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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
COMMISSION FILE NO. 0-21963
THE JUDGE GROUP, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1726661
(State or other jurisdiction of Incorporation or Organization) (IRS Employer Identification No.)
TWO BALA PLAZA, SUITE 800
BALA CYNWYD, PENNSYLVANIA 19004
(Address of principal executive offices, including zip code)
(610) 667-7700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
------------------- -----------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.01 Par Value NASDAQ Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 31, 1999, the approximate aggregate market value of the
voting stock held by non-affiliates of the Registrant was $9,404,108 based on
the closing sales price of $1.75 of the Registrant's Common Stock on the NASDAQ
Stock Market.
As of March 31, 1999, 13,497,576 shares of the Registrant's Common
Stock were outstanding.
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 AND CIRCUMSTANCES THAT ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. FACTORS
THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND
ANALYSIS - FORWARD LOOKING INFORMATION." READERS SHOULD CAREFULLY REVIEW THE
RISKS DESCRIBED IN THIS AND OTHER DOCUMENTS THAT THE COMPANY FILES FROM TIME TO
TIME WITH THE SECURITIES AND EXCHANGE COMMISSION. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY TO THE
DATE OF THIS ANNUAL REPORT ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLICLY RELEASE ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.
ITEM 1. BUSINESS.
GENERAL
The Judge Group, Inc. (the "Company"), incorporated in Pennsylvania in June
1970, services the information technology ("IT") and engineering needs of its
clients through the following four complementary operating units:
Contract Placement - Provides IT and engineering personnel ("technical
consultants") on a contract basis;
Permanent Placement - Provides IT and engineering personnel on a permanent
basis;
IT Training - Provides standard and customized IT training on established and
emerging software applications; and
Information Management Solutions - Provides document management, document
conversion, computer networking, imaging, workflow and related consulting
services.
The Company's Contract Placement business 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. The Contract Placement business provides technical consultants on a
nationwide basis through its National Division, and on a regional and local
level through its network of 10 offices in 9 states. The Contract Placement
business maintains a database of over 170,000 technical consultants, and in 1998
provided over 1,800 technical consultants to approximately 525 clients.
The Company's Permanent Placement business provides IT and engineering
personnel on a permanent basis to clients nationwide through its network of 7
offices in 7 states. The Permanent Placement business maintains a database of
approximately 150,000 professionals, and in 1998 placed 895 candidates with more
than 490 clients.
The Company's IT Training business 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. The
IT Training business currently offers licensed diploma courses, certificate
courses, and in excess of 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 IT Training business will assist the
Company in identifying emerging technologies and integrating such technologies
into its organization.
1
The Company's Information Management Solutions business offers advanced
technical solutions to increase the efficiency of business processes, such as
business process analysis and redesign, work automation, document management
systems design, integration, implementation, maintenance, Internet development
and training, project management, and advanced applications development. The
Company is a value-added reseller of Optika, Filenet, PCDOCS, Saros(C),
Greenbar, Watermark, Keyfile, OTG and Lotus Notes, and integrates its imaging
solutions on a variety of operating systems, including Banyan(R), Unix and
Windows NT. The Company provides technical solutions through it network of 8
offices in 8 states.
Since completing its initial public offering in February 1997, the Company
has pursued an aggressive expansion program through acquisitions as well as
opening of new office locations. In 1998 the Company acquired two Contract
Placement businesses, one Permanent Placement business, and three Information
Management Solutions businesses. During 1998 the Company also established or
expanded service offerings in six locations, two of which were subsequently
closed by year end.
In 1999 the Company expects to restructure its operating units around two
basic business segments. Therefore, segment reporting will follow the new
business configuration and also enable financial analysis that more closely
tracks its lines of business. The Company will evaluate its operations by the
Staffing segment, which will include Contract Placement, Permanent Placement,
and IT Training, and by the Information Management Solutions segment for which
the Company's goal is to separate from its operations in the future.
OPERATIONS
Permanent Placement. The Permanent Placement business, founded in 1970,
generated revenues of $5.9 million, $8.6 million, and $11.0 million in 1996,
1997 and 1998 respectively, representing 7.1%, 8.7%, and 9.6% of total Company
revenues for the respective periods. The Company's Permanent Placement business
provides IT and engineering personnel on a permanent basis nationwide through
its regional offices in Bala Cynwyd, Pennsylvania; Edison, New Jersey; Tampa,
Florida; Needham, Massachusetts; Dallas, Texas; Atlanta, Georgia; and Chicago,
Illinois. The Texas, Georgia, and Illinois locations were added through an
acquisition in 1998, while the Massachusetts location was a new operation
sharing office space with the Company's Contract Placement business. A
significant portion of the Company's engineering placements are in food related
industries and, to a lesser extent, the pharmaceutical industry. The Permanent
Placement business maintains a database of over 150,000 engineering and IT
professionals, and in 1998 it placed 895 professionals with more than 490
clients. As compensation for its service, the Company receives a fee based on a
percentage of each placed professional's first year salary, subject to
forfeitures if the placed professional leaves such position during a standard
guarantee period of thirty days.
Contract Placement. The Company's Contract Placement business, founded in
1986, generated revenue of $61.7 million, $70.4 million and $81.3 million in
fiscal 1996, 1997 and 1998 representing 75.0%, 71.4% and 70.9% of the Company's
consolidated net revenues in those periods, respectively. The Company's Contract
Placement business provides IT, engineering and other professional consultants
on a contract basis to organizations with complex technology and staffing needs
through regional offices in Bala Cynwyd, Pennsylvania; Edison, New Jersey;
Alexandria, Virginia; Needham, Massachusetts; Providence, Rhode Island; Walled
Lake, Michigan; Raleigh and Charlotte, North Carolina; Nashville, Tennessee;
Jacksonville, Florida; and nationally through its National Division based in
Providence. The Contract Placement business maintains a database of over 170,000
technical consultants, and in 1998 placed over 1,800 consultants with
approximately 525 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 six years. The
Company's technical consultants and independent contractors often work jointly
with clients' in-house IT personnel. This segment 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 billing hours.
2
The majority of the Company's Contract Placement 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 seeks to develop new service offerings. 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 1998 the Company began to
increase 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 will be 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 are not fully occupied for clients. In the past the Company has
focused its efforts on attracting and placing contractors with more specialized
skills thereby enabling the Company to achieve higher margin placements.
Originally established in 1991, the National Division provides both
engineering and IT personnel on a contract basis nationwide, primarily to larger
national corporations. Revenue attributable to the National Division was $10.8
million, $11.3 million, and $12.4 million in 1996, 1997, and 1998, respectively.
IT Training. The Company's IT Training business was acquired in September
1996. It provides training in a variety of software and network applications and
generated revenue of $608,000 in the fourth quarter of 1996, $3.2 million, and
$3.0 million in 1997 and 1998 respectively, which represented .7%, 3.2%, and
2.6% of the Company's consolidated net revenues during such periods,
respectively. The IT Training business provides its services at its facilities
in Bala Cynwyd, Pennsylvania and Alexandria, Virginia and at various off-site
locations. The IT Training business delivers certified training for all
Microsoft products at its locations. The IT Training business provides custom IT
training for clients across all hardware and software platforms, dependent on
the needs and requirements of the client. The IT Training business is an
authorized training center for many major software manufacturers, including
Microsoft Corporation, Adobe Systems Incorporated, Quark, Inc., Core
Corporation, and Claris Corporation, and is also an approved Apple Training
Alliance Center. The IT Training business 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 veteran's education by the U.S. Veteran's Administration. The IT
Training business 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.
Information Management Solutions. The Company intends to separate this
business by year end 1999 or as soon as possible in a way that will maximize
shareholder value. The Company's Information Management Solutions business
offers advanced technical solutions to increase the efficiency of business
processes, such as business process analysis and redesign, work automation,
document management systems design, integration, implementation, maintenance,
Internet development and training, project management and advanced application
development. The Company is a value-added reseller of Optika, Filenet, PCDOCS,
Saros, Greenbar, Watermark, Keyfile, OTG and Lotus Notes, and integrates its
imaging solutions on a variety of operating systems, including Banyan, Unix and
Windows NT. As part of the Information Management Solutions it offers, the
Company is a value-added reseller for PC and network hardware, software and
related peripherals manufactured by Compaq Computer Corp., ACER America Corp.,
International Business Machines, Apple Computer, Inc., Hewlett Packard Co. and
others.
3
The Company provides various document management, document conversion,
networking, imaging, workflow and related consulting services through its
acquisitions in 1998 of Onsite Solutions, Irvine, California; Systems Solutions,
Redmond, WA; and AOP Solutions, Buffalo, New York and through its regional
offices in Bala Cynwyd, Pennsylvania; Moorestown and Edison, New Jersey;
Hartford, Connecticut; Fort Wayne, Indiana; and Wakefield, Massachusetts. The
Information Management Solutions business which began operations in 1988,
generated revenue of $14.2 million, 16.4 million, and $19.3 million in fiscal
1996, 1997 and 1998, respectively, which represented 17.2%, 16.7% and 16.9% of
the Company's consolidated net revenues, respectively.
The Company sells and installs high-end, mid-range and low-end imaging
systems, complementary software and database products and the technical
engineering services necessary to deliver a "turn key" imaging system. The
Company offers its customers hardware and software maintenance, support and
training. The Company implements Filenet and Optika software in Banyan, and
Windows NT environments and is currently a value-added reseller of a variety of
other imaging software systems. In addition, certain Company personnel have been
certified by the Document Imaging Association, the only certification available
in the document management industry. The Company integrates its imaging software
solutions on hardware manufactured by International Business Machines, Compaq
Computer Corp., Hewlett-Packard Co. and Sun Microsystems, Inc. operating under
Windows NT and Unix operating systems.
The Company is also a value-added reseller for PC and network hardware,
software and related peripherals for a variety of manufacturers and provides a
full range of installation, training, maintenance, repair and network
integration services.
The Information Management Solution's Consulting Services Group seeks to
provide its clients with due diligence, analysis, planning and design services
for IT projects through process analysis, redesign and enabling technology
implementation. The Company believes that a thorough understanding of a client's
existing IT system and work processes is necessary to the design of an optimal
information management system. In 1998, the Company introduced its System
Development Methodology ("SDM") incorporating Joint Application Development
("JAD") to provide clients with a framework for implementing such a system.
Under the Company's SDM program, the Company assigns multiple disciplinary study
teams to evaluate the client's operations from technology, financial and overall
business perspectives. This analysis includes a review of the architecture of
the client's current IT System as well as the client's work processes, personnel
and culture. Upon completion of this analysis, the Company presents the client
with a detailed set of technological and work automation recommendations.
Additional segment information can be found in Note 12 in the accompanying
financial statements.
INTELLECTUAL PROPERTY
While the Company does not own any patents, or registered copyrights or
trademarks, it routinely enters into non-disclosure and confidentiality
agreements with employees, contractors, consultants and customers. Licenses for
a number of software products have been granted to the Company for its own use
or for remarketing to its customers. In the aggregate, these licenses are
material to the business of the Company, but the Company believes that the loss
of any one of these licenses would not materially affect the Company's results
of operations or financial position.
CUSTOMERS
The primary industries served by the Company include financial services,
manufacturing, software/computers, government, and pharmaceutical. In 1998, 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,
imaging, document management, consulting and training services that the Company
currently provides. In addition, many companies offer one or two 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.
4
Contract and Permanent Placement. Within any given geographical or technical
specialty market, the Company competes for clients with other IT, engineering
and professional service providers, outsourcing and consulting companies,
systems integrators and, to a lesser extent, temporary personnel agencies. The
majority of the competition is made up of smaller local and regional firms with
a strong presence in their local markets and occasionally with a nationally
franchised firm. The principal competitive factors for obtaining and retaining
clients include: the ability to match technical consultant skills and
personality with the client's requirements and culture; expertise of its
technical consultants; price; client satisfaction; and overall responsiveness to
client needs. The Company competes for technical consultants with other
professional services providers, outsourcing and consulting companies, systems
integrators, temporary personnel agencies and client companies. The principal
competitive factors for recruiting and retaining technical consultants include
compensation, availability and quality of benefits, consistent flow of high
quality, varied assignments and an understanding of consultant skills and work
preferences.
IT Training. 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 multiple training locations, 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.
Information Management Solutions. The information management services market
is intensely competitive and subject to rapid technological change. In order to
compete effectively, the Company needs to continually enhance its current
product and service offerings and expand its professional services capabilities.
The Company currently competes principally on the basis of its reputation, the
breadth of its product line and services, including the ability to sell document
management solutions responsive to each client's applications needs and
budgetary constraints, provide consulting and conversion services, and the
quality, ease of use, reliability and performance of the systems it offers. As
there are relatively low barriers to entering the imaging marketplace, the
Company expects additional competition from emerging companies as the market
expands. In addition, the market includes participants in a variety of market
segments, including systems consulting and integration firms such as F.Y.I. Inc.
and Lanier Worldwide Inc., professional services companies, applications
software firms, temporary employment agencies, the professional service groups
of companies such as International Business Machines and Digital Equipment
Corporation, facilities management and MIS outsourcing companies, certain
multi-national accounting firms, and general management consulting firms.
REGULATION
The Company's operations, as currently conducted, are subject to governmental
regulation in the State of New Jersey, where the Company's Permanent Placement
business is a licensed employment agency, and its Contract Placement business
has registered with the Temporary Help Service Section of the Bureau of
Employment and Personnel Services, a component 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
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.
