U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996.
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________.
Commission File number: 0-18248
JUDGE IMAGING SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 06-1184427
- ------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer ID)
incorporation or organization)
Two Bala Plaza, Bala Cynwyd, Pennsylvania 19004
- ----------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(610) 667-1190
(Issuer's telephone number)
Check whether the issuer (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
-- --
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years.
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
--- ---
Applicable only to corporate issuers
The number of shares outstanding of the issuer's common stock as of June
30, 1996 was 3,980,141
Transitional small business disclosure format. Yes No X
--- ---
JUDGE IMAGING SYSTEMS, INC.
<PAGE>
FORM 10-QSB INDEX
<TABLE>
<CAPTION>
NUMBER PAGE(s)
- ------ -------
<S> <C> <C>
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements:
Condensed Balance Sheets as of June 30, 1996
(Unaudited) and December 31, 1995 3
Condensed Statements of Operations (Unaudited)
for the six months ended June 30, 1996 and 1995 4
Condensed Statements of Operations (Unaudited)
for the three months ended June 30, 1996 and 1995 5
Condensed Statement of Shareholders' Deficiency (Unaudited)
for the six months ended June 30, 1996 6
Condensed Statements of Cash Flows (Unaudited)
for the six months ended June 30, 1996 and 1995 7
Notes to Condensed Financial Statements 8 - 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
PART II. OTHER INFORMATION 22
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports 22
SIGNATURES 23
FINANCIAL DATA SCHEDULE
</TABLE>
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
CONDENSED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 7,578 $ 11,310
Accounts receivable, net of allowance for doubtful accounts
of $10,000 in 1996 and $23,000 in 1995 2,116,094 1,471,916
Other receivables - 50,000
Inventories 782,153 515,099
Prepaid expenses and other 191,170 273,672
---------- ----------
Total current assets 3,096,995 2,321,997
---------- ----------
PROPERTY AND EQUIPMENT, NET 455,297 194,870
---------- ----------
OTHER ASSETS
Security deposits 19,603 14,063
---------- ----------
$3,571,895 $2,530,930
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft $ 550,000 $ -
Equipment note payable, current portion 20,055 15,150
Accounts payable and accrued expenses 791,376 891,829
Payroll and sales taxes payable 119,075 112,336
Advances from shareholders 115,723 139,906
Deferred revenue 273,690 46,111
Customer deposits 14,481 -
---------- ----------
Total current liabilities 1,884,400 1,205,332
---------- ----------
EQUIPMENT NOTE PAYABLE, NET OF CURRENT PORTION 59,638 53,233
---------- ----------
NOTE PAYABLE, BANK 1,406,960 1,538,425
---------- ----------
DUE TO AFFILIATE - 1,450,450
---------- ----------
MANDATORILY REDEEMABLE PREFERRED STOCK
$1,000 stated value, 1,500 shares issued and outstanding 1,520,000 -
---------- ----------
SHAREHOLDERS' DEFICIENCY
Common Stock, $0.01 and $0.005 par value,
10,000,000 shares authorized,
3,980,141 and 6,900,577 shares issued and outstanding
for 1996 and 1995, respectively 39,801 34,503
Preferred Stock, $0.10 par value,
3,665,770 shares issued and outstanding, 1995 - 366,577
Preferred Stock - Series A, $0.01 par value,
5,000,000 shares authorized,
822,628 shares issued and outstanding, 1996 8,226 -
Contributed capital 1,589,576 524,433
Accumulated deficit (2,936,706) (2,642,023)
---------- ----------
Total shareholders' deficiency (1,299,103) (1,716,510)
---------- ----------
$3,571,895 $2,530,930
========== ==========
</TABLE>
See Notes to Condensed Financial Statements.
- 3 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
NET REVENUES, including related party revenues
of $439,000 in 1996 and $364,000 in 1995 $6,156,523 $3,377,347
COST OF REVENUES 4,618,612 2,642,762
---------- -----------
GROSS PROFIT 1,537,911 734,585
OPERATING EXPENSES
Selling, general and administrative 1,741,659 858,799
----------- -----------
LOSS FROM OPERATIONS (203,748) (124,214)
OTHER EXPENSES, principally interest (90,935) (125,384)
------------ -----------
NET LOSS BEFORE PREFERRED DIVIDENDS (294,683) (249,598)
PREFERRED DIVIDENDS EARNED (75,600) (9,165)
------------ ------------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS ($ 370,283) ($ 258,763)
============ ===========
NET LOSS PER SHARE AND FULLY DILUTED
NET LOSS PER SHARE ATTRIBUTABLE
TO COMMON SHAREHOLDERS ($0.11) ($0.11)
====== ======
</TABLE>
See Notes to Condensed Financial Statements.
