UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NO. 0-21963
THE JUDGE GROUP, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1726661
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
TWO BALA PLAZA, SUITE 800
BALA CYNWYD, PENNSYLVANIA 19004
(Address of principal executive offices, including zip code)
(610) 667-7700
(Registrant's telephone number, including area code)
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 [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark if registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes____ No_____
As of May 13, 1997, 13,344,232 shares of the Registrant's Common Stock,
$0.01 par value, were outstanding.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
INDEX TO FINANCIAL STATEMENTS
NUMBER PAGE(s)
- - ------ -------
PART I-FINANCIAL INFORMATION
----------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 1997 (UNAUDITED) AND DECEMBER 31, 1996 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 4
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1997 5
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DEFICIENCY) (UNAUDITED) FOR THE THREE MONTHS ENDED
MARCH 31, 1996 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,1997 AND 1996 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8 - 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 22
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22 - 23
2
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................... $ 8,517,872 $ 105,069
Accounts receivable, net....................................... 14,345,150 13,396,495
Inventories.................................................... 870,942 910,321
Prepaid income taxes and deferred taxes........................ 507,295 340,603
Notes receivable, officers, employees and
related party................................................ -- 577,287
Other.......................................................... 808,491 1,419,758
----------- -----------
Total current assets........................................... 25,049,750 16,749,533
----------- -----------
PROPERTY AND EQUIPMENT
Furniture, office and computer equipment....................... 3,803,170 3,606,124
Automotive equipment........................................... 37,936 37,936
Leasehold improvements......................................... 65,332 45,566
----------- -----------
3,906,438 3,689,626
Less: accumulated depreciation and amortization................ 1,918,268 1,766,215
----------- -----------
Net property and equipment..................................... 1,988,170 1,923,411
----------- -----------
OTHER ASSETS
Receivables, officers.......................................... 35,212 --
Deposits....................................................... 121,386 99,844
Goodwill, net of accumulated amortization of $142,625,
1997 and $62,982, 1996......................................... 5,515,767 3,196,220
----------- -----------
Total other assets............................................. 5,672,365 3,296,064
----------- -----------
Total assets................................................... $32,710,285 $21,969,008
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt.............................. $116,902 $915,253
Convertible notes.............................................. -- 500,000
Accounts payable and accrued expenses.......................... 5,373,659 4,768,269
Payroll and sales taxes........................................ 1,149,941 727,118
Income taxes payable........................................... -- 126,538
Other notes payable............................................ -- 195,477
Deferred revenue .............................................. 1,558,908 1,168,334
Advances from shareholders..................................... -- 95,862
----------- -----------
Total current liabilities...................................... 8,199,410 8,496,851
----------- -----------
LONG-TERM LIABILITIES
Note payable, bank............................................. -- 9,210,795
Deferred rent obligation....................................... 123,766 130,402
Debt obligations, net of current portion....................... 875,373 3,008,846
----------- -----------
Total long-term liabilities.................................... 999,139 12,350,043
----------- -----------
MINORITY INTEREST.............................................. -- --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares authorized; at March 31, 1997,
13,347,969 shares issued and outstanding; December 31, 1996, 8,587,739 shares
issued and outstanding........................................ 133,479 85,877
Preferred stock, $.01 par value,
10,000,000 shares authorized.................................. -- --
Additional paid-in capital..................................... 22,974,350 365,877
Retained earnings ............................................. 403,907 670,360
----------- -----------
Total shareholders' equity..................................... 23,511,736 1,122,114
----------- -----------
Total liabilities and shareholders' equity..................... $32,710,285 $21,969,008
=========== ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
NET REVENUES ............................... $ 23,478,403 $ 16,434,980
------------ ------------
COSTS AND EXPENSES
Cost of sales (exclusive of items
shown separately below) .................... 17,385,388 12,528,047
Selling and operating ...................... 4,230,054 2,653,916
General and administrative ................. 1,981,962 1,398,107
------------ ------------
Total costs and expenses ................... 23,597,404 16,580,070
------------ ------------
LOSS FROM OPERATIONS ....................... (119,001) (145,090)
OTHER EXPENSE, NET ......................... (127,901) (180,843)
------------ ------------
LOSS BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST IN NET
LOSS OF CONSOLIDATED SUBSIDIARY ............ (246,902) (325,933)
INCOME TAX EXPENSE ......................... 19,551 16,500
------------ ------------
LOSS BEFORE MINORITY INTEREST IN NET
LOSS OF CONSOLIDATED SUBSIDIARY ............ (266,453) (342,433)
MINORITY INTEREST IN NET LOSS OF
CONSOLIDATED SUBSIDIARY .................... -- (98,400)
------------ ------------
NET LOSS ................................... ($ 266,453) ($ 244,033)
============ ============
NET LOSS PER SHARE:
PRIMARY ................................. ($0.02) ($0.03)
====== ======
FULLY DILUTED ........................... ($0.02) ($0.03)
====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Common Stock Additional
------------ Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 .................. 8,587,739 $ 85,877 $ 365,877 $ 670,360 $ 1,122,114
Merger transactions (See Note 1) ............ 1,194,230 11,942 2,416,498 -- 2,428,440
Initial Public Offering
(See Note 1) .............................. 3,000,000 30,000 19,397,635 -- 19,427,635
Conversion of debentures .................... 526,000 5,260 494,740 -- 500,000
Conversion of note payable
(See Note 1) .............................. 40,000 400 299,600 -- 300,000
Net loss .................................... -- -- -- (266,453) (266,453)
----------- -------- ------------ --------- ------------
Balance, March 31, 1997 ..................... 13,347,969 $133,479 $ 22,974,350 $ 403,907 $ 23,511,736
