This Prospectus relates to the Registration Statement on Form S-1 (File No.
333-13109) and is being filed pursuant to Rule 424(b)(1) of the Securities Act
of 1933, as amended.
THE JUDGE GROUP, INC.
[LOGO]
3,650,000 COMMON SHARES
------------------------
Of the Common Shares being offered hereby, 3,000,000 are being offered by
The Judge Group, Inc. ("The Judge Group" or the "Company") and 650,000 shares
are being offered by the Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any of the proceeds from the sale of
shares by the Selling Shareholders.
Prior to this Offering, there has been no public market for the Common
Shares. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Common Shares have been
approved for listing, subject to notice of issuance, on the Nasdaq Stock Market
under the symbol "JUDG."
------------------------
SEE "RISK FACTORS," BEGINNING ON PAGE 7, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON SHARES
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=================================================================================================================
PRICE UNDERWRITING PROCEEDS TO
TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................... $7.50 $0.53 $6.97 $6.97
- -----------------------------------------------------------------------------------------------------------------
Total(3)............................ $27,375,000 $1,934,500 $20,910,000 $4,530,500
=================================================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $1,100,000.
(3) The Company and the Selling Shareholders have granted to the Underwriters an
option, exercisable for 30 days from the date of the initial public offering
of the Common Shares, to purchase up to an aggregate of 547,500 shares at
the Price to Public, less Underwriting Discounts and Commissions, solely to
cover over-allotments, if any, with the first 250,000 shares being sold by
the Selling Shareholders and the remaining 297,500 shares being sold by the
Company. If the Underwriters exercise this option in full, the Price to
Public will total $31,481,250, the Underwriting Discounts and Commissions
will total $2,224,675, the Proceeds to Company will total $22,983,575 and
the Proceeds to Selling Shareholders will total $6,273,000. See
"Underwriting."
------------------------
The Common Shares are offered by the several Underwriters named herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made at the offices of Janney Montgomery Scott
Inc., Philadelphia, Pennsylvania, on or about February 20, 1997.
------------------------
JANNEY MONTGOMERY SCOTT INC. UNTERBERG HARRIS
The date of this Prospectus is February 14, 1997
<PAGE>
DISCOVER
THE JUDGE GROUP
Business Process Re-engineering
IT & Engineering
Permanent Placement Imaging & Networks
IT-Engineering Document Management & Workflow
Contract Placement IT Training
IT-Engineering Certified Education
[LOGO]
QUALITY SERVICES SINCE 1970
The Judge Group, Inc. o Suite 405 o Two Bala Plaza
Bala Cynwyd, PA 19004-1510
610 o 667-7700 o http: //www.judge.com
OFFICES IN: Bala Cynwyd, PA o Foxborough & Wakefield, MA
Edison & Moorestown, NJ o Hartford, CT o Tampa, FL o Alexandria, VA
Judge(Trademark) and MENTOR(Trademark) are trademarks of the Company. This
Prospectus also contains other product names, trade names, service marks and
trademarks of the Company and of other organizations.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SUCH
TRANSACTIONS MAY BE EFFECTED THROUGH THE NASDAQ STOCK MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE.
2
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless the context otherwise requires, all references herein to
the "Company" or "The Judge Group" include all direct and indirect subsidiaries.
Unless otherwise indicated, the information in this Prospectus (i) assumes the
Underwriters' over-allotment option is not exercised and (ii) gives effect to
the Pre-Offering Transactions. The "Pre-Offering Transactions" consist of
certain corporate reorganization events, including a 52.6 for 1.0 stock split,
the issuance of 526,000 Common Shares upon the conversion of $500,000 principal
amount of the Company's 10% Convertible Senior Subordinated Notes (the
"Convertible Notes"), the acquisition by The Judge Group of all of the issued
and outstanding stock of Judge Imaging Systems, Inc. ("JIS") not presently held
by it, the acquisition of The Berkeley Associates Corp. ("Berkeley") and the
acquisition of Systems Automation, Inc. ("Systems Automation"). The stock split
occurred on September 23, 1996 and the acquisitions of Berkeley and Systems
Automation were effective as of September 26, 1996 and September 30, 1996,
respectively. The remaining Pre-Offering Transactions will occur concurrently
with or prior to the consummation of this Offering. See "Business --
Pre-Offering Transactions: Corporate Reorganization, Merger and Recent
Acquisitions" for a description of the Pre-Offering Transactions.
THE COMPANY
The Judge Group services the information technology ("IT") and engineering
needs of its clients through the following four complementary operating units:
<TABLE>
<S> <C> <C>
o Contract Placement -- Provides IT and engineering personnel on a contract basis
("technical consultants");
o Permanent Placement -- Provides IT and engineering personnel on a permanent basis;
o Imaging and Network Services -- Provides computer networking, imaging, document management,
workflow and related consulting services; and
o IT Training -- Provides standard and customized IT training on established and
emerging software applications.
</TABLE>
The Company's Contract Placement business provides technical consultants
skilled in a variety of fields, such as applications programming and
development, client/server technology, legacy systems conversion, software
architecture and design, data communications, systems engineering,
Internet/Web-Site design, project consulting and Help Desk management. The
Company provides technical consultants in the MidAtlantic and New England
regions of the United States through three branch offices, and on a nationwide
basis through its National Division. The Company maintains a database of over
100,000 technical consultants, and in 1995 provided over 1,700 technical
consultants to more than 800 clients. By relying on contract consultants,
clients with complex technical requirements can reduce the costs associated with
recruiting, training and relocating employees as those requirements change.
According to Staffing Industry Report, revenues from technical/computer
temporary staffing are estimated to have grown from $5.7 billion in 1993 to $9.2
billion in 1995 and are expected to grow to $11.4 billion in 1996, representing
a 26.0% compound annual growth rate. The Company's Contract Placement business
generated revenues of $50.8 million and $44.6 million, which represented 80.3%
and 75.8% of the Company's consolidated net revenues, in 1995 and the nine
months ended September 30, 1996, respectively.
The Company's Permanent Placement business provides medium to high-level IT
and engineering professionals on a permanent basis to clients nationwide. The
Company maintains a database of over 70,000 IT and engineering professionals,
and in 1995 placed 396 candidates with more than 240 clients. According to
Staffing Industry Report, revenues from permanent placement providers are
estimated to have grown from $1.2 billion in 1993 to $1.7 billion in 1995, and
are expected to grow to $1.8 billion in 1996, representing a 14.5% compound
annual growth rate. The Company's Permanent Placement business generated
revenues of $4.3 million and $4.3 million, which represented 6.7% and 7.2% of
the Company's consolidated net revenues, in 1995 and the nine months ended
September 30, 1996, respectively.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
The Company's Imaging and Network Services business offers 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 re-engineering through its
MENTOR(Trademark) Consulting Program, project management and advanced
applications development. The Company is a value-added reseller and service
facility for personal computer ("PC") and network hardware, software and related
peripherals manufactured by Compaq Computer Corporation ("Compaq"), ACER
Incorporated ("ACER"), IBM Corporation ("IBM"), Apple Computer, Inc. ("Apple"),
Okidata, a division of OKI America, Inc. ("Okidata"), Tricord Systems, Inc.
("Tricord"), Hewlett Packard Company ("HP") and others. The Company has
installed more than 110 imaging systems, is a value-added reseller of the
imaging software of Optika Imaging Systems, Inc. ("Optika"), FileNet Corporation
("FileNet"), Saros(Copyright), Watermark Corporation ("Watermark"), Keyfile
Corporation ("Keyfile"), Optical Technology Group, Inc. ("OTG") and Lotus
Corporation ("Lotus"), and integrates its imaging solutions on a variety of
operating systems, including Banyan, OS/2 and Windows NT(Trademark). According
to a study prepared for the Association for Information and Image Management
International ("AIIM"), electronic imaging revenues, including hardware,
software, services and support, grew 18.2% in 1995, from $2.2 billion in 1994 to
$2.6 billion in 1995. The Company's Imaging and Network Services business
generated revenues of $8.2 million and $10.0 million, which represented 13.0%
and 17.0% of the Company's consolidated net revenues, in 1995 and the nine
months ended September 30, 1996, respectively. While the Company's Imaging and
Network Services business has grown consistently over the last three years, it
has historically experienced operating losses. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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. Except for consolidated net revenues and
consolidated income (loss) from operations for 1993, 1994, 1995, all of such
financial information is unaudited:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1995 1994 1993
---------------- ----------------- ----------------- ----------------- -----------------
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Permanent Placement....... $ 4,265 7.2% $ 3,187 6.8% $ 4,275 6.7% $ 3,294 7.3% $ 3,131 8.9%
Contract Placement........ 44,622 75.8 37,890 80.8 50,804 80.3 38,186 84.4 27,537 78.5
Imaging and Network
Services................ 10,027 17.0 5,800 12.4 8,220 13.0 3,773 8.3 4,401 12.6
------- ----- ------- ------ ------- ------ ------- ------ ------- ------
Consolidated net
revenues................ $58,914 100.0% $46,877 100.0% $63,299 100.0% $45,253 100.0% $35,069 100.0%
------- ----- ------- ------ ------- ------ ------- ------ ------- ------
------- ----- ------- ------ ------- ------ ------- ------ ------- ------
Income (loss) from
operations:
Permanent Placement....... $ 499 0.8% $ 376 0.8% $ 287 0.4% $ 258 0.6% $ 722 2.1%
Contract Placement........ 2,635 4.5 2,167 4.6 2,939 4.7 2,392 5.2 732 2.1
Imaging and Network
Services................ (709) (1.2) (270) (0.6) (526) (0.8) (466) (1.0) (137) (0.4)
Corporate overhead
expense................. (1,076) (1.8) (711) (1.5) (936) (1.5) (741) (1.6) (696) (2.0)
------- ----- ------- ------ ------- ------ ------- ------ ------- ------
Consolidated income (loss)
from operations......... $ 1,349 2.3% $ 1,562 3.3% $ 1,764 2.8% $ 1,443 3.2% $ 621 1.8%
------- ----- ------- ------ ------- ------ ------- ------ ------- ------
------- ----- ------- ------ ------- ------ ------- ------ ------- ------
</TABLE>
The Company's IT Training business, acquired in September 1996, provides
training on a range of software and network applications to corporate,
governmental and individual clients. The IT Training business currently offers
three licensed diploma courses, six certificate courses, and over 180
open-enrollment courses, either in its own computer labs or at client locations.
This business generated revenues of $2.3 million and $2.0 million in 1995 and
the nine months ended September 30, 1996, respectively. The Updata Group, Inc.
estimates that revenues from IT training services will grow from $2.9 billion in
1995 to $5.6 billion by the year 2000, representing a 14.8% compound annual
growth rate. Besides expanding the Company's range of technical service
offerings, the IT Training business
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
will assist the Company in identifying emerging technologies and integrating
such technologies into its organization through the training of its technical
consultants and in-house personnel.
The Company serves its clients through offices located in Bala Cynwyd,
Pennsylvania; Foxborough and Wakefield, Massachusetts; Edison and Moorestown,
New Jersey; Hartford, Connecticut; Tampa, Florida; Baltimore, Maryland; and
Alexandria, Virginia. The Company's client base includes various Fortune 500
companies and governmental agencies, including Merck & Co., Inc. ("Merck"), Bell
Atlantic NYNEX Mobile, Inc., Texas Instruments, Inc. ("Texas Instruments"),
Compaq Computer Corporation ("Compaq"), Intel Corporation ("Intel") and the City
of Philadelphia. The Company believes that its four complementary businesses
afford it a competitive advantage over IT service providers that have fewer
service offerings, and position it to benefit from the anticipated growth in the
technical staffing and IT training industry and the imaging and document
management industry. The Company has recently adopted an integrated marketing
and service approach aimed at both new and existing customers which seeks to
take advantage of its ability to offer a comprehensive, cost-effective and
convenient means to meet a wide variety of technical requirements. Key elements
of the Company's business strategy to become a leading nationwide provider of IT
and engineering professional services include:
o Offering a Single Source of Technical Solutions
o Aggressively Marketing Broad Range of Services
o Developing a National Presence
o Expanding Imaging and Network Services
o Capitalizing on IT Training Resources
o Pursuing Strategic Acquisitions
The executive offices of The Judge Group are located at Two Bala Plaza,
Suite 800, Bala Cynwyd, Pennsylvania 19004, and its telephone number is (610)
667-7700. The Company's website address is http://www.judge.com.
THE OFFERING
<TABLE>
<S> <C>
Common Shares offered by the 3,000,000 shares
Company...............................
Common Shares offered by the Selling 650,000 shares
Shareholders..........................
Common Shares to be outstanding after 13,347,969 shares(1)
the Offering..........................
Use of Proceeds....................... For repayment of certain indebtedness, payment of portions
of the purchase prices of certain recently completed
acquisitions, and for working capital and general corporate
purposes, including the establishment of a corporate level
sales force. In addition, the Company may use portions of
the proceeds for acquisitions, although the Company is not
currently engaged in any acquisition negotiations. The
Company will not receive any proceeds from the sale of the
Common Shares offered by the Selling Shareholders. See "Use
of Proceeds."
Nasdaq Stock
Market Symbol......................... "JUDG"
</TABLE>
- ------------------
(1) Based on the number of shares outstanding as of February 14, 1997 and
assuming the consummation of the Pre-Offering Transactions. Excludes 593,000
Common Shares issuable upon exercise of options outstanding on that date,
none of which were then exercisable.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ -----------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................................... $58,914 $46,876 $63,299 $45,253 $35,069
Cost of sales (Exclusive of items shown separately below)...... 43,232 35,273 47,550 34,146 26,070
Selling and operating.......................................... 10,023 6,842 9,798 6,509 5,853
General and administrative..................................... 4,310 3,199 4,187 3,155 2,525
------- ------- ------- ------- -------
Total costs and expenses....................................... 57,565 45,314 61,535 43,811 34,448
------- ------- ------- ------- -------
Income from operations......................................... 1,349 1,562 1,764 1,443 621
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Interest expense............................................... 600 517 670 427 338
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income (loss).............................................. $ 751 $ 519 $ 486 $ 343 $ 101
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Fully-diluted net income
(loss) per Common Share:(1) $ 0.08 $ 0.06 $ 0.06 $ 0.04 $ 0.01
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Fully-diluted weighted average shares(2)....................... 9,114 9,114 9,114 8,851 8,500
------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
PRO FORMA
AS
ACTUAL ADJUSTED(4)
------- -------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................................................... $ 5,957 $16,865
Total assets......................................................................... 21,188 41,818
Notes payable, including current portion(3).......................................... 8,146 0
Other long-term obligations, including current portion............................... 3,850 1,008
Shareholders' equity................................................................. 966 23,975
</TABLE>
- ------------------
(1) All per share and share amounts reflect a 52.6 for 1.0 stock split which
occurred on September 23, 1996.
(2) Fully-diluted shares includes Common Stock equivalents and 526,000 Common
Shares issuable upon conversion of the Company's Convertible Notes.
(3) Includes line of credit and term loan.
(4) Pro Forma balance sheet data reflects the consummation of the Pre-Offering
Transactions, the sale by the Company of 3,000,000 Common Shares offered
hereby at the offering price of $7.50 per share and the application of the
net proceeds therefrom. See "Business -- Pre-Offering Transactions:
Corporate Reorganization, Merger and Recent Acquisitions," "Use of Proceeds"
and Pro Forma Unaudited Consolidating Financial Statements included in the
Financial Statements.
-------------------------------------------------------------------------------
6
<PAGE>
RISK FACTORS
An investment in Common Shares offered by this Prospectus involves a high
degree of risk. Prospective purchasers of the Common Shares offered hereby
should carefully review the following risk factors as well as the other
information set forth in this Prospectus.
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. See "Business -- Technical Personnel" and "Business --
Competition."
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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Business Strategy."
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 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
7
<PAGE>
referrals, and there can be no assurance that the Company will successfully
market such services on an integrated basis. See "Business -- Business
Strategy," "Sales and Marketing" and "Management."
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 $709,000 for the nine months ended September 30, 1996, and at
September 30, 1996 had an accumulated deficit of $3.5 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 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 $2.4 million
operating loss carryforward which will expire between 2002 and 2010.
DEPENDENCE ON CONTRACT PLACEMENT BUSINESS
The Company's Contract Placement business was responsible for 75.8%, 80.3%
and 84.4% of total Company revenues for the nine months ending September 30,
1996 and in 1995 and 1994, respectively. In addition, for the nine months ended
September 30, 1996 and in 1995, one customer of the Contract Placement business,
Merck, accounted for approximately 8.2% and 8.0% of total Contract Placement
revenues, respectively, and 6.2% and 6.4% 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.
TECHNOLOGICAL OBSOLESCENCE
The market for Imaging and Network Services is characterized by rapid
technological change, changes in customer requirements, frequent new product
introductions and enhancements and emerging industry standards. The Company's
future performance will depend in part on its ability to respond effectively to
these developments and to develop expertise in, and form relationships with
vendors of, products that gain market acceptance and popularity. The
introduction of products and services embodying new technologies and the
emergence of new industry standards can render existing products obsolete,
unmarketable or noncompetitive. The Company is unable to predict the future
impact of new products on the Company's services. Furthermore, the life cycles
of the systems and products with respect to which the Company has developed
expertise are difficult to estimate. The Imaging and Network Services business's
future performance will depend on the ability of software and hardware vendors
to develop and introduce new products that respond to evolving customer
8
<PAGE>
requirements and on the Company's ability to stay abreast of and enhance its
expertise with respect to new products and systems. The inability of the Imaging
and Network Services business to enhance its expertise and capabilities in
response to changing customer requirements, technological change or emerging
industry standards would have a material adverse effect on the Company's
business, financial condition and results of operation. Furthermore, to the
extent the vendors of the hardware or software components of document management
systems experience delays in the development and shipments of new products, the
Company's ability to sell document management systems could be materially
adversely affected.