- 4 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
NET REVENUES, including related party revenues
of $210,000 in 1996 and $159,000 in 1995 $3,687,180 $1,398,548
COST OF REVENUES 2,652,753 1,244,432
------------ -----------
GROSS PROFIT 1,034,427 154,116
OPERATING EXPENSES
Selling, general and administrative 989,116 491,106
------------ -----------
INCOME (LOSS) FROM OPERATIONS 45,311 (336,990)
OTHER EXPENSES, principally interest (43,585) (68,322)
------------ -----------
NET INCOME (LOSS) BEFORE
PREFERRED DIVIDENDS 1,726 (405,312)
PREFERRED DIVIDENDS EARNED (56,700) (4,583)
------------- ------------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS ($ 54,974) ($ 409,895)
=========== ==========
NET LOSS PER SHARE AND
FULLY DILUTED NET LOSS PER SHARE
ATTRIBUTABLE TO COMMON SHAREHOLDERS ($0.01) ($0.18)
====== ======
</TABLE>
See Notes to Condensed Financial Statements.
- 5 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
CONDENSED STATEMENT OF SHAREHOLDERS' DEFICIENCY
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
SERIES A
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 6,900,577 $ 34,503 3,665,770 $ 366,577 -- $ --
ISSUANCE OF SERIES A
PREFERRED STOCK -- -- -- -- 822,628 8,226
CONVERSION OF PREFERRED
STOCK TO COMMON STOCK 3,665,770 366,577 (3,665,770) (366,577) -- --
MERGER TRANSACTIONS
(See Note 1) (6,586,206) (361,279) -- -- -- --
NET LOSS -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1996 3,980,141 $ 39,801 -- -- 822,628 $ 8,226
=========== =========== =========== =========== =========== ===========
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ------- -----
BALANCE, DECEMBER 31, 1995 $ 524,433 ($2,642,023) ($1,716,510)
ISSUANCE OF SERIES A
PREFERRED STOCK 1,088,611 -- 1,096,837
CONVERSION OF PREFERRED
STOCK TO COMMON STOCK -- -- --
MERGER TRANSACTIONS
(See Note 1) (23,468) -- (384,747)
NET LOSS -- (294,683) (294,683)
----------- ----------- -----------
BALANCE, JUNE 30, 1996 $ 1,589,576 ($2,936,706) ($1,299,103)
=========== =========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
- 6 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($294,683) ($249,598)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 34,539 19,658
Provision for doubtful accounts 13,000 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts and other receivables (553,051) (126,365)
Inventories (227,953) (77,816)
Prepaid expenses and other 87,742 (25,698)
Increase (decrease) in:
Bank overdraft 550,000 -
Accounts payable and accrued expenses (182,540) 80,989
Payroll and sales taxes payable 6,739 (89,473)
Deferred revenue (72,196) (234)
Customer deposits (47,781) -
---------- ----------
Net cash used in operating activities (686,184) (468,537)
---------- ----------
INVESTING ACTIVITIES
Net cash used in investing activities,
purchases of property and equipment (121,550) (20,443)
---------- ---------
FINANCING ACTIVITIES
Cash acquired in business combination 13,786 -
Repayments of advances to shareholders (24,183) (19,098)
Principal payments on equipment note borrowings (12,072) (5,294)
Advances from affiliates 69,550 95,059
Proceeds from (repayments of) notes payable, bank (131,465) 417,299
Issuance of Series A Preferred Stock, net 888,386 -
---------- ----------
Net cash provided by financing activities 804,002 487,966
---------- ----------
DECREASE IN CASH (3,732) (1,014)
CASH, JANUARY 1, 11,310 3,782
---------- ----------
CASH, JUNE 30, $ 7,578 $ 2,768
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the six months for interest $ 90,834 $100,123
========== ========
</TABLE>
See Notes to Condensed Financial Statements.
