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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 1999
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 NO. 0-21963
JUDGE.com, INC.
(formerly The Judge Group, Inc.)
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1726661
(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
TWO BALA PLAZA, SUITE 800
BALA CYNWYD, PENNSYLVANIA 19004
(Address of principal executive offices, including zip code)
(610) 667-7700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
- ------------------- -----------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.01 Par Value NASDAQ Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ ]
As of March 15, 2000, the approximate aggregate market value of the
voting stock held by non-affiliates of the Registrant was $24,064,920 based on
the closing sales price of $3.00 of the Registrant's Common Stock on the NASDAQ
Stock Market.
As of March 15, 2000, 13,940,651 shares of the Registrant's Common
Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions, as expressly described in this Report, of the
Registrant's Proxy Statement for the 2000 Annual Meeting of the stockholders, to
be filed within 120 days of December 31, 1999, are incorporated by reference
into Part III, Items 10 - 13, of this Report.
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
PART I
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. ALL FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY.
FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND
ANALYSIS - FORWARD LOOKING INFORMATION." READERS SHOULD CAREFULLY REVIEW THE
RISKS DESCRIBED IN THIS AND OTHER DOCUMENTS THAT THE COMPANY FILES FROM TIME TO
TIME WITH THE SECURITIES AND EXCHANGE COMMISSION. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY TO THE
DATE OF THIS ANNUAL REPORT ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLICLY RELEASE ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.
ITEM 1. BUSINESS
GENERAL
Judge.com, Inc. (the "Company") (formerly The Judge Group, Inc.),
incorporated in Pennsylvania in June 1970, services the information technology
("IT") and engineering needs of its clients by providing IT and engineering
personnel on both a temporary contract basis ("technical consultants") and on a
permanent basis, and by providing standard and customized IT training for
established and emerging software applications.
The Company provides technical consultants skilled in a variety of fields,
such as software applications programming and development, client/server
technology, legacy systems conversion, software architecture and design, data
communications, systems engineering, Internet/Web-Site design, project
consulting, project management, and Help Desk management. Technical consultants
are provided on a nationwide basis through the Company's National Division, and
on a regional and local level through a network of 11 offices in 10 states. The
Company maintains a database of approximately 170,000 technical consultants, and
in 1999 provided over 1,850 technical consultants to approximately 650 clients.
The Company provides IT and engineering personnel on a permanent basis to
clients nationwide through a network of 8 offices in 7 states, and maintains a
database of approximately 180,000 candidate professionals. In 1999 the Company
placed 995 candidates with more than 480 clients.
The Company provides training on a range of software and network
applications to the Company's technical consultants and in-house personnel, as
well as to corporate, governmental, and individual clients. It currently offers
licensed diploma courses, certificate courses, and more than 130 open-enrollment
courses, either in its own computer labs or at client locations. In addition to
expanding the Company's range of technical service offerings, the training
business assists the Company in identifying emerging technologies and
integrating such technologies into its organization.
In February 2000 the Company announced a new service of on-line recruiting
through a website which contains both on-line resumes and job postings. This
service is intended to provide a regional job board specifically tailored to the
IT industry. Initially the Company is offering the service in its headquarters
region, and plans to expand this targeted service on a regional basis throughout
the United States.
1
In January 1999 the Company reorganized its four operating units into
two business segments to enable financial analysis that more closely tracks its
lines of business. The Company's Contract Placement, Permanent Placement and IT
Training operating units were consolidated within the IT Staffing segment. The
Information Management Solutions ("IMS") business was the other segment, which
the Company adopted a plan to dispose of in June 1999. The IMS business had
provided computer network and document management system integration,
implementation, maintenance and training. Through sales occurring in June
through August 1999, the Company divested substantially all of the assets of the
IMS business. The results of operations of the IMS business are shown separately
in the accompanying consolidated statements of operations as "loss from
discontinued operations".
CONTINUING OPERATIONS
The Company has provided IT and engineering personnel on a permanent basis
since the Company was founded in 1970. Permanent placements generated revenues
of $8.6 million, $11.2 million, and $12.5 million in 1997, 1998 and 1999
respectively, representing 10.4%, 11.7%, and 11.0% of total Company revenues for
the respective periods. The Company provides IT and engineering personnel on a
permanent basis nationwide through its regional offices in Bala Cynwyd,
Pennsylvania; Edison, New Jersey; Tampa, Florida; Needham, Massachusetts;
Dallas, Texas; Atlanta, Georgia; and Chicago, Illinois. The Texas, Georgia, and
Illinois locations were added through an acquisition in 1998, while the
Massachusetts location was a new operation in 1998 sharing office space in the
location where the Company has previously provided contract placements. In early
2000 the Company began providing permanent placement services from its
Jacksonville, Florida office, which was initially opened to provide contract
placements. A significant portion of the Company's engineering placements are in
food related industries and, to a lesser extent, the pharmaceutical industry.
The Company maintains a database of over 180,000 engineering and IT candidate
professionals, and in 1999 it placed 995 professionals with more than 480
clients. As compensation for its service, the Company receives a fee based on a
percentage of each placed professional's first year salary, subject to
forfeitures if the placed professional leaves such position during a standard
period (typically thirty days).
In 1986 the Company began to provide technical consultants on a temporary
contract basis, which generated revenue of $70.6 million, $81.6 million and
$98.7 million in fiscal 1997, 1998 and 1999 representing 86.0%, 85.7% and 86.8%
of the Company's consolidated net revenues in those periods, respectively. The
Company provides IT, engineering and other professional consultants on a
contract basis to organizations with complex technology and staffing needs
through its regional offices in Bala Cynwyd, Pennsylvania; Edison, New Jersey;
Alexandria, Virginia; Needham, Massachusetts; Providence, Rhode Island; Walled
Lake, Michigan; Raleigh and Charlotte, North Carolina; Nashville, Tennessee;
Jacksonville, Florida; and nationally through its National Division based in
Providence. In early 2000 the Company began to provide technical consultants in
its Atlanta, Georgia office, which had previously provided only permanent
placements. The Company maintains a database of approximately 170,000 technical
consultants, and in 1999 placed over 1,850 consultants with approximately 650
clients. Typical engagements range in duration from six to twelve months, though
some of the Company's technical consultants have been performing services for
its clients for a period of more than seven years. The Company's technical
consultants and independent contractors often work jointly with clients'
in-house IT personnel. This aspect of the Company periodically experiences
diminished revenue growth in the fourth quarter due to the effect of the
Thanksgiving and Christmas holidays. Further, revenues can be depressed in the
first quarter due to the effect of winter weather which can prevent contractors
from performing billable services.
The majority of the Company's contract business is derived from providing
technical consultants skilled in IT and software engineering. In addition to
staff augmentation, the Company provides project consulting services, which can
include project management, workflow analysis, database design, custom software
applications and system integration. In a project management engagement, which
can be on either a fixed fee or a time and material basis, the Company will
typically oversee an entire IT project from inception to completion, utilizing
technical consultants with specialty skills in the relevant technologies.
2
The Company has expanded the type of skilled personnel its contract
placement business is capable of providing to such diverse areas as finance,
life sciences, desktop publishing, PC support and help desk, and human
resources. During 1999 the Company increased the hiring of technical consultants
as "bench employees", which are full time Company employees that receive lower
hourly rates than technical consultants that are retained on a per job basis.
Bench employees are paid their hourly rate even if they are not billed to a
client. The use of bench employees increases the Company's profit margin due to
the lower hourly rate paid the employee. However, there would be an adverse
effect on net income if bench employees were not fully occupied for clients. In
the past the Company has focused its efforts on attracting and placing
contractors with more specialized skills thereby enabling the Company to achieve
higher margin placements.
Originally established in 1991, the National Division provides both
engineering and IT personnel on a contract basis nationwide, primarily to larger
national corporations. Revenue attributable to the National Division was $11.3
million, $12.4 million, and $13.6 million in 1997, 1998, and 1999, respectively,
representing 13.8%, 13.0% and 12.0% of total Company revenues for the respective
periods.
The Company has provided IT training since September 1996, when it
acquired an IT training business. It provides training in a variety of software
and network applications and generated revenue of $3.2 million, $3.0 million,
and $3.1 million in 1997, 1998, and 1999, respectively, which represented 3.9%,
3.1%, and 2.7% of the Company's consolidated net revenues during such periods,
respectively. The Company provides IT training services at its facility in Bala
Cynwyd, Pennsylvania and at various off-site locations. The Company delivers
certified training for all Microsoft products at its location. It provides
custom IT training for clients across all hardware and software platforms,
dependent on the needs and requirements of the client. The IT training business
is an authorized training center for many major software manufacturers,
including Microsoft Corporation, Adobe Systems Incorporated, Quark, Inc., Core
Corporation, and Claris Corporation, and is also an approved Apple Training
Alliance Center. The Company is a Microsoft Solutions Provider and Certified
Technical Education Center. The Company's diploma programs in Desktop
Publishing, Business Software, Multimedia and Internet are licensed and
accredited by the Pennsylvania Board of Private Licensed Schools and are
approved for veterans' education by the U.S. Veterans Administration. The
Company frequently conducts its courses at the in-house facilities of its
corporate clients and has the ability to provide the necessary computer
equipment at conference centers, hotels and other off-site locations as
requested by its clients.
DISCONTINUED OPERATIONS
In June 1999 the Company adopted a plan to dispose of the IMS business.
Through sales occurring in June through August 1999, the Company divested
substantially all of the assets of the IMS business. As of December 31, 1999
those assets had been sold for total consideration of approximately $4,358,000
consisting of cash, note receivable, and forgiveness of amounts payable to the
buyer. Assets sold consisted primarily of accounts receivable, inventory, and
property and equipment. Liabilities assumed by the buyer consisted primarily of
trade accounts payable, accrued expenses, and equipment leases payable. The
Company incurred a loss on disposal of the IMS business of $6,275,056 (net of
tax effect of $1,994,830). Included in such loss was the write off of
approximately $7,063,000 of goodwill representing the unamortized balance of
goodwill recorded in 1998 when the Company purchased all or substantially all of
the business of three IMS companies. Also included in such loss is an estimated
loss for operations during the phase out period of approximately $134,000 for
the remaining business, which was sold in August 1999.
Operating results of the IMS business for the years ended December 31,
1999, 1998, and 1997 are shown separately in the accompanying consolidated
statements of operations. Net revenues of the IMS business for the years ended
December 31, 1999, 1998, and 1997 were approximately $7,027,000, $19,280,000 and
$16,443,000, respectively.
3
INTELLECTUAL PROPERTY
While the Company does not own any patents, or registered copyrights or
trademarks, it routinely enters into non-disclosure and confidentiality
agreements with employees, contractors, consultants and customers. Licenses for
a number of software products have been granted to the Company for its own use
or for remarketing to its customers. In the aggregate, these licenses are
material to the business of the Company, but the Company believes that the loss
of any one of these licenses would not materially affect the Company's results
of operations or financial position.
CUSTOMERS
The primary industries served by the Company include financial services,
manufacturing, software/computers, government, and pharmaceutical. In 1999, no
customer accounted for more than 10% of the Company's consolidated revenues.
COMPETITION
The IT professional services industry is highly competitive and fragmented
on the local, regional and national levels. The Company believes that some of
its competitors are, or will soon be, offering the full range of technical
staffing and training services that the Company currently provides. In addition,
many companies offer one or more of the Company's services in all of the
geographical markets in which the Company currently operates. Many of the
Company's competitors have significantly greater name recognition and financial,
technical and other resources and generate greater revenues and profits than the
Company.
Within any given geographical or technical specialty market, the Company
competes for clients with other IT, engineering and professional service
providers, outsourcing and consulting companies, systems integrators and, to a
lesser extent, temporary personnel agencies. The majority of the competition is
made up of smaller local and regional firms with a strong presence in their
local markets and occasionally with a nationally franchised firm. The principal
competitive factors for obtaining and retaining clients include: the ability to
match technical consultant skills and personality with the client's requirements
and culture; expertise of its technical consultants; price; client satisfaction;
and overall responsiveness to client needs. The Company competes for technical
consultants with other professional services providers, outsourcing and
consulting companies, systems integrators, temporary personnel agencies and
client companies. The principal competitive factors for recruiting and retaining
technical consultants include compensation, availability and quality of
benefits, consistent flow of high quality, varied assignments and an
understanding of consultant skills and work preferences.