=========== ======== ============ ========= ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Common Stock Additional Retained
------------ Paid-In Earnings
Shares Amount Capital (Deficit) Total
------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ................. 160,000 $ 800 $ 626,848 ($236,583) $ 391,065
Merger transactions (See Notes 3
and 10) .................................. -- -- (175,910) -- (175,910)
Net loss ................................... -- -- -- (244,033) (244,033)
--------- --------- --------- --------- ---------
Balance, March 31, 1996 .................... 160,000 $ 800 $ 450,938 ($480,616) ($ 28,878)
========= ========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss for the period......................................... ($266,453) ($244,033)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation.................................................. 154,897 67,243
Amortization.................................................. 79,643 36,324
Deferred rent................................................. (6,636) (6,636)
Provision for losses on accounts receivable................... 77,421 99,000
Stock compensation............................................ 29,250
Minority interest in net loss of consolidated
subsidiary.................................................. -- (98,400)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable........................................... (1,026,077) (441,253)
Inventories................................................... 39,379 (755,754)
Deposits...................................................... (21,542) --
Prepaid income taxes.......................................... 12,052 51,727
Other current assets.......................................... 611,267 53,639
Increase (decrease) in:
Accounts payable and accrued expenses......................... 605,391 699,263
Payroll and sales taxes....................................... 422,823 320,219
Deferred revenue.............................................. 390,574 129,655
Income taxes payable.......................................... (305,282) (184,569)
---------- ----------
Net cash provided by (used in) operating activities.......... 796,707 (273,575)
---------- ----------
INVESTING ACTIVITIES
Purchases of property and equipment............................. (219,656) (67,678)
(Increase) decrease in notes receivable, officers and
employees, net.................................................. 542,075 (39,504)
---------- ----------
Net cash provided by (used in) investing activities.......... 322,419 (107,182)
---------- ----------
FINANCING ACTIVITIES
Cash acquired in business combination........................... -- 13,786
Proceeds from (repayments of) notes payable, bank, net.......... (9,960,795) 132,187
Proceeds of bank overdrafts..................................... -- 137,034
Principal payments on long-term debt............................ (2,077,301) (141,069)
Proceeds from issuance of stock and exercise of warrants,
net............................................................. 19,427,635 --
Repayments from shareholders.................................... (95,862) (13,449)
Issuance of Series A Preferred Shares, net of costs............. -- 888,000
---------- ----------
Net cash provided by financing activities................... 7,293,677 1,016,489
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS........................... 8,412,803 635,732
CASH AND CASH EQUIVALENTS, BEGINNING............................ 105,069 35,078
---------- ----------
CASH AND CASH EQUIVALENTS, ENDING............................... $8,517,872 $ 670,810
========== ==========
SUPPLEMENTAL DISCLSOURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest........................................................ $ 178,000 $ 181,000
========== ==========
Income taxes.................................................... $ 294,000 $ 100,000
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 1. DESCRIPTION OF BUSINESS
On September 4, 1996, a special meeting of the Board of Directors was held where
Judge, Inc. changed its name to The Judge Group, Inc. (the "Company"), effected
certain changes to its capital structure and authorized a stock split. See Note
9. The Company, 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 "Imaging and Network Services" business) 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 March 31, 1997, the Company had offices in Bala Cynwyd,
Pennsylvania; Hartford, Connecticut; Foxborough, Massachusetts; Wakefield,
Massachusetts; Tampa, Florida; Moorestown and Edison, New Jersey and Alexandria,
Virginia.
The Contract Placement business includes the operations of three of the
Company's wholly-owned subsidiaries, Judge Technical Services, Inc. ("JTS"),
Judge Professional Services, Inc. ("JPS") and Judge Technical Services of N.J.,
Inc. ("JTNJ").
The Permanent Placement business includes the operations of the Company and two
of its wholly-owned subsidiaries, 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"), a company acquired by the Company in September
1996 (see Note 3).
At December 31, 1995 the Company owned 33%, Martin E. Judge, Jr., the Company's
founder, Chairman and Chief Executive Officer owned 47%, and another officer and
director of the Company owned 5% of the outstanding voting shares, on a fully
diluted basis, of Judge Computer Corporation ("JCC"). On December 1, 1995, JCC
entered into an Agreement and Plan of Merger (the "JCC/DI Merger Agreement")
with DataImage, Inc. ("DI" or "Data Image"), a public company, the common stock
of which was traded on the over-the-counter market. Pursuant to the JCC/DI
Merger Agreement, JCC was merged into DI on February 29, 1996 (the "JCC/DI
Merger"), and DI, as the surviving corporation, changed its name to Judge
Imaging Systems, Inc. ("JIS"). As a result of the merger, the former
shareholders of JCC held, on a fully diluted basis, a majority of the
outstanding common stock of JIS, which remained a public company.
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 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.
8
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 1. DESCRIPTION OF BUSINESS -- (Continued)
The Imaging and Network Services business of the Company consisted of the
operations of JCC prior to the JCC/DI Merger and JIS subsequent to the merger.
See Notes 3 and 10. In addition, the Company purchased the net assets and
liabilities of Systems Automation, Inc. ("Systems Automation") in September 1996
(see Note 3), a company that provides imaging and document management systems
and services located in Wakefield, Massachusetts.
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. 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 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 note payable to
Berkeley, in accordance with the purchase agreement with Berkeley. In connection
with the initial public offering, the Company incurred approximately $1,478,000
of accounting, legal, printing and other costs as of March 31, 1997 and such
costs have been charged to additional paid in capital as a reduction of the
proceeds from the initial public offering. As of December 31, 1996 approximately
$1,017,000 of such costs were included in other current assets.