- 7 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business
Judge Imaging Systems, Inc. (the "Company") derives its
revenues from computer sales, repairs, maintenance and providing
system integration for document management, imaging and workflow,
principally in the mid-Atlantic and northeastern region of the
country. The Company also develops and markets standardized and
custom software products and systems for the mass storage,
electronic management and retrieval of information. As a systems
integrator, the Company designs, assembles, installs and
maintains image-processing systems. The Company's standardized
products are sold both through distribution channels and directly
to end-users.
Financial information with regard to the six months and
the three months ended June 30, 1996 and 1995, is unaudited but
in the opinion of management contains all adjustments which are
of a normal, recurring nature and necessary to present fairly the
Company's results of operations and cash flows. Certain
information and footnote disclosure normally included in annual
financial statements have been condensed or omitted in the
financial information for the six and three months ended June 30,
1996 and 1995 pursuant to SEC Rules and Regulations. Management
believes that the disclosures which have been made are adequate.
The results of operation for the six and three months
ended June 30, 1996 are not necessarily indicative of the results
to be expected for the full year.
The financial information with regard to the statement of
operations for the six months ended June 30, 1995 and the
December 31, 1995 balance sheet are that of Judge Computer
Corporation ("Judge") (considered the acquiring corporation for
accounting purposes, as described in "Business Combination"). The
statement of operations for the six months ended June 30, 1996
includes six months of Judge operations and four months (from
February 29, 1996, the effective date of merger) of DataImage,
Inc.'s operations. The statement of operations for the three
months ended June 30, 1996 includes three months of Judge
operations and three months of DataImage, Inc.'s operations.
At June 30, 1996, the Company is a 26% owned subsidiary of
Judge, Inc., a company who, along with other of its subsidiaries,
provides engineers and other technical professionals on a
temporary and permanent basis. An additional 49% of the Company's
voting stock is owned by individuals who are also shareholders of
Judge, Inc.
- 8 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Business Combination
On September 13, 1995, Judge Imaging Systems, formerly
known as DataImage, Inc. (the "Registrant" and sometimes the
"Surviving Corporation") entered into a Letter of Intent with
respect to a proposed merger transaction between the Registrant
and Judge.
On December 1, 1995, the Registrant and Judge executed the
Agreement and Plan of Merger (the "Merger Agreement") with
respect to the merger transaction proposed by the Letter of
Intent. The Merger Agreement was amended effective December 20,
1995 and February 26, 1996.
During 1996 and prior to the consummation of the Merger,
Judge had the following equity transactions:
* 3,665,770 shares of Company preferred stock were converted
into Company common stock;
* The Company's Board of Directors resolved to increase the
authorized preferred stock by 1,150,000 shares and divide
such shares into 1,125,000 shares of Series A Convertible
Preferred Stock, par value of $.01 and 25,000 shares of
Series B Preferred Stock, par value $.01;
* $1,520,000 of advances from Judge, Inc./Judge Technical
Services, Inc. were converted into 1,500 shares of Company
Series B Preferred Stock;
* The Company raised approximately $888,000 (net of related
costs of approximately $208,000) in a private placement
offering of Series A Convertible Preferred Stock. 822,628
shares were issued in the offering at a price per share of
$1.33. The Preferred A Stock is convertible at the
holder's option into an equivalent number of common
shares, and conversion is mandatory at the time of a
subsequent public offering of common stock in excess of $5
million dollars. The Series A Convertible Preferred Stock
carries a cumulative dividend of 7% per year and holders
will have a liquidation preference prior to the common
stock shareholders and all other existing classes. In the
event Judge Imaging System, Inc. (the surviving company)
has not closed on a subsequent public offering by the
eighth anniversary of the merger, then the Company will
have the right to redeem the stock.
- 9 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
The merger transaction was consummated effective February
29, 1996. A brief summary of the merger transaction follows:
* In the merger, Judge, a privately-owned corporation, was
merged into DataImage, Inc. ("DataImage") with DataImage
as the surviving entity in the merger. Following the
merger, the separate existence of Judge ceased, and
DataImage continued as the surviving corporation under
Delaware law using the name "Judge Imaging Systems, Inc."
