Back to GetFilings.com
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, 2000
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
THE JUDGE GROUP, INC.
(formerly Judge.com, Inc.)
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1726661
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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, 2001, the approximate aggregate market value of the
voting stock held by non-affiliates of the Registrant was $7,283,000 based on
the closing sales price of $1.19 of the Registrant's Common Stock on the NASDAQ
Stock Market.
As of March 15, 2001, 14,090,652 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 2001 Annual Meeting of the stockholders, to
be filed within 120 days of December 31, 2000, 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.
For the purposes of calculating the aggregate market value of the shares of
common stock of the Company held by non-affiliates, as shown on the cover page
of this Report, it has been assumed that all the outstanding shares were held by
non-affiliates 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.
ITEM 1. BUSINESS
GENERAL
The Judge Group, Inc. (the "Company") (formerly Judge.com, 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 8 offices in 8 states. The
Company maintains a database of approximately 210,000 technical consultants, and
in 2000 provided over 1,900 technical consultants to approximately 630 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 201,000 candidate professionals. In 2000, the
Company placed 1,060 candidates with more than 680 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. The Company offers an
1
Instructor Staffing Service that provides trainers in all areas of IT to other
training schools and centers throughout the country, allowing the Company a
nationwide IT training presence.
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. Following its development and testing the website
service was formally launched in late 2000. 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.
In January 2001, the Company announced a new web enabled service
through which the Company will be the primary staffing provider and will manage
all staffing functions for clients, including the sub-contracting of services to
associate staffing providers. This process will provide automated management
tools and staff delivery systems to assist clients in reaching their objectives.
Clients will benefit from reduced costs, increased control and accountability,
as well as improved staffing results. The Company anticipates this service will
be implemented by the second quarter of 2001.
The Company's operations, including its contract placement, permanent
placement and IT training business, were consolidated within the IT Staffing
segment in January 1999 to enable financial analysis that more closely tracks
its lines of business. Previously, the Company also operated another segment
through its Information Management Solutions ("IMS") business. During 1999, the
Company sold substantially all of the assets of the IMS business. The results of
operations of the IMS business for 1999 and 1998 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 $11.0 million, $12.2 million, and $14.4 million in 1998, 1999 and
2000, respectively, representing 11.5%, 10.7%, and 12.6% 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 and Jacksonville, Florida;
Dallas, Texas; Atlanta, Georgia; Chicago, Illinois; and Nashville, Tennessee.
The Texas, Georgia, and Illinois locations were added through an acquisition in
1998. In 2000, the Company began providing permanent placement services from its
Jacksonville, Florida and Nashville, Tennessee offices, which were 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 200,000
engineering and IT candidate professionals, and in 2000 it placed 1,060
professionals with more than 680 clients. As compensation for its services, 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 to ninety days).
In 1986, the Company began to provide technical consultants on a
temporary contract basis, which generated revenue of $81.3 million, $98.5
million and $95.6 million in fiscal 1998, 1999 and 2000, respectively,
representing 85.4%, 86.6% and 83.7% of the Company's consolidated net revenues
in those periods. 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, North Carolina; Nashville,
Tennessee; and nationally through its National Division based in Providence. The
Company maintains a database of approximately 210,000 technical consultants, and
in 2000 placed over 1,900 consultants with approximately 630 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 portion of the Company's operations 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.
2
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.
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 and continuing in 2000, 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. 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 $12.4
million, $13.6 million, and $12.3 million in 1998, 1999, and 2000, respectively,
representing 13.0%, 12.0% and 10.8% 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 $3.0 million, $3.0 million,
and $4.3 million in 1998, 1999, and 2000, respectively, which represented 3.1%,
2.6%, and 3.8% of the Company's consolidated net revenues during such periods.
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 and Quark, Inc. 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 from June through August 1999, the Company divested
substantially all of the assets of the IMS business for total consideration of
approximately $4.4 million 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 approximately $6.3 million (net of tax effect of $2.0 million).
Included in such loss was the write off of approximately $7.1 million 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 was an estimated loss for operations
during the phase out period of approximately $0.1 million for the remaining
business, which was sold in August 1999.
Operating results of the IMS business for the years ended December 31,
1999 and 1998 are shown separately in the accompanying consolidated statements
3
of operations. Net revenues of the IMS business for the years ended December 31,
1999 and 1998 were approximately $7.0 million and $19.3 million, respectively.
INTELLECTUAL PROPERTY
While the Company does not own any patents, 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, food, and
pharmaceutical. In 2000, 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 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 market.
The Company occasionally competes 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 service providers, outsourcing
and consulting companies, 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 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
4
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.
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, 2000, the Company had 331 full-time, non-consultant,
employees. On that date, there were also approximately 782 IT consultants
working on full-time assignments for the Company's clients, of which
approximately 80% were treated as employees of the Company and 20% 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, 2000
------ ----- ---------- -----------------
Bala Cynwyd, Pennsylvania 35,900 October 31, 2004 Contract Placement; Permanent Placement;
IT Training
Providence, Rhode Island 7,100 March 30, 2004 Contract Placement
Edison, New Jersey 11,800 February 28, 2006 Contract Placement; Permanent Placement
Alexandria, Virginia 3,900 December 31, 2005 Contract Placement
Tampa, Florida 6,900 May 31, 2003 Permanent Placement
Needham, Massachusetts 7,000 March 31, 2005 Contract Placement
Walled Lake, Michigan 4,300 February 28, 2006 Contract Placement
Alpharetta, Georgia 4,800 September 30, 2003 Permanent Placement
Arlington, Texas 2,800 June 30, 2005 Permanent Placement
Downers Grove, Illinois 2,700 October 31, 2001 Permanent Placement
Jacksonville, Florida 2,900 November 30, 2003 Permanent Placement
Raleigh, North Carolina 3,900 January 31, 2005 Contract Placement
Nashville, Tennessee 2,700 December 31, 2001 Contract Placement; Permanent 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, 2000.
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, 2001 was $1.19. At March 15, 2001,
there were 197 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 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
Fiscal 2000
First Quarter $ 3.250 $ 1.438
Second Quarter $ 2.250 $ 1.000
Third Quarter $ 1.875 $ 1.219
Fourth Quarter $ 1.563 $ 0.813
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.
On December 29, 2000, the Company issued 150,000 shares of its common
stock at a purchase price of $1.00 per share for aggregate consideration of
$150,000 to a former executive of the Company in accordance with the terms of a
separation agreement entered into by the Company and the former executive.
The sale and issuance of securities in the transaction described above
were exempt from registration under the Securities Act of 1933, as amended, in
reliance on Section 4(2) thereunder.