Within the IT training industry, there is competition among the
available training methods, such as instructor-led training versus
computer-based training. With the instructor-led training methods, some of the
major software and equipment manufacturers maintain their own training programs
for both internal training and public training. The Company believes its
established library of courses and proprietary course materials that can be
updated (or customized for a particular customer) provide it with a competitive
advantage. Moreover, the Company believes that the diversity of its course
offerings, the quality of its personnel, its flexibility in the locations at
which it provides its services and its ability to recognize emerging
technologies and develop the requisite courses responsive thereto, permit it to
remain competitive with others in the marketplace. The Company competes in the
IT training business on the basis of its pricing, perceived quality and breadth
of course offerings.
REGULATION
The Company's operations, as currently conducted, are subject to
governmental regulation in the State of New Jersey, where the Company's
Permanent Placement business is a licensed employment agency, and its Contract
Placement business has registered with the Temporary Help Service Section of the
Bureau of Employment and Personnel Services, part of the Division of Consumer
Affairs of the Department of Law and Public Safety and in Massachusetts where
its Contract Placement business is registered as a service firm with the
Massachusetts Department of Labor and Workforce Development. Compliance with
such New Jersey and Massachusetts regulations has not and is not expected to
have a material effect on the Company's business. The Company is unaware of any
other jurisdictions in which its operations are subject to material governmental
regulation.
4
All the jurisdictions in which the Company operates its training centers
regulate and license certain kinds of vocational, trade, technical or other
post-secondary education. The Company believes that employer-funded or
reimbursed IT training is exempt from such requirements in many of these states.
The Company is licensed in each jurisdiction in which it operates training
centers.
If the Company were found to be in violation of a state's licensing or
other regulatory requirements, it could be subject to civil or criminal
sanctions, including monetary penalties. No state educational or regulatory
authority has cited the Company or commenced any proceeding against it for the
violation of any licensing or other vocational educational requirement.
EMPLOYEES
As of December 31, 1999, the Company had 302 full-time, non-consultant,
employees. On that date, there were also approximately 775 IT consultants
working on full-time assignments for the Company's clients, of which
approximately 84% were treated as employees of the Company and 16% were treated
as independent contractors for federal and state tax purposes. The Company is
not a party to any collective bargaining agreements and considers its
relationships with its employees to be good.
ITEM 2. PROPERTIES
The Company does not own any real property. The Company has leased offices in
the following locations:
SQUARE LEASE SERVICES OFFERED AS OF
OFFICE FEET EXPIRATION DECEMBER 31, 1999
------ ---- ---------- -----------------
Bala Cynwyd, Pennsylvania 36,200 October 31, 2002 Contract Placement; Permanent Placement;
IT Training
Providence, Rhode Island 7,000 March 30, 2004 Contract Placement
Edison, New Jersey 11,800 February 28, 2006 Contract Placement; Permanent Placement
Alexandria, Virginia 3,900 December 31, 2000 Contract Placement
Tampa, Florida 6,900 May 31, 2003 Permanent Placement
Needham, Massachusetts 7,000 March 31, 2005 Contract Placement, Permanent Placement
Walled Lake, Michigan 4,000 August 31, 2001 Contract Placement
Alpharetta, Georgia 4,800 September 30, 2003 Permanent Placement
Arlington, Texas 1,100 November 30, 2000 Permanent Placement
Downers Grove, Illinois 2,700 October 31, 2001 Permanent Placement
Jacksonville, Florida 2,600 September 30, 2001 Contract Placement
Durham, North Carolina 2,000 September 30, 2001 Contract Placement
Nashville, Tennessee 1,100 December 31, 2000 Contract Placement
Charlotte, North Carolina Shared space April 30, 2001 Contract Placement
5
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings from time to time in the
ordinary course of business. As of the date of this Report, there are no legal
proceedings pending against the Company which management believes will have a
material adverse effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company,
through the solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year ended December 31, 1999.
For the purposes of calculating the aggregate market value of the shares
of common stock of the Company held by nonaffiliates, as shown on the cover page
of this Report, it has been assumed that all the outstanding shares were held by
nonaffiliates except for the shares beneficially owned by directors and
executive officers of the Company. However, this should not be deemed to
constitute an admission that all directors and executive officers of the Company
are, in fact, affiliates of the Company, or that there are not other persons who
may be deemed to be affiliates of the Company. Further information concerning
shareholdings of officers, directors and principal shareholders is included in
the Company's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Common Shares, $0.01 par value per share, are traded on The
NASDAQ National Stock Market under the symbol JUDG. The closing quotation for
the Company's Common Shares on March 15, 2000 was $3.00. At March 15, 2000,
there were 202 shareholders of record of the Company's Common Shares. Because
many of such shares are held by brokers and other institutions on behalf of
shareholders, the Company is unable to estimate the total number of shareholders
represented by these record holders. The following table sets forth the high and
low sales price per share of the Company's Common Shares for the periods
indicated:
Price Range
-----------
High Low
---- ---
Fiscal 1998
First Quarter $ 5.750 $ 3.938
Second Quarter $ 6.875 $ 4.375
Third Quarter $ 5.188 $ 2.000
Fourth Quarter $ 3.438 $ 1.750
Fiscal 1999
First Quarter $ 2.313 $ 1.250
Second Quarter $ 1.969 $ 1.344
Third Quarter $ 1.688 $ 0.969
Fourth Quarter $ 1.813 $ 0.938
The Company has never paid any cash dividends on its Common Shares and
does not anticipate paying cash dividends on its Common Shares in the
foreseeable future and is prohibited from doing so under the terms of its
primary credit facility. The Company's ability to pay dividends on its Common
Shares is further dependent on the earnings and cash flow of its operating
subsidiaries and the availability of such cash flow to the Company.
6
The Company issued the following unregistered shares of its $0.01 par
value common stock in separate transactions related to its acquisitions pursuant
to Section 4(2) of the Securities Act:
June 3, 1999 OnSite Solutions earnout, 443,071 shares for consideration of
$932,200
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated operating statement
and balance sheet data for the periods indicated. Operating statement data has
been restated to reflect the discontinued operations. The selected consolidated
operating statement and balance sheet data at and for each of the five fiscal
years presented below are derived from the Company's audited Consolidated
Financial Statements. This data should be read in conjunction with management's
discussion and analysis of financial condition and results of operations and the
Company's Consolidated Financial Statements included herein.
YEARS ENDED DECEMBER 31,
STATEMENTS OF OPERATIONS
DATA 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
Net revenues $113,705 $95,218 $ 82,083 $ 68,157 $ 54,600
Cost of sales (exclusive of items shown
separately below) 75,570 64,316 57,616 49,446 40,838
Selling and operating expenses 20,563 18,874 12,190 11,075 8,237
General and administrative expenses 12,535 10,189 5,931 4,523 3,715
------- ------- -------- -------- --------
Total costs and expenses 108,668 93,379 75,737 65,044 52,790
------- ------- -------- -------- --------
Income before non-recurring charges 5,037 1,839 6,346 3,113 1,810
Non-recurring charges 0 (1,019) 0 0 0
Interest income (expense), net (816) (60) 141 (642) (479)
Other income 0 0 29 0 8
------- ------- -------- -------- --------
Income before income taxes 4,221 760 6,516 2,471 1,339
Income tax expense 1,877 752 2,373 939 588
Minority interest income 0 0 0 (888) (7)
------- ------- -------- -------- --------
Income from continuing operations 2,344 8 4,143 2,420 758
Loss from discontinued operations (2,153) (5,125) (1,431) (1,513) (272)
Loss on disposal of discontinued
operations (6,275) 0 0 0 0
------- ------- -------- -------- --------
Net income (loss) ($6,084) ($5,117) $2,712 $907 $486
======= ======= ======== ======== ========
Income from continuing operations per
Common Share (1)(2) : Basic $ 0.17 $ 0.00 $ 0.32 $ 0.29 $ 0.09
======= ======= ======== ======== ========
Diluted $ 0.17 $ 0.00 $ 0.32 $ 0.27 $ 0.09
======= ======= ======== ======== ========
Loss from discontinued operations:
Basic ($ 0.15) ($ 0.38) ($ 0.11) ($ 0.19) ($ 0.03)
======== ======== ======== ======== ========
Diluted ($ 0.15) ($ 0.38) ($ 0.11) ($ 0.17) ($ 0.03)
======== ======== ======== ======== ========
Basic and Diluted loss from disposal of
discontinued operations ($ 0.46) $ 0.00 $ 0.00 $ 0.00 $ 0.00
======= ======= ======== ======== ========
Basic and Diluted net income (loss) ($ 0.44) ($ 0.38) $ 0.21 $ 0.10 $ 0.06
======= ======= ======== ======== ========
Basic weighted average shares (1) 13,761 13,458 12,761 8,473 8,416
======= ======= ======== ======== ========
Diluted weighted average shares(2) 13,797 13,458 12,826 9,114 9,114
======= ======= ======== ======== ========
7
AS OF DECEMBER 31,
BALANCE SHEET DATA: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Working capital $ 14,181 $ 12,213 $ 18,525 $ 8,253 $ 5,567
Total assets 35,086 47,885 31,934 21,969 11,632
Notes payable, including current portion(3) 9,689 9,882 0 10,161 5,368
Other long-term obligations, including
current portion 2,135 1,996 355 3,105 1,755
Shareholders' equity 16,006 23,081 26,274 1,122 391
(1) All per share and share amounts reflect a 52.6 for 1.0 stock split, which
occurred in September 1996.
(2) Diluted shares include common stock equivalents and 526,000 Common Shares
issued upon conversion of the Company's Convertible Notes.
(3) Includes line of credit and term loan.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto
appearing elsewhere in this Report.
OVERVIEW
In January 1999 the Company reorganized its four operating units into
two business segments to enable financial analysis that more closely tracks its
lines of business. The Company's Contract Placement, Permanent Placement and IT
Training operating units were consolidated within the IT Staffing segment. The
Information Management Solutions ("IMS") business was the other segment, which
the Company adopted a plan to dispose of in June 1999. Through sales occurring
in June through August 1999, the Company divested substantially all of the
assets of the IMS business. As of December 31, 1999 those assets had been sold
for total consideration of approximately $4,358,000 consisting of cash, note
receivable, and forgiveness of amounts payable to the buyer. Assets sold
consisted primarily of accounts receivable, inventory, and property and
equipment. Liabilities assumed by the buyer consisted primarily of trade
accounts payable, accrued expenses, and equipment leases payable. The Company
incurred a loss on disposition of the IMS business of $6,275,056 (net of tax
effect of $1,994,830). Included in such loss was the write-off of approximately
$7,063,000 of goodwill representing the unamortized balance of goodwill recorded
in 1998 when the Company purchased all or substantially all of the business of
three IMS companies. Also included in such loss is an estimated loss for
operations during the phase out period of approximately $134,000 for the
remaining business, which was sold in August 1999.
Operating results of the IMS business for the years ended December 31,
1999, 1998, and 1997 are shown separately in the accompanying consolidated
statements of operations. Net revenues of the IMS business for the years ended
December 31, 1999, 1998, and 1997 were approximately $7,027,000, $19,280,000 and
$16,443,000, respectively.
As a result of the loss on disposition of the IMS business, and the
operating losses in the discontinued IMS operations, the Company experienced a
net loss of $6.1 million, or $0.44 per common share, in 1999 compared to a net
loss of $5.1 million, or $0.38 per common share, in 1998. Income from continuing
operations was $2.3 million, or $0.17 per common share, in 1999 compared to
$8,000, or $0.00 per common share, in 1998.
8
ACQUISITIONS
In 1998, the Company implemented a strategy to accelerate its growth
through the addition of new services, geographic expansion and strategic
acquisitions. The Company aggressively pursued that strategy by acquiring all or
substantially all of the business of two Contract Placement firms, one Permanent
Placement firm, and three Information Management Solutions firms. In 1999, as
part of the disposition of the IMS business, the three Information Management
Solutions firms were sold. The table below presents information regarding the
remainder of the Company's acquisitions in 1998:
Description Purchase Price (1) Effective Date Business Segment
----------- ------------------ -------------- ----------------
Asset purchase of Information Systems $6,790,000 in notes, cash, March 5, 1998 Contract Placement
Inc., an IT contract placement firm in and Company stock
the Detroit, Michigan area
Asset purchase of Cella Associates of $1,529,000 in cash and March 31, 1998 Permanent Placement
Atlanta, Inc., a permanent placement Company stock
firm with offices in Georgia,
Connecticut, Illinois and Texas
Asset purchase of Tech Stars, Inc. an $1,331,000 in cash, notes October 12, 1998 Contract Placement
IT placement business with offices in and Company stock
Tennessee and North Carolina
(1) Includes amounts paid in 1999 based on the business attaining certain
pre-tax income amounts in the period ended December 31, 1998.