Unless the context indicates otherwise, references to the Company herein prior
to February 29, 1996 include reference to its wholly-owned subsidiaries and JCC
and such references subsequent to February 29, 1996 include reference to its
wholly-owned subsidiaries and JIS.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The financial statements as of March 31, 1997 and for the three months ended
March 31, 1997 and 1996 are unaudited; however, in the opinion of management,
such statements include all adjustments, consisting solely of normal recurring
adjustments, necessary for a fair presentation of the results for the periods
presented. All significant intercompany accounts and transactions have been
eliminated.
The interim financial statements should be read in conjunction with the
financial statements for the fiscal year ended December 31, 1996 and notes
thereto.
The results of operations for the interim periods are not necessarily indicative
of the results that might be expected for the future interim periods or for the
full year ended December 31, 1997.
Risks and Uncertainties
The preparation of 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.
9
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Accounts Receivable and Accounts Payable
Accounts receivable at March 31, 1997 and December 31, 1996 were net of
allowances for doubtful accounts of $693,000 and $661,000, respectively.
Included in accounts receivable was unbilled work-in-process of approximately
$1,531,000 and $524,000 at March 31, 1997 and December 31, 1996, respectively.
Included in accounts payable and accrued expenses was approximately $1,026,000
and $283,000 of accrued employee and contractor payroll principally relating to
unbilled work-in-process at March 31, 1997 and December 31, 1996, respectively.
Interim Financial Reporting
For interim financial reporting purposes, costs and expenses are accounted for
in accordance with Accounting Principles Board Opinion No. 28 ("APB 28").
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.
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 ten years for Systems Automation and over fifteen
years for JIS and Berkeley. The Systems Automation and Berkeley acquisitions
were effective September 30, 1996 and the JIS acquisition was effective February
20, 1997 (See Note 3). Amortization of goodwill for the three months ended March
31, 1997 was approximately $80,000 and is included in general and administrative
expense in the consolidated statement of operations.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings per Share" (the "Statement") which specifies new
computation, presentation, and disclosure requirements for earning per share
(EPS) for entities with publicly held common stock or potential common stock.
The Statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The Company has not yet
determined the effect that the Statement is expected to have on the Company's
computation and presentation of earnings per share.
Earnings Per Share
The number of shares used in the earnings per share calculation and convertible
note share conversion (see Note 1) has been adjusted for the 52.6 for 1.0 stock
split which occurred in September 1996.
Primary earnings per share amounts were computed based on the weighted average
number of shares actually outstanding. The number of shares used in the
computation were approximately 10,968,000 and 8,416,000 in 1997 and 1996,
respectively.
Fully diluted earnings per share amounts for the quarters ending March 31, 1997
and 1996 were based on the weighted average number of shares calculated for
primary earnings per share purposes. The assumed conversion of outstanding
convertible notes (see Notes 1 and 7) has not been considered since the effect
of such conversion would be anti-dilutive. The number of shares used in the .
10
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
computation were approximately 10,968,000 in 1997 and 8,416,000 in 1996
NOTE 3. BUSINESS COMBINATIONS AND PRO-FORMA RESULTS OF OPERATIONS
On September 13, 1995, JCC and DI signed a Letter of Intent relating to the
JCC/DI Merger. On December 1, 1995, JCC and DI executed the JCC/DI Merger
Agreement, which was amended effective December 20, 1995 and February 26, 1996.
The JCC/DI Merger was consummated effective February 29, 1996. In the JCC/DI
Merger, JCC was merged into DI. DI survived the merger and changed its name to
JIS. JIS continued to be a public reporting company.
The JCC/DI Merger was accounted for as a "reverse acquisition" whereby JCC, in
substance, acquired DI, allocating the fair value of JCC shares exchanged over
the relative fair value of assets and liabilities of DI (assumed to equal its
book value) prior to the merger. No value was ascribed to DI's net loss
carryforwards as a result of limitations on these carryforwards subsequent to
the change in control. Accordingly, the historical financial statements included
in the consolidation prior to the acquisition are those of the acquirer, JCC,
and are those of JIS for the period subsequent to the merger. Operating results
for the Company for the three months ended March 31, 1996, on a pro forma basis
as though DataImage had been acquired as of January 1, 1996, are shown below.
Effective September 30, 1996, the Company purchased 100% of the issued and
outstanding stock of Berkeley. Berkeley, founded in 1980, is a provider of IT
training services to corporate, governmental and individual clients. The total
acquisition cost was $2,232,200. As of March 31, 1997, $872,200 of the
acquisition cost is still outstanding, of which $300,000 has been converted into
a note payable. The remaining portion of the balance, or $572,200, is contingent
on Berkeley attaining certain pre-tax income amounts in 1997. The acquisition
was accounted for as a purchase and results of operations of Berkeley are
included in the statement of operations for the three months ended March 31,
1997. The excess of acquisition cost over the fair value of net assets, assumed
to equal their carrying value, was approximately $2,220,000, which is being
amortized over fifteen years, beginning in October 1996. Operating results for
the Company for the three months ended March 31, 1996, on a pro forma basis as
though Berkeley had been acquired as of January 1, 1996, are shown below.
Also effective September 30, 1996, the Company purchased substantially all of
the tangible and intangible assets, and assumed all of the liabilities, of
Systems Automation. Systems Automation is a provider of advanced technical
solutions to increase the efficiency of business processes, such as network and
document management systems design, integration, implementation, maintenance and
training, business process redesign, project management and advanced
applications development. The total acquisition cost was $547,252. The
acquisition was accounted for as a purchase and results of operations of Systems
Automation are included in the statement of operations for the three months
ended March 31, 1997. The excess of acquisition cost over the fair value of net
assets, assumed to equal their carrying value, was approximately $1,040,000,
which is being amortized over ten years, beginning in October 1996. Operating
results for the Company for the three months ended March 31, 1996, on a pro
forma basis as though Systems Automation had been acquired as of January 1,
1996, are shown below.