5
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, 1998, the Company had 467 full-time employees. On that
date, there were also approximately 865 IT consultants working on full-time
assignments for the Company's clients, of which approximately 86% were treated
as employees of the Company and 14% 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:
LEASE SERVICES OFFERED AS OF
OFFICE SQUARE FEET EXPIRATION DECEMBER 31, 1998
- -------------------------------------------------------------------------------------------------------------------------
Bala Cynwyd, Pennsylvania 36,200 October 31, 2002 Contract Placement; Information
Management Services; Permanent
Placement; IT Training
- -------------------------------------------------------------------------------------------------------------------------
Providence, Rhode Island 7,000 September 13, 2003 Contract Placement
- -------------------------------------------------------------------------------------------------------------------------
Moorestown, New Jersey 12,800 October 31, 2000 Information Management Solutions
6,400 October 31, 2003
- -------------------------------------------------------------------------------------------------------------------------
Edison, New Jersey 11,800 February 28, 2006 Contract Placement; Permanent Placement;
Information Management Services
- -------------------------------------------------------------------------------------------------------------------------
Alexandria, Virginia 3,900 December 31, 2000 Contract Placement, IT Training
- -------------------------------------------------------------------------------------------------------------------------
Wakefield, Massachusetts 3,500 Month to Month Information Management Solutions
- -------------------------------------------------------------------------------------------------------------------------
Hartford, Connecticut 3,200 June 15, 2000 Information Management Solutions
- -------------------------------------------------------------------------------------------------------------------------
Tampa, Florida 6,900 May 31, 2003 Permanent Placement
- -------------------------------------------------------------------------------------------------------------------------
Needham, Massachusetts 7,900 March 31, 2005 Contract Placement, Permanent Placement
- -------------------------------------------------------------------------------------------------------------------------
Walled Lake, Michigan 4,000 August 31, 2001 Contract Placement ****
- -------------------------------------------------------------------------------------------------------------------------
Alpharetta, Georgia 4,500 September 30, 2003 Permanent Placement ****
- -------------------------------------------------------------------------------------------------------------------------
Arlington, Texas 1,100 November 30, 2000 Permanent Placement ****
- -------------------------------------------------------------------------------------------------------------------------
Downers Grove, Illinois 2,700 October 31, 2001 Permanent Placement ****
- -------------------------------------------------------------------------------------------------------------------------
Buffalo, New York 4,300 May 31, 2000 Information Management Solutions ****
- -------------------------------------------------------------------------------------------------------------------------
Irvine, California 6,200 September 3, 2001 Information Management Solutions ****
- -------------------------------------------------------------------------------------------------------------------------
Redmond, Washington 1,400 October 31, 2003 Information Management Solutions ****
- -------------------------------------------------------------------------------------------------------------------------
Fort Wayne, Indiana 100 November 15, 1999 Information Management Solutions ****
- -------------------------------------------------------------------------------------------------------------------------
Jacksonville, Florida 2,600 September 30, 2001 Contract Placement
- -------------------------------------------------------------------------------------------------------------------------
Durham, North Carolina 2,100 September 30, 2001 Contract Placement
- -------------------------------------------------------------------------------------------------------------------------
Nashville, Tennessee 1,100 December 31, 2000 Contract Placement ****
- -------------------------------------------------------------------------------------------------------------------------
Charlotte, North Carolina Shared space Month to Month Contract Placement ****
- -------------------------------------------------------------------------------------------------------------------------
**** Acquired in 1998.
6
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, 1998.
For the purposes of calculating the aggregate market value of the shares
of common stock of the Company held by nonaffiliates, as shown on the cover page
of this Report, it has been assumed that all the outstanding shares were held by
nonaffiliates except for the shares beneficially owned by directors and
executive officers of the Company. However, this should not be deemed to
constitute an admission that all directors and executive officers of the Company
are, in fact, affiliates of the Company, or that there are not other persons who
may be deemed to be affiliates of the Company. Further information concerning
shareholdings of officers, directors and principal shareholders is included in
the Company's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Common Shares, $0.01 par value per share, are traded on The
NASDAQ National Stock Market under the symbol JUDG. The Company's Common Shares
began trading on February 14, 1997. Prior to that date, there was no market for
the Company's Common Shares. The closing quotation for the Company's Common
Shares on March 31, 1999 was $1.75. At March 31, 1999, there were 172
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 for the high and low sales price
per share of the Company's Common Shares for the periods indicated:
Price Range
-----------
High Low
---- ---
Fiscal 1997
First Quarter (since February 14) $ 7.625 $ 3.250
Second Quarter $ 5.750 $ 3.000
Third Quarter $ 7.125 $ 5.000
Fourth Quarter $ 7.250 $ 4.750
Fiscal 1998
First Quarter $ 5.750 $ 3.938
Second Quarter $ 6.875 $ 4.375
Third Quarter $ 5.188 $ 2.000
Fourth Quarter $ 3.438 $ 1.750
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 restricted from doing so under the terms of its
primary credit facility. The Company is a holding company, and the operations of
the Company are conducted through its subsidiaries. Accordingly, the ability of
the Company to pay dividends on its Common Shares is dependent on the earnings
and cash flow of its subsidiaries and the availability of such cash flow to the
Company.
7
The Company issued the following unregistered shares of its $0.01 par
value common stock in separate transactions related to its acquisitions pursuant
to Section 4(2) of the Securities Act:
March 5, 1998 ISI acquisition, 100,000 shares for consideration of
$1,500,000
March 31, 1998 Cella acquisition, 50,000 shares for consideration of
$750,000
May 31, 1998 AOP acquisition, 33,333 shares for consideration of $499,995
October 12, 1998 Tech Stars acquisition, 10,000 shares for consideration
of $150,000
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. 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 Consolidated Financial
Statements, of which the years ended December 31, 1998, 1997, 1996, 1995 and
1994 have been audited by Rudolph, Palitz LLP, independent accountants. 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 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands, except per share data)
Net revenues $114,498 $ 98,526 $ 82,371 $ 63,299 $ 45,253
Cost of sales (exclusive of items
shown separately below) 78,771 69,164 60,121 47,550 34,146
Selling and operating 23,438 16,256 14,344 9,798 6,509
General and administrative 13,931 8,575 6,047 4,187 3,155
-------- -------- -------- -------- --------
Total costs and expenses 116,140 93,995 80,512 61,535 43,810
-------- -------- -------- -------- --------
Income(loss) before non-recurring
charges (1,642) 4,531 1,859 1,764 1,443
Non-recurring charges (4,021) 0 0 0 0
Interest income (expense), net (252) 72 (876) (670) (427)
Other income (expense) 0 29 4 (27) 7
-------- -------- -------- -------- --------
Income (loss) before income taxes (5,915) 4,632 987 1,067 1,023
Income tax expense (benefit) (798) 1,920 968 588 680
Minority interest income 0 0 (888) (7) 0
-------- -------- -------- -------- --------
Net income (loss) ($ 5,117) $ 2,712 $ 907 $ 486 $ 343
======== ======== ======== ======== ========
Basic and Diluted net income (loss)
per Common Share (1)(2) ($ 0.38) $ 0.21 $ 0.10 $ 0.06 $ 0.04
======== ======== ======== ======== ========
Basic Weighted Average Shares (1) 13,458 12,761 8,473 8,416 8,416
======== ======== ======== ======== ========
Diluted weighted average shares(2) 13,458 12,826 9,114 9,114 8,851
======== ======== ======== ======== ========
8
AS OF DECEMBER 31,
BALANCE SHEET DATA: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Working capital $ 12,213 $ 18,525 $ 8,253 $ 5,567 $ 329
Total assets 47,885 31,934 21,969 11,632 8,017
Notes payable, including current portion(3) 9,882 0 10,161 5,368 2,749
Other long-term obligations, including
current portion 1,996 355 3,105 1,755 2,030
Shareholders' equity (deficiency) 23,081 26,274 1,122 391 (95)
(1) All per share and share amounts reflect a 52.6 for 1.0 stock split which
occurred in September 1996.
(2) Diluted shares include common stock equivalents and 526,000 Common Shares
issued upon conversion of the Company's Convertible Notes.
(3) Includes line of credit and term loan.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and related notes thereto
appearing elsewhere in this Report.
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K
CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING EVENTS AND CIRCUMSTANCES THAT 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,
INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q TO BE FILED BY THE COMPANY IN 1999.
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.
OVERVIEW
The Company has historically been organized into four operating units: the
Contract Placement business which provides IT and engineering professionals on a
contract basis; the Permanent Placement business which provides IT and
engineering professionals on a permanent basis; the IT Training business which
provides IT training both internally and to clients; and the Information
Management Solutions business which provides document management, document
conversion, networking, imaging and workflow consulting. In 1999 the Company
expects to restructure its operating units into two business segments.
Therefore, segment reporting will follow the new business segments and also
enable financial analysis that more closely tracks its lines of business. The
Company will evaluate its operations by the Staffing business, which will
include Contract Placement, Permanent Placement and IT Training, and by the
Information Management Solutions business for which the Company's goal is to
separate from its operations in the future.
9
ACQUISITIONS
In 1998, the Company began to implement a strategy to accelerate its
growth through the addition of new services, geographic expansion and strategic
acquisitions. The Company has aggressively pursued this 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. The
table below presents information regarding each 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 placement firm in the and Company stock
Detroit, Michigan area
Asset purchase of Cella Associates of $1,529,000 in cash and March 31, 1998 Permanent Placement
Atlanta, Inc., a placement firm with Company stock
offices in Georgia, Connecticut,
Illinois and Texas
Stock purchase of On-Site Solutions, Assumption of $709,000 in May 11, 1998 Information Management
Inc., a company engaged in systems liabilities and $2,170,000 Solutions
integration in Irvine, California area. in cash and Company stock
Asset purchase of AOP Solutions, a $4,543,000 in cash and May 29, 1998 Information Management
company engaged in information Company stock Solutions
management services in Buffalo, New York
Stock purchase of Systems Solutions, $155,000 in cash June 8, 1998 Information Management
Inc. a systems integration company in Solutions
Seattle, Washington area
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. In the case of one
acquisition the amount of the earnout at December 31, 1998 has been recorded to
reflect management's best estimates as of this date which are subject to change.
Additional payments could occur contingent on certain of the businesses
attaining certain pre-tax income amounts in the year ended December 31, 1999.
See Note 3 in the accompanying financial statements.
NEW OFFICES
In 1998 the Company also opened Contract Placement branch offices in
Raleigh, North Carolina, Jacksonville and Tampa, Florida. Further, the Company
split its Boston Contract Placement office into two regional operations, Boston
and Providence. The Boston regional operation moved into a new facility in
Needham, Massachusetts in 1998. In early 1999, upon expiration of the
Foxborough, Massachusetts lease, the Providence regional operation and the
National Division moved into new facilities in Providence, Rhode Island. The
Company's Permanent Placement business opened an operation in shared space in
the Needham facility of the Contract Placement business. By year end 1998 the
Company had discontinued all services in the New York facility and the Contract
Placement business had ceased its operation in Tampa.
The Company's aggressive expansion in 1998 resulted in additional costs
related to a corresponding increase in the infrastructure to adequately manage
and service the expanded business. Such increase resulted in higher selling and
operating expenses and general and administrative expenses which contributed to
the loss incurred by the Company in 1998. In 1998 the Company incurred a net
loss of $5.1 million, or approximately $0.38 per common share. The primary cause
of the Company's net loss for 1998 was non-recurring charges incurred in
connection with a review of its long-lived assets in accordance with Statement
of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
The Company determined that, due to continuing losses in its Information
Management Solutions and IT Training businesses, the goodwill associated with
the acquisition of those businesses was impaired and the Company wrote the
related assets down accordingly. The Company wrote down $2,914,000 and $707,000
of goodwill in the Information Management Solutions and IT Training businesses,
respectively. In addition, the Company established a reserve of $400,000 for
future lease losses incurred when it discontinued operations in its New York
facility primarily related to the sub-lease of its office space.
10
CONTRACT PLACEMENT
Revenue in the Company's Contract Placement business is derived from
professional service activities, primarily the placement of skilled IT,
engineering and professional personnel whose work is billed at an hourly rate.
Engagements of the Company's technical consultants typically last from six to
twelve months and the Company bills clients and recognizes revenue on a weekly
basis. 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. Revenues in the Company's
Contract Placement business increased from $61.7 million in 1996 to $81.3
million in 1998. Revenues for the year ended December 31, 1998 were $81.3
million, compared to $70.4 million for the prior year period, an increase of
15.5%. Revenue growth has been primarily due to the acquisitions of ISI and Tech
Stars and new offices, which together added $8.9 million, or 82%, of the
increased revenues. Revenues also increased due to higher average billing rates.
The Company believes that the increase in the average billing rates for its
technical consultants has resulted from an increased demand for skilled and
experienced technical consultants and to its intentional focus on making higher
level IT placements. For the year ended December 31, 1998, total hours billed
were 1,485,616, with an average billing rate of $50.69, compared to total hours
billed of 1,500,469 with an average billing rate of $47.13 for the prior year
period. The decrease in total hours billed in 1998 compared with 1997 was due to
a focus of sales efforts on higher margin placements and to a decrease in the
annual billed hours by the Company's National and Regional offices located in
Providence, Rhode Island, and its Regional office located in Needham,
Massachusetts. Such decrease was related to unexpected turnover of sales and
recruiting personnel in those offices in the second half of 1997. 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
of management and administrative salaries and related fringe benefits, as well
as other overhead, such as rent and depreciation.