The Company made no acquisitions in 1999.
NEW OFFICES
In early 1999, upon expiration of the Foxborough, Massachusetts lease, the
Company's Providence regional operation and the National Division moved into new
facilities in Providence, Rhode Island.
REVENUES
The Company's contract placement revenues are derived from professional
service activities, primarily the placement of skilled IT, engineering and
professional personnel whose work is billed at an hourly rate. An engagement of
the Company's technical consultants typically lasts from six to 12 months.
Revenues are directly related to the total number of hours billed to clients and
the associated hourly billing rates. Hourly billing rates are established for
each technical consultant based on the technical consultant's skills, experience
and the type of work performed. For the year ended December 31, 1999, total
hours billed were 1,647,103, with an average billing rate of $55.27, compared to
total hours billed of 1,485,616 with an average billing rate of $50.69 for the
prior year period. The Company believes that the increase in the average billing
rates for its technical consultants has resulted from an increased demand for
skilled and experienced technical consultants and to its intentional focus on
making higher level IT placements. Cost of sales in the contract placement
business consists primarily of the compensation expenses related to the
consultants, such as salaries, fringe benefits and payroll taxes. Selling and
operating expenses consist primarily of salaries and fringe benefits for selling
representatives, and also include marketing expenditures and bad debt charges.
General and administrative expenses consist primarily of management and
administrative salaries and related fringe benefits, as well as other overhead,
such as rent and depreciation.
The Company's permanent placement revenues are generated from one-time
fees received upon successful placements of engineering and IT professionals
with clients. The standard fee arrangement is 1% of each thousand dollars of
salary, up to a maximum of 33% of the professional's first year salary. Revenue
is recognized upon commencement of the employment, subject to reversal if
employment terminates during a guarantee period (typically 30 - 90 days). The
permanent placement business placed 995 professionals with an average placement
fee of $12,350 in 1999, compared to 895 professionals placed with an average
placement fee of $12,320 for the prior year period. The increase in placements
was directly attributable to offices acquired or opened in 1998, which provided
205 placements in 1999 compared to 107 placements in 1998. No cost of sales is
recorded in the permanent placement business.
9
The Company's IT training business provides training in a variety of
software and network applications. Tuition and fee revenues are recognized
generally when the classes are held. Payments received prior to the class
commencing are recorded as deferred revenues. The IT training business provides
its services at its facility in Bala Cynwyd, Pennsylvania and at various
off-site locations. The Company frequently conducts its courses at the in-house
facilities of its corporate clients and has the ability to provide the necessary
computer equipment at conference centers, hotels and other off-site locations as
requested by its clients.
BUSINESS STRATEGY
The Company's business objectives are to increase market share in existing
markets by offering additional services, such as its regional website for
on-line recruiting and job posting; to increase cross-selling opportunities by
offering all of its services in each location; and to continue to strengthen its
market position, by expansion through internal growth. The Company continues to
pursue cost controls originally put in place in 1998, by reevaluating its
current operating practices to find ways to improve the productivity of its
personnel. In 1999 the Company continued a focused strategic planning and
budgeting process resulting in a 2000 internal operating plan that attempts to
increase revenues approximately 20%, while controlling costs, and returns the
Company to profitability. However, this plan is subject to many factors and
contingencies, and the Company may not be able to realize this goal. A part of
the increase in revenues includes a planned expansion of the sales and
recruiting staffs. The internal operating plan more closely ties management's
compensation to its ability to meet revenue and profit goals. If the Company is
able to achieve its internal operating plan, which relies upon certain
assumptions including, but not limited to, its ability to increase sales and
recruiting staffs in the contract placement and permanent placement businesses,
and to maintain strict cost controls in all of its operating units, the Company
believes it can achieve earnings before interest and taxes of approximately 5.0%
of its revenues. Failure to achieve the aforementioned assumptions as well as
other factors could prevent the Company from achieving these goals, which are
Forward-Looking statements. See "Forward-Looking Information" herein for
additional factors that could materially alter the Company's ability to meet
this objective and its other operational goals in 2000.
RESULTS OF OPERATIONS
The following table sets forth certain statement of continuing operations
data as a percentage of consolidated net revenues for each of the periods
indicated:
YEARS ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
Net Revenues 100.0% 100.0% 100.0%
------ ------ ------
Cost of Sales (Exclusive of items shown separately below) 66.5% 67.5% 70.2%
Selling and Operating Expenses 18.1% 19.8% 14.9%
General and Administrative Expenses 11.0% 10.8% 7.2%
------ ------ ------
Total Costs and Expenses 95.6% 98.1% 92.3%
------ ------ ------
Income before Non-recurring Charges and Other Items 4.4% 1.9% 7.7%
Non-recurring Charges 0.0% (1.1%) 0.0%
Other income (expense), net (0.7%) (0.0%) 0.2%
------ ------ ------
Income From Continuing Operations before Income Taxes 3.7% 0.8% 7.9%
====== ====== ======
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Revenues. Consolidated net revenues from continuing operations increased by
$18.5 million, or 19.4%, for the year ended December 31, 1999 compared to the
prior year period. Of such increase $17.1 million, or 93% of the increase, was
attributable to the Company's contract placement business. The contract
placement business generated revenues of $98.7 million for the year ended
December 31, 1999, a 21% increase over revenues of $81.6 million in the prior
year period. Such increase resulted primarily from increased marketing efforts
in the Company's offices that offer contract placement services, as well as
approximately $2.8 million in increased revenues reflecting a full year of
operations in offices opened or acquired during 1998. The Company's permanent
placement business generated revenues of $12.5 million in 1999, an increase of
$1.3 million, or 11.3%, over 1998 revenues of $11.2 million. Approximately
$500,000 of such increase reflects the full year operations of offices opened or
acquired in 1998, and the remainder is attributable to increased marketing
efforts in the offices that offer permanent placement services. The IT training
business increased revenues approximately $100,000, or 6%, from $3.0 million in
1998 to $3.1 million in 1999.
10
Revenues from discontinued operations were $7.0 million in 1999 compared
to $19.3 million in 1998. These amounts are not included in consolidated net
revenues from continuing operations. The loss from discontinued operations, net
of tax benefits, was $8.4 million in 1999, consisting of a loss from operations
of $2.1 million and a loss on disposal of $6.3 million, compared to $5.1 million
loss from discontinued operations in the prior year period.
Cost of Sales. Consolidated cost of sales increased by $11.3 million, or 17.5%,
for the year ended December 31, 1999 to $75.6 million from $64.3 million in the
prior year period. Cost of sales as a percentage of consolidated net revenues
decreased to 66.5% from 67.5% in the respective periods. In the Company's
contract placement business cost of sales as a percentage of its net revenues
decreased to 75.4% for the year ended December 31, 1999 from 77.4% for the prior
year period. Such decrease was primarily a result of an increased focus on
higher margin services in all of the Company's offices that offer contract
placement services. The decrease in cost of sales as a percentage of
consolidated net revenues was also attributable to an increase in net revenue
from the permanent placement business, the expenses for which are not included
in cost of sales, but are included in other expense categories. The Company's IT
training business contributed approximately $1.6 million in expenses included in
cost of sales, a decrease of approximately $76,000 from the prior year period.
Selling and Operating. Consolidated selling and operating expenses increased by
approximately $1.7 million, or 9.0%, for the year ended December 31, 1999 to
$20.6 million from $18.9 million in the prior year period. Selling and operating
expenses as a percentage of consolidated net revenues for the year ended
December 31, 1999 decreased to 18.1% from 19.8% in the prior year period. This
decrease was due primarily to management's efforts to control costs in areas
such as office supplies, travel and entertainment, and advertising. In the
Company's contract placement business selling and operating expenses increased
approximately $2.3 million, or 25.2%, over the prior year period of which $1.3
million reflected full year operations of offices opened or acquired in 1998. In
the Company's permanent placement business selling and operating expenses
decreased approximately $0.3 million, or 3.8%, over the prior year period due to
management's efforts to control costs in the areas mentioned above. In the
Company's IT training business selling and operating expenses decreased
approximately $0.2 million, or 16.3% over the prior year period. Such decrease
was attributable to management's efforts to control costs in the areas mentioned
above.
General and Administrative. Consolidated general and administrative expenses
increased by approximately $2.3 million, or 23.0%, for the year ended December
31, 1999 to $12.5 million from $10.2 million in the prior year period. General
and administrative expenses as a percentage of consolidated net revenues for the
year ended December 31, 1999 increased to 11.0% from 10.8% in the prior year
period. General and administrative expenses related to contract placement
increased approximately $1.7 million, or 25.6%, over the prior year period of
which $0.6 million reflected full year operations of offices opened or acquired
in 1998. General and administrative expenses related to permanent placement
increased approximately $0.7 million, or 24.9%, over the prior year period of
which $0.2 million was attributable to the full year operations of offices
opened or acquired in 1998. Amortization of goodwill increased approximately
$0.1 million in the year ended December 31, 1999 compared to the prior year
period, reflecting a full year of amortization of the goodwill incurred from the
businesses acquired in 1998.
11
Interest. Interest expense increased to approximately $829,000 for the year
ended December 31, 1999 from approximately $154,000 in the prior year period
while interest income decreased to approximately $13,000 from $94,000 in the
respective periods. Such increase in interest expense reflects the Company's
increased usage of its line of credit during the year 1999, primarily to fund
additional accounts receivable from the increased revenues, as well as
additional debt to repay notes payable to former owners of businesses acquired
in 1998. The Company also incurred additional debt through its sale/leaseback of
substantially all of its fixed assets, for which a portion of the repayment
reflects interest costs. Additionally, the interest rate on the Company's line
of credit increased from 7.75% at December 31, 1998 to 8.50% at December 31,
1999, contributing to the increased interest expense. The decrease in interest
income is primarily due to the Company redeeming its short-term investments at
the end of the first quarter of 1998 to finance the acquisition of businesses in
1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Revenues. Consolidated net revenues from continuing operations increased by
16.0%, or $13.1 million, for the year ended December 31, 1998 compared to the
prior year period. Revenue for the contract placement business increased by
15.5%, or $10.9 million, for the year ended December 31, 1998 compared to the
prior year period. This increase was primarily due to an increase in revenue of
$8.9 million attributable to acquisitions and new offices. Revenue for the
permanent placement business increased by 30.2%, or $2.6 million, for the year
ended December 31, 1998 compared to the prior year period. Of such increase $1.5
million was attributable to its acquisition and new offices, and the remainder
was due to increased marketing efforts in its established offices, primarily the
New Jersey office which contributed $0.9 million in increased revenues, a 64%
increase over the prior year period. The IT training business generated net
revenues of $3.0 million, a decrease of $261,000 from the prior year period.
Revenues from discontinued operations were $19.3 million in 1998
compared to $16.4 million in 1997. These amounts are not included in net revenue
from continuing operations. The loss from discontinued operations, net of tax
benefit, was $5.1 million in 1998 compared to $1.4 million loss from
discontinued operations in the prior year period.
Cost of Sales. Consolidated cost of sales increased by 11.6%, or $6.7 million,
for the year ended December 31, 1998 compared to the prior year period. Cost of
sales as a percentage of consolidated net revenues decreased to 67.5% from
70.2%. In the Company's contract placement business, cost of sales as a
percentage of revenue decreased to 77.4% from 78.1%. This decrease was primarily
a result of the contract placement business focusing its sales efforts on higher
margin services. The decline in cost of sales as a percentage of consolidated
net revenues was also attributable to an increase in revenue for the permanent
placement business, the expenses for which are not included in cost of sales,
but are included in other expense categories. The IT training business
contributed an additional $1.7 million of expenses included in cost of sales, an
increase of $233,000 over the prior year period.
Selling and Operating. Consolidated selling and operating expenses increased by
54.8%, or $6.7 million, for the year ended December 31, 1998 compared to the
prior year period. Of such increase $3.4 million of expenses were attributable
to acquisitions and new offices. Selling and operating expenses as a percentage
of consolidated net revenues for the year ended December 31, 1998 increased to
19.8% from 14.9% in the prior year. In the contract placement business selling
and operating expenses increased $3.3 million, or 53.6%, over the prior year
period, of which $2.0 million was attributable to acquisitions and new offices.