(the "Surviving Corporation") with all of the rights,
powers, and privileges, and subject to all of the duties
and liabilities of DataImage and Judge combined. Following
the merger, the Surviving Corporation continued to be a
public reporting company;
* At the effective time of the merger, the Certificate of
Incorporation of DataImage as the Surviving Corporation
was amended to: change its name to Judge Imaging System,
Inc., and to authorize a class of 5,000,000 shares of
preferred stock (the "Preferred Stock") in addition to the
10,000,000 shares of common stock previously authorized
("Common Stock"). The 5,000,000 shares of Preferred Stock
are divided into 1,125,000 shares of Series A Convertible
Preferred Stocks and 1,500 shares of Series B Convertible
Stock; the remaining shares of Preferred Stock are "blank
check" shares issuable at the discretion of the Board of
Directors of the Surviving Corporation. The Series A
Convertible Preferred Stock and the Series B Convertible
Preferred Stock of the Surviving Corporation have
essentially the same rights and privileges as the Series A
Convertible Preferred Stock and the Series B Preferred
Stock of Judge existing immediately prior to the merger.
The Series A Convertible Preferred Stock is convertible
into Common Stock at a 1 to 1 ratio, has a preference in
liquidation, and bears a 7% cumulative dividend. The
Series B Preferred Stock is nonvoting, nonconvertible, has
no liquidation preference, and bears a 10% cumulative
dividend;
* At the effective time of the merger, each DataImage
shareholder automatically received one share of Surviving
Corporation Common Stock in exchange for every 31.960868
shares of issued and outstanding DataImage Common Stock
owned by such shareholder as of the effective time of the
merger;
* At the effective time of the merger, each holder of Judge
Common Stock automatically received shares of Surviving
Corporation Common Stock. The number of shares received
was calculated as one share of Surviving Corporation
Common Stock for every 2.832693723 shares of Judge Common
Stock held;
- 10 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
* At the effective time of the merger, each Judge
shareholder received one share of Surviving Corporation
Series A Convertible Preferred Stock for each share of
Judge Series A Convertible Preferred Stock held, and one
share of Surviving Corporation Series B Preferred Stock
for each share of Judge Series B Preferred Stock held;
* The conversion ratios were calculated so that, after
giving effect to certain reserved shares for issuance to
employees following the merger and assuming the sale of
the maximum number of Series A Convertible Preferred Stock
available in the private placement and the conversion of
all Series A Convertible Preferred Stock to Common Stock,
there would be approximately 5,000,000 shares of Common
Stock of the Surviving Corporation outstanding immediately
following the merger, of which holders of DataImage Common
Stock immediately prior to the merger were to receive in
the aggregate approximately 5% (approximately 250,000
shares) and the holders of Judge Common Stock and Series A
Convertible Preferred Stock immediately prior to the
merger were to receive in the aggregate approximately 95%
(approximately 4,750,000 shares). The Series B Preferred
Stock was not included in the foregoing percentage
calculations. As a result, the Business Combination was
accounted for as a "reverse acquisition" whereby Judge, in
substance, acquired DataImage, allocating the fair value
of Judge stock exchanged over the relative fair value of
assets and liabilities of DataImage (assumed to equal its
book value) prior to Judge being merged into DataImage
(surviving corporation). No value was ascribed to
DataImage's net loss carryforwards as a result of
limitations on these carryforwards subsequent to the
change in control. The Surviving Corporation remained a
registrant under the Securities and Exchange Commission
Rule.
As a consequence, a change in control of the Registrant
occurred effective upon the consummation of the merger. The
consideration given for such change in control is the exchange of
certificates described in the Merger Agreement and previously
described above. The basis of the change in control includes a
change in the Directors of the Registrant and change in the share
ownership of the Registrant.
- 11 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
The persons from whom control of the Registrant was
acquired upon the merger pursuant to the exchange of securities
described above were Canaan Capital Limited Partnership and
Canaan Capital Offshore Limited Partnership C.V. (collectively
the "Partnerships"). The Partnerships acquired control of the
Registrant pursuant to an agreement with the Registrant dated
November 20, 1995 (the "Agreement"). As a result of the
Agreement, the Partnerships immediately acquired an aggregate of
1,700,000 shares of DataImage Common Stock in addition to the
362,499 shares previously held, resulting in the ownership by the
Partnerships as of the record date of the Special Meeting of
Shareholders of approximately 51.4% of the issued and outstanding
shares of DataImage Common Stock, and effective voting control of
the Registrant as of such date. As a further result of the
Agreement, immediately prior to the closing of the merger, the
Partnerships acquired in the aggregate an additional 3,980,214
shares of DataImage Common Stock, resulting in the ownership as
of the closing of the proposed merger transaction by the
Partnerships of 6,042,713 of the 7,990,217 shares issued and
outstanding at that time, representing approximately 75.6% of
such issued and outstanding shares of DataImage Common Stock.