PERMANENT PLACEMENT
Revenue in the Company's Permanent Placement business is 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 30 to 90 day guarantee period. The
Permanent Placement business placed 895 professionals with an average placement
fee of $12,320 in 1998, compared to 679 professionals placed with an average
placement fee of $12,450 for the prior year period. The Company has added
resources through its acquisition and office expansion to continue to increase
its placements. No cost of sales is recorded in the Permanent Placement
business.
INFORMATION MANAGEMENT SOLUTIONS
Revenue in the Company's Information Management Solutions business is
derived from the provision of document management, imaging, networking, workflow
and consulting services and related sales of hardware and software. Revenues are
recorded in the period in which services are rendered and merchandise is
shipped; however, when installation is significant to the completion of the
contract, revenue is recognized on a percentage of completion basis. Cost of
sales consists of computer hardware, software and related licensing fees,
salaries and fringe benefits for design, installation and maintenance personnel,
and overhead expenditures allocated to Information Management Solutions
activities.
The Information Management Solutions business currently consists of three
separate corporations: Judge Information Management Solutions (consisting of
three divisions: Document Management Solutions, Imaging Services and AOP
Solutions); On-Site Solutions, Inc.; and System Solutions, Inc. d/b/a
Corebridge.
11
Due to low operating margins on hardware and software sales a previously
existing division in Judge Information Management Solutions, NT Client Server
and Network Services, was combined with the existing Judge Information
Management Solutions in the latter part of 1998. Although the Company continues
to perform all remaining existing hardware, software and maintenance contracts,
it is no longer focusing on new sales of hardware and software. Beginning in
1988, the Company anticipated the emergence of a market incorporating imaging
and document management technology. It entered this market first as a reseller
of Optika Imaging Systems, Inc. software, and later expanded its product line to
include both high production, high-end systems such as Filenet and low-end
workflow imaging systems such as Watermark, Keyfile and Lotus Notes. More
recently, the Company has devoted substantial resources to expand the
infrastructure of its Document Management and Imaging Services divisions to
support sales growth, including the hiring of numerous consulting, engineering,
sales and administrative personnel since the beginning of 1994. Revenue
attributable to Document Management and Imaging Services division has grown from
$8.7 million at December 31, 1997 to $15.5 million in 1998, representing
approximately 53.0% and 80.3% of the Information Management Services business
total revenue in those periods, respectively. This increase is primarily the
result of revenue from acquisitions made in 1998. The Company's document
management and imaging activities have generated operating losses to date due to
slower than expected market expansion combined with the substantial investment
in infrastructure development. In addition, this business is subject to long
sales cycles which frequently cause sales to cross into future quarters.
The Company currently is focusing on achieving profitability in its
Information Management Services business. The Company made investments in
acquisitions and personnel in 1998 causing selling, operating costs and general
and administration expenses to increase in 1998 compared to 1997. The Company
believes that its investment in infrastructure and personnel could generate
further increases in revenues in this business in the future. The Company has a
goal to separate the Information Management Solutions business by the end of
1999, or as soon as possible, in an effort to maximize shareholder value.
IT TRAINING
The Company's IT Training business was acquired in September 1996. It
provides training in a variety of software and network applications and
generated revenue of $608,000 in the fourth quarter of 1996, $3.2 million, and
$3.0 million in 1997 and 1998 respectively, which represented .7%, 3.2%, and
2.6% of the Company's consolidated net revenues during such periods,
respectively. 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
facilities in Bala Cynwyd, Pennsylvania and Alexandria, Virginia and at various
off-site locations. The IT Training business delivers certified training for all
Microsoft products at its locations. The IT Training business 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, Adobe Systems Incorporated, Quark, Inc., Core Corporation, and Claris
Corporation, and is also an approved Apple Training Alliance Center. The IT
Training business 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 veteran's
education by the U.S. Veteran's Administration. The IT Training business
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
In 1998 the Company implemented a focused strategic planning and budgeting
process resulting in a 1999 internal operating plan that attempts to increase
revenues approximately 50%, while controlling costs, and return the Company to
profitability. However, this plan is subject to many factors and contingencies,
and the Company may not be able to realize this goal. A part of the increase in
revenues includes anticipated full year results of the businesses acquired in
the first and second quarter of 1998, as well as increased revenues generated by
planned expansion of the sales and recruiting staffs in the Contract Placement
and Permanent Placement businesses. The internal operating plan more closely
ties management's compensation to its ability to meet revenue and profit goals.
If the Company is able to achieve its internal operating plan, which relies upon
certain assumptions including, but not limited to, its ability to increase sales
and recruiting staffs in the Contract Placement and Permanent Placement
businesses, to achieve profitability in the Information Management Solutions
business through concentration on higher margin business, and to maintain
stricter cost controls in all of its operating units, the Company believes it
can achieve operating income of approximately 6% of revenues. Failure to achieve
the aforementioned assumptions as well as other factors could prevent the
Company from achieving these goals in 1999. See "Forward Looking Information"
herein for additional factors which could materially alter the Company's ability
to meet its operational goals in 1999.
12
The following table presents the net revenue (net of intercompany
eliminations) as a percentage of consolidated net revenues and the income (loss)
before non-recurring charges attributable to each of the Company's businesses as
a percentage of each business' respective revenues and in dollars for the
periods indicated.
(UNAUDITED) YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
Net Revenues: (Dollars in Thousands)
Permanent Placement $ 10,987 9.6% $ 8,576 8.7% $ 5,871 7.1%
Contract Placement 81,276 70.9% 70,357 71.4% 61,735 75.0%
Information Management Services 19,280 16.9% 16,442 16.7% 14,157 17.2%
IT Training 2,955 2.6% 3,151 3.2% 608 0.7%
-------- ----- -------- ----- -------- -----
Consolidated Net Revenues $114,498 100.0% $ 98,526 100.0% $82,371 100.0%
======== ===== ======== ===== ======== =====
Income (loss) Before Non-recurring Charges:
Permanent Placement $ 834 7.6% $ 1,576 18.4% $ 779 13.3%
===== ===== =====
Contract Placement 4,396 5.4% 6,760 9.6% 4,051 6.6%
===== ===== =====
Information Management Services (3,031) (15.7%) (1,623) (9.9%) (1,394) (9.8)%
===== ===== =====
IT Training (944) (31.9%) 141 4.5% (25) (4.1)%
===== ===== =====
Corporate Overhead Expense (2,897) N/A (2,323) N/A (1,552) N/A
-------- ===== ------- ===== ------- =====
Consolidated Income (loss) Before Non-recurring
Charges ($ 1,642) (1.4%) $ 4,531 4.6% $ 1,859 2.3%
======== ===== ======= ===== ======= =====
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of consolidated net revenues for each of the periods indicated:
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
Net Revenues 100.0% 100.0% 100.0%
----- ----- -----
Cost of Sales (Exclusive of items shown separately below) 68.8% 71.4% 73.0%
Selling and Operating 20.5% 15.6% 17.4%
General and Administrative 12.1% 8.4% 7.3%
----- ----- -----
Total Costs and Expenses 101.4% 95.4% 97.7%
----- ----- -----
Income (Loss) before Non-recurring Charges and Other Items (1.4%) 4.6% 2.3%
Non-recurring Charges (3.5%) 0.0% 0.0%
Other income (expense), net (0.2%) 0.1% (1.1%)
----- ----- -----
Income (Loss) Before Income Taxes (5.1%) 4.7% 1.2%
===== ===== =====
13
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Revenues. Consolidated net revenues increased by 16.2%, or $16.0 million,
for the year ended December 31, 1998 compared to the prior year period. Revenue
for the Contract Placement business increased by 15.5%, or $10.9 million, for
the year ended December 31, 1998 compared to the prior year period. This
increase was primarily due to an increase in revenue of $8.9 million
attributable to acquisitions and new offices. Revenue for the Permanent
Placement business increased by 28.1%, or $2.4 million, for the year ended
December 31, 1998 compared to the prior year period. Of such increase $1.5
million was attributable to its acquisition and new offices, and the remainder
was due to increased marketing efforts in its established offices, primarily the
New Jersey office which contributed $0.9 million in increased revenues, a 64%
increase over the prior year period. Revenue for the Information Management
Solutions business increased by 17.3%, or $2.8 million, for the year ended
December 31, 1998 compared to the prior year period. Businesses acquired in 1998
contributed $7.5 million to revenues, while revenues from established offices
decreased by $4.7 million over the prior year period. Such decrease was due in
part to the Company's decision to exit the hardware resale market which
represent high revenues but low margins, and to a change in the sales management
in the New England area that temporarily depressed revenues. The IT Training
business generated net revenues of $3.0 million, a decrease of $196,000 from the
prior year period.
Cost of Sales. Consolidated cost of sales increased by 13.9%, or $9.6 million,
for the year ended December 31, 1998 compared to the prior year period. Cost of
sales as a percentage of consolidated net revenues decreased to 68.8% from
71.4%. In the Company's Information Management Solutions business, cost of sales
as a percentage of revenue decreased to 75.0% from 77.1%, primarily as a result
of an increased focus on providing services that yield higher margins than
traditional hardware and software sales. In the Company's Contract Placement
business, cost of sales as a percentage of revenue decreased to 77.4% from
78.1%. This decrease was primarily a result of the Contract Placement business
focusing its sales efforts on higher margin services. The decline in cost of
sales as a percentage of consolidated net revenues was also attributable to an
increase in revenue for the Permanent Placement business, the expenses for which
are not included in cost of sales, but are included in other expense categories.
The IT Training business contributed an additional $1.7 million of expenses
included in cost of sales, an increase of $233,000 over the prior year period.
Selling and Operating. Consolidated selling and operating expenses increased by
44.2%, or $7.2 million, for the year ended December 31, 1998 compared to the
prior year period. Of such increase $4.3 million of expenses is attributable to
acquisitions and new offices. Selling and operating expenses as a percentage of
consolidated net revenues for the year ended December 31, 1998 increased to
20.5% from 15.6% in the prior year. Contributing to this increase was an
increase in selling and operating expenses of 42.3%, or $1.4 million, in the
Information Management Solutions business due primarily to the expansion of its
sales force, $875,000 of which is attributable to the businesses acquired in
1998. In the Contract Placement business selling and operating expenses
increased $3.3 million, or 53.6%, over the prior year period, of which $2.0
million was attributable to acquisitions and new offices. The Permanent
Placement business increased selling and operating expenses $2.2 million, or
38.2%, over the prior year period, of which $1.4 million was attributable to its
acquisition and new offices. The IT Training business contributed $1.0 million
to selling and operating expenses, an increase of $.2 million, or 21.4%, over
the prior year period.
General and Administrative. Consolidated general and administrative expenses
increased 62.5%, or $5.4 million, for the period ending December 31, 1998
compared to the prior year period, of which $2.5 million was attributable to
acquisitions and new offices. Amortization of goodwill added $.7 million to
general and administrative expenses, an increase of $.4 million over the prior
year period, primarily associated with the acquisitions in 1998. General and
administrative expenses as a percentage of consolidated net revenues increased
to 12.1% for the year ended December 31, 1998 compared to 8.4% for the prior
year period. Contributing to this increase was an increase of 76.1%, or $2.0
million, in the Contract Placement business, primarily consisting of a $1.3
million increase in costs associated with acquisitions and new offices. In the
Permanent Placement business general and administrative expenses increased $.9
million, or 77.3%, of which $.5 million was attributable to its acquisition and
new offices. The Information Management Solutions business increased general and
administrative expenses 50.8%, or $1.2 million, of which $.7 million was
attributable to its acquisitions. The IT Training business increased general and
administrative expenses 38.6%, or $.3 million, over the prior year period.
Expansion of the Company's corporate staff, specifically the hiring of
additional management information systems personnel, human resources personnel
and accounting personnel increased payroll costs by $278,000 over the prior year
period. Such expansion was necessary to manage the increased level of business
resulting from the acquisitions and new offices.
14
Interest. Interest expense increased to $346,000, at December 31, 1998 from
$212,000 at December 31, 1997 while interest income decreased to $94,000 at
December 31, 1998 from $313,000 at December 31, 1997. This increase in interest
expense and decrease in interest income reflects the Company's utilization of
the proceeds from its initial public offering in 1997 for its expanded
operations, and the need to use its line of credit to fund acquisitions and
working capital.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Revenues. Consolidated net revenues increased by 19.6%, or $16.2 million,
for the year ended December 31, 1997 compared to the prior year period. Revenue
for the Contract Placement business increased by 14.0%, or $8.6 million, for the
year ended December 31, 1997 compared to the prior year period. The Bala Cynwyd,
Pennsylvania and Edison, New Jersey offices contributed $4.5 million and $2.8
million, respectively, or 85%, of this revenue increase. The Company attributes
revenue growth in its Contract Placement business to a combination of higher
average bill rates and its focus on making higher level IT placements. Revenue
for the Permanent Placement business increased by 46.1%, or $2.7 million, for
the year ended December 31, 1997 compared to the prior year period. Contributing
to this increase was revenue of $1.1 million attributable to the Bala Cynwyd,
Pennsylvania office, $800,000 attributable to the Edison, New Jersey office and
$700,000 attributable to the Tampa, Florida office. The Company attributes this
revenue growth to the strong market demand for IT and engineering professionals,
the quality of its candidates, a 33% increase in the number of recruiters in
1997 compared with 1996 and greater placement productivity per recruiter.