6
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
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands, except per share data)
Net revenues $114,217 $113,705 $95,218 $ 82,083 $ 68,157
Cost of sales 74,356 75,570 64,316 57,616 49,446
Selling and operating expenses 20,400 20,563 18,874 12,190 11,075
General and administrative expenses 13,514 12,535 10,189 5,931 4,523
Non-recurring charges 917 0 1,019 0 0
-------- -------- --------- -------- --------
Total costs and expenses 109,187 108,668 94,398 75,737 65,044
-------- -------- --------- -------- --------
Operating Income 5,030 5,037 820 6,346 3,113
Interest income (expense), net (947) (816) (60) 141 (642)
Other income 0 0 0 29 0
-------- -------- --------- -------- --------
Income before income taxes 4,083 4,221 760 6,516 2,471
Income tax expense 100 1,877 752 2,373 939
Minority interest income 0 0 0 0 (888)
-------- -------- --------- -------- --------
Income from continuing operations 3,983 2,344 8 4,143 2,420
Loss from discontinued operations 0 (2,153) (5,125) (1,431) (1,513)
Loss on disposal of discontinued
operations 0 (6,275) 0 0 0
-------- -------- --------- -------- --------
Net income (loss) $ 3,983 ($ 6,084) ($ 5,117) $ 2,712 $ 907
======== ======== ========= ======== ========
Income from continuing operations per
Common Share: Basic $ 0.29 $ 0.17 $ 0.00 $ 0.32 $ 0.29
======== ======== ========= ======== ========
Diluted $ 0.29 $ 0.17 $ 0.00 $ 0.32 $ 0.27
======== ======== ========= ======== ========
Loss from discontinued operations:
Basic $ 0.00 ($ 0.15) ($ 0.38) ($ 0.11) ($ 0.19)
======== ======== ========= ======== ========
Diluted $ 0.00 ($ 0.15) ($ 0.38) ($ 0.11) ($ 0.17)
======== ======== ========= ======== ========
Basic and Diluted loss from disposal of
discontinued operations $ 0.00 ($ 0.46) $ 0.00 $ 0.00 $ 0.00
======== ======== ========= ======== ========
Basic and Diluted net income (loss) $ 0.29 ($ 0.44) ($ 0.38) $ 0.21 $ 0.10
======== ======== ========= ======== ========
Basic weighted average shares 13,702 13,761 13,458 12,761 8,473
======== ======== ========= ======== ========
Diluted weighted average shares 13,924 13,797 13,458 12,826 9,114
======== ======== ========= ======== ========
7
AS OF DECEMBER 31,
BALANCE SHEET DATA: 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Working capital $ 16,608 $ 14,181 $ 12,213 $ 18,525 $ 8,253
Total assets 37,341 35,086 47,885 31,934 21,969
Notes payable, including current portion(1) 9,167 9,689 9,882 0 10,161
Other long-term obligations, including
current portion 1,457 2,135 1,996 355 3,105
Shareholders' equity 18,992 16,006 23,081 26,274 1,122
- -----------
(1) 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
The Company's operations, including its contract placement, permanent
placement and IT training business, were consolidated within the IT Staffing
segment in January 1999 to enable financial analysis that more closely tracks
its lines of business. Previously, the Company also operated another segment
through its Information Management Solutions ("IMS") business. During 1999, the
Company sold substantially all of the assets of the IMS business for total
consideration of approximately $4.4 million 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 approximately $6.3 million (net of tax effect
of $2.0 million). Included in such loss was the write-off of approximately $7.1
million 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 was an estimated loss for
operations during the phase out period of approximately $0.1 million for the
remaining business, which was sold in August 1999.
Operating results of the IMS business for the years ended December 31,
1999 and 1998 are shown separately in the accompanying consolidated statements
of operations. Net revenues of the IMS business for the years ended December 31,
1999 and 1998 were approximately $7.0 million and $19.3 milllion, respectively.
The Company's continuing operations experienced an increase in revenue
of approximately $0.5 million, or 0.5%, for the twelve months ended December 31,
2000 compared to the prior year period. This relatively flat revenue was
primarily attributable to several factors including more severe winter weather
in the first two months of 2000 compared to the prior year, which prevented the
Company's IT consultants from performing billable services; the completion of
"Year 2000" projects on which some of the Company's consultants were working;
and a general trend in the IT industry toward more permanent placement business
instead of contract placement business. However, the Company's income from
continuing operations increased approximately $1.6 million, or 69.9%, in the
year ended December 31, 2000 over the prior year period. Such increase was
primarily attributable to higher gross profit and a reduction in income tax
expense. The reduction in income tax expense was the result of the Company's use
of net operating loss carryforwards, and the reduction of the deferred tax asset
valuation allowance, which was a result of certain corporate restructurings.
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 IT $1,331,000 in cash, notes October 12, 1998 Contract Placement
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 or in 2000.
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, 2000, total
hours billed were 1,515,374, with an average billing rate of $59.27, compared to
total hours billed of 1,647,103 with an average billing rate of $55.27 for the
prior year period. The Company believes that the increase in the average billing
rates for its technical consultants has resulted from its emphasis on higher
bill rate services, such as client server and web development projects. 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 1,060 professionals with an average
placement fee of $13,544 in 2000, compared to 995 professionals placed with an
average placement fee of $12,350 for the prior year period. The increase in
placements was directly attributable to placements made in the Company's
Jacksonville office, which was not providing permanent placement services prior
to 2000. The increase in average placement fee was primarily attributable to the
Company's emphasis on higher salary placements in the food and pharmaceutical
industries. 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 and its primary staffing provider
services; 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 2000 the Company
continued a focused strategic planning and budgeting process resulting in a 2001
internal operating plan that attempts to increase revenues approximately 15%,
while continuing to control costs. 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 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 2001.