As described in Note 1, upon the successful completion of the Company's initial
public offering in February 1997, JIS was merged into the Company.
11
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 3. BUSINESS COMBINATIONS AND PRO-FORMA RESULTS OF OPERATIONS -- (Continued)
The following sets forth the combined results for the Company, DataImage,
Berkeley, JIS and Systems Automation for the three months ended March 31, 1997
and 1996, as if the business combinations occurred at January 1, 1997 and 1996,
respectively.
Three Months Ended
March 31,
---------
1997 1996
---- ----
Net revenues ............................... $ 23,478,403 $ 17,411,813
Cost of revenues (exclusive of items
shown separately below) .................... 17,385,388 13,059,818
------------ ------------
Gross Profit ............................... 6,093,015 4,351,995
Operating Expenses:
Selling, general and administrative ........ 6,238,674 4,628,975
------------ ------------
Loss from operations ....................... (145,659) (276,980)
Other expenses, net ........................ (127,901) (191,703)
------------ ------------
Loss before income tax expense ............. (273,560) (468,683)
Income tax expense (benefit) ............... 8,888 (29,999)
------------ ------------
Net loss ................................... ($ 282,448) ($ 438,684)
============ ============
Notes to pro-forma results of operations:
(1) Interest expense for the three months ended March 31, 1996, adjusted
due to (a) the conversion of DI stockholders notes payable to JIS common
stock by ($3,581), (b) incurring debt/notes payable in connection with the
acquisition of Berkeley by $16,853 and (c) the conversion of the Company's
convertible notes to common stock by ($12,500).
(2) Amortization expense recorded for goodwill created by the business
combinations of Berkeley of $36,994 for the three months ended March 31,
1996, Systems Automation of $25,989 for the three months ended March 31,
1996, and JIS of $26,658 and $39,987 for the three month ended March 31,
1997 and 1996, respectively. Amortization expense for goodwill of Berkeley
and Systems Automation is included in the statement of operations for the
three months ended March 31, 1997.
(3) Adjustment to provide Federal and state income tax expense (benefit)
attributable to income (loss) of Berkeley of $33,097 for the three months
ended March 31, 1996, and Systems Automation of ($38,100) for the same
period as well as the amortization of goodwill of ($41,188) for the same
period, and interest expense of ($308) for the same period recognized in
(1) and (2) above, all at an effective tax rate of 40%.
(4) Adjustment to record merger of JIS into a wholly-owned subsidiary of
the Company as though it occurred at the beginning of the pro forma
periods presented. The adjustment represents the elimination of the
minority interest ($98,400) for the three months ended March 31, 1996.
The interest expense adjustment (see (1)(b) and (1)(c) above) assumed
the successful completion of the Company's initial public offering of stock as
discussed in Note 1.
12
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NOTE 3. BUSINESS COMBINATIONS AND PRO-FORMA RESULTS OF OPERATIONS -- (Continued)
Primary and fully diluted net income per share of common stock is calculated as
follows:
Three Months Ended
March 31,
---------
1997 1996
---- ----
Net loss attributable to
common shareholders ....................... ($ 282,448) ($ 438,684)
=========== ============
Weighted average number of shares ......... 13,347,969 13,347,969
=========== ============
Net loss per share attributable to
common shareholders ....................... ($ 0.02) ($ 0.03)
=========== ============
Weighted average number of shares includes actual shares outstanding increased
by the number of shares issued in respect to the conversion of Company
convertible debentures, the number of shares issued in the Company's initial
public offering, the number of shares issued in the JIS merger, and the number
of shares issued in conjunction with the Berkeley acquisition.
NOTE 4. NOTE PAYABLE, BANK
Note payable, Bank, consists of advances to the Company, JTS and JIS under a
$11,000,000 credit facility, of which $10,000,000 represents a line of credit
and $1,000,000 represents a term loan. At December 31, 1996, the line of credit
bore interest at the prime rate plus 1% per annum. Maximum permitted borrowings
thereunder is the lesser of $10,000,000 or 80% of qualified accounts receivable,
as defined in the line of credit agreement. Upon completion of the initial
public offering, in February 1997, the Company repaid all obligations related to
its note payable, bank. In accordance with the line of credit agreement, the
Company has the full amount available for future borrowing needs. In addition,
the shareholder guarantees have been released, and future borrowings will bear
interest at the bank's prime rate.
Included in accounts payable and accrued expenses at March 31, 1997 and December
31, 1996 were approximately $1,858,000, and $1,858,000 respectively, of bank
overdrafts.
Interest expense charged to operations was approximately $178,000 and $181,000
for the three months ended March 31, 1997 and 1996, respectively.
NOTE 5. LONG-TERM DEBT
With a portion of the proceeds from the initial public offering, the Company
paid off a significant amount of its long-term debt.
NOTE 6. ADVANCES FROM SHAREHOLDERS
JIS/JCC had advances from shareholders of $95,862 at December 31, 1996 all of
which was repaid with a portion of the proceeds from the Company's initial
public offering. Interest expense related to these advances was approximately
$4,400 in the three months ended March 31, 1996 and $1,800 in the same period in
1997.