Revenue for the Information Management Services business increased by 16.1%, or
$2.3 million, for the year ended December 31, 1997 compared to the prior year
period. Of this increase, $2.8 million was attributable to the Document
Management and Imaging Systems Division offset by a decrease in revenue of
$500,000 from the NT Client Server and Network Services division. The IT
Training business, acquired in September 1996, generated net revenue of $3.2
million in fiscal 1997, an increase of $2.5 million compared to $608,000 in the
fourth quarter of fiscal 1996.
Cost of Sales. Consolidated cost of sales increased by 16.9%, or $10.2 million,
for the year ended December 31, 1997 compared to the prior year period. Cost of
sales as a percentage of consolidated net revenues decreased to 71.4% from
73.0%. In the Company's Contract Placement business, cost of sales as a
percentage of revenue decreased to 78.1% from 79.4%. This decrease was primarily
a result of the Contract Placement business focusing its sales efforts on higher
margin services. The decline in cost of sales as a percentage of consolidated
net revenues was also attributable to a significant increase in revenue for the
Permanent Placement business which has no cost of sales. Offsetting this
favorable result was an increase in the cost of sales as a percentage of
revenues to 77.1% as of December 31, 1997 from 75.1% as of December 31, 1996 for
the Company's Information Management Services business. This result was
primarily the result of the two contracts received in the second quarter of 1997
which contributed a 1.2 percentage point increase in costs of sales for fiscal
1997 compared to fiscal 1996. The balance of the increase in costs of sales as a
percentage of revenue for this business unit was due to an increase in costs
related to network services sales, which sales were composed largely of high
cost/low margin hardware and software. The IT Training business contributed an
additional $2.6 million of expenses, compared to $520,000 in 1996 when only its
operations during the fourth quarter were consolidated by the Company in 1996.
Selling and Operating. Consolidated selling and operating expenses increased by
7.3%, or $1.1 million, for the year ended December 31, 1997 compared to the
prior year period. Selling and operating expenses as a percentage of
consolidated net revenues for the year ended December 31, 1997 decreased to
15.6% from 17.4% in the prior year period. Selling and operating expenses as a
percentage of revenues for the Contract Placement business decreased to 8.6%
from 10.5% for fiscal 1997 compared to the prior year period. This decrease was
attributable to a lower number of sales and recruiting personnel in 1997
compared to 1996. It was also attributable to a decrease of approximately
$930,000 in the bad debt expense for the business in fiscal 1997 compared to the
prior year period, which was due to the increased efforts of a credit and
collections manager. Selling and operating expenses as a percentage of revenues
for the Permanent Placement business decreased to 70.2% from 74.6% for fiscal
1997 compared to the prior year period. This decrease occurred even though the
number of sales recruiters increased to 48 at the end of 1997 compared to 36 at
the end of 1996. This favorable result reflects management's efforts to increase
sales while controlling overhead costs. Selling and operating expense as a
percentage of revenue in the Information Management Services business decreased
to 19.5% from 23.0% for fiscal 1997 compared to the prior year period. This
result was primarily due to a reduction of sales personnel in the first quarter
of 1997.
15
General and Administrative. Consolidated general and administrative expenses
increased 37.2%, or $2.3 million, for the period ending December 31, 1997
compared to the prior year period. General and administrative expenses as a
percentage of consolidated net revenues increased to 8.4% from 7.3% for the
period ending December 31, 1997 compared to the prior year period. Contributing
to this increase was $651,000 of personnel and related administrative expenses
in the Information Management Services business, primarily due to the
acquisition of the imaging and document management company in 1996 and costs
related to opening an office in New York City in August 1997. Expansion of the
Company's corporate staff, specifically management information systems,
accounting, legal and human resources personnel hired in 1997, increased
corporate overhead by $404,000 for the period ending December 31, 1997 compared
to the prior year period. In addition, the amortization of goodwill related to
the two acquisitions in September 1996 and the merger of Judge Imaging Systems
with the Company in February 1997 increased corporate overhead costs by $280,000
in the year ended December 31, 1997 compared to the prior year period. As a
result of the acquisitions and increased office space in the Edison, New Jersey
office, rent and utilities expense increased by approximately $565,000 for the
period ending December 31, 1997 compared to the prior year period. The IT
Training business, which was acquired in September of 1996, incurred general and
administrative expenses for fiscal 1997 of approximately $474,000, or 14.8% of
that business' revenues.
Interest. Interest expense was $212,000 and $876,000 for the year ended December
31, 1997 and 1996, respectively. Interest income was $313,000 and $0 for the
year ended December 31, 1997 and 1996, respectively. This decrease in interest
expense and increase in interest income is attributable to the Company's
repayment of its debt following the Offering and the interest earned on the
unused portion of the Offering proceeds.
INCOME TAXES
The Company adopted the Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," as of January 1, 1993. In 1998, due to its
operating loss, the Company recorded an income tax benefit of $798,000, or 13.5%
of its pre-tax loss. Such benefit is lower than the statutory tax rate of 34%
due primarily to the Company's inability to record a tax benefit from most of
the non-recurring charges under current tax laws. The effective tax rate was
41.4%, and 98.1% for fiscal years 1997 and 1996, respectively. The effective tax
rates for 1997 and 1996 are higher than the applicable statutory tax rate of
34%, primarily due to the Company's state tax liabilities and the net operating
losses incurred in the Information Management Solutions business, which business
was consolidated for financial but not for tax reporting purposes in 1996 and
for the period January 1, 1997 through February 20, 1997. However, since the
Company's merger with JIS (which includes the Information Management Solutions
business) on February 20, 1997, this business unit is now consolidated for tax
purposes.
SEASONALITY AND QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly statements of
operations data for each of the Company's last eight fiscal quarters. In the
opinion of the Company's management, this quarterly information has been
prepared on the same basis as the audited financial statements appearing
elsewhere in this Report and includes all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the unaudited quarterly
results set forth herein. The Company's quarterly results have in the past been
subject to fluctuations, and thus, the operating results for any quarter are not
necessarily indicative of results for any future period.
16
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31,
(Dollars in thousands) 1997 1997 1997 1997 1998 1998 1998 1998
---- ---- ---- ---- ---- ---- ---- ----
Net Revenues $ 23,478 $ 26,062 $ 25,319 $ 23,667 $ 25,090 $ 27,776 $ 30,360 $ 31,272
Cost of Sales (exclusive
of items shown separately
below) 17,385 18,736 17,759 16,083 17,420 18,402 21,447 21,502
Selling and Operating 4,230 3,901 3,627 3,879 4,478 5,334 6,375 7,251
General and Administrative 1,982 1,938 2,038 2,436 2,598 3,188 3,884 4,261
-------- -------- -------- -------- -------- -------- -------- --------
Total Costs and Expenses 23,597 24,575 23,424 22,398 24,496 26,924 31,706 33,014
Income (Loss) Before
Non-recurring Charges and
Other Items (119) 1,487 1,895 1,269 594 852 (1,346) (1,741)
Non-recurring Charges 0 0 0 0 0 0 0 (4,021)
Interest Income (Expense)
and Other, Net (128) 75 62 91 62 (10) (132) (172)
-------- -------- -------- -------- -------- -------- -------- --------
Income (Loss) Before
Income Taxes ($ 247) $ 1,562 $ 1,957 $ 1,360 $ 656 $ 842 ($ 1,478) ($ 5,935)
======== ======== ======== ======== ======== ======== ======== ========
Because the Company only derives revenue in its Contract Placement
business 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, 1997 and
1998, the number of holidays and vacation days slightly affected revenues in the
Contract Placement business. In addition, the Company's Contract Placement
business experienced higher than expected turnover of recruiting and sales
personnel in the third and fourth quarters of 1997. The effect of this turnover,
as well as lower than expected revenues in the Information Management Solutions
business, was the primary cause of the decrease in revenues on a
quarter-to-quarter basis in the second half of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's need for working capital has increased as its
revenues have grown and it has used borrowings under its credit facility to fund
working capital. In February 1997, however, the funds available for working
capital purposes increased substantially as a result of the receipt of the
proceeds from its initial public offering. The Company has used the net proceeds
from the Offering as well as its cash flow from operations to fund its
acquisitions and working capital. In June 1998 the Company began using its line
of credit to fund the cost of its acquisitions and for working capital, and as
of December 31, 1998, $9.9 million was owing on the line. The Company typically
maintains minimal cash balances as reflected in the balance of $44,000 in cash
and cash equivalents as of December 31, 1998. The Company redeemed its short
term investments of approximately $5.5 million held at December 31, 1997 and
used the proceeds to acquire substantially all of the assets of ISI and Cella.
The Company used cash in operations of $6,000, $2.4 million, and $4.0
million in 1998, 1997 and 1996, respectively. This result is primarily
attributable to the Company's net loss for 1998 which was partly offset by
non-cash non-recurring charges and depreciation and amortization. In addition,
the redemption of short term investments noted above was offset by a
corresponding increase in accounts receivable related to increased sales. As
discussed in Note 3 in the accompanying consolidated financial statements, the
Company has issued common stock as part of the purchase price of some of its
acquisitions with a guarantee that the market price of such stock will equal or
exceed specified prices per share at future dates. If the determination dates
were December 31, 1998 the Company would have to make a cash payment at least
equal to the amount reflected as "Other Liabilities" on its balance sheet to
meet that condition. Additionally as discussed in Note 3 in the accompanying
condensed consolidated financial statements the Company is obligated to make
cash payments in 1999 based on certain of the businesses acquired having
attained specified pre-tax income amounts in 1998. The Company has determined
that additional payments under the terms of its various purchase agreements will
total approximately $4.0 million in the first and second quarters of 1999.
However, the Company is still holding discussions with one seller and that
seller's accountants and the amounts may change. The Company intends to use its
line of credit, as well as any other sources of funding that may become
available to it, to fund these payments. The Company is currently negotiating
with its bank for additional credit availability based on the sale of certain of
its fixed assets. However, no assurances can be given that the Company will be
able to successfully negotiate new credit on terms acceptable to the Company.
17
Cash purchases of fixed assets for the fiscal years ended December 31,
1998, 1997, and 1996 were $2.8 million, $1.6 million, and $600,000,
respectively. These purchases were related primarily to the purchases of
computers, software, and imaging equipment to upgrade the Company's technology
infrastructure, as well as the furnishing of its new office facilities. The
Company plans to use approximately $1.5 million for capital expenditures in
1999. In 1998 the Company used $9.2 million to complete acquisitions and an
additional $495,000 to repay indebtedness assumed in several of its
acquisitions. In the first quarter of 1997 the Company received repayment of its
loans to officers and related parties in the aggregate amount of $577,000.
During 1998 the Company repaid the remaining $238,000 balance outstanding
on the notes payable related to the Berkeley acquisition, and repurchased as
treasury stock 40,000 common shares, at a price of $5.50 per share, which had
been issued to the stockholders of Berkeley in lieu of $300,000 of notes payable
at the completion of the initial public offering.
The Company currently has available a $25.0 million revolving advance
facility (the "Line of Credit") with PNC Bank, N.A. (the "Bank") The Line of
Credit expires on May 31, 2003. This facility allows the Company to borrow the
lesser of 85% of eligible accounts receivable, or $25.0 million. As of December
31, 1998 the Company had $9.9 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, including limitations on loans the
Company may extend to officers and employees, the incurring 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 ("LIBOR"). At December 31,
1998 the Company was in violation of the following financial covenants: total
allowed capital expenditures by the Company, and fixed charge coverage ratio.
The Bank has agreed to waive these violations and to modify the covenants for
future periods.
The Company anticipates that its primary uses of capital in future periods
will be to fund increases in accounts receivable and fund internal growth
through new office locations. The Company believes that the borrowings under the
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 is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is pervasive and complex, as many computer systems will be affected in some way
by the rollover of the two-digit year value to 00. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The "Year 2000" issue creates risk for the Company from unforeseen
problems in its own computer systems and from third parties with whom the
Company communicates.
The Company has received assurance from its vendor that its recently
implemented financial information system is "Year 2000" compliant. Further, the
Company is currently in the process of replacing its two candidate and client
databases utilized in its Contract Placement and Permanent Placement business
with software systems that are represented by the vendor to be "Year 2000"
compliant. The Company is analyzing its remaining computer systems to identify
any potential "Year 2000" issues and will take appropriate corrective action
based on the results of such analysis. Although management has not yet
determined the cost related to achieving "Year 2000" compliance, management
believes, based on its available information that it will be able to manage its
total "Year 2000" transition without any material adverse effects on its
business operations or financial condition.
18
FORWARD LOOKING INFORMATION
This report and other reports and statements filed by the Company from
time to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain certain forward-looking statements and
information that are based on beliefs of, and information currently available
to, the Company's management as well as estimates and assumptions made by the
Company's management. When used in SEC Filings, and in oral statements by the
Company the words "anticipate," "believe," "estimate," "expect," "future,"
"intend," "plan" and similar expressions as they relate to the Company or the
Company's management, identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions relating to the
Company's operations and results of operations, competitive factors and pricing
pressures, shifts in market demand, the performance and needs of the industries
served by the Company, and other risks and uncertainties, including, in addition
to any uncertainties specifically identified in the text surrounding such
statements and those identified below, uncertainties with respect to changes or
developments in social, economic, business, industry, market, legal and
regulatory circumstances and conditions and actions taken or omitted to be taken
by third parties, including the Company's shareholders, customers, suppliers,
business partners, competitors, and legislative, regulatory, judicial and other
governmental authorities and officials. Should one or more of these risks or
uncertainties materialize, or should the underlying assumptions prove incorrect,
actual results may vary significantly from those anticipated, believed,
estimated, expected, intended or planned.