The permanent placement business increased selling and operating expenses $2.2
million, or 38.2%, over the prior year period, of which $1.4 million was
attributable to its acquisition and new offices. The IT training business
contributed $1.0 million to selling and operating expenses, an increase of $.2
million, or 21.4%, over the prior year period.
12
General and Administrative. Consolidated general and administrative expenses
increased 71.8%, or $4.3 million, for the period ending December 31, 1998
compared to the prior year period, of which $1.8 million was attributable to
acquisitions and new offices. Amortization of goodwill added $.3 million to
general and administrative expenses, an increase of $.2 million over the prior
year period, primarily associated with the acquisitions in 1998. General and
administrative expenses as a percentage of consolidated net revenues increased
to 10.8% for the year ended December 31, 1998 compared to 7.2% for the prior
year period. Contributing to this increase was an increase of 76.1%, or $2.0
million, in the contract placement business, primarily consisting of a $1.3
million increase in costs associated with acquisitions and new offices. In the
permanent placement business general and administrative expenses increased $.9
million, or 77.3%, of which $.5 million was attributable to its acquisition and
new offices. The IT Training business increased general and administrative
expenses 38.6%, or $.3 million, over the prior year period. Expansion of the
Company's corporate staff, specifically the hiring of additional management
information systems personnel, human resources personnel and accounting
personnel increased payroll costs by $278,000 over the prior year period. Such
expansion was necessary to manage the increased level of business resulting from
the acquisitions and new offices.
Interest. Interest expense increased to $154,000, at December 31, 1998 from
$142,000 at December 31, 1997 while interest income decreased to $94,000 at
December 31, 1998 from $313,000 at December 31, 1997. This increase in interest
expense and decrease in interest income reflects the Company's utilization of
the proceeds from its initial public offering in 1997 for its expanded
operations, and the need to use its line of credit to fund acquisitions and
working capital in 1998.
INCOME TAXES
The Company adopted the Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," as of January 1, 1993. In 1999 the Company's
income tax expense from continuing operations was $1.9 million, or 44.4% of
pre-tax income from continuing operations. This effective tax rate is higher
than the applicable statutory rate of 34% primarily due to the Company's state
tax liabilities and certain expenses that are not deductible for tax purposes.
The effective tax rate was 98.9% and 36.4% of continuing operations for fiscal
years 1998 and 1997, respectively. The effective tax rates for 1998 and 1997 are
higher than the applicable statutory tax rate of 34%, primarily due to the
Company's state tax liabilities and certain expenses, including the write-off of
goodwill as a non-recurring charge, that are not deductible for tax purposes,
partially offset by non-taxable interest income in 1997.
13
SEASONALITY AND QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly statements of
data from continuing operations for each of the Company's last eight fiscal
quarters. In the opinion of the Company's management, this quarterly information
has been prepared on the same basis as the audited financial statements
appearing elsewhere in this Report and includes all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the unaudited
quarterly results set forth herein. The Company's quarterly results have in the
past been subject to fluctuations, and thus, the operating results for any
quarter are not necessarily indicative of results for any future period.
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31,
-------- -------- --------- -------- -------- -------- --------- --------
(Dollars in thousands) 1998 1998 1998 1998 1999 1999 1999 1999
---- ---- ---- ---- ---- ---- ---- ----
Net Revenues $ 21,045 $ 23,530 $ 23,971 $ 26,672 $ 28,572 $ 29,757 $ 28,384 $ 26,992
-------- -------- -------- -------- -------- -------- -------- --------
Gross Profit 6,564 8,114 7,643 8,581 9,358 9.993 9,631 9,153
-------- -------- -------- -------- -------- -------- -------- --------
Income (Loss) Before
Non-recurring Charges and
Other Items 962 1,344 (344) (123) 966 1,052 1,526 1,494
-------- -------- -------- -------- -------- -------- -------- --------
Non-recurring Charges 0 0 0 (1,019) 0 0 0 0
-------- -------- -------- -------- -------- -------- -------- --------
Income (Loss) from
Continuing Operations 584 809 (206) (1,179) 501 523 731 590
-------- -------- -------- -------- -------- -------- -------- --------
Loss from Discontinued
Operations (221) (299) (655) (3,950) (1,081) (839) (220) (13)
-------- -------- -------- -------- -------- -------- -------- --------
Loss from Disposal of
Discontinued Operations 0 0 0 0 0 (6,283) 8 0
-------- -------- -------- -------- -------- -------- -------- --------
Net Income (Loss) $ 363 $ 510 $ (861) ($ 5,128) ($ 580) ($ 6,600) $ 519 $ 576
======== ======== ======== ======== ======== ======== ======== ========
Basic and Diluted Income
(Loss) per share from
Continuing Operations $ 0.04 $ 0.06 ($ 0.02) ($ 0.08) $ 0.04 $ 0.04 $ 0.05 $ 0.04
======== ======== ======== ======== ======== ======== ======== ========
Basic and Diluted Net
Income (Loss) per share $ 0.03 $ 0.04 ($ 0.06) ($ 0.38) ($ 0.04) ($ 0.48) $ 0.04 $ 0.04
======== ======== ======== ======== ======== ======== ======== ========
Because the Company derives revenue in its contract placement business
only when its consultants are actually working, its revenues and operating
results are adversely affected when its clients' facilities close due to
holidays or inclement weather. During the quarters ended December 31, 1999 and
1998, the number of holidays and vacation days slightly affected revenues in the
contract placement business. In addition, as companies approached the Y2K
turnover they postponed some non-Y2K projects, which was reflected in decreased
revenues for the third and fourth quarters of 1999 above. Overall, however,
revenues in those quarters still exceeded the comparable quarters of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for working capital has increased as its revenues have
grown and it has used borrowings under its credit facility to fund working
capital. The Company typically maintains minimal cash balances as reflected in
the balance of $5,000 in cash and cash equivalents as of December 31, 1999. The
Company redeemed its short-term investments of approximately $5.5 million held
at December 31, 1997 and used the proceeds for acquisitions in 1998.
The Company used cash in operations of approximately $200,000, $6,000, and
$2.4 million in 1999, 1998 and 1997, respectively. This reflects the Company's
net losses for 1999 and 1998 offset by non-cash items, including the loss on
disposition of discontinued operations in 1999 and non-recurring charges in
1998. In addition, the redemption of short term investments in 1998 noted above
was offset by a corresponding increase in accounts receivable related to
increased sales.
14
Cash purchases of fixed assets for the fiscal years ended December 31,
1999, 1998, and 1997 were $1.0 million, $2.8 million, and $1.6 million
respectively. These purchases were related primarily to the purchases of
computers, software, and imaging equipment to upgrade the Company's technology
infrastructure, as well as the furnishing of its new office facilities. The
Company plans to use approximately $1.0 million for capital expenditures in
2000. In 1999 the Company received approximately $2.8 million in cash proceeds
from the disposition of the IMS business. In 1998 the Company used $9.2 million
to complete acquisitions and an additional $495,000 to repay indebtedness
assumed in several of its acquisitions. In the first quarter of 1997 the Company
received repayment of its loans to officers and related parties in the aggregate
amount of $577,000.
The Company's borrowings, net of repayments, under its line of credit and
overdraft facilities at December 31, 1999 were approximately $93,000, compared
to $11.5 million net borrowings from those facilities at December 31, 1998. In
the year ended December 31, 1999 the Company paid approximately $2.1 million
related to its guarantee that common shares issued in connection with two of its
acquisitions would equal or exceed a specified price at the anniversary date of
the issuance. One such guarantee remains to be determined in August 2000, which
the Company believes, based on its recent market price per common share, it has
adequately accrued for. The Company also completed a sale/lease back of certain
of its fixed assets with an affiliate of PNC Bank, N.A. The lease obligation was
approximately $1.4 million repayable in 36 equal monthly rental payments. During
1998 the Company repaid the remaining $238,000 balance outstanding on the notes
payable related to the acquisition of the IT training business, and repurchased
40,000 common shares (accounted for as treasury stock), at a price of $5.50 per
share from the sellers of the IT training business.
Since April 24, 1998, the Company has had available a $25.0 million
revolving advance facility (the "Line of Credit") with PNC Bank, N.A. (the
"Bank"). The Line of Credit expires on May 31, 2003. This facility allows the
Company to borrow the lesser of 85% of eligible accounts receivable, or $25.0
million. As of December 31, 1999, the Company had approximately $9.7 million
outstanding against the Line of Credit. The Line of Credit is secured by
substantially all of the Company's assets and contains customary restrictive
covenants which from time to time have been reset by the Bank, including
limitations on loans the Company may extend to officers and employees, the
incurrence of additional debt and the payment of dividends on the Company's
common shares. The Line of Credit bears interest at the Bank's prime rate.
The Company anticipates that its primary uses of capital in future periods
will be to fund increases in accounts receivable, to support internal growth by
financing new offices, and to finance additional acquisitions. The Company
believes that its Line of Credit, or other credit facilities which may be
available to the Company in the future, will be sufficient to meet the Company's
capital needs for at least the next twelve months.
INFLATION
The Company does not believe that the rates of inflation prevailing in the
United States in recent years have had a significant effect on its operations.
"YEAR 2000" ISSUES
The Company implemented a "Year 2000" compliance program to prepare for
the rollover of the two-digit year value to 00 in its computer systems on
January 1, 2000. The compliance program required the Company to develop and
validate contingency plans in the event a critical system failed, and to form a
rapid response team to address any operational problems during the "Year 2000"
date change period.
The Company experienced no significant "Year 2000" system related problems
and it has continued to operate normally after January 1, 2000. The Company is
unaware of any significant problems in the computer systems of third parties for
whom the Company implemented "Year 2000" solutions on their computer systems.
Total incremental spending on "Year 2000" issues was not material and was
charged to operations in 1999 as it occurred.
15
FORWARD LOOKING INFORMATION
This report and other reports and statements filed by the Company from
time to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain certain forward-looking statements and
information that are based on beliefs of, and information currently available
to, the Company's management as well as estimates and assumptions made by the
Company's management. When used in SEC Filings, and in oral statements by the
Company the words "anticipate," "believe," "estimate," "expect," "future,"
"intend," "plan" and similar expressions as they relate to the Company or the
Company's management, identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions relating to the
Company's operations and results of operations, competitive factors and pricing
pressures, shifts in market demand, the performance and needs of the industries
served by the Company, and other risks and uncertainties, including, in addition
to any uncertainties specifically identified in the text surrounding such
statements and those identified below, uncertainties with respect to changes or
developments in social, economic, business, industry, market, legal and
regulatory circumstances and conditions and actions taken or omitted to be taken
by third parties, including the Company's shareholders, customers, suppliers,
business partners, competitors, and legislative, regulatory, judicial and other
governmental authorities and officials. Should one or more of these risks or
uncertainties materialize, or should the underlying assumptions prove incorrect,
actual results may vary significantly from those anticipated, believed,
estimated, expected, intended or planned.
Dependence on Availability of Qualified Technical Consultants. The Company
is dependent upon its ability to attract and retain technical consultants who
possess the skills and experience necessary to meet the staffing requirements of
its clients. To keep pace with rapidly evolving information technologies and
changing client needs, the Company must continually evaluate and upgrade its
database of available qualified technical consultants. Competition for
individuals with proven technical skills is intense, and, as is currently
customary in the industry, the Company does not have any exclusive contracts
with its consultants. The Company competes for such individuals with other
providers of technical staffing services, systems integrators, providers of
outsourcing services, computer systems consultants, clients and temporary
personnel agencies. Factors influencing such competition include compensation,
benefits, growth opportunities and pre-existing relationships with other
companies, particularly specialty staffing companies. As the Company expands
into new geographic areas, it may experience difficulty attracting qualified
technical consultants who have a prior relationship or familiarity with more
established specialty staffing companies in such areas. There can be no
assurance that qualified technical consultants will continue to be available to
the Company in sufficient numbers to meet the Company's current and anticipated
growth requirements.
Acquisition Risks. The Company from time to time evaluates the possible
acquisition of companies that will complement and expand the Company's existing
businesses, principally in new geographic markets. The successful implementation
of this strategy is dependent on the Company's ability to identify suitable
acquisition candidates, acquire such companies on suitable terms and integrate
their operations with those of the Company. There can be no assurance that the
Company will be able to identify suitable acquisition candidates or that, if
identified, the Company will be able to acquire such companies on suitable
terms. The specialty staffing industry is relatively mature. Acquisitions in
this industry are therefore likely to be at higher relative prices than for
other industries due to competition from other staffing companies for
acquisition candidates. Acquisitions also involve a number of special risks,
including: (i) adverse effects on the Company's reported operating results,
including increased goodwill amortization and interest expense; (ii) diversion
of management attention; (iii) risks associated with unanticipated problems,
liabilities or contingencies; (iv) difficulties and higher than expected costs
related to the integration of the acquired business; and (v) dilution of
existing shareholders. The occurrence of some or all of the events described in
these risks could have a material adverse effect on the Company's business,
financial condition and results of operations.