NOTE 7. CONVERTIBLE NOTES
In 1994, the Company received $500,000 from a group of investors in the form of
10% convertible
13
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
senior subordinated promissory notes. The notes bear 10% interest per annum and
were scheduled to mature in July 1997. In accordance with the note purchase
agreement, since the Company effected a successful initial public offering
before July 31, 1997, 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. The notes were exchanged for 526,000 Company common
shares, immediately prior to the Offering (see Note 1).
NOTE 8. INCOME TAXES
The Company files a consolidated Federal income tax return with most of its
wholly-owned subsidiaries. JTS and JCC/JIS are not included in the Company's
consolidated Federal income tax return, as the Company previously owned less
than 80% of each such Company's outstanding common shares. Under Internal
Revenue regulations, JTS and JCC/JIS are not part of the consolidated group for
tax purposes and file their own Federal income tax returns. Although JTS
subsequently became a wholly-owned subsidiary of the Company, it has continued
to file its own Federal income tax returns. JTS files a consolidated tax return
with its wholly-owned subsidiaries, JPS and JTNJ. State income taxes are
determined on the basis of filing separate returns for each company as required
by the applicable state regulations.
In accordance with APB 28 (Interim Financial Reporting) income taxes are
calculated at the estimated effective annual (federal and state) rates of
approximately 40% for the three months ended March 31, 1997 and 1996.
The effective tax rate for 1997 and 1996 is higher than the applicable statutory
tax rate of 34% due primarily to net operating losses for JCC/JIS, a company
consolidated for financial reporting but not tax reporting purposes.
For income tax reporting purposes, as of December 31, 1996, JIS had an unused
operating loss carryforward of approximately $3,900,000, which may be applied
against future taxable income of JIS, subject to certain Federal income tax
limitations. These carryforwards expire between 2002 and 2011.
NOTE 9. SHAREHOLDERS' EQUITY
Deficit and 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 (see Note 4).
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 (Notes 1 and 3).
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.
14
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
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 1,500,000 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. Simultaneous with the
completion of the initial public offering, options to purchase a total of
593,000 common shares were granted at the initial public offering price of $7.50
per common share.
NOTE 10. CAPITAL STRUCTURE OF JCC/JIS
The JCC preferred shares (which eliminated in consolidation) bore cumulative
dividends at an annual rate of $.005 per share. No dividends were declared or
paid in 1996. In February 1996, the preferred shareholders waived receipt of all
dividends due them. In February 1996, the preferred shareholders converted their
preferred shares into JCC common shares on a one-to-one basis.
In February 1996, JCC's Board of Directors authorized new additional preferred
shares, consisting of 1,125,000 $.01 par value Series A convertible preferred
shares and 25,000, $1,000 stated value Series B preferred shares.
In February 1996, JCC raised approximately $1,097,000 ($888,000, net of costs)
in a private offering of 822,628 Series A convertible preferred shares ("JCC
Series A Preferred") at a purchase price per share of $1.33. At the effective
time of the JCC/DI Merger, these preferred shares were converted into the same
number of JIS Series A preferred shares ("JIS Series A Preferred"). The JIS
Series A Preferred shares carry a cumulative dividend of 7% per year
(aggregating approximately $45,000 at December 31, 1996). In conjunction with
the Company's initial public offering, these preferred shares were converted
into common shares in February 1997 (see Notes 1 and 3). At December 31, 1996,
the JIS Series A Preferred stock is presented at $-0- as "minority interest" in
the accompanying consolidated balance sheet. Approximately $98,400 of JIS losses
have been allocated to this minority interest in the accompanying consolidated
statement of operations for the three months ended March 31, 1996.
NOTE 11. STATEMENT OF CASH FLOWS
Supplemental disclosure of non-cash investing and financing transactions:
During the three months ended March 31, 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.
During the three months ended March 31, 1996, the Company entered into certain
financing arrangements for the purchase of property and equipment in the amount
of approximately $62,000.
15
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THREE MONTHS ENDED MARCH 31, 1997, AND 1996
NOTE 11. STATEMENT OF CASH FLOWS (Continued)
Effective February 29, 1996, JCC and DI effected a Business Combination (see
Note 3):
Acquisition of Businesses:
DI
--
Inventories..................................... $ 39,101
Accounts receivable............................. 104,127
Property and equipment, net..................... 150,034
Other assets.................................... 10,780
--------
304,042
--------
Accounts payable and accrued expenses........... (82,087)
Debt obligations................................ --
Due to the Company.............................. (100,000)
Deferred revenue and customer deposits. (362,037)
--------
(544,124)
--------
Net assets acquired (liabilities
assumed) in business combination................ ($240,082)
=========
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1996
The following discussion should be read in conjunction with the
condensed consolidated financial statements of The Judge Group, Inc. (the
"Company") and related notes thereto appearing elsewhere in this Report.
OVERVIEW
Effective February 14, 1997 the Company successfully completed it's
initial public offering of common shares (the "Offering"). 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.
Simultaneous with the closing of the Offering, the Company acquired the
remaining outstanding shares of Judge Imaging Systems, Inc. ("JIS") not already
held by the Company and merged JIS into a wholly-owned subsidiary of the
Company. In addition, simultaneous with the Offering, the holders of an
aggregate of $500,000 principal amount of debt converted their notes into
526,000 common shares of the Company.
With a portion of the proceeds, the Company paid off a significant
amount of its debt. See "Liquidity and Capital Resources" for further
information. The Company intends to use the remaining proceeds for working
capital and general corporate purposes, including establishment of a corporate
level sales force and for future acquisitions.
During the first quarter of 1997, the Company undertook certain changes
to reduce overhead costs in its Imaging and Network Services business, primarily
the reduction of administrative, production and sales personnel and closing its
Tampa, Florida operations. These reductions were made because sales growth
expected in the first quarter of 1997 did not materialize. Even if it increases
sales, however, there can be no assurance that the Imaging and Network Services
business will achieve a pricing and cost structure that will generate profits.