Dependence on Availability of Qualified Technical Consultants The Company
is dependent upon its ability to attract and retain technical consultants who
possess the skills and experience necessary to meet the staffing requirements of
its clients. To keep pace with rapidly evolving information technologies and
changing client needs, the Company must continually evaluate and upgrade its
database of available qualified technical consultants. Competition for
individuals with proven technical skills is intense, and, as is currently
customary in the industry, the Company does not have any exclusive contracts
with its consultants. The Company competes for such individuals with other
providers of technical staffing services, systems integrators, providers of
outsourcing services, computer systems consultants, clients and temporary
personnel agencies. Factors influencing such competition include compensation,
benefits, growth opportunities and pre-existing relationships with other
companies, particularly specialty staffing companies. As the Company expands
into new geographic areas, it may experience difficulty attracting qualified
technical consultants who have a prior relationship or familiarity with more
established specialty staffing companies in such areas. There can be no
assurance that qualified technical consultants will continue to be available to
the Company in sufficient numbers to meet the Company's current and anticipated
growth requirements.
Acquisition Risks A component of the Company's growth strategy is the
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.
19
Ability to Manage Growth Sustained or significant growth, if achieved,
will subject the Company to risks by placing a substantial strain on the
Company's available managerial, sales, recruiting, financial and other
resources. Specifically, such growth will require the Company to: (i) hire,
integrate and retain qualified managers, recruiters and sales personnel in
existing markets as well as markets in which the Company has no prior operating
experience; (ii) develop and maintain relationships with an increasingly large
number of highly qualified technical consultants; (iii) maintain cost controls
in all of the Company's businesses; and (iv) apply its management practices to a
significantly larger organization. Expansion beyond the geographic areas where
the Company's offices are presently located will further increase demands on the
Company's management. The Company's ability to manage its staff and facilities
growth effectively will require it to continue to expand its operational,
financial and other internal systems. There can be no assurance that the
Company's systems, procedures and controls will be successfully implemented or
adequate to support the Company's expanded operations. Furthermore, an element
of the Company's business strategy is to cross-sell the existing services of its
businesses to new and existing clients. Historically, these businesses have
operated independently, producing only occasional referrals, and there can be no
assurance that the Company will successfully market such services on an
integrated basis.
History of Operating Losses in Information Management Services Business
The Company's Information Management Solutions business has had net operating
losses since its commencement in 1988, experienced a loss before non-recurring
charges of approximately $3.0 million for the year ended December 31, 1998, and
at December 31, 1998 had an accumulated deficit of $7.6 million. The losses have
resulted from high marketing and general and administrative costs associated
with building the business' infrastructure and technical service capabilities,
combined with historically low profit margins related to the hardware component
of the former NT Client Server and Network Services division and a slower
emergence of the document management, document conversion and imaging markets
than anticipated by the Company. Specifically, the costs associated with
building this business's Document Management and Imaging Services divisions
service capabilities have included the hiring of sales and technical personnel,
and the costs associated with the acquisition and integration of three imaging
and document management companies. The Company is currently focusing on
achieving profitability in its Information Management Solutions business by
expanding it through internal growth, and new service offerings and
acquisitions, but cannot provide any assurances as to when it will achieve
profitability, if at all. The Company has announced its intention to separate
the Information Management Solutions business by the end of 1999, and as soon as
possible to maximize shareholder value. If the Company is not successful in
separating the Information Management Solutions business before the end of 1999,
or on the terms and conditions that the Company presently anticipates, there may
be additional adverse effects on the Company's results of operations or
financial condition. There can be no assurance that the Information Management
Solutions business can be separated on terms acceptable to the Company, in which
case there could be a material adverse effect on the Company.
Dependence on Contract Placement Business The Company's Contract Placement
business was responsible for 75.0%, 71.4% and 70.9% of total Company revenues
for the years ended December 31, 1996, 1997 and 1998, respectively. In addition,
for the year ended 1998, one customer of the Contract Placement business, Merck
& Company, Inc., accounted for approximately 6.0% of total Contract Placement
revenues, and 4.3% 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 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.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE JUDGE GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE(S)
-------
INDEPENDENT AUDITORS' REPORT 22
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 23
CONSOLIDATED STATEMENTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 25
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 27 - 41
21
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Judge Group, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheets of The Judge Group,
Inc. and Subsidiaries as of December 31, 1998 and December 31, 1997, and the
related consolidated statements of operations, shareholders' equity, and of cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Judge Group,
Inc. and Subsidiaries as of December 31, 1998 and December 31, 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
RUDOLPH PALITZ, LLP
February 27, 1999
Blue Bell, PA
22
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 43,568 $ 1,684,482
Short-term investments --- 5,500,000
Accounts receivable, net 21,767,995 14,415,926
Inventories 1,185,302 1,468,902
Prepaid income taxes and deferred taxes 1,909,919 286,000
Other 977,295 712,416
----------- -----------
TOTAL CURRENT ASSETS 25,884,079 24,067,726
----------- -----------
PROPERTY AND EQUIPMENT 8,166,048 5,007,416
Less: accumulated depreciation and amortization 3,220,212 2,121,034
----------- -----------
NET PROPERTY AND EQUIPMENT 4,945,836 2,886,382
----------- -----------
OTHER ASSETS
Deposits and other 716,634 275,608
Covenant not to compete, net of accumulated amortization of $37,490, 1998 52,486 ---
Goodwill, net of accumulated amortization of $4,731,788, 1998 and $405,944, 1997 16,286,392 4,703,855
----------- -----------
TOTAL OTHER ASSETS 17,055,512 4,979,463
----------- -----------
TOTAL ASSETS $47,885,427 $31,933,571
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 743,677 $ 237,721
Accounts payable and accrued expenses 8,679,519 3,647,048
Payroll and sales taxes 576,562 437,788
Income taxes payable --- 291,515
Other liabilities 2,634,954 ---
Deferred revenue 1,035,558 928,324
----------- -----------
TOTAL CURRENT LIABILITIES 13,670,270 5,542,396
----------- -----------
LONG-TERM LIABILITIES
Note payable, bank 9,881,595 ---
Deferred rent obligation 666,879 116,879
Debt obligations, net of current portion 585,490 ---
----------- -----------
TOTAL LONG-TERM LIABILITIES 11,133,964 116,879
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares authorized; at December 31,
1998, 13,541,302 shares issued and 13,501,302 shares outstanding; at
December 31, 1997, 13,347,969 shares issued and outstanding 135,412 133,479
Preferred stock, at December 31, 1998 and 1997, $.01 par value, 10,000,000
shares authorized --- ---
Additional paid-in capital 24,900,474 22,758,517
Retained earnings (deficit) (1,734,693) 3,382,300
----------- -----------
23,301,193 26,274,296
Less: Treasury Stock, 40,000 shares at December 31, 1998; at cost 220,000 ---
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 23,081,193 26,274,296
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $47,885,427 $31,933,571
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
NET REVENUES $ 114,498,397 $ 98,526,467 $ 82,371,065
------------- ------------ ------------
COSTS AND EXPENSES
Cost of sales (exclusive of items shown separately below) 78,770,638 69,164,039 60,121,123
Selling and operating 23,438,309 16,256,445 14,343,682
General and administrative 13,931,394 8,574,811 6,046,841
------------- ------------ ------------
Total costs and expenses 116,140,341 93,995,295 80,511,646
------------- ------------ ------------
INCOME (LOSS) BEFORE NON-RECURRING CHARGES (1,641,944) 4,531,172 1,859,419
NON-RECURRING CHARGES (Note 2) (4,021,099) --- ---
OTHER INCOME (EXPENSE), NET, PRINCIPALLY NET INTEREST (251,726) 100,586 (872,578)
------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) AND MINORITY
INTEREST IN NET LOSS OF CONSOLIDATED SUBSIDIARY (5,914,769) 4,631,758 986,841
INCOME TAX EXPENSE (BENEFIT) (797,776) 1,919,818 967,898
------------- ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST IN NET LOSS OF
CONSOLIDATED SUBSIDIARY (5,116,993) 2,711,940 18,943
MINORITY INTEREST IN NET LOSS OF CONSOLIDATED SUBSIDIARY --- --- 888,000
------------- ------------ ------------
NET INCOME (LOSS) ($5,116,993) $ 2,711,940 $ 906,943
============= ============ === =========
NET INCOME (LOSS) PER SHARE:
BASIC ($ 0.38) $ 0.21 $ 0.10
======= ====== ======
DILUTED ($ 0.38) $ 0.21 $ 0.10
======== ====== ======
WEIGHTED AVERAGE SHARES USED IN NET INCOME (LOSS) PER SHARE
CALCULATIONS:
BASIC 13,458,000 12,761,000 8,473,000
========== ========== =========
DILUTED 13,458,000 12,826,000 9,114,000
========== ========== =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Common Stock Additional Retained
-------------------- Paid In Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
------ ------ ------- -------- ----- -----
C>
Balance, January 1, 1996 160,000 $ 800 $ 626,848 ($ 236,583) --- $ 391,065
Merger transactions --- --- (175,910) --- --- (175,910)
Stock split, 52.6 for 1.0 8,256,000 83,360 (83,360) --- --- ---
Exercise of Warrants 171,739 1,717 (1,701) --- --- 16
Net Income --- --- --- 906,943 --- 906,943
--------- --------- ----------- ----------- --------- -----------
Balance, December 31, 1996 8,587,739 85,877 365,877 670,360 --- 1,122,114
Merger Transactions 1,194,230 11,942 2,416,498 --- --- 2,428,440
Initial Public Offering 3,000,000 30,000 19,181,802 --- --- 19,211,802
Conversion of Debentures 526,000 5,260 494,740 --- --- 500,000
Conversion of Notes Payable 40,000 400 299,600 --- --- 300,000
Net Income --- --- --- 2,711,940 --- 2,711,940
--------- --------- ----------- ----------- --------- -----------
Balance, December 31, 1997 13,347,969 133,479 22,758,517 3,382,300 --- 26,274,296
Acquisition Transactions 193,333 1,933 2,141,957 --- --- 2,143,890
Purchase of Treasury Stock --- --- --- --- (220,000) (220,000)
Net (Loss) --- --- --- (5,116,993) --- (5,116,993)
--------- --------- ----------- ----------- --------- -----------
Balance, December 31, 1998 13,541,302 $ 135,412 $24,900,474 ($ 1,734,693) ($ 220,000) $23,081,193
========== ========= =========== =========== ========= ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES
Net income (loss) ($ 5,116,993) $ 2,711,940 $ 906,943
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 1,847,586 996,240 608,248
Impairment of goodwill 3,621,099 --- ---
Provision for losses on lease 400,000 --- ---
Deferred taxes (539,000) 11,000 (67,000)
Deferred rent 150,000 (13,523) (26,541)
Provision for losses (recoveries) on accounts receivable 439,810 (35,521) 781,327
Stock compensation --- 29,250 ---
Minority interest in net loss of consolidated subsidiary --- --- (888,000)
Changes in operating assets and liabilities:
(Increase) decrease in:
Short-term investments 5,500,000 (5,500,000) ---
Accounts receivable (5,603,390) (983,910) (4,592,756)
Inventories 755,620 (558,581) (276,746)
Deposits and other (387,434) (175,764) (123,826)
Prepaid income taxes (1,044,919) 43,603 122,060
Other current assets (195,841) 707,342 (947,122)
Increase (decrease) in:
Accounts payable and accrued expenses 558,541 736,779 365,321
Payroll and sales taxes 63,000 (289,330) (29,776)
Deferred revenue (162,675) (240,010) 21,738
Income taxes payable (291,515) 164,977 119,570
----------- ----------- ---------
Net cash used in operating activities (6,111) (2,395,508) (4,026,560)
----------- ----------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment (2,835,339) (1,616,249) (638,503)
Purchase/acquisition of companies (9,159,407) --- (554,448)
Proceeds from disposals of property and equipment --- --- 3,750
Covenant not to compete (89,976) --- ---
(Increase) decrease in notes receivable, officers
and employees, net --- 577,287 (202,527)
----------- ----------- ---------
Net cash used in investing activities (12,084,722) (1,038,962) (1,391,728)
----------- ----------- ---------
FINANCING ACTIVITIES
Cash acquired in business combination 283,300 --- 150,701
Proceeds from (repayments of) notes payable, bank, net 9,881,595 (9,960,795) 4,843,279
Proceeds (repayments) of bank overdrafts 1,585,154 (1,858,000) 520,000
Principal payments on long-term debt (1,080,130) (2,283,262) (869,672)
Purchase of treasury stock (220,000) --- ---
Proceeds from issuance of stock and exercise of warrants --- 19,211,802 16
Repayments from shareholders --- (95,862) (44,045)
Issuance of Series A Preferred Shares, net of costs --- --- 888,000
----------- ----------- ---------
Net cash provided by financing activities 10,449,919 5,013,883 5,488,279
----------- ----------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,640,914) 1,579,413 69,991
CASH AND CASH EQUIVALENTS, BEGINNING 1,684,482 105,069 35,078
----------- ----------- ---------
CASH AND CASH EQUIVALENTS, ENDING $ 43,568 $ 1,684,482 $ 105,069
=========== =========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 321,000 $ 306,000 $ 842,000
=========== =========== =========
Income taxes $ 1,140,000 $ 1,784,000 $ 819,000
=========== =========== =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. DESCRIPTION OF BUSINESS
The Judge Group, Inc. (the "Company") (formerly Judge 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), (ii) computer network and document management
system integration, implementation, maintenance and training through its
"Information Management Solutions" business (see Note 13) and (iii) information
technology training (through its "IT Training" business) on a range of software
and network applications to corporate, governmental and individual clients. At
December 31, 1998, the Company, headquartered in Bala Cynwyd, Pennsylvania,
operated regional offices in sixteen 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.