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:
YEAR ENDED DECEMBER 31,
2000 1999 1998
---- ---- ----
Net Revenues 100.0% 100.0% 100.0%
------ ------ ------
Cost of Sales 65.1% 66.5% 67.5%
Selling and Operating Expenses 17.9% 18.1% 19.8%
General and Administrative Expenses 11.8% 11.0% 10.8%
Non-recurring Charges 0.8% 0.0% 1.1%
------ ------ ------
Total Costs and Expenses 95.6% 95.6% 99.2%
------ ------ ------
Operating Income 4.4% 4.4% 0.8%
Other Income (Expense), net (0.8%) (0.7%) 0.0%
------ ------ ------
Income From Continuing Operations before Income Taxes 3.6% 3.7% 0.8%
====== ====== ======
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net Revenues. Consolidated net revenues from continuing operations increased by
$0.5 million, or 0.5%, for the year ended December 31, 2000 compared to the
prior year period. The Company's permanent placement and IT training businesses
increased revenues in 2000 by $2.2 million and $1.3 million, respectively, over
the prior year period. The contract placement business generated revenues of
$95.6 million for the year ended December 31, 2000, a decrease of $2.9 million,
or 3%, from revenues of $98.5 million in the prior year period. Such decrease
resulted primarily from more severe winter weather in the first two months of
2000 compared to the prior year period, which prevented the Company's IT
consultants from performing billable services; the completion of "Year 2000"
projects on which some of the Company's consultants were working; and a general
10
trend in the IT industry toward more permanent placement business instead of
contract placement business. The Company's permanent placement business
generated revenues of $14.4 million in 2000, an increase of $2.2 million, or
18.0%, over 1999 revenues of $12.2 million. Approximately $0.9 million of such
increase reflects the operations of the Company's Jacksonville office in 2000
which was not offering permanent placement services in 1999, and the remainder
is attributable to increased marketing efforts in the other offices that offer
permanent placement services. The IT training business increased revenues
approximately $1.3 million, or 43.3%, from $3.0 million in 1999 to $4.3 million
in 2000. The increase in revenues in the Company's IT training business was
attributable to an increase in trainer brokerage business, in which the Company
acts as a broker to supply contract trainers to client companies at the client's
own facility at a markup over the contract trainer cost. The Company only
supplies the contract trainer, thereby eliminating most direct costs of this
revenue. The Company's trainer brokerage program generated approximately $1.6
million in revenues in 2000 compared to approximately $0.1 million in revenues
in 1999.
Cost of Sales. Consolidated cost of sales decreased by $1.2 million, or 1.6%,
for the year ended December 31, 2000 to $74.4 million from $75.6 million in the
prior year period. The decrease in cost of sales was primarily due to lower cost
of sales in the contract placement business related to lower revenues discussed
above. Cost of sales as a percentage of consolidated net revenues decreased to
65.1% from 66.5% in the respective periods. In the Company's contract placement
business cost of sales as a percentage of its net revenues was unchanged at
75.5% for the years ended December 31, 2000 and 1999. The decrease in cost of
sales as a percentage of consolidated net revenues was primarily attributable to
the increase in net revenue from the permanent placement business discussed
above, 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 $2.3 million in expenses included in cost of sales, an
increase of approximately $0.6 million from the prior year period, primarily due
to additional trainers required for the trainer brokerage program discussed
earlier.
Selling and Operating. Consolidated selling and operating expenses decreased by
approximately $0.2 million, or 0.8%, for the year ended December 31, 2000 to
$20.4 million from $20.6 million in the prior year period. Selling and operating
expenses as a percentage of consolidated net revenues for the year ended
December 31, 2000 decreased to 17.9% from 18.1% in the prior year period. This
decrease was due partially to lower commissions paid on lower revenues in the
contract placement business, and partially 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 decreased approximately $1.3 million, or 11.8%, over the prior year
period partially due to lower commissions paid on the lower revenues in 2000
discussed earlier, and partially due to management's cost control efforts. In
the Company's permanent placement business selling and operating expenses
increased approximately $1.0 million, or 12.9%, over the prior year period
primarily due to increased commissions paid on the higher revenues in 2000
discussed earlier. In the Company's IT training business selling and operating
expenses were relatively unchanged at $0.9 million for the years ended December
31, 2000 and 1999.
General and Administrative. Consolidated general and administrative expenses
increased by approximately $1.0 million, or 7.8%, for the year ended December
31, 2000 to $13.5 million from $12.5 million in the prior year period. General
and administrative expenses as a percentage of consolidated net revenues for the
year ended December 31, 2000 increased to 11.8% from 11.0% in the prior year
period. Contributing to this increase was an increase of $0.6 million, or 8.2%,
in salary expense for the year ended December 31, 2000 compared to the prior
year period. This increase primarily reflects usual and customary salary
increases to existing staff. Also contributing to the increase in general and
administrative expense was an increase in depreciation expense of $0.2 million,
or 27.3%, in the year ended December 31, 2000 compared to the prior year period.
This increase was due primarily to computer equipment and software installed in
late 1999 and early 2000 to upgrade the Company's technology infrastructure.
Non-recurring charges. During 2000, the Company incurred non-recurring charges
of $0.9 million compared to no such charges in the prior period. The increase
primarily represents severance costs related to two former members of
11
management. Included in such charge is $0.2 million representing the fair value
of stock compensation granted in accordance with a severance agreement executed
between the Company and one former executive.
Interest. Interest expense was approximately $995,000 for the year ended
December 31, 2000 compared to approximately $829,000 in the prior year period.
Additionally, in the year ended December 31, 1999 the Company had allocated
approximately $333,000 of interest expense to the discontinued IMS business,
which is included in "loss from discontinued operations" in the accompanying
consolidated statements of operations. The decrease in total interest expense
reflects the Company's decreased usage of its line of credit, which had been
used in 1999 to fund the IMS losses. The interest rate on the Company's line of
credit increased from 8.50% at December 31, 1999 to 9.50% at December 31, 2000,
partially offsetting the decreased total interest expense. Interest and other
income increased to approximately $47,000 for the year ended December 31, 2000
from $13,000 in the prior year period.
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 $16.9 million, or 91% of the increase, was
attributable to the Company's contract placement business. The contract
placement business generated revenues of $98.5 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 $12.2 million in 1999, an increase of
$1.0 million, or 8.9%, 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.
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 75.5% 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
12
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.
Non-recurring charges. There were no non-recurring charges incurred in the year
ended December 31, 1999. In the year ended December 31, 1998, the Company
incurred non-recurring charges of approximately $0.7 million related to the
impairment of purchased goodwill and a loss of $0.3 million related to its lease
commitment on the closing of its New York office.
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
prior year period. In addition the Company had allocated approximately $333,000
interest expense to the discontinued IMS business for the year ended December
31, 1999, which is included in "loss from discontinued operations" in the
accompanying consolidated statements of operations. Such increase in interest
expense reflects the Company's increased usage of its line of credit during the
year 1999, primarily to fund the IMS losses and additional accounts receivable
from the increased revenues, as well as debt to repay notes payable to former
owners of businesses acquired in 1998. 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.
INCOME TAXES
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." In 2000 the Company's income
tax expense from continuing operations was approximately $0.1 million, or 2.4%
of pre-tax income from continuing operations. This effective tax rate is lower
than the applicable federal statutory rate of 34% primarily due to the Company's
use of certain net operating loss carryforwards, for which the Company
previously provided a valuation allowance. In addition the Company reduced its
valuation allowance relating to the net operating loss portion of the deferred
tax asset. The effective tax rate was 44.4% and 98.9% with respect to continuing
operations for fiscal years 1999 and 1998, respectively. The effective tax rates
for 1999 and 1998 are higher than the applicable federal 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.