While the Company believes that the Imaging and Network Services business will
ultimately achieve profitability, it cannot predict the timing of such
profitability, should it occur at all, and expects to continue to incur
operating losses in this business at least through the third fiscal quarter of
1997.
The following table presents the net revenue (net of intercompany
eliminations) and the income (loss) from operations attributable to each of the
Company's businesses, in dollars and as a percentage of consolidated net
revenues, for the periods indicated.
THREE MONTHS ENDED MARCH 31,
(Dollars in Thousands) 1997 1996
-------------------- -------------------
Net Revenues:
Permanent Placement $1,930 8.2% $1,073 6.5%
Contract Placement 17,836 76.0 12,893 78.5
Imaging and Network Services 3,104 13.2 2,469 15.0
IT Training 608 2.6 -- --
------- ----- ------- -----
Consolidated Net Revenues $23,478 100.0% $16,435 100.0%
======= ===== ======= =====
Income (loss ) From Operations:
Permanent Placement $ 298 1.3% $ 38 0.2%
Contract Placement 1,159 4.9 412 2.5
Imaging and Network Services (908) (3.9) (249) (1.5)
IT Training (104) (0.4) -- --
Corporate Overhead Expense (564) (2.4) (346) (2.1)
------- ----- ------- -----
Consolidated Loss From Operations ($119) (0.5%) ($145) (0.9%)
======= ===== ======= =====
Included in corporate overhead expense are salaries, benefits and
related costs for the Company's founder and chief executive officer, Martin E.
Judge, Jr., and for corporate level financial, human resources, management
information systems and marketing personnel. The number of personnel included in
corporate overhead for the first quarter of 1997 increased to 19, compared to 16
for the first quarter of 1996. In addition, the amortization of goodwill related
to the two acquisitions and the JIS merger is included in corporate overhead
expense. The charge for goodwill for the first quarter of 1997 was $79,600.
There was no charge for goodwill for the first quarter of 1996. Founder's
compensation of $137,500 and $198,100 is included in corporate overhead for the
first quarter of 1997 and 1996, respectively.
17
<PAGE>
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:
THREE MONTHS ENDED MARCH 31,
1997 1996
---- ----
Net Revenues 100.0% 100.0%
Cost of Sales (exclusive of items shown separately 74.1 76.2
below)
Selling and Operating 18.0 16.2
General and Administrative 8.4 8.5
----- -----
Total Costs and Expenses 100.5 100.9
Loss From Operations (0.5) (0.9)
Interest Expense and Other, Net 0.5 1.1
----- -----
Loss Before Income Taxes (1.0%) (2.0%)
===== =====
Net Revenues. Consolidated net revenues increased by 42.9%, or $7.0
million, for the three months ended March 31, 1997 compared to the prior year
period. Revenue for the Contract Placement business increased by 38.3%, or $4.9
million, for the three months ended March 31, 1997, compared to the prior year
period. Contract Placement revenues for all its locations increased primarily
due to increased marketing efforts, and in particular, revenues contributed by
the Edison, New Jersey office of $1.4 million, or 8.0% of that business' total
revenues, in the first quarter of 1997, compared to $771,000, or 6.0%, in the
prior year period. For the first quarter of 1997, the average Contract Placement
billing rate increased by 20.2% compared to the prior year period. Revenue for
the Permanent Placement business increased by 79.9%, or $857,000, for the three
months ended March 31, 1997, compared to the prior year period. Contributing to
this increase was an increase in the number of placements made between December
1, 1996 and February 28, 1997, compared to placements made in prior year period,
which produced additional revenue in the amount of $246,000. The revenue
increase in the Permanent Placement business was also attributable to an
increase in the average placement fee. For the first quarter of 1997, the
average placement fee received by the Permanent Placement business increased by
6.0%. The revenue increases experienced by both the Contract and Permanent
Placement businesses reflects the current strong market demand for these
services. Revenue for the Imaging and Network Services business increased by
25.7%, or $635,000, for the three months ended March 31, 1997 compared to the
prior year period. This increase in revenues was attributable to an increase in
sales of imaging and document management systems and services. Also contributing
to this increase was revenue of approximately $291,000 from the imaging business
acquired in September 1996. The IT Training business, acquired in September
1996, generated net revenues of $608,000 for the quarter ended March 31, 1997.
Cost of Sales. Consolidated cost of sales increased by 38.8%, or $4.9
million, for the three months ended March 31, 1997 compared to the prior year
period. Overall cost of sales as a percentage of consolidated net revenues
decreased to 74.1% from 76.2%. In the Company's Contract Placement business,
cost of sales as a percentage of its revenue decreased to 79.6% from 80.4%. This
decrease was primarily a result of the Contract Placement business focusing its
sales efforts on higher margin services. Also contributing to the decrease in
cost of sales were the average profit margins obtained by the metropolitan
Boston office where average profit margins increased by approximately two
percentage points during the first quarter of 1997 compared to the prior year
period, and the increase in average profit margin achieved by the Contract
Placement's National Division of approximately 2.6 percentage points during the
first quarter of 1997 compared to the prior year period. The decline in overall
cost of sales as a percentage of consolidated net revenues was also attributable
to an increase in revenue for the Permanent Placement business, which has no
cost of sales. In the Company's Imaging and Network Services business, however,
cost of sales as a percentage of its revenue increased to 81.2% from 79.6%,
primarily as a result of an increase in technical personnel hired in the third
and fourth quarter of 1996 to service the anticipated increase in imaging and
document management revenues. The IT Training business, acquired in September
1996, also contributed an additional $566,000 in cost of sales, representing
92.2% of that business' revenues.