The Contract Placement business includes the operations of two of the
Company's wholly-owned subsidiaries, Judge Technical Services, Inc. ("JTS") and
Judge Technical Services of N.J., Inc. ("JTNJ").
The Permanent Placement business includes the operations of three of the
Company's wholly-owned subsidiaries, Judge, Inc., Judge Electronic Services of
Florida, Inc. ("JESF") and Judge Inc. of New Jersey ("JINJ").
The IT Training business is comprised of the operations of The Berkeley
Associates Corp. ("Berkeley").
The Information Management Solutions business of the Company includes the
operations of Judge Imaging Systems, Inc. ("JIS") which became a wholly owned
subsidiary of the Company at the closing of the Company's initial public
offering in 1997. Prior to that time JIS was a public company, a majority of
whose shares was owned by the Company and certain officers and directors of the
Company, and which was consolidated for financial reporting purposes.
On September 4, 1996, The Boards of Directors of the Company and JIS
approved the merger of JIS into a newly-formed, wholly-owned subsidiary of the
Company (the "Merger"). The terms of the Merger called for the conversion of
each share of JIS common stock (not already owned by the Company) and Series A
preferred stock into $2.50 of value based on the public offering price of The
Judge Group, Inc. common stock. Based upon the offering price of $7.50 per
share, the Company issued 1,194,230 shares of The Judge Group, Inc. common stock
to the shareholders of JIS at the closing of its initial public offering in
1997. In accordance with Accounting Principles Board Opinion No. 16 and related
literature, the acquisition by the Company in the Merger of the majority of the
shares of JIS, which were owned by the Company, Martin E. Judge, Jr. or other
owners of the Company securities, was accounted for as a corporate
reorganization of entities under common control, at historical cost, similar to
pooling accounting. However, the acquisition by the Company in the Merger of the
remaining JIS shares (the "Minority Shares") was accounted for in accordance
with "purchase accounting" whereby the pro rata portion of JIS's assets and
liabilities were recorded at their fair values. The excess of the value of the
Company shares issued in exchange for the Minority Shares over the fair value of
the net assets attributable to the minority interest was recorded as goodwill.
During 1996, the Company engaged an investment banking firm to assist it
in an initial public offering of its common stock. On September 30, 1996, the
Company filed a Registration Statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act of 1933, as amended. Effective
February 20, 1997 the Company successfully completed its initial public offering
of common shares. The Company sold 3,000,000 common shares at a price of $7.50
per share, realizing approximately $20,906,000 in proceeds net of underwriting
discounts and commissions. Immediately
27
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. DESCRIPTION OF BUSINESS -- (Continued)
prior to the initial public offering, the holders of $500,000 of convertible
notes exchanged them for 526,000 Company common shares. The Company issued
40,000 common shares in lieu of $300,000 of notes payable to Berkeley, in
accordance with the purchase agreement with Berkeley. In connection with the
initial public offering, the Company incurred approximately $1,694,000 of
accounting, legal, printing and other costs as of December 31, 1997 and such
costs have been charged to additional paid-in capital as a reduction of the
proceeds from the initial public offering.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation. The accompanying
consolidated financial statements include the accounts of the Company, and the
Company's wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Risks and Uncertainties. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition in Contract Placement and Permanent Placement
Businesses. The Company recognizes permanent placement revenues at the date
employment of the placed professional commences, subject to reversal and
adjustments if such employment is terminated during a guarantee period. Revenues
related to temporary placement services are recognized on a weekly basis as the
services are performed.
Revenue Recognition in Information Management Services Business. Revenues
from the sales of network, imaging and document management systems is recognized
at the date of shipment of the system, provided that any work to complete
installation of the system is routine in nature and related costs, which are
accrued at the time revenue is recognized, are not significant. However, in
instances in which installation and development costs are significant to the
completion of the contract, revenue is recognized on a percentage-of-completion
basis. Revenues recorded on a percentage-of-completion basis are based upon
management's estimates for which it is reasonably possible that such estimates
may change in the near term. Revenues billed in advance for computer sales,
warranties and maintenance contracts are deferred and recorded as income in the
period in which the merchandise is shipped or the services are rendered.
Deferred revenues in the accompanying consolidated balance sheets as of December
31, 1998 and 1997 includes approximately $190,000 and $184,000, respectively, of
billings in excess of costs and estimated earnings on contracts-in-progress.
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.
Short-Term Investments. The Company records short-term (trading)
investments at fair market value which generally equals the cost of such
investments. These securities represent investments in municipal mutual funds
($1 par value) and/or investments in municipal bonds with floating interest
rates and which allow the Company to redeem its investment on a weekly basis at
its original cost plus accrued interest. There were no realized gains or losses
on these investments in 1998 or 1997.
28
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Inventories. Inventories of computer and related supplies and equipment
held for resale are valued at the lower of cost (first-in, first-out) or market.
Inventories at December 31, 1998 and 1997 include approximately $614,000 and
$619,000, respectively, of costs and estimated earnings in excess of billings on
contracts-in-progress.
Accounts Receivable and Accounts Payable. Accounts receivable at December
31, 1998, 1997, and 1996 were net of allowances for doubtful accounts of
$511,000, $465,000, and $661,000, respectively.
Included in accounts receivable was unbilled work-in-process of
approximately $1,134,000, $584,000 and $524,000 at December 31, 1998, 1997 and
1996, respectively. Included in accounts payable and accrued expenses was
approximately $867,000, $442,000 and $283,000 of accrued employee and contractor
payroll principally relating to unbilled work-in-process at December 31, 1998,
1997 and 1996, respectively.
The allowance for doubtful accounts is established through charges to
earnings in the form of a charge to bad debt expense. Accounts which are
determined to be uncollectible are charged against the allowance account.
Management makes periodic assessments of the adequacy of the allowance which
requires the Company to recognize additions or reductions to the allowance. It
is reasonably possible that factors may change significantly and, therefore,
affect management's determination of the allowance for doubtful accounts in the
near term. An analysis of the allowance for doubtful accounts follows:
Additions (Reversals)
Year Ended Balance at Charged (Credited) To Balance At
December 31, Beginning of Period Bad Debt Expense (Charge Offs) End Of Period
- ------------ ------------------- ---------------- ------------- -------------
1998 $465,000 $440,000 ($394,000) $511,000
======== ======== ========= ========
1997 $661,000 ($ 36,000) ($160,000) $465,000
======== ======== ========= ========
1996 $174,000 $781,000 ($294,000) $661,000
======== ======== ========= ========
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, office and computer
equipment and five years for automotive 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 related to property and equipment, including
property under capital leases, amounted to $1,105,352 in 1998, $653,278 in 1997,
and $451,322 in 1996.
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 and office equipment and is included in "property and
equipment" in the accompanying consolidated balance sheets. Amortization is
provided over the shorter of the related lease terms or the estimated useful
lives of the related assets.
29
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Income Taxes. Deferred taxes are accounted for in accordance with
Statement of Financial Accounting Standards ("Statement") No. 109, "Accounting
for Income Taxes." The Statement requires the use of the liability method to
account for income taxes. Deferred income taxes are provided for the difference
between the tax basis of an asset or liability and its reported amount in the
financial statements and at the tax rates that are expected to be in effect when
the taxes are actually paid or recovered.
Deferred income taxes arise principally from differences between financial
and income tax reporting, including amounts recorded for workers' compensation
funding, amounts recorded for the allowance for doubtful accounts, the
availability of net operating loss carryforwards and certain other temporary
differences.
Deferred income tax assets are reduced by a valuation allowance when,
based on the weight of evidence available, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
determination of the requirement for a valuation allowance is an estimate which
is reasonably possible to change in the near term.
Intangible Assets. Goodwill represents the excess of the cost of companies
acquired over the fair value of their net assets at the date of acquisition and
is being amortized on the straight-line method over terms ranging from ten years
to twenty five years. Amortization of goodwill is based upon management's
estimates, for which it is reasonably possible that such estimates may change in
the near term. Amortization of goodwill for the periods ended December 31, 1998,
1997 and 1996 was approximately $704,744, $343,000 and $63,000 respectively, and
is included in general and administrative expenses in the consolidated
statements of operations.
The covenant not to compete is being amortized on a straight-line method
over the life of the covenant (twenty-four months). Amortization expense related
to the covenant was approximately $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 lease terms. The difference between rent expense
recorded and the amount paid is credited or charged to deferred rent obligation
in the accompanying consolidated balance sheets. Deferred rent at December 31,
1998 also includes a liability of $400,000 with respect to the closing of the
Company's New York City office (see "Non-recurring Charges" below).
Non-recurring Charges. In 1998 the Company recorded pretax non-recurring
charges related to the impairment of purchased goodwill and an estimated loss
related to its lease commitment on the closing of its New York City office.
These charges are comprised of the following:
Impairment of purchased goodwill:
Information Management Services $2,914,099
IT Training 707,000
Closing of New York City office 400,000
----------
Total charges $4,021,099
==========
30
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Non-recurring Charges (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 those
segments. The SFAS 121 charge had no impact on the Company's 1998 cash flow or
its ability to generate cash flow in the future. As a result of the SFAS 121
charge, amortization expense related to goodwill will decrease in future
periods. During the fourth quarter of 1998 the Company decided to cease
operations in its New York City office and recorded a charge to reserve for
future losses, primarily related to its lease commitment which has been 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 ($0.26)
per common share.
Advertising Expenses. The Company participates in various advertising
programs. All costs related to advertising are expensed in the period incurred.
Advertising expense amounted to approximately $1,143,000, $696,000, and $532,000
in 1998, 1997, and 1996, respectively.
Recently Issued Accounting Standards. In June 1997, the FASB issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This Statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This Statement was
adopted for the year ended December 31, 1998.
Earnings (Loss) Per Share. The Company adopted Statement of Financial
Accounting Standards No. 128 ("FAS 128"), Earnings Per Share, beginning in the
fourth quarter of 1997. All prior period earnings per common share were
recomputed to conform to the provisions of FAS 128. The recomputations did not
result in any restatements in earnings per share previously reported.
The number of shares used in the earnings (loss) per share calculation and
convertible note share conversion (see Note 6) has been adjusted for the 52.6
for 1.0 stock split which occurred in September 1996.
Basic earnings (loss) per share amounts are computed based on net income
(loss), reduced (increased) by dividends earned on preferred stock outstanding
on JIS through February 1997 ($6,700 and $45,000 for 1997 and 1996,
respectively), and divided by the weighted average number of shares actually
outstanding, reduced by Treasury Shares. The number of shares used in the
computation were approximately 13,458,000 in 1998, 12,761,000 in 1997, and
8,473,000 in 1996.
Diluted earnings (loss) per share amounts for years 1998, 1997 and 1996
are based on the weighted average number of shares calculated for basic earnings
(loss) per share purposes increased by the number of shares that would be
outstanding assuming exercise of outstanding stock warrants and assumed
conversion of convertible debt (for 1997 and 1996). The number of shares used in
the computation were approximately 13,458,000 in 1998, 12,826,000 in 1997, and
9,114,000 in 1996. Outstanding options to purchase shares of common stock in
1998 and in 1997 were not included in the computation of diluted earnings (loss)
per share because the assumed exercise of the options would be anti-dilutive.
On February 26, 1998 the Company repurchased 40,000 shares of its common
stock at a price of $5.50 per share, which shares are held as Treasury Stock.
Reclassifications. Certain items in the 1997 financial statements have
been reclassified to conform to the 1998 financial statement presentation.
31
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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
In the year ended December 31, 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. In
some instances, a portion of the related acquisition cost is included in other
liabilities in the accompanying consolidated financial statements, the payment
terms of which are dependent on the Company's common stock price on future
dates. Following is a description of the acquisitions:
Effective March 5, 1998, JTS purchased substantially all of the assets of
Information Systems, Inc. and ISI Systems, Inc. (together "ISI"), a company
engaged in the IT placement business in the Detroit, Michigan area, for total
original acquisition cost of $6,290,000, payable in cash, notes and Company
stock. An additional $500,000 in goodwill and note payable has been recorded
based on ISI having attained certain pre-tax income amounts in calendar year
1998.
Effective March 31, 1998, Judge, Inc. purchased substantially all of the
assets of Cella Associates of Atlanta, Inc. ("Cella"), a company engaged in the
placement of personnel with offices in Connecticut, Georgia, Texas and Illinois,
for a total acquisition cost of $1,529,000, payable in cash and Company stock.
Effective May 11, 1998, JIS purchased all of the outstanding common stock
of On-Site Solutions, Inc. ("On-Site"), a company engaged in the systems
integration business in the Irvine, California area, for total original
acquisition cost of the assumption of approximately $709,000 in liabilities. An
additional $2,170,000 payable in cash and Company stock has been recorded based
on On-Site having attained certain pre-tax income in the period April 1,1998
through December 31, 1998. Additional amounts are contingent on On-Site
attaining certain pre-tax income amounts in the period January 1, 1999 through
December 31, 1999.