Continuing rapid developments in the IT industry in general also have
substantial impact on the Company's other businesses. The Company must identify
and become proficient in emerging technologies in order to remain competitive
and achieve the higher margin business associated with emerging technologies.
There can be no assurance the Contract and Permanent Placement businesses will
be successful in continually upgrading their databases to contain professionals
proficient in such technologies. Furthermore, there can be no assurance the IT
Training business will recognize the emergence of new technologies or
successfully integrate them into its operations in a timely manner. Failure by
the Company to recognize emerging technologies and to integrate them into its
marketing efforts and service offerings in a timely manner would have a material
adverse impact on the Company's business, financial condition and results of
operations.
COMPETITION
The IT professional services industry is highly competitive. The Company
competes for both clients and qualified technical personnel with a variety of
companies, including other specialty staffing companies, national and regional
consulting firms, systems integrators, IT outsourcing firms and independent
contractors. The Company also competes for technical consultants with the
information technology staffs of its clients and potential clients. In addition,
several traditional staffing companies that historically emphasized the
placement of clerical and other less highly skilled personnel on short-term
assignments, have begun to provide services competitive with those provided by
the Company. Several of the Company's competitors in each of the businesses in
which it provides services are substantially larger than the Company and have
greater financial and other resources. Several of such competitors have also
been in business much longer than the Company and have significantly greater
name recognition throughout the United States, including the geographic areas in
which the Company operates and into which it intends to expand. In addition,
such companies are able to meet a broader range of a client's temporary
personnel needs and serve a broader geographic range than the Company, which
permits such companies to better serve national accounts. There can be no
assurance that the Company will be able to compete successfully with its
existing and future competitors. Also, to the extent that the Company offers
fixed-price contracts to clients in the future, which it may do for competitive
reasons, it will be responsible for cost overruns and may experience revenue
streams that vary from those generated by the provision of time and material
services.
DEPENDENCE ON KEY CUSTOMERS AND GEOGRAPHIC CONCENTRATION
The Company's business is dependent in part on the economic strength of its
clients. While the Company serves a large number of clients in a range of
industry groups, approximately 6.4% and 6.2% of the Company's revenues in fiscal
1995 and the nine months ended September 30, 1996, respectively, were derived
from Merck, the only customer responsible for more than 5% of the Company's
revenues in such periods. Similarly, a substantial portion of the Company's
revenues are currently derived from services provided to clients in the
Mid-Atlantic region of the United States. A deterioration in general economic
conditions in that region could adversely affect the Company.
EMPLOYMENT LIABILITY RISKS
The Company provides staffing services in the workplaces of other
businesses. Risks inherent in such activity include possible claims of errors
and omissions, misuse of client proprietary information, misappropriation of
funds, discrimination and harassment, theft of client property, other criminal
activity or torts and other claims. While the Company has not historically
experienced any material claims of these types, there can be no assurance that
the Company will not experience such claims in the future.
9
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's future success may depend to a significant extent upon the
performance of a number of the Company's key personnel, including Martin E.
Judge, Jr., Chairman of the Board and Chief Executive Officer of the Company,
Richard T. Furlano, President, and Michael A. Dunn, Executive Vice President.
The loss of any of these key management personnel or the failure to recruit and
retain experienced personnel could have a material adverse effect on the
Company's business. Typically, the Company does not enter into contracts with
these individuals providing for continued employment. See "Management --
Employment Agreements."
CONTROL OF THE COMPANY
Immediately after the effective date of the Offering, Martin E. Judge, Jr.
and Michael A. Dunn will own approximately 45.8% and 14.0% of the outstanding
Common Shares, respectively (44.6% and 13.5% if the over-allotment option is
exercised in full). As a result, Mr. Judge and Mr. Dunn will have the ability to
determine the election of all of the Company's directors and control the outcome
of substantially all issues submitted to the Company's shareholders. While no
voting agreement between Mr. Judge and Mr. Dunn exists, such concentration of
ownership could have the effect of making it more difficult for a third party to
acquire control of the Company and may discourage third parties from attempting
to do so. See "Principal and Selling Shareholders" and "Description of Capital
Shares."
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY AND GENERAL ECONOMIC CONDITIONS
Because the Company only derives revenue in its Contract Placement business
when its consultants are actually working, its operating results are adversely
affected when client facilities close due to holidays or inclement weather. In
particular, the Company generally experiences a certain amount of reduction in
revenues in its Contract Placement business in its fourth fiscal quarter due to
the number of holidays in that quarter. Further, the Company's Contract
Placement business generally incurs additional expense in its first fiscal
quarter due in part to the timing of certain payroll and related employment tax
costs.
Demand for IT professional services is significantly affected by the
general level of economic activity. When economic activity slows, clients may
delay or cancel plans that involve the hiring of permanent or contract technical
consultants, and may postpone or cancel plans to implement document management
systems or to implement training programs. The Company is unable to predict the
level of economic activity at any particular time, and fluctuations in the
general economy could adversely affect the Company's business, operating results
and financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
BROAD DISCRETION IN USE OF PROCEEDS
The Company intends to use approximately $12.5 million of the net proceeds
from the Offering to repay certain outstanding indebtedness and to pay portions
of the purchase prices of recently completed acquisitions, and it will have
broad discretion in using the remaining proceeds from the Offering. The Company
intends to use the approximately $7.3 million in remaining net proceeds
(approximately $9.4 million if the Underwriters' over-allotment is exercised in
full) for working capital and general corporate purposes, including
establishment of a corporate level sales force and possible acquisitions. The
Company currently has no understandings, commitments or agreements with respect
to any possible acquisitions. Consequently, there can be no assurance as to when
or how the remaining net proceeds from the Offering will be used. If the Company
is unable to invest such proceeds in acquisitions or to otherwise use such
proceeds in operating its business, the returns realized from holding such
proceeds may be substantially less than the returns which could be realized if
such proceeds were successfully invested in the business. See "Use of Proceeds."
RISKS RELATED TO TAX STATUS OF TECHNICAL CONSULTANTS
Generally, the Company treats its technical consultants as employees for
federal and state tax purposes and pays all requisite Social Security taxes
(FICA), payroll taxes, unemployment taxes, workers compensation insurance
premiums and other employee taxes and similar costs. In certain cases, however,
technical consultants desire to be treated as independent contractors for
federal and
10
<PAGE>
state tax purposes with respect to their assignments. In such cases, the Company
reviews the relevant facts and the applicable statutes and regulations, and if
appropriate, the consultant is treated as an independent contractor for tax
purposes. Of the technical consultants on assignment as of December 31, 1994 and
1995 and September 30, 1996, approximately 12%, 15% and 10%, respectively, were
treated as independent contractors for federal and state tax purposes. The
determination of whether a technical consultant can be treated as an independent
contractor for tax purposes is dependent on the facts and circumstances of each
case and as a result is subject to some uncertainty. The Internal Revenue
Service recently has announced various worker reclassification compliance
projects designed to ensure that personnel classified as independent contractors
are properly classified. The Company believes that it is in material compliance
with all applicable tax regulations concerning the classification of its
technical consultants, and has not, to date, been the subject of any attempt by
any federal or state authority to reclassify any of the consultants it has
treated as independent contractors. There can be no assurance, however, that
federal and state taxing authorities will not challenge the Company's
classification of technical consultants as independent contractors in the
future. If successful, such a challenge could result in the imposition of back
taxes, interest and penalties, the amount of which could be material to the
Company's financial statements.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of the Company's Common Shares in the public market after the
Offering could adversely affect the market price of the Company's Common Shares
and could impair the Company's future ability to raise capital through the sale
of equity securities. Upon completion of this Offering, at an initial public
offering price of $7.50 per share and after giving effect to the issuance of
shares contemplated by the Pre-Offering Transactions, the Company will have
outstanding 13,347,969 Common Shares (13,645,469 Common Shares if the
Underwriters' over-allotment option is exercised in full). Of these shares, the
3,650,000 Common Shares sold in this Offering will be tradeable without
restriction unless they are purchased by affiliates of the Company. All Common
Shares received by holders of JIS stock pursuant to the Merger will be tradeable
without restriction, except those shares held by affiliates. The holders of
289,539 shares (229,539 if the Underwriters' over-allotment option is exercised
in full) are subject to a two-year holding period which commenced in September
1996. Of the remaining shares, 8,214,200 (7,964,200 if the Underwriters'
over-allotment option is exercised in full) are "restricted securities" under
the Securities Act and may be sold only if they are registered under the
Securities Act or pursuant to an applicable exemption from the registration
requirements of the Securities Act. The holders of 3,294,367 shares and
6,112,599 shares (3,074,367 and 6,082,599, respectively, if the Underwriters'
over-allotment option is exercised in full) have agreed not to sell, otherwise
dispose of, or pledge any of the Company's Common Shares for 180 days and one
year, respectively, after the date of this Prospectus without the prior written
consent of Janney Montgomery Scott Inc. All of the Company's directors,
executive officers and certain other shareholders are subject to the 180-day
lock-up, other than Mr. Judge, who is subject to the one (1) year lock-up. In
addition, the Company intends, as soon as practicable after the consummation of
this Offering, to register 1,500,000 Common Shares, which are issuable to its
employees, directors, consultants and advisors under the Company's 1996
Incentive Stock Option and Non-Qualified Stock Option Plan ("the Plan"). As of
the closing of this Offering, options to purchase 593,000 Common Shares at an
exercise price equal to the Offering price were outstanding under the Plan,
however none of these options were exercisable or will become so in the next
sixty days. See "Management -- Stock Plans." "Description of Capital Shares,"
and "Shares Eligible for Future Sale."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
There has been no prior public market for the Company's Common Shares.
Although the Common Shares have been approved for inclusion in the Nasdaq Stock
Market, subject to notice of issuance, there can be no assurance that a viable
public market for the Common Shares will develop or be sustained after the
Offering or that purchasers of the Common Shares will be able to resell their
Common Shares at prices equal to or greater than the initial public offering
price. The initial public offering price has been determined by negotiations
among the Company, the Selling Shareholders and the representatives of the
Underwriters and may not be indicative of the prices that may prevail in the
public market after the Offering is completed. Numerous factors, including
announcements of fluctuations in the Company's or its competitors' operating
results and market conditions for staffing
11
<PAGE>
services industry stocks in general, could have a significant impact on the
future price of the Common Shares. In addition, the stock market in recent years
has experienced significant price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of companies. These
broad fluctuations may adversely affect the market price of the Common Shares.
See "Description of Capital Stock" and "Underwriting."
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends on the Common Shares and does
not anticipate paying any cash dividends on the Common Shares in the foreseeable
future. In addition, the Company is prohibited under the terms of its revolving
line of credit from paying dividends without the consent of the lender. Future
dividends, if any, will depend, among other things, on the Company's results of
operations, capital requirements and financial condition, and on such other
factors as the Company's Board of Directors may, in its discretion, consider
relevant. See "Dividend Policy."
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation") and By-Laws may have
anti-takeover effects that may delay, deter or prevent a takeover attempt that
shareholders might consider in their best interest. These provisions include (i)
the authority of the Board of Directors to issue up to 10,000,000 preferred
shares in one or more series with such rights, obligations and preferences as
the Board of Directors may determine, (ii) authorization for only the Board of
Directors, President, Chief Executive Officer or Secretary to call special
meetings of the shareholders, and (iii) certain advance notice procedures for
shareholder nomination of candidates for election as directors and for certain
shareholder proposals. See "Description of Capital Stock."
The Company's Articles of Incorporation permit the Board of Directors to
establish the rights, preferences, privileges and restrictions of, and to issue,
up to 10,000,000 preferred shares without any further vote or action by the
Company's shareholders. The issuance of preferred shares could adversely affect
the holders of Common Shares and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plans
to issue any preferred shares. See "Description of Capital Shares."
CERTAIN ANTI-TAKEOVER EFFECTS OF THE PENNSYLVANIA BUSINESS CORPORATION LAW
The "business combination" provisions under the Pennsylvania Business
Corporation Law ("BCL") prohibit the Company from engaging in certain "business
combinations" with "interested shareholders" without certain director or
shareholder approval. The "business combination" provisions potentially could
deter certain types of transactions that might be proposed, whether or not such
transactions were favored by the majority of the shareholders, and could enhance
the ability of the Company's officers and directors to retain their positions.
The BCL expressly permits directors of a corporation to consider the interests
of constituencies other than shareholders in discharging their duties, provides
that they need not, in considering the best interests of the corporation,
consider any particular constituency's interests (including the interests of
shareholders) as the dominant or controlling interest, and provides that
directors do not violate their fiduciary duty by relying on shareholders' rights
plans and other anti-takeover provisions of the BCL. See "Description of Capital
Stock."
DILUTION
Purchasers of the Common Shares offered hereby will realize an immediate
and substantial dilution of approximately $6.11 in net tangible book value per
share of Common Shares of their investment from the initial public offering
price. See "Dilution."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from its sale of 3,000,000 Common Shares at
the public offering price of $7.50 per share, after deducting underwriting
discounts and commissions and estimated Offering expenses (which expenses
include a financial advisory fee of approximately $225,000 payable to The
Gemstone Group, Inc.), are estimated to be approximately $19.8 million
(approximately $21.9 million if the Underwriters' over-allotment option is
exercised in full).
The Company intends to use a portion of the estimated net proceeds to pay
down its working capital line of credit, which bears interest at the prime rate
plus 1% and is due on May 31, 1998, the balance of which was $9.2 million as of
December 31, 1996. The Company intends to maintain this line of credit and may
draw on the line as needed in the future. The Company intends to use
approximately $1.5 million to pay certain portions of the purchase prices
relating to the Berkeley and Systems Automation acquisitions. The Company
anticipates using $1.8 million for the retirement of other short-term and
long-term indebtedness, principally equipment leases.
The remaining net proceeds of approximately $7.3 million will be used for
working capital and general corporate purposes, including establishment of the
corporate level sales force described in "Business -- Sales and Marketing." In
addition, the Company may use portions of the remaining net proceeds for future
acquisitions. As discussed in "Business -- Business Strategy," a significant
element of the Company's strategy is to grow through acquisitions of companies
in existing or complementary lines of business, although the Company is not
currently engaged in any acquisition negotiations.
Pending application of the net proceeds as set forth above, the Company
intends to invest any remaining net proceeds temporarily in short-term,
investment grade securities. The Company will not receive any proceeds from the
sale of the Common Shares offered by the Selling Shareholders.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Shares. The
Company currently intends to retain future earnings for use in its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. The payment of future dividends, if any, will depend, among other
things, on the Company's results of operations and financial condition, any
restriction in the Company's loan agreements and on such other factors as the
Company's Board of Directors may, in its discretion, consider relevant. The
Company's ability to pay dividends is dependent in part upon the receipt of
dividends from its direct and indirect subsidiaries. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
13
<PAGE>
DILUTION
The net tangible book value (deficit) per common share represents the
amount of the Company's total tangible assets less its total liabilities,
divided by the number of common shares outstanding. The net tangible book value
(deficit) of the Company on a fully diluted basis at September 30, 1996 was
($2.3) million or ($0.25) per Common Share. The sale of Common Shares by the
Company pursuant to this Offering, at the initial public offering price of
$7.50, would increase net tangible book value to $1.39 per Common Share,
representing an immediate increase in net tangible book value of $1.64 per
Common Share to existing shareholders and an immediate dilution in net tangible
book value of $6.11 per Common Share to purchasers of the Common Shares in this
Offering. The following table illustrates this per share dilution at September
30, 1996:
<TABLE>
<S> <C> <C>
Initial public offering price per share.............................. $ 7.50
------
------
Net tangible book value per share before Offering.................. (0.25)
Increase per share attributable to sale of shares in Offering...... 1.64
-----
Pro forma net tangible book value per share after this Offering...... 1.39
------
Dilution per share to new shareholders(1)............................ $ 6.11
------
------
</TABLE>
- ------------------
(1) Dilution is determined by subtracting pro forma net tangible book value per
Common Share after completion of this Offering from the price paid by
investors purchasing Common Shares in this Offering.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996 and as adjusted to give effect to the sale by the Company of
3,000,000 Common Shares at the offering price of $7.50 per share, the
application of the estimated net proceeds therefrom, and certain business
combinations and other transactions which are more fully described elsewhere in
this Prospectus. This table should be read in conjunction with the Company's
consolidated historical financial statements, the Pro Forma Consolidated
Financial Statements and the Notes thereto, and "Use of Proceeds," all included
elsewhere herein.
SEPTEMBER 30, 1996
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Convertible Notes(1)............................... $ 500 $ 0(2)
------- -----------
Current portion of long-term debt.................. 941 156
------- -----------
Long-term debt:
Note payable, bank(3)............................ $ 7,146 0
Other long-term debt............................. 3,409 852
------- -----------
Total long-term debt............................. 10,555 852
------- -----------
Minority interest(4)............................... 271 0
------- -----------
Shareholders' equity:
Preferred shares(5).............................. 0 0
Common shares(6)................................. 86 133
Additional paid in capital....................... 366 23,328
Retained earnings................................ 514 514
------- -----------
Total shareholders' equity....................... 966 23,975
------- -----------
Total capitalization.......................... $13,233 $24,983
------- -----------
------- -----------
- ------------------
(1) Due July 1997.
(2) Assumes conversion into 526,000 Common Shares.
(3) For a description of the Company's note payable, bank, see Note 5 of Notes
to Consolidated Financial Statements, for the nine months ended September
30, 1996.
(4) Elimination of minority interest due to merger of JIS into a wholly-owned
subsidiary of the Company.