Judge and DataImage anticipate that the merger transaction
qualifies as a "reorganization" to Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), and that Judge and
DataImage are each a party to the reorganization within the
meaning of section 368(b) of the Code. Judge and DataImage
further anticipate that no gain or loss has been recognized by
Judge or DataImage by reason of the merger.
At June 30, 1996, the capital structure of the Company is
as follows:
Common Stock -
$.01 par value, 10,000,000 shares authorized, 3,980,141
shares issued and outstanding;
Preferred Stock -
5,000,000 shares authorized divided into 1,125,000 shares
of Series A, 1,500 shares of Series B with the remainder
"blank check" shares; 822,628 shares of Series A issued
and outstanding and 1,500 shares of Series B issued and
outstanding.
- 12 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Revenue Recognition and Deferred Revenues
Revenues are recorded as income in the period in which the
merchandise is shipped or the services are rendered. Revenues
billed in advance for warranties and maintenance contracts are
deferred and recorded as income in the period in which the
services are rendered.
Revenue from sales of the Company's image-processing
systems is recognized at the date of shipment of the system,
provided that any work to complete installation of the systems is
routine in nature and costs are not significant. The system
components are assembled and tested with the developed software
in the Company's facilities prior to delivery. Where installation
is significant to the completion of the contract revenue is
recognized when the installation is completed and accepted by the
customer.
Software incorporated into the systems is licensed under a
perpetual, non-exclusive, non-transferable license, and revenue
is recognized as part of the completed system. Service contract
revenue is recorded ratably over the term of the contract.
Substantially all service contracts expire within the year ending
December 31, 1996.
At June 30, 1996, $273,690 of warranty, maintenance and
service contract revenue has been deferred.
Inventories
Inventories of computer and related supplies and equipment
held for resale are valued at the lower of cost (first-in,
first-out) or market.
Management's Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumption that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
- 13 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Income Taxes
Deferred taxes are accounted for in accordance with
Statement of Financial Accounting Standards ("Statement") No.
109, "Accounting for Income Taxes." The Statement requires the
use of the liability method to account for income taxes. Deferred
income taxes are provided for the difference between the tax
basis of an asset or liability and its reported amount in the
financial statements at the currently enacted tax rates that are
expected to be in effect when the taxes are actually paid or
recovered.
Deferred income taxes arise principally from temporary
differences between financial and income tax reporting, including
differences relating to depreciation methods used, amounts
recorded for inventory capitalization, the availability of net
operating loss carryforwards and certain other differences.
Deferred income tax assets are reduced by a valuation allowance
when, based on the weight of evidence available, it is more
likely than not that some portion or all of the deferred tax
assets will not be realized.
Deferred income taxes are primarily the result of net
operating loss carryforwards and are completely reduced by a
valuation allowance at June 30, 1996.
Net Income (Loss) Per Share
Net income (loss) per share and fully diluted net income
(loss) per share attributable to common shareholders is based on
the weighted average number of shares of common stock outstanding
during the periods. The assumed conversion of certain convertible
preferred stock has not been considered in the calculations of
loss per share in 1996, since the effect of such
conversions/exercise would be antidilutive. The weighted average
number of shares outstanding during the six months ended June 30,
1996 and 1995 were 3,435,436 and 2,333,204, respectively. The
weighted average number of shares outstanding, primary and fully
dilutive, during the three months ended June 30, 1996 and 1995
were 3,980,141 and 2,333,204, respectively.