Selling and Operating. Consolidated selling and operating expenses
increased by 59.4%, or $1.6 million, for the three months ended March 31, 1997
compared to the prior year period. Selling and operating expenses as a
percentage of consolidated net revenues
18
<PAGE>
for the three months ended March 31, 1997 increased to 18.0% from 16.2% in the
prior year period, due primarily to a 71.1%, or $1.3 million, increase in
payroll costs associated with the Company's hiring of sales and marketing
personnel in all of its businesses that occurred throughout 1996, and the
addition of sales personnel resulting from the acquisition of two Imaging and
Network Services businesses.
General and Administrative. Consolidated general and administrative
expenses increased 41.8%, or $584,000, for the three months ended March 31, 1997
compared to the prior year period. Contributing to this increase was an increase
of $269,000 in the Imaging and Network Services business, primarily consisting
of an increase in payroll costs associated with the hiring of additional
personnel in the second, third and fourth quarters of 1996. Expansion of the
Company's corporate staff, specifically the hiring of additional management
information systems, accounting and human resources personnel in 1996, in
addition to the amortization of goodwill related to the acquisitions, increased
corporate overhead costs by $218,000 in the first quarter of 1997 compared to
the prior year period. General and administrative expenses as a percentage of
consolidated net revenues decreased slightly to 8.4% for the three months ended
March 31, 1997 from 8.5% for the prior year period.
Interest. Interest expense was $178,000 and $181,000 for the three
months ended March 31, 1997 and the prior year period, respectively. Interest
Income was $51,000 and $0 for the three months ended March 31, 1997 and the
prior year period, respectively. This increase is directly attributable to the
interest earned on the unused portion of the proceeds of the Offering.
INCOME TAXES
The effective tax rates for the three months ended March 31, 1997 and
1996 are higher than the applicable statutory tax rate of 34%, primarily due to
net operating losses for the Imaging and Network Services business, which are
consolidated for financial but not for tax reporting purposes for the period of
January 1, 1997 through February 20, 1997. However, since the Company's merger
with JIS (which includes the Imaging and Network Services business) on February
20, 1997, this business unit will now be consolidated for tax purposes and any
future losses generated by the Imaging and Network Services business may be used
in the calculation of income tax expense or benefit. If the Imaging and Network
Services business is able to achieve profitability, it will be able to utilize
approximately $3.9 million in federal operating loss carryforwards, which will
expire between 2002 and 2011.
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 the three months ended March 31, 1997, however, the
funds available for working capital purposes increased substantially as a direct
result of the receipt of the proceeds from its Offering. The Company will now
use the proceeds from the Offering to fund its working capital needs.
During the first quarter of 1997, the Company successfully completed
its Offering of common shares. From the proceeds of $20,906,000 (net of
underwriting discounts and commission) the Company paid approximately $1,478,000
of accounting, legal, financial advisory, printing and other costs associated
with the Offering. The Company paid off its note payable due to the bank in the
amount of $10.0 million and other long term debt of $2.1 million, which includes
payments related to the notes payable for the two acquisitions. Immediately
prior to the Offering, the holders of $500,000 of convertible notes exchanged
them for 526,000 Company common shares. The Company also issued 40,000 common
shares in lieu of a $300,000 note payable to the sellers of its IT training
unit, in accordance with the purchase agreement for that business.
The Company has available a bank line of credit consisting of an $11.0
million revolving advance facility (the "Line of Credit") with PNC Bank, N.A.
(successor to Midlantic Bank, NA). The Line of Credit expires on May 31, 1998
and carries interest at the prime rate. This facility allows the Company to
borrow the lesser of 80% of eligible receivables, or $11.0 million. As of March
31, 1997 the Company has no borrowings 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 incurrence of additional debt and the
payment of dividends on the Company's common shares.
The Company generated cash from operations of $797,000 for the three
months ended March 31, 1997 as compared to a use of cash of $274,000 for the
same period last year. This result is attributable to several factors, but is
primarily attributable to decreased inventory purchases. The Company has also
increased controls on credit and collections since December 31, 1996 which has
resulted in a decrease in days outstanding from approximately 59 days at
December 31, 1996 to 55 days at March 31, 1997. While the Company will continue
to strive to improve the credit and collection process, there can be no
assurance that the Company will be able to maintain or improve its current
credit and collection practices.
19
<PAGE>
Cash purchases of fixed assets for the three months ended March 31,
1997 and 1996 were $220,000 and $68,000. During the first quarter of 1997 the
Company also received repayment of its loans to officers and to Judge Financial
Group in the aggregate amount of $542,000.
The Company typically maintains minimal cash balances, however the
proceeds from the Company's Offering has currently increased it's cash and cash
equivalents as of March 31, 1997 to $8.5 million from approximately $105,000 at
December 31, 1996, most of which is invested in short-term, investment grade
securities. Cash as of March 31, 1996 was $671,000.
The Company anticipates that its primary uses of capital in future
periods will be for acquisitions, funding of increases in accounts receivable
and the development of its corporate level sales force. The Company believes
that the proceeds from the Offering and 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.
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, 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 stockholders, 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 principal 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; and (iv) difficulties
related to the integration of the acquired business. 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.
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, financial and other resources. Specifically,
such growth will require the Company to: (i) hire, integrate and retain
qualified managers 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
20
<PAGE>
consultants; and (iii) 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 four 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 Imaging and Network Services Business.