(5) Preferred Shares at September 30, 1996 were $0.01 par value, 10,000,000
shares authorized, none issued.
(6) Common Shares at September 30, 1996 were $0.01 par value, 50,000,000 shares
authorized; 8,587,739 shares issued and outstanding; Common Shares Pro Forma
As Adjusted were $0.01 par value, 50,000,000 shares authorized, 13,347,969
shares issued and outstanding.
15
<PAGE>
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, 1995, 1994 and 1993 have been
audited by Rudolph, Palitz LLP, independent accountants. The selected statement
of operations and balance sheet data for the years ended December 31, 1992 and
1991 and the nine month periods ended September 30, 1995 and 1996 are derived
from the unaudited Consolidated Financial Statements of the Company, which
include all adjustments, consisting only of normal recurring adjustments, which
management considers necessary for a fair presentation of the data for such
periods. This data should be read in conjunction with the Consolidated Financial
Statements, related notes, and other financial information included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues.................. $ 58,914 $ 46,876 $ 63,299 $ 45,253 $ 35,069 $ 26,722 $ 22,438
Cost of sales (Exclusive of
items shown separately
below)...................... 43,232 35,273 47,550 34,146 26,070 20,104 1,616(1)
Selling and operating......... 10,023 6,842 9,798 6,509 5,853 4,950 18,655
General and administrative.... 4,310 3,199 4,187 3,155 2,525 2,171 1,600
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses...... 57,565 45,314 61,535 43,810 34,448 27,225 21,871
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations.................. 1,349 1,562 1,764 1,443 621 (503) 567
Interest expense.............. 600 517 670 427 338 238 222
Other income (expense)........ 0 (28) (27) 7 4 (6) 31
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes....................... 749 1,017 1,067 1,023 287 (747) 376
Income taxes.................. 615 498 588 680 228 41 294
Minority interest (income).... (617) 0 (7) 0 0 (126) 161
Cumulative effect change...... 0 0 0 0 42 0 0
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............. $ 751 $ 519 $ 486 $ 343 $ 101 $ (662) $ (79)
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Fully diluted net income
(loss) per Common
Share(2)(3):
Income before cumulative
effect adjustment........... $ 0.08 $ 0.06 $ 0.06 $ 0.04 $ 0.01 $ (0.08) $ (0.01)
Cumulative effect
adjustment.................. 0.00 0.00 0.00 0.00 0.00 0.00 0.00
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 0.08 $ 0.06 $ 0.06 $ 0.04 $ 0.01 $ (0.08) $ (0.01)
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Fully-diluted weighted average
shares(2)(3):............... 9,114 9,114 9,114 8,851 8,500 8,416 8,416
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------------------------
1996 1995 1994 1993 1992 1991
------------- ------ ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficiency)................................. $ 5,957 $5,567 $ 329 $(608) $(615) $ 367
Total assets................................................. 21,188 11,632 8,017 5,687 4,539 3,398
Notes payable, including current portion(4).................. 8,146 5,368 2,749 2,499 1,977 1,299
Other long-term obligations, including current portion....... 3,850 1,755 2,030 961 1,236 412
Shareholders' equity (deficit)............................... 966 391 (95) (438) (539) 123
</TABLE>
- ------------------
(1) Does not reflect reclassification between cost of sales and selling and
operating expense principally related to the cost of consultants.
(2) All per share and share amounts reflect a 52.6 for 1.0 stock split which
occurred in September 1996.
(3) Fully-diluted shares include Common Stock equivalents and 526,000 Common
Shares issuable upon conversion of the Company's Convertible Notes.
(4) Includes line of credit and term loan.
16
<PAGE>
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 Prospectus.
OVERVIEW
The Company derives its revenues from the provision of contract and
permanent IT and engineering personnel, networking, imaging, document management
and workflow services and IT training. Components of cost of sales differ
depending on the type of service or product supplied, and may include salaries,
as well as hardware and software costs, but do not include depreciation and
amortization expenses. 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. In the Imaging and
Network Services business, in fiscal years 1995, 1994 and 1993, general and
administrative expenses also included $46,631, $56,915 and $48,255,
respectively, of payroll costs for advanced development programmers. During
fiscal 1996, the Company included $215,680 of payroll costs related to
consultants and advanced development programmers in general and administrative
expenses.
Revenue in the Company's Contract Placement business is derived from
professional service activities, primarily the placement of skilled IT and
engineering 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 have increased from $27.5 million in 1993 to $50.8 million in 1995, or
approximately 35.8% per year on average. Revenues for the nine months ended
September 30, 1996 were $44.6 million, compared to $37.9 million for the prior
year period, an increase of 17.7%. Revenue growth has been derived primarily
from increases in the number of technical consultants placed with existing and
new clients and increases in average billing rates. The Company believes that
the recent increase in the average billing rates for its technical consultants
has resulted from improved economic conditions and increased demand for skilled
and experienced technical consultants. Total hours billed in 1995 were
1,303,412, with an average billing rate of $38.99. For the nine months ended
September 30, 1996, total hours billed were 1,115,488, with an average billing
rate of $40.00, compared to total hours billed of 1,038,516 with an average
billing rate of $36.48 for the prior year period. 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.
Revenue in the Company's Permanent Placement business is generated from one
time fees received upon successful placements of engineering or 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 396 professionals with an average placement fee of
$10,800 in 1995. For the nine months ended September 30, 1996, 436 professionals
were placed with an average placement fee of $9,614 compared to 348
professionals placed with an average placement fee of $9,034 for the prior year
period. No cost of sales is recorded in the Permanent Placement business.
Revenue in the Company's Imaging and Network Services business is derived
from the provision of networking, imaging and document management 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
17
<PAGE>
and related licensing fees, salaries and fringe benefits for design,
installation and maintenance personnel, and overhead expenditures allocated to
imaging and networking activities.
The Company's Imaging and Network Services business was originally formed
to provide networking services to educational markets, primarily network design,
installation and maintenance utilizing the Company's private-label PC products,
and its networking operations were later expanded to include additional
platforms and peripherals. Due to relatively low operating margins on hardware
and software sales, which has accounted for a substantial portion of networking
revenues, this business historically has generated operating losses. Beginning
in 1988, the Company anticipated the emergence of a market for networking
systems incorporating imaging and document management technology. It entered
this market first as a reseller of Optika software, and later decided to expand
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 imaging and document management business to
support anticipated sales growth, including the hiring of numerous consulting,
engineering, sales and administrative personnel since the beginning of 1994.
Revenue attributable to imaging and document management systems and
services has grown from $2.3 million in 1995 to $3.9 million in the nine months
ended September 30, 1996, representing approximately 28.0% and 38.9% of the
Imaging and Network Services business total revenue in those periods,
respectively. However, the Company's imaging activities have generated operating
losses to date due to slower than expected market expansion combined with the
substantial investment in infrastructure development. Specifically, imaging and
document management systems and services generated operating losses of $477,000
and $672,000 in 1995 and for the nine months ended September 30, 1996,
respectively, representing 90.6% and 94.7% of the total operating losses
experienced by the Imaging and Network Services business as a whole,
respectively.
The Company currently is focusing on achieving profitability in its Imaging
and Network Services business and expanding it through internal growth and new
service offerings, such as its MENTOR(Trademark) Consulting Program and a help
desk practice. In 1996 the Company increased the number of locations from which
it offers its Imaging and Network Services from three to six, and hired 12 new
salespeople, eight consultants/advanced development personnel and 22
engineers/technical support personnel in this business. As a result, selling,
operating and general and administrative costs for the Imaging and Network
Services business increased by 128.1%, or $1.8 million, for the nine months
ended September 30, 1996 as compared to the prior period, while selling,
operating and general and administrative costs for the Company as a whole
increased 42.8%, or $4.3 million, over this same period. Revenues for the
Imaging and Network Services business increased by 72.9%, or $4.2 million, for
the nine months ended September 30, 1996 as compared to the prior period, and
the Company believes that its investment in infrastructure and personnel should
generate further increases in revenues in this business in the future. 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 expects 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 first fiscal
quarter of 1997.
18
<PAGE>
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. Except for consolidated net revenues and
consolidated income (loss) from operations for 1993, 1994, 1995, all of such
financial information is unaudited:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------------- ---------------------------------------------------
1996 1995 1995 1994 1993
---------------- ----------------- ----------------- ----------------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Permanent Placement....... $ 4,265 7.2% $ 3,187 6.8% $ 4,275 6.7% $ 3,294 7.3% $ 3,131
Contract Placement........ 44,622 75.8 37,890 80.8 50,804 80.3 38,186 84.4 27,537
Imaging and Network
Services................ 10,027 17.0 5,800 12.4 8,220 13.0 3,773 8.3 4,401
------- ----- ------- ------ ------- ------ ------- ------ -------
Consolidated net
revenues................ $58,914 100.0% $46,877 100.0% $63,299 100.0% $45,253 100.0% $35,069
------- ----- ------- ------ ------- ------ ------- ------ -------
------- ----- ------- ------ ------- ------ ------- ------ -------
Income (loss) from
operations:
Permanent Placement....... $ 499 0.8% $ 376 0.8% $ 287 0.4% $ 258 0.6% $ 722
Contract Placement........ 2,635 4.5 2,167 4.6 2,939 4.7 2,392 5.2 732
Imaging and Network
Services................ (709) (1.2) (270) (0.6) (526) (0.8) (466) (1.0) (137)
Corporate overhead
expense................. (1,076) (1.8) (711) (1.5) (936) (1.5) (741) (1.6) (696)
------- ----- ------- ------ ------- ------ ------- ------ -------
Consolidated income (loss)
from operations......... $ 1,349 2.3% $ 1,562 3.3% $ 1,764 2.8% $ 1,443 3.2% $ 621
------- ----- ------- ------ ------- ------ ------- ------ -------
------- ----- ------- ------ ------- ------ ------- ------ -------
<CAPTION>
<S> <C>
(DOLLARS IN THOUSANDS)
<S> <C>
Net revenues:
Permanent Placement....... 8.9%
Contract Placement........ 78.5
Imaging and Network
Services................ 12.6
-----
Consolidated net
revenues................ 100.0%
-----
-----
Income (loss) from
operations:
Permanent Placement....... 2.1%
Contract Placement........ 2.1
Imaging and Network
Services................ (0.4)
Corporate overhead
expense................. (2.0)
-----
Consolidated income (loss)
from operations......... 1.8%
-----
-----
</TABLE>
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 has increased from five at December 31, 1993, to 16 at September 30,
1996. Founder's compensation of $357,000, $390,000, $495,000, $453,000 and
$371,000 was charged to the Permanent Placement business in 1993, the Imaging
and Network Services business in 1994, and the Contract Placement business in
1995 and the nine months ended September 30, 1996 and 1995, respectively. Future
corporate overhead expense will be allocated according to the number of
full-time employees in each of the Company's businesses.
Early in 1995 the Company began to implement a strategy to accelerate its
growth through the addition of new services, geographic expansion and strategic
acquisitions. As part of this strategy, the Company added sales, marketing,
engineering and operational personnel in its existing four regional offices and
in its National Division in Foxborough, Massachusetts, and opened a fifth branch
office in Edison, New Jersey. In addition, in September 1996, the Company
completed the acquisitions of Berkeley and Systems Automation.
Berkeley, now the Company's IT Training business, provides training on a
variety of computer network and software applications through offices located in
Bala Cynwyd, Pennsylvania; Alexandria, Virginia; and Baltimore, Maryland.
Besides 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 through the training of
its technical consultants and in-house personnel. The Company's IT Training
business generated revenues of $2.3 million and $2.0 million for 1995 and the
first nine months of 1996, respectively.
Systems Automation, located in Wakefield, Massachusetts, provides imaging
and document management systems and services, and establishes a presence for the
Imaging and Network Services business in the Boston metropolitan area. Systems
Automation generated revenues of $1.2 million and $867,000 for 1995 and the
first nine months of 1996, respectively.
19
<PAGE>
RECENT DEVELOPMENTS
Consolidated net revenues for the three months and year ended December 31,
1996 were approximately $23.8 million and $82.7 million, respectively.
Consolidated cost of sales for the three months and year ended December 31, 1996
were approximately $17.1 million and $60.4 million, respectively, representing
71.8% and 73.0% of consolidated net revenues, respectively. Consolidated income
from operations for the three months and year ended December 31, 1996 were
approximately $574,000 and $1.9 million, respectively, representing 2.4% and
2.3% of consolidated net revenues, respectively. Consolidated net income for the
three months and year ended December 31, 1996 were approximately $156,000 and
$907,000, respectively. The preceding consolidated financial information is from
the Company's consolidated statements of operations for the three month period
and the year ended December 31, 1996, which are unaudited.
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:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- -----------------------------
1996 1995 1995 1994 1993
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (Exclusive of items shown separately below)..... 73.4 75.2 75.1 75.4 74.3
Selling and operating......................................... 17.0 14.7 15.5 14.4 16.7
General and administrative.................................... 7.3 6.8 6.6 7.0 7.2
----- ----- ----- ----- -----
Total costs and expenses...................................... 97.7 96.7 97.2 96.8 98.2
Income from operations........................................ 2.3 3.3 2.8 3.2 1.8
Interest and other, net....................................... 1.0 1.2 1.1 0.9 1.0
----- ----- ----- ----- -----
Income before income taxes.................................... 1.3% 2.1% 1.7% 2.3% 0.8%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1995
Net Revenues. Consolidated net revenues increased by 25.7%, or $12.0
million, for the nine months ended September 30, 1996 compared to the prior year
period. Revenue for the Contract Placement business increased by 17.8%, or $6.7
million, for the nine months ended September 30, 1996 compared to the prior year
period. Contributing to this increase was revenue of $2.1 million attributable
to the Edison, New Jersey office, which opened in April 1995, and revenue of
$1.6 million attributable to the Company's National Division in Foxborough,
Massachusetts. Revenue for the Permanent Placement business increased by 33.8%,
or $1.1 million, for the nine months ended September 30, 1996 compared to the
prior year period. Contributing to this increase was revenue of $750,000
attributable to the Bala Cynwyd, Pennsylvania office and revenue of $378,000
attributable to the Edison, New Jersey office. Revenue for the Imaging and
Network Services business increased by 72.9%, or $4.2 million, for the nine
months ended September 30, 1996 compared to the prior year period. Of this
increase, $2.1 million was attributable to networking systems and services and
$2.1 million was attributable to imaging and document management systems and
services.
Cost of Sales. Consolidated cost of sales increased by 22.6%, or $8.0
million, for the nine months ended September 30, 1996 compared to the prior year
period. Cost of sales as a percentage of consolidated net revenues decreased to
73.4% from 75.2%. In the Company's Imaging and Network Services business, cost
of sales as a percentage of revenue decreased to 75.5% from 80.7%, primarily as
a result of the realization of economies of scale and 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 slightly to 80.0% at September 30, 1996 from
80.7% at September 30, 1995. The decline in cost of sales as a percentage of
20
<PAGE>
consolidated net revenues was also attributable to an increase in revenue for
the Permanent Placement business, which has no cost of sales.
Selling and Operating. Consolidated selling and operating expenses
increased by 46.5%, or $3.2 million, for the nine months ended September 30,
1996 compared to the prior year period. Contributing to this increase was an
increase in selling and operating expenses of 113.9%, or $1.1 million, in the
Imaging and Network Services business. Selling and operating expenses as a
percentage of consolidated net revenues for the nine months ended September 30,
1996 increased to 17.0% from 14.7% in the prior year period, due primarily to a
44.3% increase in payroll costs associated with the Company's hiring of sales
and marketing personnel in all of its businesses and a $207,000 increase in bad
debt charges resulting principally from the bankruptcy of one of the Company's
Contract Placement customers.
General and Administrative. Consolidated general and administrative
expenses increased 34.7%, or $1.1 million, for the period ending September 30,
1996 compared to the prior year period. Contributing to this increase was an
increase in general and administrative expenses of 160.1%, or $682,000, in the
Imaging and Network Services business. General and administrative expenses as a
percentage of consolidated net revenues increased to 7.3% for the period ending
September 30, 1996 compared to 6.8% for the prior year period, primarily as a
result of increased payroll costs associated with consulting and engineering
personnel in the Imaging and Network Services business and the expansion of the
Company's corporate staff, specifically the hiring of additional management
information systems personnel, human resources personnel and a financial
analyst. In addition, rent expense increased by $237,000 as a result of the
opening of the Company's Edison, New Jersey office and the expansion of the Bala
Cynwyd, Pennsylvania office.
Interest. Interest expense increased by $60,000, or 11.1%, for the nine
months ended September 30, 1996 compared to the prior year period. This increase
was due to increased borrowing under the Company's line of credit.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Revenues. Consolidated net revenues increased by 39.9%, or $18.0
million, in 1995 compared to 1994. Revenue for the Contract Placement business
increased by 33.0%, or $12.6 million, in 1995 compared to 1994. Contributing to
this increase was revenue of $1.6 million attributable to the Edison, New Jersey
office, which opened in April, 1995. Revenue for the Permanent Placement
business increased by 29.8%, or $981,000, in 1995 compared to 1994. Contributing
to this increase was revenue of $81,000 attributable to the Edison, New Jersey
office. Revenue for the Imaging and Network Services business increased by
117.8%, or $4.4 million, in 1995 compared to 1994. Contributing to this increase
was revenue of approximately $2.0 million attributable to the addition of a
major networking systems contract with the State of New Jersey.
Cost of Sales. Consolidated cost of sales increased by 39.3%, or $13.4
million, in 1995 compared to 1994. Cost of sales as a percentage of consolidated
net revenues decreased slightly to 75.1% in 1995 from 75.4% in 1994. This
decrease is attributable to an increase in Permanent Placement revenue which has
no cost of sales, and a decrease in cost of sales as a percentage of revenue for
the Contract Placement business, partially offset by an increase in cost of
sales as a percentage of net revenue for the Imaging and Network Services
business.