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
13
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) 1999 1999 1999 1999 2000 2000 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
Net Revenues $ 28,572 $ 29,757 $ 28,384 $ 26,992 $ 27,320 $ 28,067 $ 28,828 $ 30,002
-------- -------- -------- -------- -------- -------- -------- --------
Gross Profit 9,358 9,993 9,631 9,153 9,427 9,970 10,098 10,366
-------- -------- -------- -------- -------- -------- -------- --------
Operating Income 966 1,052 1,526 1,494 1,209 1,749 1,516 556
-------- -------- -------- -------- -------- -------- -------- --------
Income from Continuing
Operations 501 523 731 590 919 1,232 1,218 614
-------- -------- -------- -------- -------- -------- -------- --------
Loss from Discontinued
Operations (1,081) (839) (220) (13) 0 0 0 0
-------- -------- -------- -------- -------- -------- -------- --------
Gain (Loss) from Disposal
of Discontinued Operations 0 (6,283) 8 0 0 0 0 0
-------- -------- -------- -------- -------- -------- -------- --------
Net Income (Loss) ($ 580) ($ 6,600) $ 519 $ 576 $ 919 $ 1,232 $ 1,218 $ 614
======== ========= ======== ======== ======== ======== ======== ========
Basic and Diluted Income
(Loss) per share from
Continuing Operations $ 0.04 $ 0.04 $ 0.05 $ 0.04 $ 0.06 $ 0.09 $ 0.09 $ 0.05
======== ========= ======== ======== ======== ======== ======== ========
Basic and Diluted Net
Income (Loss) per share ($ 0.04) ($ 0.48) $ 0.04 $ 0.04 $ 0.06 $ 0.09 $ 0.09 $ 0.05
======== ========= ======== ======== ======== ======== ======== ========
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, 2000 and
1999, 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, and continued during the
first quarter of 2000. During the fourth quarter of 2000, the Company recorded
non-recurring charges for severance costs related to two former members of
management.
LIQUIDITY AND CAPITAL RESOURCES
The Company has used borrowings under its credit facility to fund its
working capital needs as its business has expanded. The Company utilizes a cash
management program to minimize non-earning cash assets, including a zero balance
disbursement account as reflected in the balance of $0 in cash and cash
equivalents as of December 31, 2000.
The Company provided cash from operating activities in 2000 of
approximately $3.5 million and used cash in operations of approximately
$200,000, and $6,000 in 1999 and 1998, respectively. This reflects the Company's
net income of approximately $4.0 million in 2000, and net losses of
approximately $6.1 million and $5.1 million for 1999 and 1998, respectively.
Those losses included non-cash items, such as 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 was offset by a corresponding
increase in accounts receivable related to increased sales.
Cash purchases of fixed assets for the fiscal years ended December 31,
2000, 1999, and 1998 were $0.7 million, $1.0 million, and $2.8 million
respectively. These purchases were related primarily to the purchases of
computers, software, and imaging equipment to upgrade the Company's technology
infrastructure, particularly that of the businesses it acquired in 1998. The
Company plans to spend approximately $1.0 million for capital expenditures in
2001. 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.
The Company repaid, net of borrowings, approximately $0.4 million of
its line of credit and overdraft facilities at December 31, 2000, compared to
net borrowings from those facilities of approximately $0.1 million at December
31, 1999 and approximately $11.5 million at December 31, 1998. At December 31,
14
2000 the Company had approximately $2.0 million outstanding in connection with
its overdraft facility compared to approximately $1.9 million at December 31,
1999. Such overdrafts represent the amount of checks issued by the Company prior
to being funded by the Company's line of credit through the zero balance
disbursement account discussed above. In the year ended December 31, 2000 the
Company paid approximately $0.3 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, compared to
approximately $2.1 million in the year ended December 31, 1999. The Company
repurchased approximately $1.1 million of its common stock in the year ended
December 31, 2000, in market transactions at prices ranging from $1.50 to $1.97
per share, which stock is considered treasury stock. In the year ended December
31, 1999, the Company 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 notes payable related to
the acquisition of the IT training business, and repurchased 40,000 common
shares (also accounted for as treasury stock), at a price of $5.50 per share
from the sellers of the IT training business.
Since April 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 April 30, 2003. This facility allows the
Company to borrow the lesser of 85% of eligible accounts receivable, or $25.0
million. As of December 31, 2000, the Company had approximately $9.2 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 Company's option, at
either the Bank's prime rate or 200 basis points over the London Inter-Bank
Offering 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 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.
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
15
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.
Ability to Manage Growth. Sustained or significant growth, including
growth contemplated under the Company's 2001 internal operating plan, 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 85.4%, 86.6% and 83.7% of total Company
revenues for the years ended December 31, 1998, 1999 and 2000, respectively. In
addition, for the year ended 2000, one customer of the Contract Placement
business, Merck & Company, Inc., accounted for approximately 6.4% of total
Contract Placement revenues, and 5.3% 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
16
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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE(S)
-------
INDEPENDENT AUDITOR'S REPORTS 19 - 20
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 1999 21
CONSOLIDATED STATEMENTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 23
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 25 - 36
18
INDEPENDENT AUDITOR'S REPORT
Board of Directors
The Judge Group, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheet of The Judge Group,
Inc. (formerly Judge.com, Inc.) and Subsidiaries as of December 31, 2000, and
the related consolidated statements of operations, shareholders' equity, and of
cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Judge Group,
Inc. and Subsidiaries as of December 31, 2000, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
MCGLADREY & PULLEN, LLP
February 16, 2001
Blue Bell, PA
19
INDEPENDENT AUDITOR'S REPORT
Board of Directors
The Judge Group, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheets of The Judge Group,
Inc. (formerly Judge.com, Inc.) and Subsidiaries as of December 31, 1999, and
the related consolidated statements of operations, shareholders' equity, and of
cash flows for each of the two 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Judge Group,
Inc. and Subsidiaries as of December 31, 1999 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
RUDOLPH PALITZ, LLC
February 25, 2000
Blue Bell, PA
20
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ --- $ 4,571
Accounts receivable, net 20,777,480 18,584,708
Prepaid income taxes and deferred taxes 3,162,983 2,801,245
Other 976,061 947,823
------------ ------------
TOTAL CURRENT ASSETS 24,916,524 22,338,347