16
Ability to Manage Growth. Sustained or significant growth, if achieved,
will subject the Company to risks by placing a substantial strain on the
Company's available managerial, sales, recruiting, financial and other
resources. Specifically, such growth will require the Company to: (i) hire,
integrate and retain qualified managers, recruiters and sales personnel in
existing markets as well as markets in which the Company has no prior operating
experience; (ii) develop and maintain relationships with an increasingly large
number of highly qualified technical consultants; (iii) maintain cost controls
in all of the Company's businesses; and (iv) apply its management practices to a
significantly larger organization. Expansion beyond the geographic areas where
the Company's offices are presently located will further increase demands on the
Company's management. The Company's ability to manage its staff and facilities
growth effectively will require it to continue to expand its operational,
financial and other internal systems. There can be no assurance that the
Company's systems, procedures and controls will be successfully implemented or
adequate to support the Company's expanded operations. Furthermore, an element
of the Company's business strategy is to cross-sell the existing services of its
businesses to new and existing clients. Historically, these businesses have
operated independently, producing only occasional referrals, and there can be no
assurance that the Company will successfully market such services on an
integrated basis. In addition, if the technology sector of the economy
experiences a downturn, the Company could be affected more so than other
businesses.
Dependence on Contract Placement Business. The Company's Contract
Placement business was responsible for 86.0%, 85.7% and 86.8% of total Company
revenues for the years ended December 31, 1997, 1998 and 1999, respectively. In
addition, for the year ended 1999, one customer of the Contract Placement
business, Merck & Company, Inc., accounted for approximately 7.2% of total
Contract Placement revenues, and 6.2% of total Company revenues. There can be no
assurance that the Company will be able to retain this level of revenue from
this client. The ability of the Company to sustain or increase revenues in the
Contract Placement business is subject to various factors, including its ability
to attract and retain qualified technical consultants, to hire, integrate and
retain qualified managers, recruiters and sales personnel in existing and new
markets, to apply its management practices to a significantly larger
organization and to consummate acquisitions of and to successfully integrate
profitable staffing companies. The inability of the Company to successfully
manage these factors would have a material adverse effect on the revenues of the
Contract Placement business. There can be no assurance that the Company will be
able to sustain or increase its Contract Placement revenues. Furthermore, a
decline in the level of Contract Placement revenues would have a material
adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE(S)
-------
INDEPENDENT AUDITORS' REPORT 19
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 20
CONSOLIDATED STATEMENTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 22
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 24 - 36
18
INDEPENDENT AUDITORS' REPORT
Board of Directors
Judge.com, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheets of Judge.com, Inc.
(formerly The Judge Group, Inc.) and Subsidiaries as of December 31, 1999 and
December 31, 1998, and the related consolidated statements of operations,
shareholders' equity, and of cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Judge.com, Inc.
(formerly The Judge Group, Inc.) and Subsidiaries as of December 31, 1999 and
December 31, 1998, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
RUDOLPH PALITZ, LLC
February 25, 2000
Blue Bell, PA
19
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,571 $ 43,568
Accounts receivable, net 18,584,708 21,767,995
Inventories -- 1,185,302
Prepaid income taxes and deferred taxes 2,801,245 1,909,919
Other 947,823 977,295
----------- ----------
TOTAL CURRENT ASSETS 22,338,347 25,884,079
----------- ----------
PROPERTY AND EQUIPMENT 5,083,530 8,166,048
Less: accumulated depreciation and amortization 2,083,785 3,220,212
----------- ----------
NET PROPERTY AND EQUIPMENT 2,999,745 4,945,836
----------- ----------
OTHER ASSETS
Deposits and other assets 988,981 716,634
Covenant not to compete, net of accumulated amortization of $82,478, 1999 and
$37,490, 1998 7,498 52,486
Goodwill, net of accumulated amortization of $1,595,313, 1999 and $4,731,788, 1998 8,750,950 16,286,392
----------- ----------
TOTAL OTHER ASSETS 9,747,429 17,055,512
----------- ----------
TOTAL ASSETS $35,085,521 $47,885,427
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $902,118 $ 743,677
Accounts payable and accrued expenses 6,358,970 8,679,519
Payroll and sales taxes 422,017 576,562
Other liabilities -- 2,634,954
Deferred revenue 474,067 1,035,558
----------- ----------
TOTAL CURRENT LIABILITIES 8,157,172 13,670,270
----------- ----------
LONG-TERM LIABILITIES
Note payable, bank 9,688,925 9,881,595
Deferred rent obligation 399,537 666,879
Debt obligations, net of current portion 833,558 585,490
----------- ----------
TOTAL LONG-TERM LIABILITIES 10,922,020 11,133,964
----------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares authorized; at December 31,
1999, 13,984,373 shares issued and 13,944,373 shares outstanding; at
December 31, 1998, 13,541,302 shares issued and 13,501,302 shares outstanding 139,843 135,412
Preferred stock, at December 31, 1999 and 1998, $.01 par value, 10,000,000
shares authorized -- --
Additional paid-in capital 23,905,057 24,900,474
Deficit (7,818,571) (1,734,693)
----------- ----------
16,226,329 23,301,193
Less: Treasury Stock, 40,000 shares; at cost 220,000 220,000
----------- ----------
TOTAL SHAREHOLDERS' EQUITY 16,006,329 23,081,193
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $35,085,521 $47,885,427
=========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
NET REVENUES $113,704,958 $ 95,218,213 $ 82,083,173
------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales (exclusive of items shown separately below) 75,569,731 64,315,716 57,616,429
Selling and operating 20,562,479 18,873,617 12,189,782
General and administrative 12,535,158 10,189,140 5,931,500
------------ ------------ ------------
Total costs and expenses 108,667,368 93,378,473 75,737,711
------------ ------------ ------------
INCOME BEFORE NON-RECURRING CHARGES 5,037,590 1,839,740 6,345,462
NON-RECURRING CHARGES (Note 2) -- (1,019,000) --
OTHER INCOME (EXPENSE), NET, PRINCIPALLY INTEREST (815,925) (59,806) 170,234
------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 4,221,665 760,934 6,515,696
INCOME TAX EXPENSE 1,877,115 752,382 2,372,781
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 2,344,550 8,552 4,142,915
LOSS FROM DISCONTINUED OPERATIONS (NET OF TAX BENEFIT OF
$1,089,056, $1,550,158, AND $452,963 FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997, RESPECTIVELY) (2,153,372) (5,125,545) (1,430,975)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, INCLUDING
PROVISION OF $134,000 FOR OPERATING LOSSES DURING PHASE-OUT
PERIOD (NET OF TAX EFFECT OF $1,994,830 FOR THE YEAR ENDED
1999) (6,275,056) -- --
------------ ------------ ------------
NET INCOME (LOSS) ($6,083,878) ($5,116,993) $ 2,711,940
============ ============ ============
NET INCOME (LOSS) PER SHARE:
BASIC
INCOME FROM CONTINUING OPERATIONS $ 0.17 $ 0.00 $ 0.32
============ ============ ============
LOSS FROM DISCONTINUED OPERATIONS ($ 0.15) ($ 0.38) ($ 0.11)
============ ============ ============
LOSS FROM DISPOSAL OF DISCONTINUED OPERATIONS ($ 0.46) ($ 0.00) ($ 0.00)
============ ============ ============
NET INCOME (LOSS) ($ 0.44) ($ 0.38) $ 0.21
============ ============ ============
DILUTED
INCOME FROM CONTINUING OPERATIONS $ 0.17 $ 0.00 $ 0.32
============ ============ ============
LOSS FROM DISCONTINUED OPERATIONS ($ 0.15) ($ 0.38) ($ 0.11)
============ ============ ============
LOSS FROM DISPOSAL OF DISCONTINUED OPERATIONS ($ 0.46) ($ 0.00) ($ 0.00)
============ ============ ============
NET INCOME (LOSS) ($ 0.44) ($ 0.38) $ 0.21
============ ============ ============
WEIGHTED AVERAGE SHARES USED IN NET INCOME (LOSS) PER SHARE
CALCULATIONS:
BASIC 13,761,000 13,458,000 12,761,000
============ ============ ============
DILUTED 13,797,000 13,458,000 12,826,000
============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Common Stock Additional Retained
------------ Paid In Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
------ ------ ------- --------- ----- -----
Balance, January 1, 1997 8,587,739 $ 85,877 $ 365,877 $ 670,360 $ -- $ 1,122,114
Merger Transactions 1,194,230 11,942 2,416,498 -- -- 2,428,440
Initial Public Offering 3,000,000 30,000 19,181,802 -- -- 19,211,802
Conversion of Debentures 526,000 5,260 494,740 -- -- 500,000
Conversion of Notes Payable 40,000 400 299,600 -- -- 300,000
Net Income -- -- -- 2,711,940 -- 2,711,940
---------- --------- ------------ ------------ ----------- ------------
Balance, December 31, 1997 13,347,969 133,479 22,758,517 3,382,300 -- 26,274,296
Acquisition Transactions 193,333 1,933 2,141,957 -- -- 2,143,890
Purchase of Treasury Stock -- -- -- -- (220,000) (220,000)
Net loss -- -- -- (5,116,993) -- (5,116,993)
---------- --------- ------------ ------------ ----------- ------------
Balance, December 31, 1998 13,541,302 135,412 24,900,474 (1,734,693) (220,000) 23,081,193
Acquisition/Disposition Transactions 443,071 4,431 (995,417) -- -- (990,986)
Net loss -- -- -- (6,083,878) -- (6,083,878)
---------- --------- ------------ ------------ ----------- ------------
Balance December 31, 1999 13,984,373 $ 139,843 $ 23,905,057 ($ 7,818,571) ($ 220,000) $ 16,006,329
========== ========= ============ ============ =========== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
OPERATING ACTIVITIES
Net income (loss) ($6,083,878) ($ 5,116,993) $ 2,711,940
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 1,762,973 1,847,586 996,240
Impairment of goodwill -- 3,621,099 --
Provision for losses on lease -- 400,000 --
Loss on disposal of discontinued operations 6,275,056 -- --
Deferred taxes (9,000) (539,000) 11,000
Deferred rent (342,342) 150,000 (13,523)
Provision for losses (recoveries) on accounts receivable 927,951 439,810 (35,521)
Stock compensation -- -- 29,250
Loss on disposal of equipment 204,393 -- --
Changes in operating assets and liabilities:
(Increase) decrease in:
Short-term investments -- 5,500,000 (5,500,000)
Accounts receivable (1,526,105) (5,603,390) (983,910)
Inventories (144,853) 755,620 (558,581)
Deposits and other (148,008) (387,434) (175,764)
Prepaid income taxes 1,112,504 (1,044,919) 43,603
Other current assets (146,536) (195,841) 707,342
Increase (decrease) in:
Accounts payable and accrued expenses (2,037,307) 558,541 736,779
Payroll and sales taxes (154,545) 63,000 (289,330)
Deferred revenue 108,377 (162,675) (240,010)
Income taxes payable -- (291,515) 164,977
---------- ----------- -----------
Net cash used in operating activities (201,320) (6,111) (2,395,508)
---------- ----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (958,286) (2,835,339) (1,616,249)
Purchase/acquisition of companies -- (9,159,407) --
Covenant not to compete -- (89,976) --
Proceeds from disposition of businesses 2,788,000 -- --
Decrease in notes receivable, officers
and employees, net -- -- 577,287
---------- ----------- -----------
Net cash provided by (used in) investing activities 1,829,714 (12,084,722) (1,038,962)
---------- ----------- -----------
FINANCING ACTIVITIES
Cash acquired in business combination -- 283,300 --
Proceeds from (repayments of) notes payable, bank, net (192,670) 9,881,595 (9,960,795)
Proceeds (repayments) of bank overdrafts 285,951 1,585,154 (1,858,000)
Principal payments on long-term debt (1,040,672) (1,080,130) (2,283,262)
Proceeds from lease payable, bank 1,425,000 -- --
Contingent amounts paid - acquisitions (2,145,000) -- --
Purchase of treasury stock -- (220,000) --
Proceeds from issuance of stock and exercise of warrants -- -- 19,211,802
Repayments from shareholders -- -- (95,862)
---------- ----------- -----------
Net cash provided by (used in) financing activities (1,667,391) 10,449,919 5,013,883
---------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (38,997) (1,640,914) 1,579,413
CASH AND CASH EQUIVALENTS, BEGINNING 43,568 1,684,482 105,069
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, ENDING $ 4,571 $ 43,568 $ 1,684,482
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $1,142,000 $ 321,000 $ 306,000
========== =========== ===========
Income taxes $ 768,000 $ 1,140,000 $ 1,784,000
========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1. DESCRIPTION OF BUSINESS
Judge.com, Inc. (the "Company") (formerly The Judge Group, Inc.), a
Pennsylvania corporation founded in 1970, provides (i) information technology
("IT") and engineering professionals to its clients on both a temporary basis
(through its "Contract Placement" business) and a permanent basis (through its
"Permanent Placement" business), and (ii) information technology training
(through its "IT Training" business) on a range of software and network
applications to corporate, governmental and individual clients. The Company also
formerly provided computer network and document management system integration,
implementation, maintenance and training (through its "Information Management
Solutions" business ("IMS")). On June 15, 1999 the Company adopted a plan to
dispose of the IMS business through the sale of substantially all of the assets
of that business (See Note 3). At December 31, 1999, the Company, headquartered
in Bala Cynwyd, Pennsylvania, operated regional offices in twelve states
throughout the United States. A substantial portion of the Company's revenues
are derived from customers located in the Mid-Atlantic corridor of the United
States.