Selling and Operating. Consolidated selling and operating expenses
increased by 50.5%, or $3.3 million, in 1995 compared to 1994, and increased to
15.5% of consolidated net revenues in 1995 compared to 14.4% in 1994.
Contributing to this increase was an increase in selling and operating expenses
of 87.7%, or $730,000, in the Imaging and Network Services business. Also
contributing to this increase was an increase in salaries and related fringe
benefits incurred as a result of an increase in sales personnel in each of the
Company's other businesses. In addition, the Company realized a bad debt charge
of $300,000 in 1995 compared to $72,000 in 1994, principally attributable to the
bankruptcy of a Contract Placement customer.
21
<PAGE>
General and Administrative. Consolidated general and administrative
expenses increased 32.7%, or $1.0 million, in 1995 compared to 1994.
Contributing to this increase was an increase in general and administrative
expenses of $13.5%, or $56,000, in the Imaging and Network Services business.
Also contributing to this increase was an increase in administrative staffing
levels in the Edison, New Jersey, Bala Cynwyd, Pennsylvania and Foxborough,
Massachusetts offices and increased rent expense of $168,000 associated with the
new Edison office and the expansion of the Bala Cynwyd office. In addition, in
1995 the Company realized tax penalties of $237,000 pursuant to a settlement
with the IRS. General and administrative expenses as a percentage of
consolidated net revenues decreased marginally from 7.0% in 1994 to 6.6% in
1995.
Interest. Interest expense increased by 56.9%, or $243,000, in 1995
compared to 1994. This increase was attributable to the increased borrowing
under the Company's line of credit.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net Revenues. Consolidated net revenues increased by 29.0%, or $10.2
million, in 1994 compared to 1993. Revenue from the Contract Placement business
increased by 38.7%, or $10.6 million, due to increased marketing efforts in all
of the Company's offices, and a $1.0 million increase in revenue in the
Company's National Division. Revenue for the Permanent Placement business
increased by 5.2%, or $163,000, from 1993 to 1994. Revenue for the Imaging and
Network Services business decreased by 14.3%, or $628,000, in 1993, due
principally to a vacancy in the office of president for all of 1994 and the loss
of a networking systems contract with the State of New Jersey that had generated
$2.0 million in revenue in 1993.
Cost of Sales. Consolidated cost of sales increased by 31.0%, or $8.1
million, in 1994 compared to 1993. Cost of sales as a percentage of consolidated
net revenues increased to 75.4% in 1994 compared to 74.3% in 1993. This increase
is primarily attributable to the cost of sales in the Imaging and Network
Services business, which increased as a percentage of its revenue from 74.8% in
1993 to 80.5% in 1994, due in large part to the loss of the $2.0 million
contract with the State of New Jersey. Cost of sales for the Contract Placement
business decreased slightly as a percentage of its revenue.
Selling and Operating. Consolidated selling and operating expenses
increased by 11.2%, or $656,000, in 1994 compared to 1993. Contributing to this
increase was an increase in selling and operating expenses of 11.4%, or $85,000,
in the Imaging and Network Services business. Selling and operating expenses
decreased as a percentage of consolidated net revenues to 14.4% in 1994 compared
to 16.7% in 1993, primarily as a result of the increased volume of business and
a decrease in medical and workmen's compensation insurance expense in all of the
Company's businesses.
General and Administrative. Consolidated general and administrative
expenses increased 25.0%, or $630,000, in 1994 compared to 1993, primarily due
to an increase in salaries and related fringe benefits associated with the
hiring of management information systems and accounting personnel in the
Contract Placement business. General and administrative expenses also increased
as a result of higher rent expense for the Company's Bala Cynwyd office and an
increase in accounting fees. Offsetting this increase was a decrease in general
and administrative expenses of $16.5%, or $82,000, in the Imaging and Network
Services business. General and administrative expenses as a percentage of
consolidated net revenues remained constant at approximately 7.0% in 1994 and
1993.
Interest. Interest expense increased by 26.3%, or $89,000, in 1994,
compared to 1993. This increase was attributable to increased borrowing under
the Company's line of credit.
INCOME TAXES
The Company adopted the Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," as of January 1, 1993 by determining the
cumulative effect on prior years of the change in method of accounting for
income taxes. The effective tax rates for 1995, 1994 and 1993 are higher than
the applicable statutory tax rate of 34%, due to certain non-deductible expenses
related to the Company's repurchase of equity interests held in the Company by a
former employee, a Federal
22
<PAGE>
and state provision at the maximum rates for the Contract Placement business and
net operating losses for the Imaging and Network Services business, which are
consolidated for financial but not for tax reporting purposes. In addition, if
the Imaging and Network Services business is unable to achieve profitability, it
will not realize the federal tax benefit of its $2.4 million operating loss
carryforward, which will expire between 2002 and 2010. (See Note 10 of Notes to
the Consolidated Financial Statements for the nine months ended September 30,
1996.) The effective tax rate was 79.3%, 66.4%, 55.1%, 49.0% and 82.1% for
fiscal years 1993, 1994, 1995, the nine months ended September 30, 1995 and the
nine months ended September 30, 1996, respectively.
SEASONALITY AND QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly statements of
operations data for each of the Company's last seven 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 Prospectus 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
--------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................... $14,131 $ 15,268 $17,478 $ 16,422 $16,435 $ 20,892 $21,588
Cost of sales (Exclusive of items shown
separately below).................... 10,859 11,432 12,982 12,277 12,528 15,060 15,645
Selling and operating.................. 2,124 2,439 2,279 2,956 2,654 3,710 3,659
General and administrative............. 976 1,062 1,161 988 1,398 1,450 1,462
--------- -------- --------- -------- --------- -------- ---------
Total costs and expenses............... 13,959 14,933 16,422 16,221 16,580 20,220 20,766
Income from operations................. 172 335 1,056 201 (145) 672 822
Interest expense and other, net........ 131 186 228 152 181 191 228
--------- -------- --------- -------- --------- -------- ---------
Income (loss) before income taxes...... $ 41 $ 149 $ 828 $ 49 $ (326) $ 481 $ 594
--------- -------- --------- -------- --------- -------- ---------
--------- -------- --------- -------- --------- -------- ---------
</TABLE>
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. The Company also incurs additional expenses in its first
fiscal quarter, in part as a result of higher employment and related payroll
taxes. During the quarter ended December 31, 1995, the number of holidays and
vacation days marginally affected revenues in the Contract Placement business.
In the quarter ended March 31, 1996, severe weather negatively affected revenues
in all of the Company's operating businesses, particularly the Contract
Placement business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for working capital has increased as its sales have
grown over the last three years. In each of the last three fiscal years and in
the nine months ending September 30, 1996, the Company has used cash in
operations. This is primarily attributable to the nature of the Company's
Contract Placement business and to losses in the Imaging and Network Services
business. As is customary in the staffing industry, the Company pays its
technical consultants on a weekly basis for hours billed, but invoices its
clients for those services approximately one week later, with the invoices
payable from 30 to 60 days after issuance. Certain large customers of the
Contract Placement business may receive even more favorable payment terms.
Similarly, as a result of the project-oriented nature of the Company's Imaging
and Network Services business, the Company pays its personnel semi-monthly,
while payment for the services performed are often received over a six to nine
month period, depending on the nature of the installation and the amount of
advanced development and/or consulting services that are requested by the
customer. In addition, the Company has used cash in each of the last three
fiscal years and in the nine months ending September 30, 1996 to fund its
investment in the
23
<PAGE>
infrastructure of its Imaging and Network Services business. The Company expects
to continue to use cash in its operations for the foreseeable future.
The Company has funded its working capital and capital expenditure needs
primarily through borrowings under its credit facility. The Company typically
maintains minimal cash balances, and at September 30, 1996 had approximately
$154,000 in cash.
The Company used approximately $87,000, $896,000, $2.3 million, $2.4
million and $2.2 million of cash in operations in 1993, 1994 and 1995 and the
nine months ended September 30, 1995 and 1996 respectively. The Company's
primary uses of cash have been to fund increases in accounts receivables, to
purchase fixed assets and to repay long-term debt. The Company's net accounts
receivable have increased from $4.3 million at December 31, 1993 to $13.0
million at September 30, 1996, principally due to the growth in revenue in its
Contract Placement business. Purchases of fixed assets in 1993, 1994, 1995 and
the nine months ended September 30, 1995 and 1996 were $91,000, $480,000,
$637,000, $331,000 and $874,000, respectively.
Cash provided from financing activities, principally bank borrowings, was
approximately $203,000, $1.3 million, $2.6 million, $2.6 million and $2.6
million in 1993, 1994 and 1995 and the nine months ended September 30, 1995 and
1996, respectively. During 1994, the Company raised $500,000 from a group of
investors through the sale of Convertible Notes. These notes mature in July 1997
and therefore are classified as current in the balance sheet as of September 30,
1996. The Convertible Note holders have agreed to convert their notes into
526,000 Common Shares concurrently with this Offering. Effective September 30,
1996, the Company received waivers from the Convertible Note holders regarding
certain covenant violations relating to limitations on annual capital
expenditures and the issuance of unsecured notes. See Note 7 of Notes to
Consolidated Financial Statements. In addition, in February 1996 the Company
received cash proceeds of $888,000 from a private placement of Series A
preferred shares by its Imaging and Network Services business.
At various times during prior periods, the Company borrowed amounts under
its then existing credit facility in excess of the amounts permitted to be
borrowed under the facility, thus requiring the bank to waive the lending
limitation. In order to provide the Company with a credit facility more suitable
for its needs, effective September 30, 1996, the Company amended and restated
its credit facility to increase the amounts that it may borrow under the line
and modified various covenants. In addition, the bank amended the loan agreement
to include the transactions related to the Company's reorganization and the
acquisition of Berkeley and Systems Automation, and redefined certain financial
ratios to accommodate the acquisitions.
The Company's bank borrowings currently consist of a $10.0 million
revolving advance facility with PNC Bank, N.A. (sucessor to Midlantic Bank,
N.A.) (the "Line of Credit") and a $1.0 million term loan. The Line of Credit
expires on May 31, 1998 and carries an interest rate of prime plus 1.0%, which
interest rate will revert to prime upon the successful completion of this
Offering. This facility allows the Company to borrow the lesser of 80% of
eligible receivables or $10.0 million. Based on eligible receivables of $10.8
million at September 30, 1996, the maximum amount that the Company can borrow
under the Line of Credit is $8.7 million. The Line of Credit also requires the
Company to meet certain financial ratios and transactional covenants. The
Company intends to use a portion of the estimated net proceeds to pay down the
Line of Credit, the balance of which was $7.1 million as of September 30, 1996,
although the Company does intend to draw on the line as needed in the future.
The Line of Credit is secured by substantially all of the Company's assets and
contains customary restrictive covenants, including limitations on amounts of
loans the Company may extend to officers and employees, the incurrence of
additional debt and the payment of dividends on the Company's common or
preferred shares. The term loan, which carries an interest rate of prime plus 1
1/2%, is payable in 60 monthly installments, with the balance due upon
consummation of this Offering. At September 30, 1996, there was $1.0 million
outstanding under the term loan. In addition, at September 30, 1996, the Company
had approximately $834,000 of additional short-term and long-term debt
outstanding, principally equipment leases, which it intends to repay with a
portion of the proceeds from this Offering. In connection with the acquisitions
of Berkeley and Systems Automation, the Company issued unsecured notes in the
aggregate principal amount of $2.5 million for the stock of
24
<PAGE>
Berkeley and the net assets of Systems Automation, $1.6 million of which will be
paid with a portion of the proceeds of this Offering.
The Company anticipates that its primary uses of capital in future periods
will be for acquisitions, funding of increases in accounts receivables and the
development of its corporate level sales force. See "Use of Proceeds." The
Company believes that the proceeds from this 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.
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.
25
<PAGE>
BUSINESS
INTRODUCTION
The Judge Group services the IT and engineering needs of its clients
through the following four complementary operating units:
<TABLE>
<S> <C> <C>
o Contract Placement -- Provides IT and engineering personnel ("technical
consultants") on a contract basis;
o Permanent Placement -- Provides IT and engineering personnel on a permanent
basis;
o Imaging and Network Services -- Provides computer networking, imaging, document
management, workflow and related consulting services;
and
o IT Training -- Provides standard and customized IT training on
established and emerging software applications.
</TABLE>
The Company's Contract Placement business provides technical consultants
skilled in a variety of fields, such as applications programming and
development, client/server technology, legacy systems conversion, software
architecture and design, data communications, systems engineering,
Internet/Web-Site design, project consulting and Help Desk management. The
Company provides technical consultants in the MidAtlantic and New England
regions of the United States through three branch offices, and on a nationwide
basis through its National Division. The Company maintains a database of over
100,000 technical consultants, and in 1995 provided over 1,700 technical
consultants to more than 800 clients.
The Company's Permanent Placement business provides medium to high-level IT
and engineering professionals on a permanent basis to clients nationwide. The
Company maintains a database of over 70,000 IT and engineering professionals,
and in 1995 placed 396 candidates with more than 240 clients.
The Company's Imaging and Network Services business offers 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 through its
MENTOR(Trademark) Consulting Program, project management, and advanced
applications development. The Company is a value-added reseller and service
facility for PC and network hardware, software and related peripherals
manufactured by Compaq, ACER, IBM, Apple, Okidata, Tricord, HP and others. The
Company has installed more than 110 imaging systems, is a value-added reseller
of Optika, Filenet, Saros(Copyright), Watermark, Keyfile, OTP and Lotus Notes
imaging software, and integrates its imaging solutions on a variety of operating
systems, including Banyan, OS/2 and Windows NT(Trademark).
The Company's IT Training business, acquired in September 1996, provides
training on a range of software and network applications to corporate,
governmental and individual clients. The IT Training business currently offers
three licensed diploma courses, six certificate courses, and over 180
open-enrollment courses, either in its own computer labs or at client locations.
Besides 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 through the training of
its technical consultants and in-house personnel.
The Company serves its clients through offices located in Bala Cynwyd,
Pennsylvania; Foxborough and Wakefield, Massachusetts; Edison and Moorestown,
New Jersey; Hartford, Connecticut; Tampa, Florida; Baltimore, Maryland; and
Alexandria, Virginia. The Company's client base includes various Fortune 500
companies and governmental agencies, including Merck, Bell Atlantic NYNEX
Mobile, Texas Instruments, Compaq, Intel and the City of Philadelphia. The
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<PAGE>
Company believes that its four complementary businesses afford
it a competitive advantage over IT service providers that have fewer service
offerings, and position it to benefit from the anticipated growth in the
technical staffing and IT training industry and the imaging and document
management industry. The Company has recently adopted an integrated marketing
and service approach aimed at both new and existing customers which seeks to
take advantage of its ability to offer a comprehensive, cost-effective and
convenient means to meet a wide variety of technical requirements.
INDUSTRY OVERVIEW
The Company operates in two interrelated and growing segments within the IT
professional services industry: the Technical Personnel Placement and IT
Training segment and the Imaging, Document Management and Network Services
segment. Both segments are highly fragmented and characterized by a large number
of local and regional service providers.
Technical Personnel Placement and IT Training. To address the demands
created by an increasing shortage of technical personnel and expertise in the
workplace, organizations need to (i) permanently hire qualified personnel, (ii)
temporarily engage qualified personnel, or (iii) train their existing personnel.
In order to more effectively identify and understand technical professional
skills and gain access to a broader range of professionals, many organizations
are turning to permanent placement providers. According to Staffing Industry
Report, revenues from permanent placement services are estimated to have grown
from $1.2 billion in 1993 to $1.7 billion in 1995, and are expected to grow to
$1.8 billion in 1996, representing a 14.5% compound annual growth rate.
Organizations desiring variable cost solutions to their technical staffing
needs are increasingly using contract service providers to supplement or
outsource in-house technical personnel requirements. By relying on technical
consultants, organizations can reduce the costs associated with recruiting,
training and relocating employees as technical needs change. According to
Staffing Industry Report, revenues from technical/computer temporary staffing
are estimated to have grown from $5.7 billion in 1993 to $9.2 billion in 1995,
and are expected to grow to $11.4 billion in 1996, representing a 26.0% compound
annual growth rate. Furthermore, since technical consultants are often able to
maintain compensation levels comparable to or higher than those of similarly
skilled full-time employees, the number of individuals with technical skills who
work independently for one or more contract service providers has increased in
recent years.
In many industries, organizations are training increasing proportions of
their workforces on certain relevant applications in order to achieve maximum
productivity with their IT systems. In addition, many individuals, including
those already employed as technical consultants, seek training to acquire or
improve technical skills in order to advance professionally. The Updata Group,
Inc. estimates that revenues from IT training services will grow from $2.9
billion in 1995 to $5.6 billion by the year 2000, representing a 14.8% compound
annual growth rate.
Imaging, Document Management and Network Services. During the early to
mid-1980's, many organizations began to migrate from mainframe-based computer
operations to platforms based on PC client/server networks utilizing
multi-vendor and multi-protocol technologies. While IT networks provide many
competitive benefits, including increased computing power, ease of use and
flexibility, they also have placed increased pressures on clients' in-house IT
personnel, as well as on software and hardware vendors, to support and manage
the networks in an environment of rapidly changing technology. As a result,
organizations must increasingly rely on independent service providers with the
technical expertise to design and configure complex IT networks, integrate and
support a variety of protocols, applications and equipment, and manage and
upgrade the networks on an ongoing basis.
