse stock split, which occurred on December 17,
1993.
[7] Warrants
The Company has issued various series of warrants to purchase shares of its
common stock.
Series I Warrants - Each Series I Warrant entitles the registered holder to
purchase 2.511 shares of common stock at a price of $1.80 per share on or
before June 30, 1996. Any warrant not exercised by that date will be null and
void. At December 31, 1994, there were 25,760 Series I Warrants outstanding.
In March 1994, as an inducement to raise capital, the Company offered holders
of the Series I Warrants the right to exchange each warrant for three Series
II Warrants which were exercisable at $.625 per share. The exchange offer
expired on April 30, 1994. Pursuant to the exchange offer, the Company
received net proceeds of $413,482 upon the issuance of 718,704 shares of its
common stock. Additionally, the Company issued 61,824 shares of its common
stock to an underwriter in lieu of fees in connection with this transaction.
Said shares represented an amount equal to 10% of the aggregate shares sold in
connection with this transaction. At December 31, 1994, all Series II Warrants
had been exercised.
Series III Warrants - In connection with the December 1994 private placement,
2,200,000 Series III Warrants were issued. Each Series III Warrant entitles
the registered holder to purchase one share of common stock at an exercise
price of $.35 per share. The warrants expire November 14, 2004, and any
warrant not exercised by that date will be null and void. At December 31,
1994, there were 2,200,000 Series III Warrants outstanding.
F-21
JUDICATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- -------------------------------------------------------------------------------
[8] November Private Placement
In November 1994, the Company issued 2,515,200 shares of its common stock in a
private offering, 2,000,000 shares of which were sold through a placement
agent. Net proceeds from the offering amounted to $957,600. As additional
consideration for common shares issued, one of the purchasers rendered 103,040
Series I Warrants to the Company for cancellation. Additionally, 200,000
shares of Company common stock and warrants to purchase 200,000 shares of
Company common stock at an exercise price of $.35 per share were issued to the
placement agent in lieu of fees in connection with this transaction. Said
shares and warrants represented an amount equal to 10% of the units sold
through the placement agent in the private offering.
[9] Commitments and Contingencies
Leases - The Company leases office space under an operating lease which
expires in February 1996. The Company also leases office equipment under
non-cancelable operating leases which expire through April 1999. The statement
of operations includes rent expense recognized on a straight-line basis over
the term of the leases.
Minimum annual rental payments under non-cancelable operating leases as of
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Years Ending
December 31,
<S> <C>
1995 $52,702
1996 7,615
1997 3,120
1998 2,427
1999 809
Thereafter --
-------
Total $66,673
-------
-------
</TABLE>
Rental expense of $65,070 has been charged to operations for the year ended
December 31, 1994.
Litigation - In 1991, the Company commenced a lawsuit against three of its
former employees and their then current employer. The lawsuit alleges that
the defendants wrongfully took numerous Company files, documents and other
papers containing confidential information, that the former employees breached
their duty of good faith to the Company and tortuously interfered with the
Company's prospective contractual and business relations and engaged in unfair
competition. The defendants asserted several counterclaims alleging that
Company personnel have made false statements regarding defendants, that the
Company refused to pay commissions, pay other forms of compensation and issue
stock options promised to the former employees. The defendants sought damages
of approximately $2,000,000 plus additional unspecified damages and costs.
On September 7, 1994 and January 9, 1995, partial settlements were made and
mutual releases were exchanged among two of the former employees, their
current employer, and the Company. A trial in the proceeding against the
third employee is scheduled to commence in late April 1995 [See Note 15].
Counsel for the Company has advised that at this stage in the proceedings,
counsel cannot offer
F-22
JUDICATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- -------------------------------------------------------------------------------
[9] Commitments and Contingencies [Continued]
an opinion as to the probable outcome. The Company and Counsel believe the
counterclaim is without merit and the Company intends to vigorously defend its
position.
During 1993, a former employee of the Company filed a complaint of
discrimination against the Company. The complaint alleges that the employees'
employment was terminated pursuant to a sexually discriminatory reduction of
the Company's workforce. An estimate of the possible loss or range of loss in
regard to this matter cannot be made. Management believes there is no basis
for such action, and there has been no material change in this action to date.