During 1996, the Company engaged an investment banking firm to assist it
in an initial public offering of its common stock. On September 30, 1996, the
Company filed a Registration Statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act of 1933, as amended. Effective
February 20, 1997 the Company successfully completed its initial public offering
of common shares. The Company sold 3,000,000 common shares at a price of $7.50
per share, realizing approximately $20,906,000 in proceeds net of underwriting
discounts and commissions. In connection with the initial public offering, the
Company incurred approximately $1,694,000 of accounting, legal, printing and
other costs and such costs have been charged to additional paid-in capital as a
reduction of the proceeds from the initial public offering.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation. The accompanying
consolidated financial statements include the accounts of the Company, and the
Company's wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Risks and Uncertainties. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions 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.
Revenue Recognition in Contract Placement and Permanent Placement
Businesses. The Company recognizes permanent placement revenues at the date
employment of the placed professional commences, subject to reversal and
adjustments if such employment is terminated during a guarantee period. Revenues
related to temporary placement services are recognized on a weekly basis as the
services are performed.
Revenue Recognition in IT Training Business. Tuition and fee revenues are
recognized generally when the classes are held. Payments received prior to the
class commencing are recorded as deferred revenues.
Cash and Cash Equivalents. Cash and cash equivalents consist of cash in
bank and other short-term investments with original maturities of three months
or less.
The Company maintains cash balances at financial institutions. These
balances are insured by the Federal Deposit Insurance Corporation up to $100,000
at each institution.
24
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (continued)
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.
Inventories at December 31, 1998 include approximately $614,000 of costs and
estimated earnings in excess of billings on contracts-in-progress.
Accounts Receivable and Accounts Payable. Accounts receivable at December
31, 1999, 1998, and 1997 were net of allowances for doubtful accounts of
$987,000, $511,000, and $465,000, respectively.
Included in accounts receivable was unbilled work-in-process of
approximately $1,234,000, $1,134,000, and $584,000 at December 31, 1999, 1998
and 1997, respectively. Included in accounts payable and accrued expenses was
approximately $913,000, $867,000, and $442,000 of accrued employee and
contractor payroll principally relating to unbilled work-in-process at December
31, 1999, 1998 and 1997,respectively.
The allowance for doubtful accounts is established through charges to
earnings in the form of a charge to bad debt expense. Accounts that are
determined to be uncollectible are charged against the allowance account.
Management makes periodic assessments of the adequacy of the allowance that
requires the Company to recognize additions or reductions to the allowance. It
is reasonably possible that factors may change significantly and, therefore,
affect management's determination of the allowance for doubtful accounts in the
near term. An analysis of the allowance for doubtful accounts follows:
Additions (Reversals)
Year Ended Balance at Charged (Credited) To Balance At
December 31, Beginning of Period Bad Debt Expense (Charge Offs) End Of Period
------------ ------------------- ---------------- ------------- -------------
1999 $ 511,000 $ 927,000 ($ 451,000) $ 987,000
========= ========= ========== =========
1998 $ 465,000 $ 440,000 ($ 394,000) $ 511,000
========= ========= ========== =========
1997 $ 661,000 ($ 36,000) ($ 160,000) $ 465,000
========= ========= ========== =========
Property and Equipment and Depreciation and Amortization. Property and
equipment are stated at cost. Depreciation and amortization is computed on the
straight-line and accelerated methods over the estimated useful lives of the
related assets, principally five to ten years for furniture and office
equipment, and three to five years for computer equipment.
Leasehold improvements are amortized using the straight-line method over
the shorter of the lease term or estimated useful lives of the improvements,
principally five to ten years.
Depreciation and amortization expense charged to continuing operations
related to property and equipment, including property under capital leases,
amounted to $877,849 in 1999, $701,648 in 1998, and $425,997 in 1997.
Property Under Capital Leases and Amortization. Property under capital
leases is stated at the lower of fair market value or net present value of the
minimum lease payments at inception of the leases. Property under capital leases
consists of furniture, office and computer equipment and is included in
"property and equipment" in the accompanying consolidated balance sheets.
Amortization is provided over the shorter of the related lease terms or the
estimated useful lives of the related assets.
25
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 2. 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 and at the tax rates that are expected to be in effect when
the taxes are actually paid or recovered.
Deferred income taxes arise principally from differences between
financial and income tax reporting, including amounts recorded for workers'
compensation funding, amounts recorded for the allowance for doubtful accounts,
the availability of net operating loss carryforwards and certain other temporary
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. The
determination of the requirement for a valuation allowance is an estimate, which
is reasonably possible to change in the near term.
Intangible Assets. Goodwill represents the excess of the cost of companies
acquired over the fair value of their net assets at the date of acquisition and
is being amortized on the straight-line method over terms ranging from ten years
to twenty-five years. Amortization of goodwill is based upon management's
estimates, for which it is reasonably possible that such estimates may change in
the near term. Amortization of goodwill charged to continuing operations for the
periods ended December 31, 1999, 1998 and 1997 was approximately $403,000,
$347,000, and $102,000 respectively, and is included in general and
administrative expenses in the consolidated statements of operations. An
additional $7,063,000 of goodwill was written off as part of the disposal of the
IMS business, and is included in the loss on disposal of IMS in the accompanying
consolidated statements of operations for the year ended December 31, 1999.
The covenant not to compete is being amortized on a straight-line method
over the life of the covenant (twenty-four months). Amortization expense related
to the covenant was approximately $45,000 for 1999 and $37,000 for 1998.
Deferred Rent Obligation. The Company is party to operating lease
agreements for certain of its office facilities, which contain provisions for
free rent for a certain period, with subsequent rent increases. In accordance
with generally accepted accounting principles, the Company records monthly rent
expense equal to the total of the payments due over the lease terms, divided by
the number of months of the respective lease agreements. The difference between
rent expense recorded and the amount paid is credited or charged to deferred
rent obligation in the accompanying consolidated balance sheets. Deferred rent
at December 31, 1999 also includes a liability of approximately $231,000 with
respect to the closing of the Company's New York City office in 1998 (see
"Non-recurring Charges" below).
Non-recurring Charges. In 1998 the Company recorded pretax non-recurring
charges related to the impairment of purchased goodwill and an estimated loss
related to its lease commitment on the closing of its New York City office.
These charges consisted of the following:
Impairment of purchased goodwill:
IT Training $ 707,000
Closing of New York City office 312,000
-----------
Total charges $ 1,019,000
===========
26
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (continued)
The impairment of purchased goodwill was a non-cash charge determined in
accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", due to continuing losses in that
business. The SFAS 121 charge had no impact on the Company's 1998 cash flow or
its ability to generate cash flow in the future. As a result of the SFAS 121
charge, amortization expense related to goodwill will decrease in future
periods. During the fourth quarter of 1998 the Company decided to cease
operations in its New York City office and recorded a charge to reserve for
future losses, primarily related to its lease commitment which was recorded at
the net present value of the difference between the lease obligation and related
sublease income.
The effect of these non-recurring charges, net of tax effect, was ($0.06)
per common share.
Advertising Expenses. The Company participates in various advertising
programs. All costs related to advertising are expensed in the period incurred.
Advertising expense charged to continuing operations amounted to approximately
$847,000, $1,119,000, and $658,000 in 1999, 1998, and 1997, respectively.
Earnings (Loss) Per Share. The Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share, beginning in the
fourth quarter of 1997. All prior period earnings per common share were
recomputed to conform to the provisions of SFAS 128. The recomputations did not
result in any restatements in earnings per share previously reported.
Basic earnings (loss) per share amounts are computed based on net income
(loss), and divided by the weighted average number of shares actually issued,
reduced by Treasury Shares. The number of shares used in the computation were
approximately 13,761,000 in 1999, 13,458,000 in 1998, and 12,761,000 in 1997.
Diluted earnings (loss) per share amounts for years 1999, 1998 and 1997
are based on the weighted average number of shares calculated for basic earnings
(loss) per share purposes increased by (when dilutive) the number of shares that
would be outstanding assuming exercise of outstanding stock options, and assumed
conversion of convertible debt (for 1997). The number of shares used in the
computation was approximately 13,797,000 in 1999, 13,458,000 in 1998, and
12,826,000 in 1997. In computing diluted earnings (loss) per share, certain
options to purchase shares of common stock were excluded from the computation
for the years ended December 31, 1999, 1998, and 1997. The options were excluded
from the 1999 computation because the exercise prices of such options were
greater than the average market price of the Company's common stock during that
period. The options were excluded from the 1998 and 1997 computations because
the assumed exercise of the options would be anti-dilutive.
On February 26, 1998 the Company repurchased 40,000 shares of its common
stock at a price of $5.50 per share, which shares are held as Treasury Stock.
Reclassifications. Certain items in the 1998 and 1997 financial statements
have been reclassified to conform to the 1999 financial statement presentation.
Fair Value of Financial Instruments. The estimated fair values of
substantially all of the Company's financial instruments are approximately equal
to their carrying values for all periods presented.
27
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 3. BUSINESS COMBINATIONS AND DISPOSITIONS
During 1998 the Company, through its subsidiaries, consummated several
acquisitions which were accounted for as purchase transactions, with the results
of their operations included in the accompanying financial statements since each
of their respective purchase dates. In each acquisition, the excess cost over
the fair value of net assets acquired is considered goodwill and is being
amortized over terms ranging from fifteen years to twenty-five years, beginning
with the month following the acquisition. Following is a description of the
acquisitions:
Effective March 5, 1998, the Company, through a subsidiary, purchased
substantially all of the assets of Information Systems, Inc. and ISI Systems,
Inc. (together "ISI"), a company engaged in the IT placement business in the
Detroit, Michigan area, for total original acquisition cost of $6,290,000,
payable in cash, notes and Company stock. An additional $500,000 note payable
was issued to the sellers of ISI based on ISI having attained certain pre-tax
income amounts in calendar year 1998.
Effective March 31, 1998, the Company, through a subsidiary, purchased
substantially all of the assets of Cella Associates of Atlanta, Inc. ("Cella"),
a company engaged in the placement of personnel with offices in Connecticut,
Georgia, Texas and Illinois, for a total acquisition cost of $1,529,000, payable
in cash and Company stock.
Effective October 12, 1998, the Company, through a subsidiary, purchased
substantially all of the assets of Tech Stars, Inc. ("Tech Stars"), a company
engaged in the IT placement business with offices in Nashville, Tennessee and
Charlotte, North Carolina, for a total acquisition cost of $1,331,000.
Effective May 11, 1998, the Company, through its now discontinued IMS
subsidiary, purchased all of the outstanding common stock of On-Site Solutions,
Inc. ("On-Site"), a company engaged in the systems integration business in the
Irvine, California area, for total original acquisition cost of the assumption
of approximately $709,000 in liabilities. An additional $872,000 was paid in
cash and 443,071 shares of Company stock were issued as consideration for
$932,000, based on On-Site having attained certain pre-tax income in the period
April 1,1998 through December 31, 1998. In 1999, as part of the disposal of the
IMS business, substantially all of the assets of this company were sold.