One type of IT network system that has grown in prevalence in recent years
is the imaging and document management system. Historically, information has
been stored, manipulated and retrieved through the use of paper based filing
systems, microfilm and microfiche. Each of these methods suffer one or more of
the disadvantages of being relatively costly, slow in providing information
exchange, subject to human error and not simultaneously accessible to multiple
users. The document management
27
<PAGE>
industry has evolved as a result of the need to store, manipulate and retrieve
large quantities of information in an efficient and cost-effective manner.
An imaging system uses software and high speed input scanners to convert
paper documents into digitized images and store them on optical or magnetic
disks. Documents that have been converted to a digital format, as well as other
computerized text and data, can be indexed, stored, retrieved and routed from
one worker or department to another by using a document management system.
Workflow, a feature of a document management system, automates routine work
processes by automatically, rather than manually, routing digital information
(such as invoices or insurance claims) from one workstation to another. For
paper intensive industries, document management systems offer several advantages
over paper or microfilm, including faster, easier and more reliable digital file
access by multiple users in various locations, and a reduction in the overall
cost of document storage, including related time and labor.
The increasing implementation of client/server networks, the decreasing
cost of such systems and the desire of businesses to increase productivity are
sources of growth for the document management and network services markets. In
addition, paper intensive industries, such as health care, insurance, financial
services and retailing, are seeking cost-effective document management solutions
to take advantage of the full capabilities of their existing IT systems.
According to a study prepared for AIIM, electronic imaging revenues, including
hardware, software, services and support, grew approximately 18.2% in 1995, from
$2.2 billion in 1994 to $2.6 billion in 1995. The Company believes that document
management service providers, such as the Company, will benefit from the
anticipated growth in the market to a greater degree than software or hardware
vendors, due to the declining prices of hardware and software and the increasing
number of installations, which are expected to result in the need for new
applications and maintenance.
BUSINESS STRATEGY
The Company's objective is to become a leading nationwide provider of IT
and engineering professional services. Key elements of the Company's business
strategy include:
Offering a Single Source of Technical Solutions. The Company provides its
clients with a wide range of technical staffing, consulting, imaging, document
management, workflow and training services. By integrating multiple IT and
engineering services, the Company is able to provide clients with a
comprehensive, cost-effective and convenient means to meet their technical
requirements, reducing the time and expense associated with selecting multiple,
qualified vendors. The Company intends to continue to develop complementary new
services, such as Help Desk and Asset Management services, and its recently
introduced MENTOR(Trademark) Consulting Program, a methodology for evaluating
new technology and organizational redesign, in order to enhance its capabilities
as a single-source provider of technical solutions.
Aggressively Marketing a Broad Range of Services. The Company's marketing
programs seek to emphasize its competitive advantage over other IT service
providers that have fewer service offerings. The Company has recently
established several incentive sales programs to increase business from existing
clients by encouraging the cross-selling of the services of its four operating
units. Furthermore, the Company plans to establish a corporate-level sales force
to identify opportunities where it can provide integrated solutions to new
clients and then market such solutions in conjunction with the sales
professionals of the relevant operating businesses.
Developing a National Presence. The Company believes that many
organizations with multiple geographic locations prefer to utilize technical
service providers that can offer high quality services on a nationwide basis.
The Company has provided engineering personnel on a contract basis nationwide
through its National Division in Foxborough, Massachusetts since 1991 and has
recently expanded its national efforts to include IT personnel. In addition, the
Company has begun targeting longer-term national projects as well as those
projects utilizing more highly skilled personnel. The Company believes that it
has several national accounts with which it has a large enough base of business
to
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<PAGE>
warrant establishing local Contract Placement offices, and intends to leverage
select national accounts to expand into new geographic areas.
Expanding Imaging and Network Services Business. The Company began
developing its imaging, document management and workflow service capabilities
and infrastructure in 1988. The Company's Imaging and Network Services business
has installed more than 110 imaging and document management systems, and
currently has 101 people committed full-time to imaging projects, including
personnel specializing in high-volume backfile conversion, an Advanced
Development Group, and the MENTOR(Trademark) Consulting Group. The Company
believes that many organizations are evaluating the implementation or expansion
of imaging technologies, and will continue to invest resources to develop this
business in order to benefit from the projected growth in the imaging and
document management market. In addition, the Company will seek to establish
initial client relationships with many organizations through its Imaging and
Network Services business, enabling it to then cross-sell the capabilities of
its other three operating units.
Capitalizing on IT Training Resources. The Company intends to leverage its
recently acquired IT Training business to assist it in identifying emerging
technologies and integrating such technologies into its organization in order to
expand its service offerings and maintain its competitive position. The Company
intends to employ its instructors to train its technical consultants in
leading-edge technologies, and believes this will enhance its ability to
attract, retain and increase the marketability and job satisfaction of such
consultants. By training its in-house personnel, the Company will enhance its
ability to stay current on new technologies and to position itself as a provider
of leading-edge technical solutions.
Pursuing Strategic Acquisitions. The IT professional services industry is
highly fragmented and contains a number of local and regional technical service
providers that market one or more of the Company's four service offerings and
have established customer bases and access to qualified technical personnel. In
order to facilitate its expansion into new geographic markets and strengthen its
position in existing markets, the Company intends to acquire certain of these
providers through which it can then market its full range of complementary
service offerings and expand its databases of technical consultants and
permanent placement professionals. The Company will seek to make such
acquisitions in major metropolitan areas that have a significant concentration
of companies with a need for IT services and in which the Company believes it
can secure a sufficient market share to warrant opening a new office.
SERVICES
CONTRACT PLACEMENT
The Company provides IT and engineering technical consultants on a contract
basis regionally through its offices in Bala Cynwyd, Pennsylvania; Foxborough,
Massachusetts; and Edison, New Jersey, and nationally through its National
Division in Foxborough. The Company maintains a database of over 100,000
technical consultants, and in 1995 placed over 1,700 consultants with more than
800 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 five years. The Company's technical
consultants and independent contractors often work jointly with clients'
in-house IT personnel, and are generally placed with clients on an hourly basis
at billing rates ranging from $10 to $150 and averaging $40 as of September 30,
1996. The Company's Contract Placement business, founded in 1986, generated
revenue of $50.8 million in fiscal 1995 and $44.6 million for the nine months
ending September 30, 1996, which represented 80.3% and 75.8% of the Company's
consolidated net revenues in those periods, respectively.
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 has recently begun to provide
project consulting services, which can include project management, workflow
analysis, database design, custom applications and systems integration. In a
project
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management engagement, which is usually priced on a fixed fee 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 following chart illustrates some of the capabilities of the Company's
technical consultants:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
INFORMATION SYSTEMS
- ------------------------------------- -----------------------------------------------------
POSITION/TITLE SKILLS
- ------------------------------------- -----------------------------------------------------
<S> <C>
Client/Server Developer Visual Basic; GUI Access; Powerbuilder
Database Developer Foxpro; Paradox Dbase
Database Manager DB2 DBA; Oracle DBA; Maintenance of Database
Software Engineer Unix; C++; Realtime; Embedded Systems; QA; OOP;
OOD; Visual C++; MFC
Internet/Web-Site Designer HTML; Java; Shell Script; Shockwave; CGI Unix;
TCP/IP; Perl
IBM Mainframe Programmer Cobol; CICS; DB2; IMS; DMS
Network Engineer Novell or Windows NT; CNE Certificate; MCSE
Help Desk Consultant Support of MS Office/Lotus Suite; Windows;
Trouble shooting hardware/software
<CAPTION>
- --------------------------------------------------------------------------------------------
ENGINEERING
- ------------------------------------- -----------------------------------------------------
POSITION/TITLE SKILLS
- ------------------------------------- -----------------------------------------------------
<S> <C>
Engineer ASIC Chip Design;
(Mechanical; Electrical; Chemical) Embedded Microprocessor Design Engineer;
Autolisp Programming; Pharmaceutical Validation
Designer Piping Design; Mechanical Design;
Unigraphics Design; Semiconductor Machine Design;
Liquid Crystal Display Systems; Micro-station Design;
3-D Pro Engineering Design;
Chilled Water Electro-Mechanical Packaging Design
- ------------------------------------- -----------------------------------------------------
</TABLE>
The Company, as part of its strategy of being a single source provider of
technical solutions, seeks to develop new service offerings. Since many IT
systems currently are incapable of recognizing dates subsequent to 1999, the
Company has designed several approaches to assist clients in re-engineering
their IT systems and databases to accommodate the year 2000 and beyond. The
Company is also currently developing a Help Desk practice to assist clients in
staffing and training personnel to implement and maintain their in-house help
desks. Alternatively, clients will be able to outsource this function to the
Company under a monthly fee arrangement. The Company is also developing an Asset
Management service whereby it will monitor and service a client's mobile
computing inventory, such as a network of laptop or notebook computers utilized
by pharmaceutical representatives. In addition, the Company has recently
expanded the type of skilled personnel its Contract Placement business is
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<PAGE>
capable of providing to such diverse areas as finance, life sciences, desktop
publishing, PC support and help desk, and human resources. Furthermore, as it
has done in the past, the Company will continue to leverage its Contract
Placement capabilities by providing technical consultants to assist in the
implementation and operation of systems installed by its Imaging and Network
Services business.
The Company believes that many organizations with multiple geographic
locations prefer to utilize technical service providers that can offer high
quality services on a nationwide basis. The Company established its National
Division in Foxborough, Massachusetts in 1991 to provide engineering personnel
on a contract basis nationwide, and the Company currently serves national
clients in such locations as Portland, Oregon and Houston, Texas. The Company
has recently expanded its national efforts to include placement of IT as well as
engineering professionals, and to begin longer term projects requiring more
highly skilled personnel. Revenue attributable to the National Division was $8.9
million and $8.0 million in 1995 and the first nine months of 1996,
respectively.
PERMANENT PLACEMENT
The Company's Permanent Placement business provides medium to high-level IT
and engineering professionals nationwide through its regional offices in Bala
Cynwyd, Pennsylvania; Tampa, Florida; and Edison, New Jersey. A significant
portion of the Company's engineering placements are in food related industries.
The Company maintains a database of over 70,000 engineering and IT applicants,
and in 1995 it placed 396 professionals with more than 240 clients. Over the
course of the Company's twenty-six year history in the technical permanent
placement industry, it has forged long-term relationships with many individuals
with hiring authority, which have resulted in significant repeat business. Of
the 240 clients serviced in 1995, approximately 16% were clients of the business
in 1990. 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 specified
guarantee period of thirty to ninety days. The Permanent Placement business,
founded in 1970, generated revenues of $4.3 million in 1995 and $4.3 million for
the nine months ending September 30, 1996, representing 6.7% and 7.2% of total
Company revenues for those periods, respectively.
IMAGING AND NETWORK SERVICES
The Company provides various networking, imaging, document management,
workflow and related consulting services through regional offices in Bala
Cynwyd, Pennsylvania; Moorestown, New Jersey; Hartford, Connecticut; Tampa,
Florida; and Wakefield, Massachusetts. The Imaging and Network Services
business, which began operations in 1988, generated revenue of $8.2 million and
$10.0 million, which represented 13.0% and 17.0% of the Company's consolidated
net revenues, in fiscal 1995 and the nine months ending September 30, 1996,
respectively.
The Company is a value-added reseller and service facility for PC and
network hardware, software and related peripherals for a variety of
manufacturers, including Compaq, ACER, IBM, Apple, Okidata, Tricord and HP, and
provides a full range of installation, training, maintenance, repair and network
integration services. In addition, the Company assembles, sells and services its
own private-label PC products.
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 has installed more than 110 imaging and document management systems, and
offers its customers hardware and software maintenance, support and training.
The Company implements Optika software in Banyan, OS/2 and Windows NT(Trademark)
environments and is currently a value-added reseller of a variety of other
imaging software systems, including FileNet, Saros(Copyright),
Watermark(Trademark), Keyfile, OTG and Lotus Notes. 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
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hardware manufactured by IBM, Compaq, HP and SunMicrosystems, Inc. operating
under Windows NT(Trademark), OS/2(Registered) and Unix operating systems.
The Company seeks to provide its clients with networking and document
management solutions to improve their operations through work process
re-engineering and enabling technology implementation. The Company believes that
a thorough understanding of a clients' existing IT system and work processes is
necessary to the design of an optimal network and/or document management system.
In 1996, Company introduced its MENTOR(Trademark) Consulting Program, a
Methodology for Evaluating New Technology and Organizational Redesign
("MENTOR"), to provide clients with a framework for selecting such a system.
Under the MENTOR program the Company assigns senior level, 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, security and limitations of the client's current IT system as well
as the client's personnel and culture. Upon completion of this analysis, the
Company presents the client with a detailed set of technological and work
process recommendations.
The Company assists clients in designing a technology infrastructure that
will support the client's interrelated strategic business objectives and IT
needs. Design services include selection of viable systems components, creation
of migration plans from the existing to the proposed system and integration of
systems, networks, applications and databases. In those instances where the
network or imaging software solution selected by the client does not completely
meet its application requirements, the Company's Advanced Development Group
provides custom application development.
The Company is capable of providing all of the necessary technical
personnel to implement each networking or document management solution, often
drawing on the technical consultant resources of its Contract Placement
business. The Company's internal staff of network engineers is certified by
Novell, Banyan(Registered) and Microsoft to perform installation, maintenance
and training in their network operating system platforms. The Company also can
provide backfile conversion of paper, microfilm and microfiche files as part of
the integrated new document management system or as a stand alone service.
The Company is authorized to service all of the hardware products it sells.
The Company typically enters into maintenance contracts in connection with the
installation of networking and document management systems. The Company also
offers training on all of the networking and imaging products it sells, as well
as on the use and administration of all network operating systems it installs.
TRAINING
The Company's IT Training business, acquired in September 1996, has
provided training to over 3,000 client companies and trainees in a variety of
software and network applications since its founding in 1986. The IT Training
business provides these services at its facilities in Bala Cynwyd, Pennsylvania;
Baltimore, Maryland and Alexandria, Virginia, and at various off-site locations.
The Company is an authorized training center for many major software
manufacturers, including Microsoft, Adobe Systems Incorporated, Quark, Inc.,
Corel Corporation, and Claris Corporation, and is also an approved Apple
Training Alliance Center, Microsoft Solutions Provider and Microsoft Advanced
Technical Education Center. The Company's diploma programs in Desktop
Publishing, Business Software and 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
Company also offers six certificate programs, often geared toward retraining
mid-career workers in new technology applications, and 180 open-enrollment
courses. The Company's job search assistance program achieved a 92% placement
rate for the Company's graduates in 1995. The Company maintains twelve computer
labs in its Bala Cynwyd, Pennsylvania facility and eight computer labs in its
Alexandria, Virginia facility. In addition, the Company frequently conducts its
courses at the in-house facilities of its corporate clients and has the ability
to provide the necessary computer equipment at conference centers, hotels and
other off-site locations as requested by its clients. Prices for a single,
open-enrollment training course range from $99 to $900, with an average of
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<PAGE>
$385, and prices for a diploma course range from $3,900 to $7,400, with an
average of $6,300. The chart below sets forth many of the training programs
offered by the Company:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SUBJECT APPLICATIONS
- -------------------------------------------------------------------------------------------------
<S> <C>
Operating Systems/Networking Microsoft Windows for Workgroups, Windows 95,
Microsoft Windows NT(Trademark), Microsoft Windows
NT(Trademark) Server, Macintosh, Novell
Windows/Advanced Macintosh Business Software Lotus 1-2-3, Lotus Notes, Microsoft Excel,
Microsoft PowerPoint, Microsoft Project, Microsoft
Word, Microsoft Works, PageMaker, Persuasion,
Quattro Pro, QuickBooks, Quicken, WordPerfect for
Windows, WordPro, ClarisWorks, Filemaker Pro, Fox
Pro
Desktop Publishing Quark XPress, PageMaker, FrameMaker, Interleaf,
Multi-Ad Creator
Electronic Design Prepress/Advanced
Publishing Photoshop, Presswise, Trapwise, Scanning
Multimedia/Presentation Graphics Macromedia Director, PowerPoint, Authorware,
Persuasion
Internet/WorldWide Web HTML, HotMetal Pro, Premiere, Hot Dog, PageMill,
SiteMill, Netscape, Java
- -------------------------------------------------------------------------------------------------
</TABLE>
CUSTOMERS
The primary industries served by the Company include financial services,
manufacturing, software/computers, telecommunications, healthcare, government,
and pharmaceutical. In fiscal 1995, approximately 24% of the Company's revenue
was derived from its top 10 customers and Merck accounted for 6.4% of revenues.
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<PAGE>
The following table sets forth a list of certain of the largest clients, by
revenues, for which each of the Company's four operating units provided services
in 1995:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
TELECOMMUNICATIONS PHARMACEUTICAL SOFTWARE/COMPUTERS
<S> <C> <C>
Bell Atlantic NYNEX Merck & Co., Inc. (1) Texas Instruments, Inc. (1)
Mobile, Inc. (3)(4) Rhone Poulenc Rorer Compaq Computer Corporation (1)
Pharmaceuticals, Inc. (1) Intel Corporation (1)
Wyeth-Ayerst International
Inc.(2)
Hoffman LaRoche, Inc. (3)
<CAPTION>
- ----------------------------------------------------------------------------------------------
MANUFACTURING FINANCIAL SERVICES GOVERNMENTAL
<S> <C> <C>
Nestle Incorporated (2) The Vanguard Group, Inc. (1) City of Philadelphia (3)(4)
Ciba Corning Diagnostics Reliance Insurance Company (2) Bordentown (NJ) Board of
Corporation (1) Education (3)
Tandem Computer, Inc. (1)
<CAPTION>
- ----------------------------------------------------------------------------------------------
HEALTHCARE
---------------------------------
Aetna US Healthcare (1)(4)
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Contract Placement client
(2) Permanent Placement client
(3) Imaging and Network Services client
(4) IT Training client
TECHNICAL PERSONNEL
The Company believes its applicant and technical consultant sourcing and
retention practices are, and will continue to be, a significant factor in its
continued growth and competitiveness. The Company maintains a proprietary
database in each of its Permanent and Contract Placement businesses specifically
designed to identify and match these individuals with clients' needs. The
Company's Permanent and Contract Placement databases currently contain the
resumes of approximately 70,000 and 100,000 technical personnel, respectively.