In July 1994, a complaint was filed against the Company, charging the Company
with breach of contract and breach of fiduciary duty. The complaint seeks
damages in the amount of $262,290. The Company filed a motion to dismiss the
federal court action for lack of jurisdiction and failure to state a cause of
action. The parties stipulated to transfer the action to state court. The
plaintiffs have not re-filed the action in state court and currently there is
no action pending. Counsel to the Company is unable to render an opinion as to
the possible outcome of this matter. The Company believes the complaint is
without merit and intends to vigorously defend its position.
While it is not feasible to predict the outcome of all pending suits and
claims, based on the most recent review by management of these matters,
management is of the opinion that their ultimate disposition will not have a
material adverse effect upon the consolidated financial position, liquidity or
results of operations of the Company.
[10] Income Taxes
The Company has net operating loss carryforwards of approximately $12.8
million as of December 31, 1994, expiring in the years 1999 through 2008.
Statement of Financial Accounting Standards [SFAS] No. 109, "Accounting for
Income Taxes," which was adopted by the Company on January 1, 1993 requires
the establishment of a deferred tax asset for all deductible temporary
differences and operating loss carryforwards. The deferred tax asset
attributable to operating loss carryforwards amounted to approximately
5,500,000 at December 31, 1994. Because of the uncertainties surrounding the
generation of future taxable income, however, any deferred tax asset
established for utilization of the Company's tax loss carryforwards would
correspondingly require a valuation allowance of the same amount pursuant to
SFAS No. 109. Accordingly, no deferred tax asset is reflected in these
financial statements.
F-23
JUDICATE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
Sheet #8
- -------------------------------------------------------------------------------
[10] Income Taxes [Continued]
The approximate amount of the carryforwards and their expiration dates as of
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Expiring in Net
Years Ending Operating Loss Investment
December 31, Carryforwards Tax Credits
<S> <C> <C>
1999 $ 278,000 $ 1,500
2000 536,000 4,500
2001 1,243,000 --
2002 1,414,000 --
2003 1,574,000 --
2004 1,100,000 --
2005 579,000 --
2006 782,000 --
2007 2,945,000 --
2008 2,336,000 --
----------- -----------
$12,787,000 $ 6,000
----------- -----------
----------- -----------
</TABLE>
[11] Loss Per Share
Loss per share is determined by dividing the net loss by the weighted average
number of common shares outstanding during the year. The weighted average
number of common shares issued and outstanding for the year ended December 31,
1994 was 2,793,402. The weighted average number of shares have not been
adjusted for assumed conversion of stock options or warrants or any other
common stock equivalents since the effect of such conversion would be
anti-dilutive.
[12] Proposed Acquisitions
On December 7, 1994, the Company reached an agreement in principle with the
stockholders of Touche Manufacturing Company, Inc. ["TMCI"] and Touche
Electronics, Inc. ["TEI"] to acquire all of outstanding stock of TMCI and TEI.
At December 31, 1994, the Company has advanced $25,000 to TMCI as a good faith
deposit in connection with the proposed transaction. Such amount is included
in deposits at that date. Subsequent to December 31, 1994, the agreement in
principle expired. There can be no assurance that the acquisitions will be
consummated.
[13] New Authoritative Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards [SFAS] No.
109, "Accounting for Income Taxes," on January 1, 1993. Since that
implementation, the Financial Accounting Standards Board has issued eleven new
authoritative accounting pronouncements [SFAS's]. These new pronouncements
either do not apply to the Company, or will be implemented when the Company
engages in applicable transactions, such as making investments in certain debt
and equity securities, at which time the Company will implement SFAS No. 115.
None of these potentially applicable accounting pronouncements is anticipated
to have a material impact on the Company's financial statements.
F-24
JUDICATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- -------------------------------------------------------------------------------
[14] Subsequent Events
Private Placement - In March and April 1995, the Company, through a placement
agent, consummated the sale of fifty-eight units of its securities at a gross
sales price of $30,000 per unit. Each unit consisted of 20,000 shares of
Company common stock. The net proceeds to the Company, after placement fee
expenses of $217,500, were $1,522,500. The placement agent also received a
portion of its fee in the form of 116,000 options to purchase Company common
stock at an exercise price of $3.50 per share. These options expire March 31,
2000.