Effective May 29, 1998, JIS purchased substantially all of the assets of
AOP Solutions ("AOP"), a company engaged in the Information Management Services
business in the Buffalo, New York area, for a total acquisition cost of
$3,240,000, payable in cash and Company stock. An additional $1,303,000 payable
in cash and Company stock has been recorded, as determined by management, based
on AOP having attained certain pre-tax income in calendar 1998. Additional
amounts are contingent on AOP attaining certain pre-tax income amounts in the
period January 1, 1999 through December 31, 1999.
Effective June 8, 1998, JIS purchased all of the outstanding common stock
of Systems Solutions, Inc. d/b/a Corebridge Technologies, Inc. ("Corebridge"), a
company engaged in document management, imaging and workflow solutions in the
Seattle, Washington area, for a total acquisition cost of $155,000, payable in
cash. Additional amounts are contingent on Corebridge attaining certain pre-tax
income amounts in the period January 1, 1999 through December 31, 1999.
Effective October 12, 1998, JTS purchased substantially all of the assets
of Tech Stars, Inc. ("Tech Stars"), a company engaged in the IT placement
business with offices in Nashville, Tennessee and Charlotte, North Carolina, for
a total acquisition cost of $1,331,000. Additional amounts are contingent on
Tech Stars attaining certain pre-tax income amounts.
32
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 3. BUSINESS COMBINATIONS -- (Continued)
The following sets forth the pro forma consolidated results for the
Company for the years ended December 31, 1998 and 1997 as though these business
combinations occurred at January 1, 1998 and 1997, respectively.
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Net revenues $118,973,000 $114,510,000
============ ============
Income (loss) before non-recurring charges ($1,898,000) $4,989,000
=========== ==========
Net Income (loss) ($5,335,000) $2,940,000
=========== ==========
Pro-forma adjustments included adjustments to goodwill amortization
expense, interest expense and income tax expense/benefit.
Basic and diluted net income (loss) per share of common stock is
calculated as follows:
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Net income (loss) ($5,335,000) $ 2,940,000
=========== ===========
Weighted average number of shares:
Basic 13,458,000 12,954,000
========== ==========
Diluted 13,458,000 13,019,000
========== ==========
Net income (loss) per share, basic and
diluted ($0.40) $0.23
====== =====
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 (7.75% at December 31, 1998) 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 ("LIBOR"). Maximum permitted borrowings
thereunder are the lesser of $25,000,000 or 85% of qualified accounts
receivable, as defined in the line of credit agreement. The line of credit is
collateralized by substantially all of the Company's assets, expires May 31,
2003 and is subject to certain covenants, including financial covenants
requiring certain levels of net worth, debt service ratios, fixed charge
coverage and limiting capital expenditures. The Company was in violation of the
covenants relating to allowable capital expenditures and the fixed charge
coverage ratio at December 31, 1998. The Company's bank agreed to waive the
violations, and modified the covenants for future periods. 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, 1998
were approximately $1,585,000 of bank overdrafts.
33
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 5. LONG-TERM DEBT
Long-term debt consisted of the following:
December 31, 1998 December 31, 1997
----------------- -----------------
Note Payable, purchase of Berkeley; payable in various monthly
installments plus interest at 8% through August 2000; repaid in 1998 --- $ 237,721
Note Payable, purchase of certain assets and assumption of certain liabilities
of ISI; payable in various monthly installments plus
interest at 8%, through March 2000 $ 175,000 ---
Note Payable, purchase of certain assets and assumption of certain liabilities
of ISI; payable in 24 monthly installments of $12,500 plus
interest at 8%, through March 2000 175,000 ---
Note Payable, additional purchase cost of ISI attaining certain pre-tax income
in 1998; payable in 8 quarterly payments of $102,333 including
interest at 8%, through December 2000 750,000 ---
Note Payable, purchase of certain assets and assumption of certain liabilities
of Tech Stars; payable in 36 monthly installments of $6,944
plus interest at 8%, through October 2001 229,167 ---
--------- ---------
1,329,167 237,721
Less: Current portion (743,677) (237,721)
--------- ---------
Long-term portion $ 585,490 $ ---
========= =========
Maturities of long-term debt are as follows:
Year Ending December 31, Amount
------------------------ ------
1999 $ 743,677
2000 522,990
2001 62,500
----------
$1,329,167
==========
Interest expense charged to operations was approximately $346,000,
$212,000 and $876,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
NOTE 6. CONVERTIBLE NOTES
In 1994, the Company received $500,000 from a group of investors in the
form of 10% convertible senior subordinated promissory notes. The notes were
exchanged for 526,000 Company common shares, immediately prior to the offering
(see Note 1). The notes bear 10% interest per annum and were scheduled to mature
in July 1997. Since the Company effected a successful initial public offering
before July 31, 1997, in accordance with the Note Purchase Agreement, the
financial advisor who arranged such financing was paid a fee equal to 1% of the
proceeds of the initial public offering (approximately $225,000) in February
1997.
34
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 7. INCOME TAXES
The Company files a consolidated Federal income tax return with all of its
wholly-owned subsidiaries. Prior to February 20, 1997, JIS was not included in
the Company's consolidated Federal income tax return, as the Company owned less
than 80% of JIS's outstanding common shares. Under Internal Revenue regulations,
JIS was not part of the consolidated group for tax purposes and filed their own
Federal income tax returns. Effective February 20, 1997, JIS began filing as
part of the consolidated group. State income taxes are determined on the basis
of filing separate returns for each company as required by the applicable state
regulations.
The net deferred tax asset at December 31, 1998 and 1997 included the
following:
1998 1997
---- ----
Deferred tax asset $ 2,743,000 $ 1,897,000
Valuation allowance for deferred tax asset (1,878,000) (1,611,000)
----------- -----------
Net deferred tax asset after valuation allowance $ 865,000 $ 286,000
=========== ===========
At December 31, 1998 and 1997, the net deferred tax assets of $865,000 and
$286,000, 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:
1998 1997
---- ----
Net operating loss carryforwards $1,797,000 $1,569,000
Allowance for doubtful accounts 205,000 187,000
Accrued expenses and lease provision 314,000 50,000
Amortization of goodwill and covenant not to
compete 324,000 17,000
Other 103,000 74,000
---------- ----------
$2,743,000 $1,897,000
========== ==========
Income tax expense (benefit) for the years ended December 31, 1998, 1997
and 1996 consisted of the following:
1998 1997 1996
---- ---- ----
Current tax expense (benefit):
Federal ($ 544,875) $1,392,085 $ 863,313
State 286,099 516,733 171,585
Deferred tax expense (benefit) (539,000) 11,000 (67,000)
---------- ---------- ----------
Income tax expense (benefit) ($ 797,776) $1,919,818 $ 967,898
========== ========== ==========
35
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 7. INCOME TAXES -- (Continued)
The effective tax rate for all periods presented was higher than the
applicable statutory tax rate, due to certain expenses that were not deductible
for tax purposes, Federal and state provisions at the maximum rates and net
operating losses for JIS, which was consolidated for financial reporting but not
tax reporting purposes (prior to the merger of the Company and JIS in February
1997). A reconciliation of the Company's effective income tax rate with the
statutory federal rate follows:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Tax expense (benefit) at statutory rate (34%) ($2,011,000) $ 1,575,000 $ 336,000
Effect of losses of subsidiary not consolidated
for tax purposes -- 85,000 529,000
Permanent differences, including non-deductible
goodwill amortization, net 1,108,000 5,000 29,000
Reduction in deferred tax benefit due to increase
in valuation allowance 267,000 -- --
Other 13,624 (78,000) (63,000)
State income taxes, net of Federal tax benefit (175,400) 333,000 137,000
----------- ----------- -----------
($ 797,776) $ 1,920,000 $ 968,000
=========== =========== ===========
As a result of operating losses, no provision for income taxes was
required for all periods prior to February 20, 1997 for JIS. JIS operating
losses subsequent to February 20, 1997 have been used in the consolidated tax
accrual. For income tax reporting purposes, as of December 31, 1998, JIS had an
unused operating loss carryforward of approximately $4,200,000, which may be
applied against future taxable income of JIS, subject to certain Federal income
tax limitations. These carryforwards expire between 2002 and 2012.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease office facilities under operating
lease agreements that expire at various times through the year 2008. Certain of
these leases contain optional provisions for additional periods of time. Rent
expense was approximately $2,480,000, $1,437,000 and $897,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. Minimum annual future
rental commitments, net of subleases rents (see Note 2), at December 31, 1998,
and exclusive of common area maintenance costs and utilities, are as follows:
Year Ending December 31, Amount
------------------------ ------
1999 $ 2,507,000
2000 2,291,000
2001 1,974,000
2002 1,670,000
2003 873,000
Thereafter 1,657,000
-----------
$10,972,000
===========
Effective January 1994, the Company became self-insured for workers'
compensation purposes and is liable for aggregate claims up to approximately
$164,000 for 1998, $164,000 for 1997, and $185,000 for 1996. In addition, the
Company is responsible for certain fixed costs including underwriting,
brokerage, reinsurance and administration costs.
36
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 8. COMMITMENTS AND CONTINGENCIES -- (Continued)
The Company is partially self-insured for health care claims for eligible
active employees. The Company is currently liable for aggregate claims up to
approximately $1,009,000 annually. Self-insurance costs are accrued based upon
the aggregate of the liability for reported claims and an estimated liability
for claims incurred but not reported.
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The "Year 2000" problem
is pervasive and complex, as many computer systems will be affected in some way
by the rollover of the two-digit year value to 00. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The "Year 2000" issue creates risk for the Company from unforeseen
problems in its own computer systems and from third parties for whom the Company
implements "Year 2000" solutions on their computer systems.
The Company believes its recently implemented financial information system
is "Year 2000" compliant. Further, the Company is currently in the process of
replacing its candidate and client databases utilized in its Contract Placement
and Permanent Placement businesses with software systems that are represeented
to be "Year 2000" compliant. The Company is analyzing its remaining computer
systems to identify any potential "Year 2000" issues and will take appropriate
corrective action based on the results of such analysis. Management has not yet
determined the cost related to achieving "Year 2000" compliance. Management
believes, based on its available information, that it will be able to manage its
total "Year 2000" transition without any material adverse effects on its
business operations or financial condition.
NOTE 9. RETIREMENT PLANS
The Company had various 401(k) retirement plans (the "Plans") covering
substantially all employees through June 30, 1996. Employees were able to
contribute a percentage of their pre-tax salary to the Plans. Company
contributions to the Plans were at the discretion of the Board of Directors.
There were no Company contributions charged to operations related to the Plans
in 1996. Effective July 1, 1996, all the Plans were merged into one Plan. The
new Plan has no Company contribution provision, although employees may continue
to contribute a percentage of their pre-tax salary to the Plan.
NOTE 10. SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE
Dividends. In accordance with the provisions of its line of credit, the
Company is not permitted to declare or pay any cash dividends on its common
stock.
Additional Paid-In Capital. During 1996, additional paid-in capital
decreased due to the JCC/DI merger which was accounted for as a reverse
acquisition.
Capital Structure. On September 4, 1996, the Company's Board of Directors
voted to (i) modify the Company's capital structure to increase the number of
authorized common shares to 50,000,000, (ii) adjust the par value per share from
$.005 to $.01, (iii) authorize the issuance of 10,000,000 preferred shares with
a par value of $.01 per share, (iv) authorize a 52.6 for 1.0 split of the
outstanding common shares for shareholders of record on September 23, 1996, (v)
authorize a change in the Company's name from "Judge, Inc." to "The Judge Group,
Inc." and (vi) authorize the formation of a new subsidiary, Judge, Inc., and the
contribution of substantially all the assets related to the Permanent Placement
business to this new subsidiary.
Common Shares -- Warrants. During 1993, the Company issued to a financial
advisor warrants to purchase 171,739 (split-adjusted) common shares of the
Company. During September 1996, such warrants were exercised.
37
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 10. SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE -- (Continued)
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 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 1998 and 1997, the Company granted two non-employee directors
options to purchase 10,000 common shares each at an exercise price of $4.938 and
$3.25, respectively, under the Non-Qualified Stock Option Plan.
A summary of the Company's Incentive Stock Option Plan activity for common
shares for the year ended December 31, 1998 and 1997 (there were no options
granted in 1996) follows:
Weighted Average
Number of Shares Exercise Price
---------------- --------------
Outstanding 1/1/97 -0- N/A
Granted 695,500 $7.18
Exercised -0- N/A
Terminated 95,000 $7.43
---------
Outstanding 12/31/97 600,500 $7.14
Granted 1,044,750 $4.73
Exercised -0- N/A
Terminated 78,300 $5.73
---------
Outstanding 12/31/98 1,566,950 $5.61
=========
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, 1998 and 1997 would be
as follows:
1998 1997
---- ----
Net Income (loss):
As reported ($5,116,993) $2,711,940
Pro forma ($6,898,814) $2,117,278
Basic earnings (loss) per share:
As reported ($0.38) $0.21
Pro forma ($0.51) $0.17
The resulting pro forma compensation cost may not be representative of
that to be expected in future years.
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1998: risk-free interest rate of 5.10%,
expected dividend yields of 0%, expected life of five years from date of grant,
and expected price volatility of 131%. The weighted average fair value of the
options granted in 1998 was $3.59.
38
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 11. STATEMENT OF CASH FLOWS
Supplemental disclosure of non-cash investing and financing transactions:
During 1998, the Company entered into the following non-cash transactions:
o recorded the following with respect to business combinations entered into in
1998 (Note 3):
o goodwill of $15,908,000;
o incurred long-term debt ($1,640,000) and contingent purchase price
($2,635,000) and other liabilities ($1,595,000);
o issued stock (193,333 shares - $1,933) and recorded additional paid-in
capital ($2,141,957);
o reduced goodwill $707,000 due to an impairment loss in Berkeley;
o reduced goodwill $2,914,099 due to an impairment loss in JIS.