- 14 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 2. PRO-FORMA RESULTS OF OPERATIONS
The following sets forth the combined results of
operations for both Judge and DataImage for the six months ended
June 30, 1996 and 1995, as if the Business Combination occurred
at January 1, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $3,687,180 $1,635,565 $6,279,215 $4,023,274
Cost of Revenues 2,652,753 1,345,172 4,679,062 3,015,388
---------- ---------- ----------- -----------
Gross Profit 1,034,427 290,393 1,600,153 1,007,886
Operating Expenses:
Selling, general
and administrative 989,116 633,685 1,826,805 1,190,922
------------ ----------- ------------ ------------
Income (Loss) from Operations 45,311 (343,292) (226,652) (183,036)
Other Income (Expenses), net (43,585) (80,991) (90,952) (140,056)
------------- ------------ ------------- ------------
Net Income (Loss) $ 1,726 ($ 424,283) ($ 317,604) ($ 323,092)
============= =========== ============ ============
</TABLE>
Notes to Pro-Forma results of Operations:
(1) Interest expense adjusted due to the conversion of
DataImage, Inc.'s stockholders' notes payable to common
stock.
(2) Primary and fully-diluted net income (loss) per share of
common stock is calculated as follows (the assumed
conversion of certain convertible preferred stock has not
been considered in the calculation since the effect of
such conversion would be antidilutive):
- 15 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 2. PRO-FORMA RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ----------------------------------
1996 1995 1996 1995
------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net Income (Loss) $ 1,726 ($ 424,283) ($ 317,604) ($ 323,092)
7% Cumulative Dividend On
Series A Preferred Stock (19,200) (19,200) (38,400) (38,400)
Less 10% Cumulative Dividends
On Series B Preferred Stock (37,500) (37,500) (75,000) (75,000)
------------- ------------ ------------- -------------
Net Loss Attributable To
Common Shareholders ($ 54,974) ($ 480,983) ($ 431,004) ($ 436,492)
============ ============ ============ ============
Weighted Average Number of Shares 3,980,141 3,980,141 3,980,141 3,980,141
========= ========= ========= =========
Net Loss Per Share Attributable To
Common Shareholders ($0.01) ($0.12) ($0.11) ($0.11)
====== ====== ====== ======
</TABLE>
- 16 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 3. NOTE PAYABLE, BANK
During 1995, the Company consolidated its line of credit
along with certain affiliated entities lines into a $5,500,000
line of credit. During 1996, the Bank line of credit was
increased to $6,400,000. Outstanding borrowings relating to the
Company at June 30, 1996 were $1,406,960. Interest on the line is
prime plus 1% (9.5% at December 31, 1995). Maximum borrowings
under the new facility are limited to 80% of qualified accounts
receivable, as defined. The line of credit was originally due in
full on May 31, 1997, but was extended by the Bank until 1998.
The line is collateralized by substantially all of the Company's
assets as well as substantially all of Judge, Inc., and Judge
Technical Services, Inc.'s assets, is personally guaranteed by
certain shareholders and certain affiliated companies. The line
contains financial covenants, certain of which were in violation
at June 30, 1996 but which were waived by the Bank. In addition,
the Company, as well a each of its affiliates, is jointly and
severally responsible for all of the debt outstanding under the
line.
NOTE 4. RELATED PARTY TRANSACTIONS
The Company had advances from Judge, Inc. and Judge
Technical Services, Inc. amounting to $1,450,450 at December 31,
1995. These advances increased to $1,520,000 during the first
quarter of 1996. At the effective time of the Merger, these
advances were converted into 1,500 shares of Company Series B
Preferred Stock (the "shares"). The shares are not convertible,
nor do they have any liquidation preference and carry a 10%
cumulative annual dividend. Dividend payments are permitted,
contingent upon certain profit goals set forth by the Company.
Partial and full redemption of the $1,500,000 face amount is
permitted, contingent upon the dollar value of proceeds raised in
a subsequent public offering. Subsequent to the closing of the
Merger, such shares were converted into 1,500,000 shares of
Series B Preferred Stock of the surviving corporation from the
merger. The Surviving Corporation shares have the same rights and
privileges as the predecessor shares, and are mandatorily
redeemable automatically upon the tenth anniversary of issuance
or upon a subsequent public offering of at least $6,000,000.
During the six months ended June 30, 1996 and 1995, the
Company billed a subsidiary of Judge, Inc. for consulting and
related technical advisory services in the amount of $45,000 and
$240,000, respectively. Such amounts are included in net revenues
in the accompanying statement of operations. During the six
months ended June 30, 1996 and 1995, the Company sold
approximately $394,000 and $124,000, respectively, of
computer-related equipment to Judge, Inc. and/or its
subsidiaries.