------------ ------------
PROPERTY AND EQUIPMENT 6,331,479 5,083,530
Less: accumulated depreciation and amortization 3,148,417 2,083,785
------------ ------------
NET PROPERTY AND EQUIPMENT 3,183,062 2,999,745
------------ ------------
OTHER ASSETS
Deposits and other assets 355,282 596,042
Other receivables, officers and employees 539,069 400,437
Goodwill, net of accumulated amortization of $1,998,879, 2000 and $1,595,313,
1999 8,347,384 8,750,950
------------ ------------
TOTAL OTHER ASSETS 9,241,735 9,747,429
------------ ------------
TOTAL ASSETS $ 37,341,321 $ 35,085,521
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 583,384 $ 902,118
Accounts payable and accrued expenses 5,971,000 6,358,970
Payroll and sales taxes 495,809 422,017
Other liabilities 766,719 ---
Deferred revenue 491,883 474,067
------------ ------------
TOTAL CURRENT LIABILITIES 8,308,795 8,157,172
------------ ------------
LONG-TERM LIABILITIES
Note payable, bank 9,166,902 9,688,925
Deferred rent obligation 318,416 399,537
Debt obligations, net of current portion 555,610 833,558
------------ ------------
TOTAL LONG-TERM LIABILITIES 10,040,928 10,922,020
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares authorized; at December 31,
2000, 14,134,373 shares issued and 13,497,228 shares outstanding; at
December 31, 1999, 13,984,373 shares issued and 13,944,373 shares outstanding 141,343 139,843
Preferred stock, at December 31, 2000 and 1999, $.01 par value, 10,000,000
shares authorized --- ---
Additional paid-in capital 24,053,557 23,905,057
Deficit (3,835,649) (7,818,571)
------------ ------------
20,359,251 16,226,329
Less: Treasury Stock, 637,145 shares at December 31, 2000; 40,000 shares at
December 31, 1999; at cost 1,367,653 220,000
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 18,991,598 16,006,329
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,341,321 $ 35,085,521
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
NET REVENUES $ 114,217,453 $ 113,704,958 $ 95,218,213
------------- ------------- ------------
COSTS AND EXPENSES
Cost of sales 74,356,097 75,569,731 64,315,716
Selling and operating 20,400,612 20,562,479 18,873,617
General and administrative 13,513,519 12,535,158 10,189,140
Non-recurring charges (Note 2) 916,719 --- 1,019,000
------------- ------------- ------------
Total costs and expenses 109,186,947 108,667,368 94,397,473
------------- ------------- ------------
OPERATING INCOME 5,030,506 5,037,590 820,740
OTHER INCOME (EXPENSE), NET, PRINCIPALLY INTEREST (947,594) (815,925) (59,806)
------------- ------------- ------------
INCOME BEFORE INCOME TAX EXPENSE 4,082,912 4,221,665 760,934
INCOME TAX EXPENSE 99,990 1,877,115 752,382
------------- ------------- ------------
INCOME FROM CONTINUING OPERATIONS 3,982,922 2,344,550 8,552
LOSS FROM DISCONTINUED OPERATIONS (NET OF TAX BENEFIT OF
$1,089,056 AND $1,550,158 FOR THE YEARS ENDED DECEMBER 31,
1999, AND 1998, RESPECTIVELY) --- (2,153,372) (5,125,545)
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) $ 3,982,922 ($6,083,878) ($5,116,993)
============= ============= ============
NET INCOME (LOSS) PER SHARE:
BASIC
INCOME FROM CONTINUING OPERATIONS $ 0.29 $ 0.17 $ 0.00
LOSS FROM DISCONTINUED OPERATIONS --- ( 0.61) ( 0.38)
------ ------- -------
NET INCOME (LOSS) $ 0.29 ($ 0.44) ($ 0.38)
====== ======= =======
DILUTED
INCOME FROM CONTINUING OPERATIONS $ 0.29 $ 0.17 $ 0.00
LOSS FROM DISCONTINUED OPERATIONS --- ( 0.61) ( 0.38)
------ ------- -------
NET INCOME (LOSS) $ 0.29 ($ 0.44) ($ 0.38)
====== ======= =======
WEIGHTED AVERAGE SHARES USED IN NET INCOME (LOSS) PER SHARE
CALCULATIONS:
BASIC 13,702,000 13,761,000 13,458,000
============= ============= ============
DILUTED 13,924,000 13,797,000 13,458,000
============= ============= ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Common Stock Additional Retained
----------------------- Paid In Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
------ ------ ---------- -------- -------- -----
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
Purchase of Treasury Stock --- --- --- --- (1,147,653) (1,147,653)
Issuance of common stock in
connection with severance agreement 150,000 1,500 148,500 --- --- 150,000
Net Income --- --- --- 3,982,922 --- 3,982,922
---------- --------- ------------ ------------- ------------- ------------
Balance December 31, 2000 14,134,373 $ 141,343 $ 24,053,557 ($ 3,835,649) ($ 1,367,653) $ 18,991,598
========== ========= ============ ============= ============= ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
OPERATING ACTIVITIES
Net income (loss) $ 3,982,922 ($ 6,083,878) ($ 5,116,993)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,529,162 1,762,973 1,847,586
Impairment of goodwill --- --- 3,621,099
Provision for losses on lease --- --- 400,000
Loss on disposal of discontinued operations --- 6,275,056 ---
Deferred taxes (137,000) (9,000) (539,000)
Deferred rent (81,121) (342,342) 150,000
Provision for losses on accounts receivable 957,771 927,951 439,810
Stock compensation 150,000 --- ---
Loss on disposal of equipment 20,830 204,393 ---
Changes in operating assets and liabilities:
(Increase) decrease in:
Short-term investments --- --- 5,500,000
Accounts receivable (3,150,543) (1,526,105) (5,603,390)
Inventories --- (144,853) 755,620
Deposits and other 94,630 (148,008) (387,434)
Prepaid income taxes (224,738) 1,112,504 (1,044,919)
Other current assets (308,430) (146,536) (195,841)
Increase (decrease) in:
Accounts payable and accrued expenses 563,523 (2,037,307) 558,541
Payroll and sales taxes 73,792 (154,545) 63,000
Deferred revenue 17,816 108,377 (162,675)
Income taxes payable --- --- (291,515)
----------- ----------- ----------
Net cash provided by (used in) operating activities 3,488,614 (201,320) (6,111)
----------- ----------- ----------
INVESTING ACTIVITIES
Purchases of property and equipment (682,727) (958,286) (2,835,339)
Purchase/acquisition of companies --- --- (9,159,407)
Covenant not to compete --- --- (89,976)
Proceeds from disposition of businesses --- 2,788,000 ---
----------- ----------- ------------
Net cash provided by (used in) investing activities (682,727) 1,829,714 (12,084,722)
----------- ----------- ------------
FINANCING ACTIVITIES
Cash acquired in business combination --- --- 283,300
Proceeds from (repayments of) notes payable, bank, net (522,023) (192,670) 9,881,595
Proceeds (repayments) of bank overdrafts 151,012 285,951 1,585,154
Principal payments on long-term debt (956,008) (1,040,672) (1,080,130)
Proceeds from lease payable, bank --- 1,425,000 ---
Contingent amounts paid - acquisitions (335,786) (2,145,000) ---
Purchase of treasury stock (1,147,653) --- (220,000)
----------- ----------- ----------
Net cash provided by (used in) financing activities (2,810,458) (1,667,391) 10,449,919
----------- ----------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (4,571) (38,997) (1,640,914)
CASH AND CASH EQUIVALENTS, BEGINNING 4,571 43,568 1,684,482
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, ENDING $ --- $ 4,571 $ 43,568
=========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 921,000 $1,142,000 $ 321,000
========= ========== ===========
Income taxes $ 568,000 $ 768,000 $ 1,140,000
========= ========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 1. DESCRIPTION OF BUSINESS
The Judge Group, Inc (the "Company") (formerly Judge.com, 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")). In 1999, the Company disposed of the IMS business
through the sale of substantially all of the assets of that business (See Note
3). At December 31, 2000, 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.