Acquisitions - As of the close of business on March 31, 1995, the Company
acquired 100% of the stock of Quest Electronic Hardware, Inc. ["Quest"], a
privately owned Company, in exchange for a 25% interest in Judicate, Inc. on a
fully diluted basis. Such acquisition was effected pursuant to a share
acquisition agreement, dated as of November 29, 1994. Pursuant to the Share
Agreement, the Company issued, at the closing of the transaction, 3,871,944
newly issued, fully-paid and non- assessable shares of common stock of the
Company, in exchange for all of the issued and outstanding shares of common
stock of Quest. As required by the Share Agreement, this number represented
25% of the outstanding Common Stock of the Company on a fully diluted basis.
The Company will account for such acquisition using purchase method of
accounting.
Simultaneously with the foregoing events, Quest acquired the fasteners
distribution business [the "Fasteners Business"] of Arrow Electronics, Inc., a
New York corporation ["Arrow"]. Such acquisition was effected on March 31,
1995, pursuant to a Purchase of Assets Agreement, dated as of November 29,
1994, by and between Quest and Arrow [the "Purchase Agreement"]. Under the
Purchase Agreement, Quest acquired the assets of Arrow used exclusively in
connection with Arrow's operations of the Fasteners Business. Such assets
include, but are not limited to, machinery, equipment, furniture, motor
vehicles and other personal property, inventories, rights [including accounts
receivable] under contracts, agreements, leases, permits and licenses [to the
extent assignable], expensed items, price lists and other documents. The
Company is using the acquired assets to continue the business of the Fasteners
Business.
The purchase for the acquisition of the Fasteners Business was a negotiated
fixed price. The price consisted of a cash payment of approximately $5 million
plus the assumption of certain liabilities of the Fasteners Business. As more
fully described below, the purchase price was funded through a combination of
proceeds of borrowings under a Loan and Security Agreement [as defined below],
the proceeds from the sale of the Company's securities under a private
placement and available cash.
Under a Loan and Security Agreement, dated as of March 31, 1995, by an between
Quest and Silicon Valley Bank [the "Loan Agreement"], Quest borrowed $2.2
million to partially fund the acquisition of the Fasteners Business. In order
to secure the obligations of Quest under the Loan Agreement, the Company
entered into a Stock Pledge Agreement, dated as of March 31, 995, with Silicon
Valley Bank [the "Bank"]. Under the terms of said agreement, the Company
pledged to the Bank the shares of capital stock of Quest which the Company
held at such date and in which the Company may thereafter acquire an interest.
In addition, Quest granted a security interest in substantially all of its
assets to the Bank.
An additional portion of the funds for the purchase price for the Fasteners
Business [approximately $1.5 million] was provided from the proceeds of the
private placement of noted above. The balance of the cash portion of the
purchase price for the Fasteners Business was provided by available cash.
F-25
JUDICATE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- -------------------------------------------------------------------------------
[14] Subsequent Events [Continued]
Pursuant to employment agreements dated November 29, 1994, by and between
Quest and two individuals, Quest has agreed to employ the individuals in
executive positions for a period of five (5) years unless terminated pursuant
to the terms of the agreements. In consideration of the services to be
provided by the executives, the Company is to compensate the executives at a
combined rate of $200,000 per annum during the term of the employment
agreements.
[15] Subsequent Event [Unaudited] Subsequent to the Date of the Report of
Independent Auditors
Litigation - On May 4, 1995, a settlement was agreed to between the Company
and the third employee described in Note 9. Upon execution of a mutual
release, the action is expected to be discontinued with prejudice.
. . . . . . . . .
F-26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this amendment to this report to be signed on its
behalf by the undersigned, thereunto duly authorized on August 28,
1995.
JUDICATE, INC.
By: /s/ STEPHEN J. DRESCHER
Stephen J. Drescher
Chairman and Chief Executive
Officer
In accordance with the Exchange Act, this amendment to this report
has been signed below by the following persons on behalf of this
registrant, and in the capacities indicated on August 28, 1995.
/s/ STEPHEN J. DRESCHER
Stephen J. Drescher
Chairman, Chief Executive
Officer and Director
(Principal Executive Officer)
/s/ MILTON M. ADLER
Milton M. Adler
Treasurer, Secretary and
Controller (Principal Financial
and Accounting Officer)
/s/ PAUL L. BURTON
Paul L. Burton, Director
Michael Minkoff, Director
/s/ MITCHELL HYMOWITZ
Mitchell Hymowitz, Director
Marc Powell, Director
/s/ DOMINIC A. POLIMENI
Dominic A. Polimeni, Director