- 17 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 5. PREFERRED STOCK
Holders of preferred stock at December 31, 1995 were
entitled to vote as a single class with the holders of the
Company's common stock. In addition, holders of preferred stock
were entitled to receive cumulative dividends at the annual rate
of $.005 per share. Cumulative dividends in arrears at December
31, 1995 were approximately $74,000. No dividends were declared
or paid in 1995. During 1996, preferred stockholders waived such
dividends due and converted their preferred stock into common
stock (see Note 1).
NOTE 6. STATEMENT OF CASH FLOWS
Supplemental Disclosure of Noncash Financing Transactions:
During 1996, $1,520,000 of advances from affiliates were
converted to mandatorily redeemable preferred stock.
During 1996, $366,577 of preferred stock was converted to common
stock.
During 1996, a $50,000 note receivable was forgiven due to the
Business Combination.
Supplemental Disclosure of Noncash Investing Activities:
During 1996, the Company entered into certain financing
arrangements for the purchase of property and equipment in the
amount of approximately $23,000.
During 1996, the Company entered into certain financing
arrangements for the purchase of property and equipment in the
amount of approximately $15,000.
- 18 -
<PAGE>
JUDGE IMAGING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NOTE 6. STATEMENT OF CASH FLOWS (Continued)
Supplemental Disclosure of Noncash Investing and Financing
Activities:
Effective February 29, 1996, Judge Computer Corporation and
DataImage effected a Business Combination:
<TABLE>
<S> <C>
Acquisition of Business:
Inventories $ 39,101
Accounts Receivable 104,127
Property and Equipment 150,034
Other Assets 10,780
---------
304,042
Accounts Payable and Accrued Expenses (82,087)
Due to Judge (100,000)
Deferred Revenue and Customer Deposits (362,037)
---------
(544,124)
---------
Net liabilities assumed in Business Combination ($240,082)
=========
</TABLE>
- 19 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE SECOND
QUARTER ENDING AND THE SIX MONTHS ENDING JUNE 30, 1996
Results of Operation
Second quarter 1996 and six months ending June 30, 1996 compared to second
quarter 1995 and six months ending June 30, 1995.
The Company reflected an improvement in operations for the second quarter
1996 by generating income before preferred dividends of $1,726 versus a loss of
$405,312 for the second quarter of 1995. This result is attributable to a 164%
increase in net revenue and a corresponding increase in gross profit margin from
11% to 28%, but was also offset by an increase operating expenditures of 101%
compared to the corresponding period in 1995.
For the six months ending June 30, 1996, however, the Company reflected a
loss before preferred dividends of $294,683 versus a loss for the same period
in 1995 of $249,598. This $45,085 increase in loss is due primary to increased
Operating Expenses (selling, general and administration) which was primarily due
to increases in staffing necessary to support the revenue growth. Preferred
dividends earned increased by $52,117 for the second quarter of 1996 as compared
to the second quarter of 1995, and increased $66,435 for the six months ended
June 30, 1996 compared to June 30, 1995. These increases are a result of the
issuance of additional preferred stock to certain investors concurrent with the
effectiveness of the merger with DataImage, Inc. on February 29, 1996.
Backlog of orders as of June 30, 1996 was $1,800,000 compared to $703,000
at June 30, 1995. This 156% increase is primarily attributable to increased
business in the Company's imaging operations.
Revenues for the second quarter of 1996 increased 164% as compared to
revenues for the second quarter of 1995. This increase is attributable to a 70%
increase in network and service revenues as compared to the network and service
revenues for the second quarter of 1995, as well as a 449% increase in the
imaging revenues for the second quarter of 1996. Revenues for the six months
ending June 30, 1996 increased 82% as compared to the same period for 1995. This
increase is mostly attributable to the above-referenced increase in imaging
revenues, which was associated with the Company's increased marketing effort.
Gross profit margin for the second quarter of 1996 was 28% versus 11% for
the second quarter of 1995. This increase in margin is a result of the
realization of economies of scales as well as an increase in imaging revenues,
which produce higher margins. For the same reasons, the gross profit margin for
the six months ending June 30, 1996 increased to 25% versus 22% for the same
period in 1995.
Operating expenditures increased approximately 100% both for the second
quarter of 1996 and the six months ending June 30, 1996 versus the comparable
periods in the prior year. This increase is primarily attributable to the
Company's increase in staffing associated with increased sales. Staffing levels
increased to 85 employees as of June 30, 1996 versus 50 employees as of June 30,
1995.