During 1998, the Company effected various business combinations:
Acquisition of Businesses - ISI Cella On-Site AOP Corebridge Tech Stars
--- ----- ------- --- ---------- ----------
1998:
Inventories $ 0 $ 0 $ 0 $ 472,020 $ 0 $ 0
Accounts receivable 1,225,151 168,938 106,175 411,581 28,207 248,437
Property and equipment, net 46,051 31,059 143,210 53,325 15,000 40,822
Deferred income taxes 0 0 40,000 0 0 0
Other assets 10,000 600 14,269 90,222 1,000 6,539
---------- ---------- ---------- ---------- ---------- ----------
1,281,202 200,597 303,654 1,027,148 44,207 295,798
---------- ---------- ---------- ---------- ---------- ----------
Accounts payable and accrued
expenses 237,470 90,107 557,993 416,594 6,386 61,029
Debt obligations 418,759 0 112,817 0 0 0
Due to the Company 0 0 319,620 0 0 0
Deferred revenue and customer
deposits 0 0 7,900 262,009 0 0
---------- ---------- ---------- ---------- ---------- ----------
656,229 90,107 988,300 678,603 6,386 61,029
---------- ---------- ---------- ---------- ---------- ----------
Net assets acquired
(liabilities assumed) in
business combination $ 624,973 $ 110,490 ($ 694,676) $ 348,545 $ 37,821 $ 234,768
========== ========== ========== ========== ========== ==========
During 1997, the Company entered into the following non-cash transactions:
o incurred goodwill of $2,399,190 in the business combination with JIS;
o converted $300,000 of long-term debt to equity in accordance with the
Berkeley agreement;
o converted $500,000 of convertible debentures into 526,000 shares of
common stock;
o reversed $572,200 of goodwill and long-term debt due to a contingent
payment which was not required to be made, relating to the Berkeley
acquisition.
During 1996, the Company entered into the following non-cash transactions:
o incurred long-term debt ($2,379,452) for certain business combinations
(see Notes 3 and 5);
o restructured $1,000,000 of the existing line of credit facility debt
into long-term debt (see Notes 4 and 5).
During the year ended December 31, 1996, the Company entered into certain
financing arrangements for the purchase of property and equipment in the amount
of approximately $432,000.
39
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 11. STATEMENT OF CASH FLOWS -- (Continued)
Effective February 29, 1996, JCC and DI effected a Business Combination
and effective September 1996, the Company, and Berkeley and Systems Automation
effected business combinations.
Acquisition of Businesses - 1996: DI Berkeley Systems Automation
-- -------- ------------------
Inventories $ 39,101 $ -- $ 79,375
Accounts receivable 104,127 455,124 144,756
Property and equipment, net 150,034 167,876 56,706
Other assets 10,780 51,110 34,314
--------- -------- ---------
304,042 674,110 315,151
--------- -------- ---------
Accounts payable and accrued expenses 82,087 254,685 307,398
Debt obligations -- 206,005 196,193
Due to the Company 100,000 -- --
Deferred revenue and customer deposits 362,037 172,079 315,118
--------- -------- ---------
544,124 632,769 818,709
--------- -------- ---------
Net assets acquired (liabilities assumed) in
business combination ($240,082) $ 41,341 ($503,558)
========= ======== =========
NOTE 12. SEGMENT INFORMATION
The Company's operations cover three industry segments, the Contract and
Permanent Placement segment (consisting of the Company's Contract Placement
business and Permanent Placement business), the Information Management Solutions
segment, and the Information Technology Training segment. The information
technology training segment was purchased effective September 30, 1996. The
following represents financial information for each of the Company's reportable
industry segments:
Year Ended December 31, 1998
----------------------------
Contract and Information Information Eliminations Total
------------ ----------- ----------- ------------ -----
Permanent Management Technology
--------- ---------- ----------
Placement Solutions Training
--------- --------- --------
Sales to unaffiliated customers $92,263,310 $19,280,184 $ 2,954,903 $ --- $114,498,397
Intersegment sales 543,161 --- --- 543,161 ---
----------- ------------ ----------- ----------- -------------
Total revenues $92,806,471 $19,280,184 $2,954,903 $ 543,161 $114,498,397
=========== ============ =========== =========== =============
Income (loss) before non-
recurring charges $ 2,532,885 ($ 3,180,689) ($ 994,140) $ --- ($ 1,641,944)
=========== ============= =========== =========== =============
Non-recurring charges $ 312,000 $ 3,002,099 $ 707,000 $ --- $ 4,021,099
=========== =========== =========== =========== =============
Net income (loss) $ 1,456,609 ($ 5,169,578) ($1,404,024) $ --- ($ 5,116,993)
=========== ============ =========== =========== =============
Depreciation and amortization $ 782,010 $ 761,929 $ 303,647 $ --- $ 1,847,586
=========== ============ =========== =========== =============
Identifiable assets $42,830,774 $ 16,998,786 $1,613,504 $13,557,637 $ 47,885,427
=========== ============ =========== =========== =============
Capital expenditures $ 1,918,393 $ 670,365 $ 246,581 $ --- $ 2,835,339
=========== ============ =========== =========== =============
40
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 12. SEGMENT INFORMATION -- (Continued)
Year Ended December 31, 1997
----------------------------
Contract and Information Information Eliminations Total
------------ ----------- ----------- ------------ -----
Permanent Management Technology
--------- ---------- ----------
Placement Solutions Training
--------- --------- --------
Sales to unaffiliated customers $78,933,050 $16,443,294 $3,150,123 $ -- $98,526,467
Intersegment sales 358,517 -- 65,418 423,935 --
----------- ------------ ---------- ---------- -----------
Total revenues $79,291,567 $16,443,294 $3,215,541 $ 423,935 $98,526,467
=========== ============ ========== ========== ===========
Income (loss) from operations $ 6,425,956 ($1,814,290) ($80,494) -- $ 4,531,172
=========== ============ ========== ========== ===========
Net income (loss) $ 4,217,933 ($1,430,975) ($75,018) -- $ 2,711,940
=========== ============ ========== ========== ===========
Depreciation and amortization $ 318,067 $ 468,591 $ 209,582 -- $ 996,240
=========== ============ ========== ========== ===========
Identifiable assets $33,310,679 $ 5,942,808 $1,157,929 $8,477,845 $31,933,571
=========== ============ ========== ========== ===========
Capital expenditures $ 519,000 $ 676,000 $ 421,000 $ -- $ 1,616,000
=========== ============ ========== ========== ===========
Year Ended December 31, 1996
----------------------------
Contract and Information Information Eliminations Total
------------ ----------- ----------- ------------ -----
Permanent Management Technology
--------- ---------- ----------
Placement Solutions Training
--------- --------- --------
Sales to unaffiliated customers $67,605,373 $14,157,565 $ 608,127 $ --- $82,371,065
Intersegment sales 289,198 56,692 --- 345,890 ---
----------- ----------- ----------- ---------- -----------
Total revenues $67,894,571 $14,214,257 $ 608,127 $ 345,890 $82,371,065
=========== ============ =========== ========== ============
Income (loss) from operations $ 3,234,305 ($ 1,349,495) ($25,391) $ --- $ 1,859,419
=========== ============ =========== ========== ===========
Net income (loss) $ 1,647,601 ($1,608,861) ($19,797) ($888,000) $ 906,943
=========== ============ =========== ========== ===========
Depreciation and amortization $ 461,937 $ 125,522 $ 20,789 $ --- $ 608,248
=========== ============ =========== ========== ===========
Identifiable assets $19,386,384 $ 5,638,839 $ 612,188 $3,668,403 $21,969,008
=========== =========== =========== ========== ===========
Capital expenditures $ 665,000 $ 362,000 $ 44,000 $ --- $ 1,071,000
=========== =========== =========== ========== ===========
See Note 2 for summary of significant accounting policies.
NOTE 13. MANAGEMENT'S PLANS - INFORMATION MANAGEMENT SOLUTIONS BUSINESS
The Company's Information Management Solutions business has had net
operating losses since its commencement in 1988. The Company is currently
focusing on achieving profitability in its Information Management Solutions
business, but cannot provide any assurances as to when it will achieve sustained
profitability, if at all.
The Company has a goal to separate the Information Management Solutions
business. The Company has not yet determined the method or timing of this
separation. In addition, the Company has not determined the effect this
separation may have on its results of operations or financial condition,
although certain material commitments (e.g. lease obligations, severance and
employment arrangements, customer service maintenance agreements, etc.) could
result based upon the method and terms of the separation.
41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
INCORPORATION BY REFERENCE
The information called for by Item 10 "Directors and Executive Officers of
the Registrant," Item 11 "Executive Compensation," Item 12 "Security Ownership
of Certain Beneficial Owners and Management," and Item 13 "Certain Relationships
and Related Transactions" is incorporated herein by reference to the Company's
definitive proxy statement for its 1999 Annual Meeting of Shareholders which
definitive proxy statement is expected to be filed with the Commission no later
than 120 days after the end of the fiscal year to which this Report relates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this Annual Report on Form 10-K.
1. Consolidated Financial Statements:
Report of Independent Auditors 22
Consolidated Balance Sheets 23
Consolidated Statements of Operations 24
Consolidated Statements of Shareholders' Equity 25
Consolidated Statements of Cash Flows 26
Notes to Consolidated Financial Statements 27-41
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.
42
3. Exhibits
Exhibit
No. Description of Document
- ------- -----------------------
3.1 Amended and Restated Articles of Incorporation. Incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement on
Form S-1 (Reg. No. 333-13109).
3.2 Bylaws. Incorporated by reference to Exhibit 3.2 of the Form S-1.
4.1 10% Convertible Senior Subordinated Note Purchase Agreement.
Incorporated by reference to Exhibit 4.1 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 Stock Purchase Agreement by and among the Company, The Berkeley
Associates Corporation, Sandy Mayer and Gregory McCarthy, as amended.
Incorporated by reference to Exhibit 10.2 of the Form S-1.
10.3 Asset Purchase Agreement by and among the Company, Systems Automation,
Inc. and Edward Haskell. Incorporated by reference to Exhibit 10.3 of
the Form S-1.
10.4 1996 Incentive Stock Option and Non-Qualified Stock Option Plan for
Key Employees and Non-Employee Directors. Incorporated by reference to
Exhibit 10.4 of the Form S-1.
10.5 Professional Services Agreement between Merck & Company, Inc. and
Judge Technical Services, Inc. Incorporated by reference to Exhibit
10.5 of the Form S-1.
10.6 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.
10.7 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.
10.8 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.
43
Exhibit
No. Description of Document
- ------- -----------------------
10.9 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.
10.11 Stock Option Agreement between the Company and James A. Hahn.
10.12 Stock Option Agreement between the Company and Randolph J. Angermann.
10.13 Asset Purchase Agreement dated as of March 5, 1998 among Judge
Technical Services, Inc., Information Solutions, Inc., ISI Systems,
Inc. and John Runyon. Incorporated by reference to Exhibit 2 to Form
8-K filed on March 20, 1998.
10.14 Asset Purchase Agreement dated as of March 31, 1998 among Judge, Inc.,
and Cella Associates of Atlanta, Inc. Incorporated by reference to
Exhibit 10.2 to Form 10-Q filed on August 14, 1998.
10.15 Stock Purchase Agreement dated as of June 5, 1998 among Judge Imaging
Systems, Inc., James Turner, and Systems Solutions, Inc., d/b/a
Corebridge Technologies, Inc.
10.16 Employment Agreement by and between The Judge Group, Inc. and Frank
Barrett incorporated by reference to Exhibit 10.1 to Form 10-Q filed
August 14, 1998.
10.17 Asset Purchase Agreement dated as of October 12, 1998 among Judge
Technical Services, Inc., Tech Stars, Inc., David Hood and Scott Bass.
10.18 Stock Purchase Agreement dated as of May 1, 1998 by and among Judge
Imaging Systems, Inc., Terry Cooper, The Other Security Holders of
On-Site Solutions, Inc. and On-Site Solutions, Inc.
10.19 Asset Purchase Agreement dated June 29, 1998 by and between Judge
Imaging Systems, Inc., Automated Office Products of Western New York,
Inc. d/b/a AOP Solutions, and Paul F. Eckert and Suzanne Eckert.
Incorporated by reference to Exhibit 10.3 to Form 10-Q filed August
14, 1998.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of the Registrant. Incorporated by reference to Exhibit
21.1 of the Form S-1.
27.1 Financial Data Schedule.
No reports were filed by the Registrant on Form 8-K during the quarter
ended December 31, 1998.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned,
Dated: April 13, 1999 THE JUDGE GROUP, INC.
By: /s/ Frank M. Barrett By: /s/ Martin E. Judge, Jr.
----------------------- ---------------------------
Frank M. Barrett 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, April 13, 1999
- ------------------------ Director, President and Chief
Martin E. Judge, Jr. Executive Officer
(Principal Executive Officer)
/s/ Richard T. Furlano Director April 13, 1999
- ----------------------
Richard T. Furlano
/s/ Michael A. Dunn Director and Executive April 13, 1999
- ------------------- Vice President
Michael A. Dunn
/s/ Randolph J. Angermann Director April 13, 1999
- -------------------------
Randolph J. Angermann
/s/ James C. Hahn Director April 13, 1999
- -----------------
James C. Hahn
45