All of the Company's technical recruiters who place applicants and consultants
have on-line access to the appropriate database.
The Company identifies applicants and recruits technical consultants
through advertisements in local media and trade journals, industry specific job
fairs and referrals by current and past applicants. In addition, the Company has
developed a World Wide Web site on the Internet that provides information about
the Company and enables individuals to submit their resumes. The Company also
actively searches the Internet to identify potential technical consultants,
often downloading resumes and proactively recruiting such individuals. The
resumes of technical professionals are entered into the appropriate database,
thus giving technical recruiters in all offices immediate access to the
professionals. Once a professional is identified for a particular position, the
technical recruiter institutes screening procedures designed to ensure a good
match for the client and professional. These procedures include personal
interviews, reference checks and review of work product. Once a technical
consultant is placed with a client, the Company routinely interviews the client
and technical consultant to make sure a proper fit exists, thereby ensuring both
customer and technical consultant satisfaction.
The Company recognizes the need to differentiate itself from other
technical personnel providers and has adopted a number of policies to enhance
its attractiveness to technical consultants, such as paid vacation,
participation in a 401(k) Plan, access to group medical coverage, and on-going
professional training. In addition, the Company seeks to secure new engagements
for its technical consultants before their current engagements end to keep them
continuously employed and eliminate downtime.
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<PAGE>
The Company believes that its ability to offer a variety of assignments
nationwide through its National Division is also a factor in retaining technical
consultants.
SALES AND MARKETING
The Company's Contract Placement, Imaging and Network Services and IT
Training businesses each market their respective services through discrete
direct sales forces. In the Permanent Placement business, recruiters are
responsible for both originating and maintaining client contacts, and updating
the database with new applicants.
Account Managers constitute the sales force in the Company's Contract
Placement business, operating out of offices in Bala Cynwyd, Pennsylvania;
Edison, New Jersey; and Foxborough, Massachusetts. The responsibilities of the
Account Managers include identification of new staffing requirements,
coordination of client/consultant interviews, monitoring existing projects,
interaction with technical consultants, expanding services to additional areas
within the client's organization and coordination with the Company's corporate
office to facilitate the billing and purchasing cycle. Account Managers receive
a base salary plus individual incentives tied to gross margins. The Company
generates new business leads through a combination of a telemarketing programs,
media advertising and local trade shows. In addition, the Company receives sales
leads from its other operating units.
The Company has two direct technical sales teams through which it markets
its Imaging and Network Services business, one that concentrates on imaging and
document management systems and services, and one that focuses on more
traditional network systems and services. Technical sales personnel are located
in Bala Cynwyd, Pennsylvania; Moorestown and Edison, New Jersey; Hartford,
Connecticut; Wakefield, Massachusetts; and Tampa, Florida. The Company generates
leads through a combination of telemarketing programs, seminars, local trade
shows and media advertising. The Company also receives sales leads from its
software vendors.
The Company markets its IT training services through print advertising in
trade publications, telemarketing, trade shows and direct mail and on local
radio. The Company uses media demographics and industry psychographic profiles
to identify potential client firms and individuals who will benefit from
training. Targeted efforts are then concentrated toward these markets by an
executive sales force located in Bala Cynwyd, Pennsylvania. The Company believes
that approximately 45% of its 1995 IT Training sales were generated by either
repeat business or client referrals.
The Company's Bala Cynwyd, Pennsylvania location is the prototype sales
office out of which the full range of its services are offered. The Company
believes that its four complementary businesses afford it a competitive
advantage over other IT service providers that have fewer service offerings and
intends to eventually offer all of its services at each of its locations. The
Edison, New Jersey office, which currently offers Contract Placement, Permanent
Placement and Imaging and Network Services, is scheduled to begin offering IT
Training by the end of 1997, becoming the Company's second full-service
location.
The Company has recently adopted a new marketing and service delivery
approach which seeks to take advantage of its ability to offer comprehensive,
cost-effective and convenient means to meet a wide variety of technical
requirements. In addition, the Company plans to develop a corporate level sales
force which will identify opportunities where it can provide integrated
solutions to new and existing clients and then market such solutions in
conjunction with the existing sales professionals in the Company's four
operating businesses.
COMPETITION
The IT professional services industry is highly competitive and fragmented
on the local, regional and national levels. Although the Company is not aware of
any competitors that offer a full range of technical staffing, imaging, document
management, consulting and training services, many companies offer one or two of
the Company's services in all of the geographical markets in which the Company
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<PAGE>
currently operates. Many of the Company's competitors have significantly greater
name recognition and financial, technical and other resources and generate
greater revenues than the Company.
Contract and Permanent Placement. Within any given geographical or
technical specialty market, the Company competes for clients with other IT and
engineering professional services 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. The Company's principal
competitors in the Contract Placement business include a range of companies such
as The Registry, Inc., Techaid Corporation, Volt Information Services, Inc.,
H.L. Yoh & Company, Additional Tech Support, and CompuData, Inc.
Imaging, Document Management and Network Services. The imaging, document
management and network 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, professional services companies, applications software firms, temporary
employment agencies, the professional service groups of companies such as Unisys
Corporation and Digital Equipment Corporation, facilities management and MIS
outsourcing companies, certain Big Six accounting firms, and general management
consulting firms. The Company's principal competitors include a range of
companies such as Andersen Consulting, a Division of Arthur Andersen, L.L.P.,
Technology Solutions Corporation, Cambridge Technology Partners, Inc., Universal
Systems, Inc. and ViewStar Corporation.
IT Training. Within the IT training industry, there is competition among
the available training methods, such as instructor-led training versus
computer-based training. Within the instructor-led training segments, 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. The Company's principal
competitors in the IT Training business include Chubb Computer Services, a
division of Chubb Corporation, Computer Learning Centers, ExecuTrain Corporation
and Catapult, Inc.
36
<PAGE>
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. Compliance with
such New Jersey regulations has not and is not expected to have a material
effect on the Company's business. The Company is unaware of any other
jurisdictions in which its operations are subject to material governmental
regulation.
All the jurisdictions in which the Company operates its training centers
regulate and license certain kinds of vocational, trade, technical or other
post-secondary education. The Company believes that employer-funded or
reimbursed IT training is exempt from such requirements in many of these states.
The Company is licensed in each jurisdiction in which it operates training
centers.
If the Company were found to be in violation of a state's licensing or
other regulatory requirements, it could be subject to civil or criminal
sanctions, including monetary penalties. No state educational or regulatory
authority has cited the Company or commenced any proceeding against it for the
violation of any licensing or other vocational educational requirement.
EMPLOYEES
As of December 31, 1996, the Company had 314 employees, of which five were
staff IT consultants, 78 were either Technical Recruiters or Recruiting
Coordinators, 59 served in sales or marketing capacities, 71 served in
engineering and technical support capacities and 101 served in managerial and
administrative capacities. On that date, there were also approximately 834 IT
consultants (including the five staff IT consultants) working on full-time
assignments for the Company's clients. The Company is not a party to any
collective bargaining agreements and considers its relationships with its
employees to be good.
Approximately 85% of the technical consultants placed by the Company during
1995 were treated as employees of the Company for federal and state tax
purposes. For such employees, the Company pays Social Security Taxes (FICA),
federal and state unemployment taxes, workers' compensation insurance premiums
and other employee costs. The remainder of the technical consultants were
treated as independent contractors for federal and state tax purposes. The
Company believes that these consultants meet the requirements for such treatment
under applicable law. See "Risk Factors -- Risks Related to Tax Status of
Technical Consultants."
PRE-OFFERING TRANSACTIONS: CORPORATE REORGANIZATION, MERGER AND RECENT
ACQUISITIONS
The Company recently completed a corporate reorganization (the
"Reorganization") and acquired Berkeley and Systems Automation. Prior to the
completion of this Offering, JIS will be merged into a wholly-owned subsidiary
of the Company.
Reorganization. In the Reorganization, completed in October 1996, the
Company became a holding company for its operating subsidiaries, effected a 52.6
for 1.0 stock split, and amended and restated its Articles of Incorporation and
by-laws.
JIS Merger. Immediately prior to the Offering, and as a condition to the
completion of the Offering, the Company will acquire JIS in a merger in which
JIS will merge into a newly organized, wholly-owned subsidiary of the Company
("Judge Acquisition"). Judge Acquisition will be the surviving corporation in
the Merger and will change its name to "Judge Imaging Systems, Inc." As a result
of the Merger, JIS will become a wholly-owned subsidiary of the Company at the
time of the Offering. The Merger was approved by the stockholders of JIS at a
Special Meeting held on January 17, 1997.
As consideration, each share of JIS common stock or Series A preferred
stock, other than shares owned by the Company, outstanding at the time of the
Merger will be converted into .333 Common
37
<PAGE>
Shares of the Company, which is equal to $2.50 divided by the initial public
offering price. All JIS shares owned by the Company will be cancelled.
As of the date of this Prospectus, JIS had approximately 3,991,841 and
822,628 shares of common stock and Series A preferred stock outstanding,
respectively. The Company will issue approximately 1,194,230 Common Shares in
the Merger, representing approximately 8.9% of the total number Common Shares
that will be outstanding after the Offering. Prior to the Merger, the Company
owned approximately 25.6% of JIS's fully-diluted outstanding common stock
(calculated after giving effect to the conversion of the outstanding Series A
preferred stock of JIS into its common stock). Mr. Judge beneficially owned an
additional 34.1%, and other officers and directors of the Company beneficially
owned an additional 3.7% of JIS's fully-diluted outstanding common stock. See
"Certain Transactions."
In accordance with Accounting Principles Board Opinion No. 16 and related
literature, the majority of the shares of JIS, which are owned by the Company,
Martin E. Judge, Jr. or other owners of Company securities, will be accounted
for as a corporate reorganization of entities under common control at historical
cost, similar to pooling accounting. However, the exchange of the remaining JIS
shares (the "minority interest") will be accounted for in accordance with
"purchase accounting" whereby the pro rata portion of JIS's assets and
liabilities as of September 30, 1996 will be recorded at their fair values. The
excess of the value of the Common Shares issued in exchange for the "minority
interest" shares over the fair value of the net assets attributable to the
minority interest will be recorded as goodwill.
Judge Imaging Systems, Inc. Effective February 29, 1996, Judge Computer
Corporation ("Judge Computer"), a subsidiary of the Company, merged into
DataImage, Inc. ("DataImage"), a publicly traded provider of imaging and
document management services, with DataImage as the surviving entity. Following
the merger, DataImage changed its name to Judge Imaging Systems, Inc. (the
"Surviving Corporation"). As a result of this transaction, the Company held
25.6% of the Surviving Corporation's outstanding shares of common stock on a
fully-diluted basis, and affiliates of the Company held an additional 45.7% of
the Surviving Corporation's outstanding common stock on a fully diluted basis.
Following this transaction, the Surviving Corporation continued to be a public
reporting company.
The Berkeley Associates Corp. In September 1996, the Company acquired
Berkeley for cash, notes and stock consideration of approximately $2.2 million.
Berkeley, founded in 1980, is a provider of IT training services to corporate,
governmental and individual clients. The Company intends to expand the IT
training services of Berkeley in its other locations, as well as to use
Berkeley's materials and expertise to train its internal staff and to enhance
the capabilities of the Company's technical consultants.
Systems Automation, Inc. In September 1996, the Company acquired Systems
Automation for consideration consisting of cash and a note totaling
approximately $547,252. This acquisition established a presence for the
Company's Imaging and Network Services business in the metropolitan Boston area.
38
<PAGE>
FACILITIES
The Company has leased offices in the following locations:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
SQUARE SERVICES OFFERED
OFFICE FEET LEASE EXPIRATION AS OF DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bala Cynwyd, Pennsylvania 32,000 June 30, 2000 Contract Placement, Imaging
and Network Services,
Permanent Placement,
IT Training
Foxborough, Massachusetts 7,100 March 1, 2000 Contract Placement
Moorestown, New Jersey 6,400 Month to Month Imaging and Network Services
Edison, New Jersey 4,700 March 1, 2000 Contract Placement,
Permanent Placement and
Imaging and Network Services
Alexandria, Virginia 4,700 December 31, 2000 IT Training
Wakefield, Massachusetts 3,500 Month to Month Imaging and Network Services
Hartford, Connecticut 3,200 June 15, 2000 Imaging and Network Services
Tampa, Florida 2,500 April 30, 1998 Permanent Placement and
Imaging and Network Services
- ------------------------------------------------------------------------------------------
</TABLE>
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 Prospectus, there are no
material legal proceedings pending against the Company.
39
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information concerning the executive officers
and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- -------------------------------------------------------
<S> <C> <C>
Martin E. Judge, Jr.......................... 52 Chairman of the Board and Chief Executive Officer
Richard T. Furlano........................... 47 President and Director; President -- Contract Placement
Michael A. Dunn.............................. 48 Executive Vice President and Director; President --
Permanent Placement
Jeffrey J. Andrews........................... 45 Chief Financial Officer and Treasurer
Katharine A. Wiercinski...................... 35 Secretary; Vice President -- Human Resources
Randolph J. Angermann........................ 46 Director Nominee
</TABLE>
- ------------------
Martin E. Judge, Jr. founded the Company in 1970 and has been the Chief
Executive Officer and Chairman of the Board since that time.
Richard T. Furlano has served as the President of the Company's Contract
Placement business since April 1992 and since January 1997 has served as acting
President of JIS. From 1990 to 1992, Mr. Furlano was a Regional Sales Manager
for Yorkship Business Supplies, and from 1980 to 1990 he was a partner of The
Furst Group, a reseller of telecommunications services. He is the President of
the Company and currently serves on its Board of Directors. Mr. Furlano is the
brother-in-law of Mr. Judge.
Michael A. Dunn has served as the President of the Company's Permanent
Placement business since 1990. Mr. Dunn served as Executive Vice President of
the Permanent Placement business from 1980 to 1990, and has also held various
recruiting and managerial positions in that business since joining the Company
in 1973. Mr. Dunn is an Executive Vice President of the Company and serves on
the Company's Board of Directors.
Jeffrey J. Andrews has served as the Company's Chief Financial Officer
since joining the Company in May 1996. Mr. Andrews was an independent financial
advisory consultant from September 1995 until May 1996, and served as Controller
for Godwin Pumps of America (a manufacturer of industrial pumps) from September
1994 to August 1995. From April 1993 to August 1994, Mr. Andrews was a Manager
for Ernst & Young, LLP, and prior to that time, was the President and sole
shareholder of Andrews Associates, an investment banking firm.
Katharine A. Wiercinski has served as the Vice President of Human Resources
for the Company and each of its subsidiaries since 1990 and as Secretary of the
Company since 1990. Ms. Wiercinski has also held various administrative and
managerial positions since joining the Company in 1981.
Randolph J. Angermann was nominated as a director in January 1997. It is
anticipated that Mr. Angermann will be elected to the Board of Directors upon
consummation of this Offering. From February 1994 to the present, Mr. Angermann
has been the President of Four Seasons Properties Inc., a real estate investment
firm. From 1971 until its sale to Office Depot, Inc. in February 1994, Mr.
Angermann owned and operated Yorkship Business Supply, a diversified office
products company.
In order to comply with the requirements of the Nasdaq Stock Market and the
Company's agreement with the Underwriters, within 90 days after the effective
date of the registration statement of which this Prospectus is a part, the
Company will increase its Board by two directors, (including Mr. Angermann) both
of whom will be independent.
40
<PAGE>
DIRECTORS' COMPENSATION
In fiscal years 1994, 1995 and 1996, the Company's directors, and the
directors of each of the Company's subsidiaries, did not receive any
compensation for their services as directors except that in 1996, Messrs.
Demchick and Keith, directors of JIS, each received $5,000 cash compensation for
their services as directors of JIS.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid for fiscal 1996 to the
Chief Executive Officer and to each of the Company's most highly compensated
officers whose total annual salary and bonus for the fiscal year ended December
31, 1996 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER
FISCAL SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
- -------------------------------------------------------------------- ------ ------- ------ ------------
<S> <C> <C> <C> <C>
Martin E. Judge, Jr.
Chairman of the Board and Chief Executive Officer................. 1996 530,524 -0- 63,800
Richard T. Furlano
President......................................................... 1996 226,736 54,882 5,925
Michael A. Dunn
Executive Vice President.......................................... 1996 266,361 -0- 23,507
Wendy Greenberg-Marcelli
Former Vice President(1).......................................... 1996 103,379 19,265 -0-
</TABLE>
- ------------------
(1) Ms. Greenberg-Marcelli resigned her positions as Vice President of the
Company and President and Director of JIS in January 1997.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Jeffrey J. Andrews, and
requires that all key employees execute confidentiality and one-year
post-termination non-competition agreements.
Mr. Andrews' agreement, dated May 1, 1996, provides for a two-year term of
employment with one year automatic renewals thereafter, unless the Company
provides prior written notice. The agreement provides a base salary of $75,000
and certain other benefits. As of January 1, 1997, Mr. Andrews' base salary was
increased to $85,000 per year.