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.
Use of Estimates. 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.
25
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Accounts Receivable and Accounts Payable. Accounts receivable at
December 31, 2000, 1999, and 1998 were net of allowances for doubtful accounts
of $1,264,000, $987,000, and $511,000, respectively.
Included in accounts receivable was unbilled work-in-process of
approximately $168,000, $1,234,000, and $1,134,000 at December 31, 2000, 1999
and 1998, respectively. Included in accounts payable and accrued expenses was
approximately $876,000, $913,000, and $867,000 of accrued employee and
contractor payroll principally relating to billed and unbilled work-in-process
at December 31, 2000, 1999 and 1998, 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:
Year Ended Balance at Additions Charged to Balance at
December 31, Beginning of Period Bad Debt Expense (Charge Offs) End Of Period
------------ ------------------- ---------------- ------------- -------------
2000 $ 987,000 $ 958,000 ($ 681,000) $ 1,264,000
========= ========== =========== ===========
1999 $ 511,000 $ 927,000 ($ 451,000) $ 987,000
========= ========== =========== =========
1998 $ 465,000 $ 440,000 ($ 394,000) $ 511,000
========= ========= =========== =========
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 $1,118,098 in 2000, $877,849 in 1999, and $701,648 in 1998.
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. The
carrying value of assets under capital leases amounted to approximately
$1,148,000 and $1,033,000 at December 31, 2000 and 1999, respectively.
Amortization is provided over the shorter of the related lease terms or the
estimated useful lives of the related assets.
26
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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. 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, 2000, 1999 and 1998 was
approximately $404,000, $403,000, and $347,000 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 in 1999 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, which was included in "deposits and other
assets" in the accompanying consolidated balance sheets, was amortized on a
straight-line method over the life of the covenant (twenty-four months) through
February 2000. Amortization expense related to the covenant was approximately
$7,000 for 2000, $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.
Non-recurring Charges. In the fourth quarter of 2000, the Company
recorded pretax non-recurring charges of approximately $917,000 to reflect
severance costs related to two former members of management. At December 31,
2000, $716,000 of this charge is included in "other liabilities" in the
accompanying consolidated balance sheets and $150,000 was recorded in the
Statement of Shareholders Equity representing the fair value of common stock
issued as part of the severance agreement between the Company and one of the
former members of management. In 1998, the Company recorded pretax non-recurring
charges of $1,019,000 related to the impairment of purchased goodwill ($707,000)
and an estimated loss related to its lease commitment on the closing of its New
York City office ($312,000).
27
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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. 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
($0.05) per common share in 2000, and ($0.06) per common share in 1998.
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
$1,283,000, $847,000, and $1,119,000 in 2000, 1999, and 1998, respectively.
Earnings (Loss) Per Share. Earnings (loss) per share are computed in
accordance with Statement of Financial Accounting Standards No. 128 ("SFAS
128"), Earnings Per Share.
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 13,702,000 in 2000, 13,761,000 in 1999, and 13,458,000 in
1998.
Diluted earnings (loss) per share amounts for years 2000, 1999 and 1998
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. The number
of shares used in the computation was approximately 13,924,000 in 2000,
13,797,000 in 1999, and 13,458,000 in 1998. In computing diluted earnings (loss)
per share, options to purchase 1,073,000, 1,619,000 and 1,437,000 shares of
common stock were excluded from the computation for the years ended December 31,
2000, 1999, and 1998, respectively. The options were excluded from the 2000 and
1999 computations 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 computation because the assumed exercise of
the options would be anti-dilutive.
Reclassifications. Certain items in the 1999 and 1998 financial
statements have been reclassified to conform to the 2000 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.
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:
28
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 3. BUSINESS COMBINATIONS AND DISPOSITIONS - (continued)
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.
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.
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.
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. 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. 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. In 1999, as part of the disposal of the IMS business, substantially all of
the assets of this company were sold.
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 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 respective purchasers consist
primarily of accounts payable, accrued expenses, and equipment leases payable.
The loss on disposal of the IMS business of approximately $6,275,000
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 and 1998 are shown separately in the accompanying consolidated statements
of operations, as "loss from discontinued operations", and include a charge in
1998 for impairment of goodwill in the amount of $2,914,000.
Net revenues of the IMS business for the years ended December 31, 1999,
and 1998 were approximately $7,027,000, and $19,280,000, respectively. These
amounts are not included in net revenues in the accompanying consolidated
statements of operations for the respective periods.
29
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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 (9.50% at December 31, 2000) or, at the option of the Company,
a portion of the outstanding balance bears interest at 200 basis points over the
London Inter- Bank Offering Rate (8.76% at December 31, 2000). 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 April 30,
2003 and is subject to certain covenants, including financial covenants
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, 2000
and 1999 were approximately $2,022,000 and $1,871,000, respectively, of bank
overdrafts.