Effective May 29, 1998, the Company, through its now discontinued IMS
subsidiary, purchased substantially all of the assets of AOP Solutions ("AOP"),
a company engaged in the Information Management Services business in the
Buffalo, New York area, for a total acquisition cost of $3,240,000, payable in
cash and Company stock. An additional $510,000 in cash was paid, based on AOP
having attained certain pre-tax income in calendar 1998. In 1999, as part of the
disposal of the IMS business, substantially all of the assets of this company
were sold.
Effective June 8, 1998, the Company, through its now discontinued IMS
subsidiary, purchased all of the outstanding common stock of Systems Solutions,
Inc. d/b/a Corebridge Technologies, Inc. ("Corebridge"), a company engaged in
document management, imaging and workflow solutions in the Seattle, Washington
area, for a total acquisition cost of $155,000, payable in cash. In 1999, as
part of the disposal of the IMS business, substantially all of the assets of
this company were sold.
28
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 3. BUSINESS COMBINATIONS AND DISPOSITIONS -- (continued)
The following sets forth the unaudited pro forma consolidated results from
continuing operations for the Company for the year ended December 31, 1998 as
though these business combinations occurred at January 1, 1998.
Year Ended
December 31, 1998
-----------------
Net revenues $ 98,097,000
============
Income before non-recurring charges $ 2,102,000
============
Income from continuing operations $ 148,000
============
Pro-forma adjustments included adjustments to goodwill amortization
expense, interest expense and income tax expense/benefit.
Unaudited pro-forma basic and diluted income from continuing operations
per share of common stock is calculated as follows:
Year Ended
December 31, 1998
-----------------
Income from continuing operations $ 148,000
==========
Weighted average number of shares:
Basic 13,508,000
==========
Diluted 13,508,000
==========
Income from continuing operations per
share, basic and diluted $ 0.01
==========
On June 15, 1999 the Company adopted a formal plan to dispose of the IMS
business. During 1999 substantially all of the net assets of the IMS business
were disposed of for total consideration of $4,357,673 consisting of cash, note
receivable, and forgiveness of amounts payable to the buyer. The December 31,
1998 balance sheet has not been restated. Assets sold consisted primarily of
accounts receivable, inventory, and property and equipment. Liabilities assumed
by the respective purchasers consist primarily of accounts payable, accrued
expenses, and equipment leases payable.
The loss on disposal of the IMS business of $6,275,056 represents the
actual and estimated loss on the disposal of the assets and a provision of
$134,000 for operating losses during the phase-out period.
Operating results of the IMS business for the years ended December 31,
1999, 1998, and 1997 are shown separately in the accompanying consolidated
statements of operations, as "loss from discontinued operations".
Net revenues of the IMS business for the years ended December 31, 1999,
1998, and 1997 were $7,026,611, $19,280,184, and $16,443,294, respectively.
These amounts are not included in net revenues in the accompanying consolidated
statements of operations for the respective periods.
NOTE 4. NOTE PAYABLE, BANK
Note payable, Bank, consists of advances to the Company under a
$25,000,000 line of credit facility. The line of credit bears interest at the
Bank's prime rate (8.50% at December 31, 1999). Maximum permitted borrowings
thereunder are the lesser of $25,000,000 or 85% of qualified accounts
receivable, as defined in the line of credit agreement. The line of credit is
collateralized by substantially all of the Company's assets, expires May 31,
2003 and is subject to certain covenants, including financial covenants
29
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 4. NOTE PAYABLE, BANK - (continued)
requiring certain levels of net worth, cash flow coverage, and leverage, as well
as limitations on capital expenditures. In addition, the Company and all of its
subsidiaries are jointly and severally responsible for all of the debt
outstanding under the line.
Included in accounts payable and accrued expenses at December 31, 1999 and
1998 were approximately $1,871,000 and $1,585,000, respectively, of bank
overdrafts.
NOTE 5. LONG-TERM DEBT
Long-term debt consisted of the following:
December 31, 1999 December 31, 1998
----------------- -----------------
Capital lease obligation, pursuant to a sale/leaseback transaction; payable in
monthly installments of $41,992, including interest and taxes, through March
2002; and a final payment of $213,750 in April 2002; collateralized by
substantially all of the Company's property and equipment; the lease transfers
ownership of certain office equipment to
the Company at the end of the lease term $1,150,188 $ --
Note Payable; payable in various monthly installments plus interest at
8%, through March 2000 25,000 175,000
Note Payable; payable in 24 monthly installments of $12,500 plus
interest at 8%, through March 2000 25,000 175,000
Note Payable; payable in 8 quarterly payments of $102,333 including
interest at 8%, through December 2000 389,656 750,000
Note Payable; payable in 36 monthly installments of $6,944 plus
interest at 8%, through October 2001 145,832 229,167
---------- ---------
1,735,676 1,329,167
Less: Current portion (902,118) (743,677)
---------- ---------
Long-term portion $ 833,558 $ 585,490
========== =========
Maturities of long-term debt are as follows:
Year Ending December 31, Amount
------------------------ ------
2000 $ 902,118
2001 504,713
2002 328,845
----------
$1,735,676
==========
Interest expense charged to continuing operations was approximately
$829,000, $154,000, and $142,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
30
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 6. CONVERTIBLE NOTES
In 1994, the Company received $500,000 from a group of investors in the
form of 10% convertible senior subordinated promissory notes. The notes were
exchanged for 526,000 Company common shares, immediately prior to the Company's
1997 initial public offering. The notes bear 10% interest per annum and were
scheduled to mature in July 1997. Since the Company effected a successful
initial public offering before July 31, 1997, in accordance with the Note
Purchase Agreement, the financial advisor who arranged such financing was paid a
fee equal to 1% of the proceeds of the initial public offering (approximately
$225,000) in February 1997.
NOTE 7. INCOME TAXES
The Company files a consolidated Federal income tax return with all of its
wholly-owned subsidiaries. Prior to February 20, 1997, the IMS subsidiary was
not included in the Company's consolidated Federal income tax return, as the
Company owned less than 80% of the IMS subsidiary's outstanding common shares.
Under Internal Revenue regulations, the IMS subsidiary was not part of the
consolidated group for tax purposes and filed its own Federal income tax
returns. Effective February 20, 1997, the IMS subsidiary began filing as part of
the consolidated group. State income taxes are determined on the basis of filing
separate returns for each company as required by the applicable state
regulations.
The net deferred tax asset at December 31, 1999 and 1998 included the
following:
1999 1998
---- ----
Deferred tax asset $ 5,437,000 $ 2,743,000
Valuation allowance for deferred tax asset (2,919,000) (1,878,000)
----------- -----------
Net deferred tax asset after valuation allowance. $ 2,518,000 $ 865,000
=========== ===========
At December 31, 1999 and 1998, the net deferred tax assets of $2,518,000
and $865,000, respectively, were included in "prepaid income taxes and deferred
taxes" in the accompanying consolidated balance sheets.
The tax effect of major temporary differences that gave rise to the
Company's net deferred tax asset are as follows:
1999 1998
---- ----
Net operating loss carryforwards $ 4,637,000 $1,797,000
Allowance for doubtful accounts 467,000 205,000
Accrued expenses and lease provision 348,000 314,000
Amortization of goodwill and covenant not to compete (114,000) 324,000
Other 99,000 103,000
----------- ----------
$ 5,437,000 $2,743,000
=========== ==========
Income tax expense for continuing operations for the years ended December 31,
1999, 1998 and 1997 consisted of the following:
1999 1998 1997
---- ---- ----
Current tax expense:
Federal $ 1,184,901 $ 647,327 $ 1,845,048
State 701,214 289,055 516,733
Deferred tax expense (benefit) (9,000) (184,000) 11,000
----------- --------- -----------
Income tax expense $ 1,877,115 $ 752,382 $ 2,372,781
=========== ========= ===========
31
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 7. INCOME TAXES -- (continued)
The effective rate of income tax expense from continuing operations for
all periods presented was higher than the applicable statutory tax rate, due to
certain expenses that were not deductible for tax purposes and state tax
provisions. A reconciliation of the Company's effective income tax rate with the
statutory Federal rate follows:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Tax expense at statutory rate (34%) $1,436,000 $ 258,000 $ 2,215,000
Permanent differences, including non-deductible
goodwill amortization, net 73,000 311,000 (53,000)
Other (3,885) 39,441 (122,000)
State income taxes, net of Federal tax benefit 372,000 143,941 333,000
----------- --------- -----------
$ 1,877,115 $ 752,382 $ 2,373,000
=========== ========= ===========
As a result of operating losses, no provision for income taxes was
required for all periods prior to February 20, 1997 for the IMS subsidiary. The
IMS subsidiary's operating losses subsequent to February 20, 1997 have been used
in the consolidated tax accrual. For income tax reporting purposes, as of
December 31, 1999, the IMS subsidiary had an unused operating loss carryforward
of approximately $4,200,000, which may be applied against future taxable income
of the IMS subsidiary, subject to certain Federal income tax limitations. These
carryforwards expire between 2002 and 2012.
As a result of a net operating loss incurred in 1999 by the consolidated
group, the Company has a net operating loss carryforward of approximately
$5,000,000, which can be applied against future taxable income of the Company.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease office facilities under operating
lease agreements that expire at various times through the year 2008. Certain of
these leases contain optional provisions for additional periods of time. Rent
expense was approximately $2,228,000, $1,899,000 and $986,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. Minimum annual future
rental commitments, net of subleases rents (see Note 2), at December 31, 1999,
and exclusive of common area maintenance costs and utilities, are as follows:
Year Ending December 31, Amount
------------------------ ------
2000 $ 1,837,000
2001 1,738,000
2002 1,489,000
2003 704,000
2004 448,000
Thereafter 322,000
-----------
$ 6,538,000
===========
The Company is self-insured for workers' compensation purposes and is
liable for aggregate claims up to approximately $249,000 for 1999, $164,000 for
1998, and $164,000 for 1997. In addition, the Company is responsible for certain
fixed costs including underwriting, brokerage, reinsurance and administration
costs.
32
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 8. COMMITMENTS AND CONTINGENCIES -- (continued)
The Company is partially self-insured for health care claims for eligible
active employees. The Company is currently liable for aggregate claims up to
approximately $1,288,000 annually. Self-insurance costs are accrued based upon
the aggregate of the liability for reported claims and an estimated liability
for claims incurred but not reported.
The Company experienced no significant adverse effects from the rollover
of the two-digit year value to 00 on January 1, 2000. The Company's computer
systems continue to operate normally after the "Year 2000" transition. The
Company is unaware of any significant problems in the computer systems of third
parties for whom the Company implemented "Year 2000" solutions on their computer
systems. Total incremental spending on "Year 2000" issues was not material and
were charged to operations in 1999 as they occurred.
NOTE 9. RETIREMENT PLAN
The Company has a 401(k) retirement plan (the "Plan") covering
substantially all employees. Employees are able to contribute a percentage of
their pre-tax salary to the Plan. The Plan has no Company contribution
provision.
NOTE 10. SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE
Dividends. In accordance with the provisions of its line of credit, the
Company is not permitted to declare or pay any cash dividends on its common
stock.
Stock Option Plan. On September 4, 1996 the Company adopted an Incentive
Stock Option and Non-Qualified Stock Option Plan (the "Incentive Plan") for key
employees and non-employee directors. Options may be granted under the Incentive
Plan to purchase up to a maximum of 3,500,000 of the Company's common shares,
subject to certain adjustments and restrictions. The price of each option shall
be the fair market value of the shares on the date of the grant. The options
granted are generally subject to a four year vesting schedule in equal
increments annually, and are exercisable any time after vesting up to 10 years
from grant date.
During 1999, 1998 and 1997, the Company granted two non-employee Directors
options to purchase 10,000 common shares each at an exercise price of $1.813,
$4.938 and $3.25, respectively, under the Incentive Plan.