STOCK PLANS
The Judge Group, Inc.'s 1996 Incentive Stock Option and Non-Qualified Stock
Option Plan for Key Employees and Non-Employee Directors (the "Plan") was
adopted in September of 1996, subject to shareholder approval, to provide a
means whereby the Company could, through the grant of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended ("ISOs") and non-qualified stock options ("NQSOs") to purchase Common
Shares of the Company to officers and other key employees ("Key Employees"),
attract and retain such Key Employees and motivate such Key Employees to
exercise their best efforts on behalf of the Company and of any related
corporation ("Related Corporation"). Moreover, the Company may, through the
grant of NQSOs to non-employee directors ("Non-Employee Directors") under a
formula, attract and retain Non-Employee Directors and motivate such
Non-Employee Directors to exercise their best efforts on behalf of the Company
and any Related Corporation.
ISOs and NQSOs (collectively, "Options") may be granted under the Plan to
purchase up to a maximum of one million five hundred thousand (1,500,000) of the
Company's Common Shares, par value $.01 per share, subject to certain
adjustments and provided that no Key Employee shall receive Options for more
than 50,000 Common Shares over any one (1) year period.
The Plan shall be administered by the Company's Stock Option Committee
("Committee"), which shall consist of two (2) directors of the Company who shall
be appointed by, and shall serve at
41
<PAGE>
the pleasure of, the Company's Board of Directors ("Board") and each of whom
shall be an "outside director", within the meaning of Treasury Regulation
Section1.162-27(e)(3), within the period of time described in Treasury
Regulation Section1.162-27(f)(2). Each member of such Committee, while serving
as such, shall be deemed to be acting in his or her capacity as a director of
the Company.
The exercise price of each Option shall be the fair market value (110% of
fair market value in the case of an ISO granted to a more than 10% shareholders)
of the Common Shares on the date of the grant. The term of each Option shall be
not more than ten (10) years (five (5) years in the case of an ISO granted to
more than ten percent (10%) shareholder) from the date of grant, and the Options
shall be exercisable in such installments and on such dates, not less than six
(6) months from the date of grant, as the Committee may specify. The Option
price shall be payable in cash or its equivalent or, in the Committee's
discretion, in Company Common Shares. In the event the Option price is paid, in
whole or in part, with Common Shares, the portion of the Option price so paid
shall be equal to the "fair market value" of such Shares on the date of exercise
of the Option.
The aggregate fair market value of the Common Shares with respect to which
ISOs are exercisable for the first time by a Key Employee during any calendar
year (under this Plan and any other ISO plan of the Company or a Related
Corporation) shall not exceed one hundred thousand dollars ($100,000). The
annual limit set forth above for ISOs shall not apply to NSQOs.
If a Key Employee's employment by the Company and the Related Corporations
is terminated by either party prior to the expiration date fixed for his or her
Option for any reason other than death or disability, such Option may be
exercised, to the extent of the number of Common Shares that the Key Employee
could have exercised on the date of such termination, or to any greater extent
permitted by the Committee, by the Key Employee at any time prior to the earlier
of (i) the expiration date specified in such Option or (ii) an accelerated
termination date determined by the Committee, which date, in the case of ISOs,
shall not be later than three (3) months after the date of such termination of
employment.
If a Key Employee shall become disabled (within the meaning of section
22(e)(3) of the Code) during his or her employment and, prior to the expiration
date fixed for his or her Option and his or her employment is terminated as a
consequence of such disability, such Option may be exercised, to the extent of
the number of Common Shares that the Key Employee could have exercised on the
date of such termination, or to any greater extent permitted by the Committee,
by the Key Employee at any time prior to the earlier of (i) the expiration date
specified in such Option or (ii) an accelerated termination date determined by
the Committee, which date, in the case of ISOs, shall not be later than one (1)
year after the date of such termination of employment.
If a Key Employee shall die during his or her employment and prior to the
expiration date fixed for his or her Option, or if a Key Employee shall die
following termination of employment but prior to the earliest of (i) the
expiration date fixed for his or her Option; (ii) the accelerated expiration
date determined by the Committee (as described above); or (iii) in the case of
an ISO, three (3) months following termination of employment; then such Option
may be exercised, to the extent of the number of Common Shares that the Key
Employee could have exercised it on the date of his or her death, or to any
greater extent permitted by the Committee, by the Key Employee's estate,
personal representative or beneficiary, at any time prior to the earlier of (A)
the expiration date specified in such Option or (B) an accelerated termination
date determined by the Committee, which date shall not be earlier than one (1)
year nor later than three (3) years after the date of death.
No ISO and, except as otherwise provided in any Option agreement, no NQSO
granted pursuant to the Plan shall be assignable or transferable by the Key
Employee or Non-Employee Director otherwise than by will or by the laws of
descent and distribution, and, during the lifetime of the Key Employee, the ISO
shall be exercisable only by him or by his or her guardian or legal
representative.
Pursuant to the Plan, each Non-Employee Director will receive an initial
grant of an NQSO to purchase 2,500 Common Shares on the date of this Offering,
and any person subsequently elected as a Non-Employee Director will receive an
initial grant of an NQSO to purchase 2,500 Common Shares on the first business
day immediately following the date he or she is elected a director. In addition,
on the first business day immediately following each of the dates on which an
incumbent Non-Employee Director is re-elected, he will receive an additional
grant of an NQSO to purchase 2,500 additional Common Shares. The grant of NQSOs
to Non-Employee Directors pursuant to the Plan shall be
42
<PAGE>
automatic and neither the Committee or the Board shall have any discretionary
authority with respect thereto.
The exercise price of NQSOs granted pursuant to the Plan will be the fair
market value of the Common Shares at the time of the grant. NQSOs granted on the
date of this Offering will have an exercise price equal to the initial public
offering price set forth on the cover page of this Prospectus. The Option
exercise price may be paid in full in cash or, unless in the opinion of counsel
to the Company that to do so may result in a possible violation of law, in whole
or in part through the transfer of Common Shares previously acquired by the
Non-Employee Director, provided the Common Shares so transferred have been held
by the Non-Employee Director for more than 12 months on the date of exercise at
the time an NQSO is exercised.
An NQSO granted under the Plan to a Non-Employee Director will expire on
the earliest of (i) ten years from the date of grant, (ii) one year from the
date the grantees ceases to be a director by reason of death or disability or
(iii) three months from the date the grantee ceases to be a director for any
reason other than death or disability.
NQSOs granted to Non-Employee Directors shall be exercisable in three equal
annual installments commencing with the first anniversary of the grant date, but
only if the Non-Employee Director has attended at least seventy-five (75)
percent of the Board meetings during the twelve (12) month period immediately
preceding the date the annual installment first becomes exercisable. In the
event the Non-Employee Director fails to attend at least seventy-five (75)
percent of the Board meetings during the twelve (12) month period immediately
preceding the date the annual installment first becomes exercisable, the Options
otherwise exercisable in that installment shall not be exercisable but shall be
cancelled and shall be available for other grants under the Plan.
Notwithstanding the foregoing, the first annual installment of Options granted
on the date of this Offering shall be exercisable as of the earlier of twelve
months from the date of grant or six months after the Plan is approved by the
shareholders of the Company.
Effective upon the completion of this Offering, options to purchase up to
593,000 Common Shares will be granted under the Plan to officers and employees
of the Company. Of these options, Mr. Judge will be granted options to purchase
up to 50,000 Common Shares; Mr. Furlano will be granted options to purchase up
to 41,000 Common Shares; Mr. Dunn will be granted options to purchase up to
26,000 Common Shares; Ms. Wiercinski will be granted options to purchase up to
16,000 Common Shares and Mr. Andrews will be granted options to purchase up to
15,000 Common Shares. The remaining options will be awarded to various other
employees. The options to be granted at the time of the completion of this
Offering will have an exercise price equal to the initial public offering price
set forth on the cover page of this Prospectus. The options will become
exercisable in equal annual installments over a four-year period, will have a
term of ten years and will be subject to the other terms and conditions of the
Plan.
The Plan provides that certain adjustments will be made to the exercise
price and number of shares subject to options granted thereunder in the event of
a stock split, stock dividend, combination or reclassification. In the event of
certain other corporate transactions, outstanding Options may terminate. Subject
to certain limitations, the Board of Directors may amend or discontinue the Plan
as it deems necessary, but no amendment may adversely affect the rights of a
grantee with respect to an outstanding Option without his or her consent.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Currently, the Company does not have a Compensation Committee. As soon as
practicable after the consummation of this Offering, the Company will establish
a Compensation Committee, the members of which will be outside directors within
the meaning of the Code.
Decisions concerning compensation of executive officers were made by the
Board of Directors, which included Mr. Judge, the Chairman of the Board and
Chief Executive Officer of the Company.
43
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Shares as of December 10, 1996, and
as adjusted to reflect the sale of Common Shares offered hereby and the
consummation of the Merger, (1) by each person known by the Company to own
beneficially 5% or more of the outstanding Common Shares, (2) by each director,
executive officer and certain other officers of the Company, (3) by all
directors and executive officers as a group, and (4) by the Selling
Shareholders.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THIS NUMBER OF SHARES AFTER THIS
OFFERING(1) SHARES TO BE RECEIVED OFFERING(1)(2)
----------------------- SOLD IN THIS PURSUANT TO ------------------------
NAME AND ADDRESS SHARES PERCENTAGE OFFERING(2) MERGER SHARES(3) PERCENTAGE
- --------------------------------------- --------- ---------- ------------ ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Martin E. Judge, Jr.(4)................ 5,878,050(5) 64.5% 270,000 504,549 6,112,599(5) 45.8%
Michael A. Dunn........................ 1,959,350(6) 21.5% 150,000 58,763 1,868,113(6)(7) 14.0%
Richard T. Furlano..................... 52,600 * 0 0 52,600 *
Katharine A. Wiercinski................ 52,600 * 0 0 52,600 *
Jeffrey J. Andrews..................... 0 * 0 0 0 *
Randolph J. Angermann.................. 0 * 0 8,294 8,294 *
Arthur Kania(4)........................ 420,800 4.6% 30,000 143,292 534,092 4.0%
Lawrence Chimerine(8).................. 26,300 * 8,000 16,589 34,889 *
Marvin N. Demchick(8).................. 52,600(9) * 16,000 16,589 53,189(9) *
DGA Investments(8)(10)................. 26,300 * 8,000 8,294 26,594 *
Edwin T. Johnson(8).................... 26,300 * 8,000 8,294 26,594 *
Robert and Margot Keith(8)............. 198,039(11) 2.2% 8,000 16,589 191,495(12) 1.4%
Max H. Kraus(8)........................ 26,300 * 8,000 0 18,300 *
Ira Lubert(8).......................... 224,339(13) 2.5% 16,000 16,589 209,795(12) 1.6%
Edward H. and Evelyn B. Rosen(8)....... 105,200 1.2% 32,000 16,589 89,789 *
Trust Under Will of Maurice L. Strauss
for Thomas S. Rosen(8)............... 52,600 * 16,000 16,589 53,189 *
Ernest Scheller, Jr.(8)................ 26,300 * 8,000 8,294 26,594 *
A. Richard Sloane(8)................... 52,600 * 16,000 0 36,600 *
Milton S. Stearns, Jr.(8).............. 36,820 * 11,200 8,294 33,914 *
Milton S. Stearns, Jr. Trustee(8)
U/D/T 12/20/88....................... 15,780 * 4,800 0 10,980 *
The Gemstone Group, Inc................ 171,739(14) 1.9% 40,000 24,867 156,606 1.2%
All Directors and executive officers as
a group (five people)................ 7,942,600 87.1% 420,000 563,312 8,085,912 60.6%
</TABLE>
- ------------------
* Less than 1% of the outstanding Common Shares of the Company.
44
<PAGE>
(1) Unless otherwise indicated, each person has sole voting and investment
power with respect to all such shares.
(2) In the event the Underwriters' overallotment option of up to 547,500 shares
is exercised in full, the Selling Shareholders will sell additional shares,
allocated among them as follows: Mr. Judge -- 30,000 shares; Mr. Dunn --
20,000 shares; Mr. Chimerine -- 7,556 shares; Mr. Demchick -- 15,111
shares; DGA Investments -- 7,554 shares; Mr. Johnson -- 7,556 shares; Mr.
Keith -- 7,556 shares; Mr. Kraus -- 7,556 shares; Mr. Lubert -- 15,111
shares; Mr. Rosen -- 30,222 shares; Trust Under Will of Maurice L. Strauss
FBO Thomas S. Rosen -- 4,000 shares; Mr. Scheller -- 7,556 shares; Mr.
Sloane -- 15,111 shares; Mr. Stearns -- 10,578 shares; Milton S. Stearns,
Jr. Trustee U/D/T 12/20/88 -- 4,533 shares; The Gemstone Group, Inc. --
60,000 shares. The remaining 297,500 shares will be sold by the Company.
See "Underwriting."
(3) Includes Common Shares received in exchange for JIS common and Series A
preferred shares pursuant to the Merger.
(4) The mailing address of such beneficial owner is Two Bala Plaza, Suite 800,
Bala Cynwyd, Pennsylvania 19004.
(5) Includes 504,549 shares held by Takema Ltd., L.P., a Delaware limited
partnership ("Takema") of which Mr. Judge is the General Partner.
(6) Includes 202,247 Common Shares held by the Michael A. Dunn Descendants'
Trust. Mr. Dunn has sole dispositive power over the shares held by the
Trust.
(7) Includes 58,763 Common Shares held by the Michael A. Dunn Descendants'
Trust. Mr. Dunn has sole dispositive power over the shares held by the
Trust.
(8) Such Selling Shareholders acquired their Common Shares through the
conversion, immediately prior to the Offering, of their Convertible Notes
purchased from the Company in July 1994.
(9) Mr. Demchick is a director of JIS.
(10) David Kleiman and Gary Kleiman, each a General Partner of DGA Investments,
may each be deemed to own beneficially the 26,300 shares owned by DGA
Investments. David Kleiman will also receive 8,294 Common Shares in
exchange for his JIS common and Series A Preferred stock as a result of the
Merger. See footnote 14.
(11) Includes 171,739 shares held by The Gemstone Group, Inc. ("Gemstone") of
which Mr. Keith is a principal and shareholder. Mr. Keith is a director of
JIS.
(12) Includes 156,606 Common Shares held by Gemstone.
(13) Includes 171,739 shares held by Gemstone, of which Mr. Lubert is a
principal and a shareholder.
(14) Consists entirely of shares acquired through the exercise of a warrant on
September 6, 1996 issued by the Company in July 1993 in connection with
Gemstone's engagement as the Company's financial advisor. Gary Kleiman is a
principal and shareholder of Gemstone and may be considered to own
beneficially the 171,739 shares owned by Gemstone.
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SELLING SECURITY HOLDERS
Gemstone, an investment and merchant banking firm, has been engaged as the
Company's and JIS's financial advisor since June 1993. Pursuant to an agreement
dated July 8, 1996 between Gemstone, the Company, JIS and Judge Technical
Services, Inc., a wholly-owned subsidiary of the Company (the "Advisory
Agreement"), Gemstone is entitled to receive a monthly advisory fee of $2,500
during the period beginning July 1, 1996 and ending on the earlier of the
completion of (i) a public offering by the Company, (ii) the date on which all
of the Convertible Notes of the Company in the original aggregate principal
amount of $500,000 have been repaid in full and/or converted into Common Shares,
or (iii) July 31, 1997. The Advisory Agreement also entitles Gemstone to
reasonable out-of-pocket expenses and a fee upon the completion of an initial
public offering in the amount of 1% of the gross proceeds to the Company
therefrom if such offering is consummated on or before July 31, 1997. The
monthly $2,500 fee is an advance against the 1% of gross proceeds fee due upon a
successful offering. In February 1996, Gemstone acted as financial advisor to
JIS in connection with the private placement of Series A Preferred stock of JIS
to several investors for a total purchase price of $1,096,000. In July 1994,
Gemstone acted as a financial advisor in connection with the purchase by certain
investors of the Convertible Notes for which it received an additional financial
advisory fee of $25,000. See Note 8 of Notes to the Consolidated Financial
Statements for the nine months ended September 30, 1996. The holders of the
Convertible Notes will convert the Convertible Notes into Common Shares
immediately prior to this Offering. Common Shares so received are represented in
the table under the caption "Principal and Selling Shareholders" which is
footnoted to indicate each noteholder and the amount of Common Shares such
holder is selling in this Offering.
Mr. Kania was a director of the Company from January 1989 to June 1996.
Mr. Keith has been a director of JIS since July 1996. He is also a
principal and shareholder of Gemstone.
Mr. Ira Lubert is a principal and shareholder of Gemstone.
Mr. Demchick has been a director of JIS since July 1996.
CERTAIN TRANSACTIONS
Effective upon the date of this Offering, any transactions between the
Company and related parties will be subject to the review and approval of its
Audit Committee or a comparable committee consisting of a majority of
disinterested parties.
As of September 3, 1996 each of Mr. Judge and Mr. Dunn and his wife
executed personal guaranties of the Company's obligations under the Line of
Credit with Midlantic Bank, N.A., to enable the Company to obtain the Line of
Credit. The amount outstanding under the Line of Credit at October 31, 1996 was
$7,345,623. Upon the completion of this Offering, Mr. Judge and Mr. and Mrs.
Dunn will be released from these guaranties, subject to certain qualifications.
As of October 31, 1996, the Company owed an aggregate of approximately
$102,405 to Martin E. Judge, Jr. These loans are unsecured and due upon demand
and bear interest at various rates (from prime plus 1% to a fixed rate of 12%).
The Company pays the interest related to these loans directly to the commercial
banks from which Mr. Judge borrowed the funds on behalf of the Company. As of
October 31, 1996, Mr. Judge owed the Company $345,884. This loan, which
represents advances for personal expenditures paid by the Company, is due upon
demand, unsecured and non-interest bearing, will be repaid at the completion of
this Offering.