NOTE 5. LONG-TERM DEBT
At December 31, 2000 and 1999, long-term debt consisted of the
following:
2000 1999
---- ----
Capital lease obligation, pursuant to a sale/leaseback transaction; payable in
monthly installments of $41,992, including interest imputed at 12.0% 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 $764,110 $1,150,188
Capital lease obligation; payable in monthly installments of $4,037, including
interest, plus taxes, through March 2004; collateralized by
certain computer equipment 111,324 ---
Capital lease obligation: payable in monthly installments of $2,827
including interest, plus taxes, through March 2004; collateralized by certain
computer equipment 77,950 ---
Capital lease obligation; payable in various monthly installments through
December 2003 currently aggregating $3,923 including interest imputed at 9.0%,
over 36 months from the installation date of the equipment, as defined;
collateralized by certain computer equipment 123,110 ---
Other notes payable; paid in full during 2000 --- 439,656
Note payable; payable in monthly installments of $6,944 plus interest
at 8%, through October 2001 62,500 145,832
--------- ---------
1,138,994 1,735,676
Less: Current portion (583,384) (902,118)
--------- ---------
Long-term portion $ 555,610 $ 833,558
========= =========
30
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 5. LONG-TERM DEBT - (continued)
Approximate maturities of long-term debt are as follows:
Year Ending December 31, Amount
------------------------ ------
2001 $ 583,000
2002 425,000
2003 111,000
2004 20,000
----------
$1,139,000
==========
Interest expense charged to continuing operations was approximately
$995,000, $829,000, and $154,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
NOTE 6. INCOME TAXES
The Company files a consolidated Federal income tax return with all of its
wholly-owned subsidiaries. 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, 2000 and 1999 included the
following:
2000 1999
---- ----
Deferred tax asset $ 3,022,000 $ 4,758,000
Valuation allowance for deferred tax asset (236,000) (2,109,000)
----------- -----------
Net deferred tax asset after valuation allowance. $ 2,786,000 $ 2,649,000
=========== ===========
At December 31, 2000 and 1999, the net deferred tax assets of $2,786,000
and $2,649,000, 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:
2000 1999
---- ----
Net operating loss carryforwards $ 2,419,000 $ 3,958,000
Allowance for doubtful accounts 576,000 467,000
Accrued expenses and lease provision 530,000 348,000
Other 91,000 99,000
Amortization of goodwill and covenant not to compete (201,000) (114,000)
Depreciation (393,000) ---
----------- -----------
$ 3,022,000 $ 4,758,000
=========== ===========
Income tax expense for continuing operations for the years ended
December 31, 2000, 1999 and 1998 consisted of the following:
2000 1999 1998
---- ---- ----
Current tax expense:
Federal $ --- $ 1,184,901 $ 647,327
State 236,990 701,214 289,055
Deferred tax expense (benefit) (137,000) (9,000) (184,000)
--------- ----------- ---------
Income tax expense $ 99,990 $ 1,877,115 $ 752,382
========= =========== =========
31
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 6. INCOME TAXES -- (continued)
Current tax expense in 2000 has been reduced by the utilization of
certain federal and state net operating loss carryforwards. At December 31,
1999, the Company provided a deferred tax valuation allowance of $2,109,000.
During 2000, the valuation allowance was reversed due to earnings of the Company
and management's assessment that it is more likely than not that a portion of
the deferred tax asset relating to net operating loss carryforwards will be
realized in future years through taxable earnings.
The effective rate of income tax expense from continuing operations for
2000 was lower than the applicable statutory tax rate due to the Company's
utilization of certain net operating loss carryforwards, for which the Company
had previously provided a valuation allowance. In 1999 and 1998 the effective
rate of income tax from continuing operations was higher than the applicable
statutory tax rate, due to certain financial reporting 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,
-----------------------
2000 1999 1998
---- ---- ----
Tax expense at statutory rate (34%) $ 1,389,000 $ 1,436,000 $ 258,000
Permanent differences, including non-deductible
goodwill amortization, net 72,000 73,000 311,000
Change in valuation allowance (1,873,000) --- ---
Other, principally adjustments to estimated
tax accruals 351,990 (3,885) 39,441
State income taxes, net of Federal tax benefit 160,000 372,000 143,941
----------- ----------- ---------
$ 99,990 $ 1,877,115 $ 752,382
=========== =========== =========
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 $2,500,000, which can be applied against future federal taxable
income of the Company. In addition, the Company has a federal net operating loss
carryforward of approximately $2,800,000 that is subject to certain Federal
income tax limitations. As a result of the corporate reorganization during 2000,
these losses will be available to offset future taxable income of the Company.
These loss carryforwards expire between 2002 and 2012.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Lease Obligations. The Company and its subsidiaries lease office
facilities under operating lease agreements that expire at various times through
the year 2006. Certain of these leases contain optional provisions for
additional periods of time. Rent expense was approximately $2,037,000,
$2,228,000 and $1,899,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. At December 31, 2000, minimum annual future rental commitments,
exclusive of common area maintenance costs and utilities, are as follows:
Year Ending December 31, Amount
------------------------ ------
2001 $ 2,099,000
2002 2,058,000
2003 2,081,000
2004 1,748,000
2005 546,000
Thereafter 56,000
-----------
$ 8,588,000
===========
32
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 7. COMMITMENTS AND CONTINGENCIES -- (continued)
Self-Insurance. The Company is self-insured for workers' compensation
purposes and is liable for aggregate claims up to approximately $242,000 for
2000, $249,000 for 1999, and $164,000 for 1998. In addition, the Company is
responsible for certain fixed costs including underwriting, brokerage,
reinsurance and administration costs.
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 $1,522,000 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.
NOTE 8. 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 9. SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE
Treasury Stock. 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
considered treasury stock. In June 2000 the Company's Board of Directors
authorized a program to repurchase the Company's common shares on the open
market to a maximum cost of $1,200,000. As of December 31, 2000 an additional
597,145 common shares at prices ranging from $1.50 to $1.97 per share had been
repurchased, which shares are considered treasury stock.
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 2000, 1999 and 1998, the Company granted two non-employee
Directors options to purchase 10,000 common shares each at an exercise price of
$1.625, $1.813 and $4.938, respectively, under the Incentive Plan.
33
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 9. 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, 2000, 1999 and 1998 follows:
Options
Weighted Average Exercisable
Number of Shares Exercise Price at Year End
------------------------- --------------------- ---------------
Outstanding 12/31/97 600,500 $ 7.14
Granted 1,014,750 4.81
Exercised -0-
Terminated 154,800 5.54
---------
Outstanding 12/31/98 1,460,450 5.70 138,541
=======
Granted 1,059,444 1.55
Exercised -0-
Terminated 690,200 4.24
---------
Outstanding 12/31/99 1,829,694 3.84 362,935
=======
Granted 1,116,500 1.46
Exercised -0-
Terminated 204,500 2.68
---------
Outstanding 12/31/00 2,741,694 $ 2.96 837,442
========= =======
The following table summarizes information about stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------- ---------------------------------------
Number Weighted-Average Number
Range of Exercise Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Prices 12/31/00 Contractual Life Exercise Price 12/31/00 Exercise Price
- ---------------------- ------------------- ------------------ -------------------- ------------------- -------------------
$0.83 - $1.65 1,657,944 8.9 $1.43 239,069 $1.37
$1.65 - $2.48 184,000 8.6 $1.87 54,541 $1.92
$2.48 - $4.95 110,500 7.3 $4.06 62,332 $4.11
$4.95 - $5.78 474,250 7.2 $5.33 245,250 $5.32
$5.78 - $8.25 315,000 6.1 $7.66 236,250 $7.66
--------- --- ----- ------- -----
2,741,694 8.2 $2.96 837,442 $4.54
========= === ===== ======= =====
34
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 9. 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, 2000, 1999 and
1998 would be as follows:
2000 1999 1998
---- ---- ----
Net Income (loss):
As reported $ 3,982,922 ($ 6,083,878) ($ 5,116,993)
Pro forma $ 1,808,254 ($ 8,022,526) ($ 6,898,814)
Basic and diluted earnings (loss)
per share:
As reported $ 0.29 ($ 0.44) ($ 0.38)
Pro forma $ 0.13 ($ 0.58) ($ 0.51)
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 2000, 1999 and 1998, respectively;
risk-free interest rate of 6.20%, 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 153%, 125% and 131%. The weighted average fair value of the
options granted was $1.19 in 2000, $1.12 in 1999 and $3.59 in 1998.