- 20 -
<PAGE>
Liquidity and Capital Resources
The Company's principal lender has agreed to increase the Company's credit
facility to accommodate its continued growth. The Company believes that the
increase in the bank credit facility as well as cash generated from operations
will be sufficient to support the anticipated level of operations and capital
expenditures through fiscal 1996.
Financial Condition at June 30, 1996 versus December 31, 1995.
Current assets increased to $3,096,000 as of June 30, 1996 from $2,322,000
as of December 31, 1995. This increase was primarily attributable to an increase
in receivables of $644,000 associated with the increased sales, with the balance
of the increase originating from higher inventory levels. Offsetting the
increase in current assets of $775,000 was an increase in current liabilities of
$679,000. These accounts reflect the increased liabilities attributable to a
higher level of business activity, increased revenues and the merger of
DataImage, Inc.
Property, plant and equipment increased from $195,000 as of December 31,
1995 to $455,000 as of June 30, 1996. This increase reflects the DataImage
acquisition as well as the equipment needed to support the Company's revenue
growth.
Notes payable to the Company's principal lender decreased in the second
quarter by $131,000 from December 31, 1995, due to the utilization of a portion
of the private placement proceeds. The line of credit relating to notes payable
contains financial covenants, certain of which were in violation at June 30,
1996 but which were waived by the lender. The Company received net cash proceeds
from the issuance of Preferred Series "A" stock on February 29, 1996 of cash of
approximately $888,000, which provided working capital to assist the Company's
growth in 1996.
- 21 -
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
(a) There has been no material default in the payment of principal,
interest, a sinking or purchase fund installment, or any other material default
not cured within thirty (30) days with respect to any indebtedness of the
Registrant.
(b) There has been no material arrearage in the payment of dividends
and there has been no material delinquency not cured within thirty (30) days,
with respect to any class of preferred stock of the registrant or with respect
to any class of preferred of any significant subsidiary of the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Effective as of July 31, 1996, the Board of Directors of the
Registrant (the "Board") increased the size of the Board to five members
and Messrs. Robert E. Keith, Jr. and Marvin Demchick were duly appointed by the
Board of Directors to fill the two vacancies created thereby.
Item 6. Exhibits and Reports on Form 8-K.
LIST OF EXHIBITS
Exhibit
Number Exhibit Name
3(i)(a) Second Restated Certificate of Incorporation of the Company, effective
February 29, 1996. Exhibit 3(i)(a) of the Registrant's Report on Form
10-QSB/A filed June 14, 1996 is herein incorporated by reference.
3(ii)(a) By-laws of the Company, effective April 10, 1996. Exhibit 3(ii)(a) of
the Registrant's Report on Form 10-QSB/A filed June 14, 1996 is herein
incorporated by reference.
27 Financial Data Schedule
- 22 -
<PAGE>
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
JUDGE IMAGING SYSTEMS, INC.
Date: August 13, 1996 By: /s/ Martin E. Judge, Jr.
--------------- ------------------------
Martin E. Judge, Jr.
Chief Executive Officer
Date: August 13, 1996 By: /s/ Jeffrey J. Andrews
--------------- ----------------------
Jeffrey J. Andrews
Chief Financial Officer
- 23 -
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Name
- ------ ------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,578
<SECURITIES> 0
<RECEIVABLES> 2,126,094
<ALLOWANCES> 10,000
<INVENTORY> 782,153
<CURRENT-ASSETS> 3,096,995
<PP&E> 455,297
<DEPRECIATION> 34,539
<TOTAL-ASSETS> 3,571,895
<CURRENT-LIABILITIES> 1,884,400
<BONDS> 1,466,598
1,520,000
8,266
<COMMON> 39,801
<OTHER-SE> (1,347,130)
<TOTAL-LIABILITY-AND-EQUITY> 3,571,895
<SALES> 3,687,180
<TOTAL-REVENUES> 3,687,180
<CGS> 2,652,753
<TOTAL-COSTS> 3,641,869
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 43,585
<INCOME-PRETAX> 1,726
<INCOME-TAX> 0
<INCOME-CONTINUING> (54,974)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (54,974)
<EPS-PRIMARY> ($.01)
<EPS-DILUTED> ($.01)
</TABLE>