The Company's Imaging and Network Services business has had net operating losses
since its commencement in 1988, experienced a loss from operations of
approximately $900,000 for the quarter ended March 31, 1997, and at March 31,
1997 had an accumulated deficit of $4.9 million. The losses have resulted from
high marketing and general and administrative costs associated with building the
division's imaging and document management infrastructure and capabilities,
combined with historically low profit margins related to the hardware component
of the networking business and a slower emergence of the imaging and document
management market than anticipated by the Company. Specifically, the costs
associated with building this division's imaging and document management
capabilities have included the hiring of sales and technical personnel, the
opening and closing of a new office, and the costs associated with the
acquisition and integration of two imaging and document management companies.
The Company is currently focusing on achieving profitability in its Imaging and
Network Services business and expanding it through internal growth, new service
offerings and acquisitions, but cannot provide any assurances as to when it will
achieve profitability, if at all. Typically, the decision by a prospective
customer to install a network or to implement a document management system
requires the Company to engage in a lengthy and complex sales cycle and involves
a significant commitment of resources by the customer over an extended period of
time. For these and other reasons, the sales and implementation cycles are
subject to a number of significant delays over which the Company has little or
no control. Even if it increases sales, there can be no assurance that the
Imaging and Network Services business will achieve a pricing and cost structure
that will generate profits, or that the Company will be able to identify and
acquire appropriate acquisition candidates on favorable terms. Failure of the
Imaging and Network Services business to grow through internal expansion and
favorable acquisitions or to achieve profitability would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, if the Imaging and Network Services business is unable to achieve
profitability, it will not realize the federal tax benefit of its $3.9 million
operating loss carryforward which will expire between 2002 and 2011.
Dependence on Contract Placement Business. The Company's Contract
Placement business was responsible for 84.4%, 80.3% and 75.0% of total Company
revenues for the years ended December 31, 1994, 1995 and 1996, respectively. In
addition, for the years ended 1995 and 1996, one customer of the Contract
Placement business, Merck, accounted for approximately 8.0% and 10.0% of total
Contract Placement revenues, respectively, and 6.4% and 7.5% of total Company
revenues, respectively. 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 in existing and
new markets and to apply its management practices to a significantly larger
organization. There can be no assurance that the Company will be able to sustain
or increase its Contract Placement revenues. Furthermore, a decline in the level
of Contract Placement revenues would have a material adverse effect on the
Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II
-------
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this Quarterly Report on Form
10-Q.
Exhibit
No. Description of Document
- - ------- -----------------------
2.1 Agreement and Plan of Merger, among the Company, Judge Acquisition,
Inc. and Judge Imaging Systems, Inc. Incorporate by reference to
Exhibit 2.1 to the Registrant's Form S-4 (File No. 333-13753)
originally filed on October 9, 1996, as amended.
21
<PAGE>
3.1 Amended and Restated Articles of Incorporation. Incorporated by
reference to Exhibit 3.1 of the Form S-1.
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.
4.2 Form of common stock certificate for Company Common Shares.
Incorporated by reference to Exhibit 4.2 of the Form S-1.
4.3 Fourth Amended and Restated Loan and Security Agreement, dated
December 10, 1996, between the Company and PNC Bank, N.A. Incorporated
by reference to Exhibit 4.3 to the Form S-1.
11.1 Statement re Computation of Earnings Per Share.
27.1 Financial Data Schedule.
No reports were filed by the Registrant on Form 8-K during the quarter
ended March 31, 1997.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned,
Dated: May 15, 1997
THE JUDGE GROUP, INC.
By: /s/ Jeffrey J. Andrews By: /s/ Martin E. Judge, Jr.
---------------------- ---------------------------
Jeffrey J. Andrews Martin E. Judge, Jr.
Chief Financial Officer Chairman of the Board
and Chief Executive Officer
23
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- - ----------- -----------
11.1 Statement re Computation of Earnings Per Share.
27.1 Financial Data Schedule.
<PAGE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE (1)
<TABLE>
<CAPTION>
Quarter Ended March 31,
1997 1996
---- ----
<S> <C> <C>
Primary
- - -------
Weighted average common shares outstanding 10,968,000 8,416,000
Net Loss after adjustment for preferred dividends
earned on JIS stock ($273,053) ($248,512)
=========== ==========
Primary net loss per common share ($0.02) ($0.03)
=========== ==========
Fully diluted:
- - --------------
Weighted average common shares outstanding 10,968,000 8,416,000
Net Loss after adjustment for preferred dividends
earned on JIS stock ($273,053) ($248,512)
========== ==========
Fully diluted net income per common share ($0.02) ($0.03)
========== ==========
</TABLE>
(1) All per share and share amounts reflect a 52.6 for 1.0 stock split which
occurred on September 23, 1996.
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Judge Group, Inc. quarterly report
on Form 10-Q for the three months ended March 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 8,517,872
<SECURITIES> 0
<RECEIVABLES> 15,038,150
<ALLOWANCES> 693,000
<INVENTORY> 870,942
<CURRENT-ASSETS> 25,049,750
<PP&E> 3,906,438
<DEPRECIATION> 1,918,268
<TOTAL-ASSETS> 32,710,285
<CURRENT-LIABILITIES> 8,199,410
<BONDS> 0
0
0
<COMMON> 133,479
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 32,710,285
<SALES> 0
<TOTAL-REVENUES> 23,478,403
<CGS> 17,385,388
<TOTAL-COSTS> 23,597,404
<OTHER-EXPENSES> (127,901)
<LOSS-PROVISION> 77,421
<INTEREST-EXPENSE> (127,901)
<INCOME-PRETAX> (246,902)
<INCOME-TAX> 19,551
<INCOME-CONTINUING> (266,453)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (266,453)
<EPS-PRIMARY> ($0.02)
<EPS-DILUTED> ($0.02)
</TABLE>