NOTE 10. STATEMENT OF CASH FLOWS
Supplemental disclosure of non-cash investing and financing
transactions:
During 2000, the Company entered into the following non-cash transactions:
o placed into service approximately $280,000 of property and equipment
previously classified as "other current assets";
o entered into certain lease arrangements for the purchase of equipment
in the amount of approximately $359,000.
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 approximately $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
35
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE.COM, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 10. STATEMENT OF CASH FLOWS - (continued)
During 1998, the Company entered into the following transactions with
respect to business combinations (Note 3):
Cash paid for business combinations, net of cash acquired $ 8,876,000
Incurred long-term debt 1,640,000
Incurred other liabilities and contingent purchase price 4,230,000
Issuance of common stock (common stock $1,933 and additional paid
in capital $2,141,957) 2,144,000
-----------
16,890,000
Fair value of assets acquired, net of assumed liabilities (982,000)
-----------
Goodwill $15,908,000
===========
NOTE 11. 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 $4,294,000 in 2000, $3,039,000 in 1999, and $2,954,000
in 1998. The IT training subsidiary incurred a loss from continuing operations
of approximately $214,000 in 2000, $509,000 in 1999, and $1,426,000 in 1998.
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On August 1, 2000, the Company was notified that Rudolph, Palitz LLC
had merged with McGladrey & Pullen, LLP, the successor of that merger, and that
Rudolph, Palitz LLC would no longer be the auditor for the Registrant. McGladrey
& Pullen LLP was engaged as the Company's new auditor effective August 1, 2000.
This event is further described in the auditing firm's press release dated
August 2, 2000, and in the Company's press release dated August 3, 2000, copies
of which are filed as exhibits to the Report and were filed as exhibits to the
Company's Report on Form 8-K filed with the Securities and Exchange Commission
on August 3, 2000. Rudolph, Palitz LLC's notice of the merger dated August 1,
2000 is filed as an exhibit to this Report and was filed as an exhibit to the
Company's Report on Form 8-K filed with the Securities and Exchange Commission
on August 3, 2000.
The auditor's reports from Rudolph, Palitz LLC for the Company's past
two fiscal years did not contain an adverse opinion or a disclaimer of opinion,
and were not qualified or modified as to uncertainty, audit scope, or accounting
principles.
The decision to engage McGladrey & Pullen LLP was approved by the
Company's board of directors at a regular meeting held on October 20, 2000.
During the Company's two most recent fiscal years and the subsequent
interim period preceding the change, there have been no disagreements with
Rudolph, Palitz LLC on any matter of accounting principles or practices,
financial disclosure, or auditing scope or procedure.
The Company has requested Rudolph, Palitz LLC to furnish a letter
addressed to the Securities and Exchange Commission stating whether it agrees
with the statements made in this Item. Such letter is filed as an exhibit to
this Report.
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 2001 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.
37
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:
Reports of Independent Auditors 19 - 20
Consolidated Balance Sheets 21
Consolidated Statements of Operations 22
Consolidated Statements of Shareholders' Equity 23
Consolidated Statements of Cash Flows 24
Notes to Consolidated Financial Statements 25-36
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.
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) (the "Form S-l").
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 the Company's Registration
Statement on 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.
38
Exhibit
No. Description of Document
------- -----------------------
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.
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 the
Company's Report on 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 the
Company's Report on Form 10-K for the year ended December
31, 1998 filed on April 15, 1999.
10.10 Employment Agreement, dated January 1, 2000, by and between
the Company and Robert G. Alessandrini. Incorporated by
reference to Exhibit 10.10 of the Company's Report on Form
10-K for the year ended December 31, 1999 filed on March 29,
2000.
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 of the Company's
Report on 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 of the Company's Report on 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 of the Company's
Report on 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.
Incorporated by reference to Exhibit 10.14 of the Company's
Report on Form 10-K for the year ended December 31, 1999
filed on March 29, 2000.
10.15 Asset Purchase Agreement between FILENET CORPORATION as
Purchaser and ON-SITE SOLUTIONS, INC. as Seller, dated as of
July 31, 1999. Incorporated by reference to Exhibit 10.15 of
the Company's Report on Form 10-K for the year ended
December 31, 1999 filed on March 29, 2000.
39
Exhibit
No. Description of Document
------ -----------------------
10.16 Severance Agreement and General Release, dated December 29,
2000, by and between the Company and Richard T. Furlano.*
21.1 Subsidiaries of the Registrant. Incorporated by reference to
Exhibit 21.1 of the Company's Report on Form 10-K for the
year ended December 31, 1999 filed on March 29, 2000.
23.1 Consents of Independent Auditors.*
99.1 Rudolph, Palitz LLC Press Release dated August 2, 2000.
Incorporated by reference to Exhibit 99.2 of the Company's
Report on Form 8-K filed on August 3, 2000.
99.2 The Company's Press Release dated August 3, 2000.
Incorporated by reference to Exhibit 99.3 of the Company's
Report on Form 8-K filed on August 3, 2000.
99.3 Notification of merger from Rudolph, Palitz LLC, dated
August 1, 2000. Incorporated by reference to Exhibit 99.4 of
the Company's Report on Form 8-K filed on August 3, 2000.
99.4 Letter of agreement from Rudolph, Palitz LLC, dated March
23, 2001.*
- --------------------------------------------------------------------------------
* Filed herewith
(b) Reports on Form 8-K.
None
40
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, thereunto duly authorized.
Dated: March 27, 2001 THE JUDGE GROUP, INC.
(FORMERLY JUDGE.COM, 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, Director, March 27, 2001
- ------------------------ President and Chief Executive
Martin E. Judge, Jr. Officer
(Principal Executive Officer)
/s/ Michael A. Dunn Director and Executive March 27, 2001
- ------------------- Vice President
Michael A. Dunn
/s/ Randolph J. Angermann Director March 27, 2001
- -------------------------
Randolph J. Angermann
/s/ James C. Hahn Director March 27, 2001
- -----------------
James C. Hahn
/s/ Robert H. Strouse Director March 27, 2001
- ---------------------
Robert H. Strouse
/s/ John E. Shields Director March 27, 2001
- -------------------
John E. Shields
41