33
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 10. SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE -- (continued)
A summary of the Company's Incentive Plan activity for common shares for
the years ended December 31, 1999, 1998 and 1997 follows:
Options
Weighted Average Exercisable
Number of Shares Exercise Price at Year End
---------------- --------------- -----------
Outstanding 1/1/97 -0- N/A
Granted 695,500 $ 7.18
Exercised -0- N/A
Terminated 95,000 $ 7.43
---------
Outstanding 12/31/97 600,500 $ 7.14 -0-
===
Granted 1,014,750 $ 4.81
Exercised -0- N/A
Terminated 154,800 $ 5.54
---------
Outstanding 12/31/98 1,460,450 $ 5.70 138,541
=======
Granted 1,059,444 $ 1.55
Exercised -0- N/A
Terminated 690,200 $ 4.24
---------
Outstanding 12/31/99 1,829,694 $ 3.84 362,935
========= =======
The following table summarizes information about stock options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------- ----------------------------------
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Outstanding at Remaining Exercise Exercisable at Exercise
Prices 12/31/99 Contractual Life Price 12/31/99 Price
-------- -------------- ---------------- -------- -------- -----
$0.83 - $1.65 746,944 9.4 $1.45 0 $0.00
$1.65 - $2.48 137,000 9.2 $1.86 25,375 $1.96
$2.48 - $3.30 20,000 7.3 $3.25 13,332 $3.25
$3.30 - $4.13 5,000 8.7 $3.38 1,250 $3.38
$4.13 - $4.95 77,000 8.3 $4.55 20,916 $4.58
$4.95 - $5.78 514,250 8.0 $5.32 137,312 $5.30
$5.78 - $6.60 2,500 7.6 $6.25 1,250 $6.25
$6.60 - $7.43 5,000 7.8 $6.75 2,500 $6.75
$7.43 - $8.25 322,000 7.0 $7.68 161,000 $7.68
--------- --- ----- ------- -----
1,829,694 8.5 $3.84 362,935 $6.01
========= === ===== ======= =====
34
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 10. SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE -- (continued)
The Company accounts for its Incentive Plan in accordance with Accounting
Principles Board Opinion No. 25 and related interpretations. Accordingly, no
compensation expense has been recognized for the Incentive Plan. Had
compensation cost been determined in accordance with the fair value method of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), the Company's pro forma net income (loss) and net
income (loss) per share for the years ended December 31, 1999, 1998 and 1997
would be as follows:
1999 1998 1997
---- ---- ----
Net Income (loss):
As reported ($ 6,083,878) ($ 5,116,993) $ 2,711,940
Pro forma ($ 8,022,526) ($ 6,898,814) $ 2,117,278
Basic and diluted earnings (loss)
per share:
As reported ($ 0.44) ($ 0.38) $ 0.21
Pro forma ($ 0.58) ($ 0.51) $ 0.17
The resulting pro forma compensation cost may not be representative of
that to be expected in future years.
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1999 and 1998, respectively; risk-free
interest rate of 5.50% and 5.10%, expected dividend yields of 0%, expected life
of option of five years from date of grant, and expected price volatility of
125% and 131%. The weighted average fair value of the options granted was $1.12
in 1999 and $3.59 in 1998.
NOTE 11. STATEMENT OF CASH FLOWS
Supplemental disclosure of non-cash investing and financing transactions:
During 1999, the Company entered into the following non-cash transactions:
o entered into certain capital lease arrangements to fund the purchase of
equipment in the amount of approximately $345,700
o recorded the following with respect to the disposition of the IMS
segment:
o reduced contingent stock payables which were forgiven in the amount of
a pproximately $952,000
o reduced earnouts payable which were forgiven in the amount of
approximately $718,000
o wrote off approximately $7,063,000 of goodwill
During 1998, the Company entered into the following non-cash transactions:
o recorded the following with respect to business combinations entered
into in 1998 (Note 3):
o goodwill of $15,908,000;
o incurred long-term debt ($1,640,000) and contingent purchase price
($2,635,000) and other liabilities ($1,595,000);
o issued stock (193,333 shares - $1,933) and recorded additional paid-in
capital ($2,141,957);
o reduced goodwill $707,000 due to an impairment loss in IT Training
subsidiary;
o reduced goodwill $2,914,099 due to an impairment loss in IMS subsidiary.
35
JUDGE.COM, INC. AND SUBSIDIARIES
(FORMERLY THE JUDGE GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 11. STATEMENT OF CASH FLOWS - (continued)
During 1998, the Company effected various business combinations:
Acquisition of Businesses: ISI Cella On-Site AOP Corebridge Tech Stars
--- ----- ------- --- ---------- ----------
Inventories $ 0 $ 0 $ 0 $ 472,020 $ 0 $ 0
Accounts receivable 1,225,151 168,938 106,175 411,581 28,207 248,437
Property and equipment, net 46,051 31,059 143,210 53,325 15,000 40,822
Deferred income taxes 0 0 40,000 0 0 0
Other assets 10,000 600 14,269 90,222 1,000 6,539
---------- --------- ---------- ---------- ------- ---------
1,281,202 200,597 303,654 1,027,148 44,207 295,798
---------- --------- ---------- ---------- ------- ---------
Accounts payable and accrued
expenses 237,470 90,107 557,993 416,594 6,386 61,029
Debt obligations 418,759 0 112,817 0 0 0
Due to the Company 0 0 319,620 0 0 0
Deferred revenue and customer
deposits 0 0 7,900 262,009 0 0
---------- --------- ---------- ---------- ------- ---------
656,229 90,107 988,300 678,603 6,386 61,029
---------- --------- ---------- ---------- ------- ---------
Net assets acquired
(liabilities assumed) in
business combinations $ 624,973 $ 110,490 ($ 694,676) $ 348,545 $37,821 $ 234,768
========== ========= ========== ========== ======= =========
During 1997, the Company entered into the following non-cash transactions:
o incurred goodwill of $2,399,190 in the business combination with IMS;
o converted $300,000 of long-term debt to equity in accordance with an
agreement;
o converted $500,000 of convertible debentures into 526,000 shares of
common stock;
o reversed $572,200 of goodwill and long-term debt due to a contingent
payment which was not required to be made, relating to the Berkeley
acquisition.
NOTE 12. SEGMENT INFORMATION
With the sale of the IMS segment in 1999, substantially all of the Company's
revenues and assets are derived from the IT Staffing business. The Company also
generates minor revenues from its IT training subsidiary which amounted to
approximately $3,100,000 in 1999, $2,950,000 in 1998, and $3,200,000 in 1997.
The IT training subsidiary incurred a loss from continuing operations of
approximately $500,000 in 1999, $1,426,000 in 1998, and $75,000 in 1997.
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
INCORPORATION BY REFERENCE
The information called for by Item 10 "Directors and Executive Officers
of the Registrant," Item 11 "Executive Compensation," Item 12 "Security
Ownership of Certain Beneficial Owners and Management," and Item 13 "Certain
Relationships and Related Transactions" is incorporated herein by reference to
the Company's definitive proxy statement for its 2000 Annual Meeting of
Shareholders under the caption "Nominees for Election as Directors;
Identification of Executive Officers", "Executive Compensation", "Security
Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Transactions". The definitive proxy statement is
expected to be filed with the Commission no later than 120 days after the end of
the fiscal year to which this Report relates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a.) The following documents are filed as a part of this Annual Report on Form
10-K:
1. Consolidated Financial Statements:
Report of Independent Auditors 19
Consolidated Balance Sheets 20
Consolidated Statements of Operations 21
Consolidated Statements of Shareholders' Equity 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24-36
2. Consolidated Financial Statement Schedules:
Included in Part IV of this report:
All such information is included in the Notes to the
Consolidated Financial Statements.
Other Schedules are omitted because of the absence of conditions
under which they are required.
37
3. Exhibits
Exhibit
No. Description of Document
- ------- -----------------------
3.1 Amended and Restated Articles of Incorporation. Incorporated by reference to Exhibit
3.1 of the Company's Registration Statement on Form S-1
(Reg. No. 333-13109).
3.2 Bylaws. Incorporated by reference to Exhibit 3.2 of the Form S-1.
4.3 Fourth Amended and Restated Loan and Security
Agreement, dated December 10, 1996, between the
Company and PNC Bank, N.A. Incorporated by reference
to Exhibit 4.3 to the Form S-1.
10.1 Lease of Two Bala Plaza, Bala Cynwyd, Pennsylvania, dated January 21, 1994, between
The Prudential Insurance Company of America, as landlord, and Judge, Inc., as tenant.
Incorporated by reference to Exhibit 10.1 of the Form S-1.
10.2 1996 Incentive Stock Option and Non-Qualified Stock
Option Plan for Key Employees and Non-Employee
Directors, as amended and restated effective June 9,
1998. Incorporated by reference to Exhibit 4.1 to Form
S-8 filed on August 6, 1998.
10.3 Professional Services Agreement between Merck & Company, Inc. and Judge Technical
Services, Inc. Incorporated by reference to Exhibit 10.5 of the Form S-1.
10.4 Split-Dollar Agreement by and between Judge, Inc. and Dennis F. Judge, Trustee of
Irrevocable Agreement of Trust of Martin E. Judge, Jr., Settlor, Dated December 28,
1995. Incorporated by reference to Exhibit 10.6 of the Form S-1.
10.5 Split-Dollar Agreement by and between Judge, Inc. and Kathleen Dunn, Trustee of the
Irrevocable Agreement of Trust of Michael Dunn, Settlor, date June 19, 1996.
Incorporated by reference to Exhibit 10.7 of the Form S-1.
10.6 Split-Dollar Agreement by and between Judge, Inc. and Ann L. Judge, Trustee of the
Irrevocable Agreement of Trust of Martin E. Judge, Jr., Settlor, dated December 20,
1995. Incorporated by reference to Exhibit 10.8 of the Form S-1.
38
Exhibit
No. Description of Document
- ------- -----------------------
10.7 Split-Dollar Agreement by and between Judge, Inc. and D. Michael Carmody, Trustee of
the Irrevocable Agreement of Trust of Michael Dunn, Settlor, dated June 19, 1996.
Incorporated by reference to Exhibit 10.9 of the Form S-1.
10.8 Stock Option Agreement between the Company and James A. Hahn. Incorporated by
reference to Exhibit 10.11 of Form 10-K for the year ended December 31, 1998 filed on
April 15, 1999.
10.9 Stock Option Agreement between the Company and Randolph J. Angermann. Incorporated by
reference to Exhibit 10.12 of Form 10-K for the year ended December 31, 1998 filed on
April 15, 1999.
10.10 Employment Agreement by and between the Company and Robert G. Alessandrini.
10.11 Asset Purchase Agreement by and among Judge Imaging Systems, Inc., Automated Office
Products of Western New York, Inc. d/b/a AOP Solutions, Paul F. Eckert and Suzanne
Eckert. Incorporated by reference to Exhibit 10.1 to Form 10-Q filed on August 16,
1999.
10.12 Asset Purchase Agreement by and among Systems Solutions, Inc., Judge Imaging Systems,
Inc., AOP Acquisition Corp., Paul F. Eckert and Suzanne Eckert. Incorporated by
reference to Exhibit 10.2 to Form 10-Q filed on August 16, 1999.
10.13 Asset Purchase Agreement by and among Judge Imaging Systems, Inc., The Judge Group,
Inc. and AOP Morristown Corp. Incorporated by reference to Exhibit 10.3 to Form 10-Q
filed on August 16, 1999.
10.14 Master Lease Agreement, dated April 20, 1999, between
the Company and PNC Leasing Corp, a subsidiary of PNC
Bank, N.A.
10.15 Asset Purchase Agreement by and among Filenet Corporation and On Site Solutions, Inc.
dated as of July 31, 1999.
21.1 Subsidiaries of the Registrant.
23.1 Consents of Independent Auditors.
27.1 Financial Data Schedule.
No reports were filed by the Registrant on Form 8-K during the quarter
ended December 31, 1999.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned,
Dated: March 27, 2000 JUDGE.COM, INC.
(FORMERLY THE JUDGE GROUP, INC.)
By: /s/ Robert G. Alessandrini By: /s/ Martin E. Judge, Jr.
-------------------------- ------------------------
Robert G. Alessandrini Martin E. Judge, Jr.
Chief Financial Officer Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Martin E. Judge, Jr. Chairman of the Board, March 27, 2000
- ------------------------ Director, President and Chief
Martin E. Judge, Jr. Executive Officer
(Principal Executive Officer)
/s/ Richard T. Furlano Director March 27, 2000
- ----------------------
Richard T. Furlano
/s/ Michael A. Dunn Director and Executive March 27, 2000
- ------------------- Vice President
Michael A. Dunn
/s/ Randolph J. Angermann Director March 27, 2000
- -------------------------
Randolph J. Angermann
/s/ James C. Hahn Director March 27, 2000
- -----------------
James C. Hahn
40