As of October 31, 1996, the Company had advanced $133,350 to Judge
Financial Group, a personal financial advisory company, which is owned by Dennis
Judge, Martin E. Judge, Jr.'s brother. This advance was made for working capital
purposes, does not bear interest, is unsecured and due upon demand and will be
repaid at the completion of this Offering.
In connection with the Merger, Martin E. Judge, Jr., Michael A. Dunn and
Arthur Kania will acquire 504,549, 58,763 and 143,292 Common Shares of the
Company, respectively, in exchange for shares of common and/or preferred stock
they presently hold in JIS. See "Business -- Pre-Offering Transactions:
Corporate Reorganization, Merger and Recent Acquisitions."
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (1) 50,000,000
Common Shares, par value $.01 per share (the "Common Shares"), and
(iii) 10,000,000 Preferred Shares, par value $.01 per share (the "Preferred
Shares"). Upon the closing of this Offering, 13,347,969 Common Shares will be
issued and outstanding. There are no Preferred Shares outstanding.
The following summary description relating to the Company's capital stock
sets forth the material terms of the capital stock, but does not purport to be
complete. A description of the Company's capital stock is contained in the
Amended and Restated Articles of Incorporation, which is filed as an exhibit to
the registration statement of which this Prospectus forms a part. Reference is
made to such exhibit for a detailed description of the provisions thereof
summarized below.
COMMON SHARES
The holders of the Company's Common Shares are entitled to one vote per
share for each share held of record on all matters submitted to a vote of
shareholders. Holders of Common Shares do not have the right to cumulate their
votes in the election of directors. The Company does not anticipate paying cash
dividends on the Common Shares in the foreseeable future. See "Dividend Policy."
The holders of the Common Shares have no preemptive right or rights to convert
Common Shares into any other securities and are not subject to future calls or
assessments by the Company. All of the outstanding Common Shares are, and, when
issued, the Common Shares offered hereby will be, validly issued, fully paid,
and nonassessable by the Company.
Each share of Common Shares is entitled to receive dividends if, as and
when declared by the Board of Directors of the Company out of funds legally
available therefor.
In the event of a merger or consolidation to which the Company is a party,
each share of Common Shares will be entitled to receive the same consideration.
Shareholders of the Company have no preemptive or other rights to subscribe
for additional shares. Subject to any rights of holders of any preferred shares,
all holders of Common Shares, regardless of class, are entitled to share equally
on a share for share basis in any assets available for distribution to
shareholders on liquidation, dissolution or winding up of the Company. No Common
Shares are subject to redemption or a sinking fund. All Common Shares offered
hereby will be, when so issued or sold, validly issued, fully paid and
nonassessable.
PREFERRED SHARES
The Company has authorized 10,000,000 preferred shares, $.01 par value per
share. No preferred shares have been issued and the Company does not presently
contemplate the issuance of such shares. The Board of Directors is empowered by
the Company's Articles of Incorporation to designate and issue from time to time
one or more classes or series of preferred shares without any action of the
shareholders, and may fix and determine the relative rights, preferences and
limitations of each class or series so authorized. Such action could adversely
affect the voting power of the holders of the Common Shares or could have the
effect of discouraging or making difficult any attempt by a person or group to
obtain control of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Shares is StockTrans, Inc.
Ardmore Pennsylvania. Its telephone number is (610) 649-7300.
PENNSYLVANIA ANTI-TAKEOVER LAWS, LIMITATION ON DIRECTORS' LIABILITY AND CERTAIN
PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BY-LAWS
Certain provisions of the Pennsylvania Business Corporation Law of 1988
(the "BCL") and the Company's Articles of Incorporation and By-laws may have the
effect of deterring, delaying or preventing an attempt by a third party to
acquire control of the Company.
The "business combination" provisions in Sections 2551 through 2556 of the
BCL prohibit the Company from engaging in any business combination (which is
defined broadly to include mergers, consolidations, share exchanges, divisions
and sales or other dispositions of assets having a value in excess of 10% or
more of the assets, market value or earning power or net income of the
corporation)
47
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with an "interested shareholder" or an affiliate thereof unless (A) the business
combination or the acquisition of shares in which a person becomes an interested
shareholder is approved by the Board of Directors before the shareholder becomes
an "interested shareholder," (B) the interested shareholder owns 80% of the
corporation's outstanding voting shares and the business combination satisfies
certain "fair price" criteria and is approved by the holders of a majority of
the remaining shares, or (C) the holders of a majority of the voting shares
(excluding those held by the interested shareholder unless the fair price
criteria are satisfied) approve the business combination at a meeting held no
earlier than five years after the interested shareholder's acquisition date. An
"interested shareholder" is any beneficial owner of 20% or more of the voting
shares of a corporation or an affiliate of the corporation who was at any time
within the five year period prior to the date in question a beneficial owner of
20% or more of the voting shares of the corporation, but does not include
shareholders who were interested shareholders prior to the date of the adoption
of these provisions by the Company.
The Company has opted out of, and is not subject to, certain anti-takeover
provisions of the BCL, including the "control transactions" provision, which
provides for mandatory shareholder notice of the acquisition of 20% of the
voting power of a Pennsylvania corporation and provides shareholders with the
opportunity to demand "fair value" for their shares upon acquisition of voting
power, the "control share" provision, which limits the voting power of
shareholders owning 20% or more of a corporation's voting stock, and the
"disgorgement" provision, which permits a corporation to recover profits
resulting from the sale of shares in certain situations, including those where
an individual or group attempts to acquire at least 20% of the corporation's
voting shares do not apply to the Company.
Under the BCL, directors of a corporation are not required to regard the
interests of the shareholders as being dominant or controlling when determining
the best interests of the corporation. The directors may consider, to the extent
the directors deem appropriate, a broad range of additional factors in taking
corporate actions. These additional factors include: the effects of any action
upon any group affected by such action (including shareholders, employees,
suppliers, customers and creditors of the corporation); the short term and long
term interests of the corporation (including benefits that may accrue to the
corporation from its long term plans and the possibility that these interests
may be best served by the continued independence of the corporation); and the
resources, intent and conduct of any person seeking to acquire control of the
corporation. These BCL provisions also provide directors with additional
protection from challenges to their decision-making process, particularly with
respect to acquisitions or proposed acquisitions of corporate control.
The Company's Articles of Incorporation and By-Laws provide that special
meetings of the Company's shareholders can be called only by the Board of
Directors or the Company's Chairman of the Board, Chief Executive Officer,
President or Secretary.
The Company's By-laws establish an advance notice procedure that must be
followed by shareholders wishing to propose nominations of professionals for
election as directors, or to bring other business before an annual meeting of
shareholders of the Company. The By-laws provide that only persons who are
nominated by, or at the direction of, the Chairman, the President or the Board
of Directors, or by a shareholder who has given timely written notice to the
secretary of the Company prior to the meeting at which directors are to be
elected, will be eligible for election as directors of the Company. The By-laws
also provide that at an annual meeting only such business may be conducted as
has been brought before the meeting by, or at the direction of, the Chairman,
the President or the Board of Directors or by a shareholder who has given timely
written notice to the secretary of the Company of such shareholder's intention
to bring such business before such meeting. Generally, for notice of shareholder
nominations or business to be brought before an annual meeting to be timely
under the By-laws, such notice must be received by the Company not less than 70
days nor more than 90 days prior to the first anniversary of the previous year's
annual meeting (or, in the case of a special meeting, not earlier than the 90th
day before such meeting and not later than the later of (i) the 70th day prior
to such meeting and (ii) the 10th day after public announcement of the date of
such meeting is first made). Under the By-laws, a shareholder's notice must also
contain certain information specified in the By-laws.
As permitted by the BCL, the Company's Articles of Incorporation provide
that, subject to certain limited exceptions, directors of the Company shall not
be personally liable, as such, for monetary damages for any action taken unless
the director has breached or failed to perform the duties of his
48
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office under the BCL and the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness. The effect of this provision
is to limit the ability of the Company and its shareholders (through shareholder
derivative suits on behalf of the Company) to recover monetary damages against a
director for the breach of certain fiduciary duties as a director (including
breaches resulting from grossly negligent conduct). In addition, the Company's
Articles of Incorporation and By-Laws provide that the Company shall, to the
full extent permitted by the BCL, indemnify all persons whom it has the power to
indemnify pursuant thereto, including directors and officers of the Company.
The By-Laws of the Company provide that the number of directors will be
fixed from time to time exclusively by the Board of Directors. The By-Laws also
provide that any action required or permitted to be taken at any annual or
special meeting of shareholders may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the actions so
taken, is executed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, at an initial public offering price of
$7.50 per share and after giving effect to the issuance of shares contemplated
by the Pre-Offering Transactions, the Company will have outstanding 13,347,969
Common Shares (13,645,469 Common Shares if the Underwriters' over-allotment
option is exercised in full). Of these shares, the 3,650,000 Common Shares sold
in this Offering will be tradeable without restriction unless they are purchased
by affiliates of the Company. All Common Shares received by holders of JIS stock
pursuant to the Merger will be tradeable without restriction, except those
shares held by affiliates. The holders of 289,539 shares (229,539 if the
Underwriters' over-allotment option is exercised in full) are subject to a
two-year holding period which commenced in September 1996. Of the remaining
shares, 8,214,200 (7,964,200 if the Underwriters' over-allotment option is
exercised in full) are "restricted securities" under the Securities Act and may
be sold only if they are registered under the Securities Act or pursuant to an
applicable exemption from the registration requirements of the Securities Act.
The holders of 3,294,367 shares and 6,112,599 shares (3,074,367 and 6,082,599,
respectively, if the Underwriters' over-allotment option is exercised in full)
have agreed not to sell, otherwise dispose of, or pledge any of the Company's
Common Shares for 180 days and one year, respectively, after the date of this
Prospectus without the prior written consent of Janney Montgomery Scott Inc. All
of the Company's directors, executive officers and certain other shareholders
are subject to the 180-day lock-up, other than Mr. Judge, who is subject to the
one (1) year lock-up.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted shares for at least two years, including
affiliates, may sell, within any three-month period, a number of shares that
does not exceed the greater of 1% of the then outstanding Common Shares (133,480
immediately after this Offering) or the average weekly trading volume in the
Common Shares on the Nasdaq during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain provisions regarding the manner
of sale, notice requirements and the availability of current public information
about the Company. A person who is not deemed an affiliate of the Company and
who has beneficially owned restricted shares for three years from the date of
acquisition of restricted securities from the Company or any affiliate is
entitled to sell such shares under Rule 144(k) freely and without restriction or
registration under the Securities Act. Affiliates continue to be subject to the
limitations described below. As used in Rule 144, affiliates of the Company
generally include its directors, executive officers and persons directly or
indirectly owning 10% or more of the Common Shares.
The Commission has proposed to amend the holding period required by Rule
144 to permit sales of "restricted securities" after one year rather than two
years (and two years rather than three years for affiliates who desire to sell
such shares under Rule 144(k)). If such proposed amendment were enacted, the
"restricted securities" would become freely tradeable (subject to any applicable
contractual restrictions) at correspondingly earlier dates.
49
<PAGE>
REGISTRATION RIGHTS
Pursuant to a Note Purchase Agreement for the Company's Convertible Notes
executed in July 1994 (the "Agreement"), certain existing stockholders of the
Company have certain rights to require the Company, at its expense, to register
Common Shares under the Securities Act. Following completion of this Offering,
an aggregate of 336,000 Common Shares (196,000 Common Shares if the
Underwriters' over-allotment option is exercised in full) will be subject to
registration rights under the Agreement.
Under the terms of the Agreement, holders of 336,000 Common Shares (196,000
Common Shares if the Underwriters' over-allotment option is exercised in full)
are entitled to make request for the Company to register such shares under the
Securities Act, subject to certain limitations and conditions. In addition, if
the Company at any time proposes to register any of its securities under the
Securities Act (other than securities issuable pursuant to employee compensation
plans or for certain other purposes), parties to the Agreement are entitled to
require the Company to include their shares in such registration. The
underwriter of such offering has the right to limit the number of shares
included in such registration for marketing purposes.
Pursuant to an agreement dated October 21, 1996, Gemstone has certain
registration rights in secondary public offerings on terms identical to those
described in the preceding paragraph, pursuant to the consent of the certain
shareholders described above.
In addition, under the terms of a stock purchase agreement, as amended,
(the "Purchase Agreement") between the Company, Berkeley, and Sandra Mayer and
Gregory McCarthy, Ms. Mayer and Mr. McCarthy (the "Sellers") received certain
registration rights relating to the shares issuable pursuant to the Purchase
Agreement. The Purchase Agreement provides the Sellers with demand registration
rights for all of the shares issuable pursuant to the Purchase Agreement
beginning five days after the first anniversary of the closing of this Offering.
LOCK-UP AGREEMENT
All of the executive officers, directors and certain other shareholders of
the Company, who will be deemed to beneficially own 9,406,966 Common Shares
(9,156,966 Common Shares if the Underwriters' over-allotment option is exercised
in full) upon consummation of this Offering, have agreed with the Underwriters
not to sell, otherwise dispose of or pledge any of the Common Shares for 180
days after the date of this Prospectus without the prior written consent of
Janney Montgomery Scott Inc. In addition, Mr. Judge has agreed with the
Underwriters not to sell or otherwise dispose of or pledge any of the Common
Shares for one year after the date of this Prospectus without the prior written
consent of Janney Montgomery Scott Inc.
ABSENCE OF PRIOR MARKET
Prior to this Offering, there has been no public market for the Common
Shares offered hereby, and no prediction can be made about the effect, if any,
that market sales of shares or the availability of shares for sale will have on
the market price from time to time. Nevertheless, sales of substantial amounts
of Common Shares in the public market may have an adverse impact on the market
price.
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UNDERWRITING
The Underwriters named below, acting through their Representatives, Janney
Montgomery Scott Inc. and Unterberg Harris (the "Representatives") have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement, to purchase a total of 3,650,000 Common Shares from the Company and
the Selling Shareholders. The number of Common Shares that each Underwriter has
agreed to purchase is set forth opposite its name below. The Underwriters are
committed to purchase all of such shares if any are purchased. Under certain
circumstances the commitments of non-defaulting Underwriters may be increased.
The names of the several Underwriters and the respective number of shares to be
purchased by each of them are as follows:
UNDERWRITER NUMBER OF SHARES
- ----------------------------------------------------------- ----------------
Janney Montgomery Scott Inc................................ 938,000
Unterberg Harris........................................... 937,000
Cowen & Company............................................ 75,000
Dillon, Read & Co. Inc..................................... 75,000
Donaldson, Lufkin & Jenrette Securities Corporation........ 75,000
A.G. Edwards & Sons, Inc................................... 75,000
Montgomery Securities...................................... 75,000
Morgan Stanley & Co. Incorporated.......................... 75,000
Smith Barney Inc........................................... 75,000
Adams, Harkness & Hill, Inc................................ 50,000
Advest, Inc................................................ 50,000
Robert W. Baird & Co. Incorporated......................... 50,000
William Blair & Company, L.L.C............................. 50,000
J.C. Bradford & Co......................................... 50,000
Cruttenden Roth Incorporated............................... 50,000
Dain Bosworth Incorporated................................. 50,000
Everen Securities, Inc..................................... 50,000
Fahnestock & Co. Inc....................................... 50,000
First of Michigan Corporation.............................. 50,000
Friedman, Billings, Ramsey & Co., Inc...................... 50,000
Furman Selz LLC............................................ 50,000
Gerard Klauer Mattison & Co., Inc.......................... 50,000
McDonald & Company Securities, Inc......................... 50,000
Needham & Company, Inc..................................... 50,000
Piper Jaffray Inc.......................................... 50,000
Rauscher Pierce Refsnes, Inc............................... 50,000
The Robinson-Humphrey Company, Inc......................... 50,000
Roney & Co................................................. 50,000
Tucker Anthony Incorporated................................ 50,000
Wheat First Butcher Singer................................. 50,000
George K. Baum & Company................................... 25,000
Burnham Securities Inc..................................... 25,000
Hanifen, Imhoff Inc........................................ 25,000
C.L. King & Associates, Inc................................ 25,000
Mesirow Financial, Inc..................................... 25,000
Parker/Hunter Incorporated................................. 25,000
The Seidler Companies Incorporated......................... 25,000
H.C. Wainwright & Co., Inc................................. 25,000
---------
TOTAL................................................ 3,650,000
---------
---------
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The Underwriters propose to offer the Common Shares to the public initially
at the offering price per share set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of $0.30
per share, and the Underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share on sales to other dealers. After the
initial public offering of the Common Shares, the offering price and the
concession may be changed.
The Company has agreed to indemnify the several Underwriters against
certain liabilities which may be incurred in connection with the offering,
including liabilities under the Act.
The Company and the Selling Shareholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to an aggregate of 547,500 Common Shares at the same
price per share as the initial public offering price (with the first 250,000
Common Shares being sold by the Selling Shareholders and the remaining 297,500
Common Shares being sold by the Company). The Underwriters may exercise such
option only to cover over-allotments in the sale of the Common Shares that the
Underwriters have agreed to purchase. To the extent the Underwriters exercise
this option, each of the Underwriters has a firm commitment, subject to certain
conditions, to purchase the same percentage of the option shares as the number
of shares to be purchased and offered by that Underwriter as shown in the above
table bears to the 3,650,000 Common Shares initially offered hereby.
Martin E. Judge, Jr., has agreed with the Representatives not to sell or
dispose of any shares owned by him for a period of one year after the date of
this Prospectus. All of the other directors, executive officers, the Selling
Shareholders and certain other shareholders have agreed with the Representatives
not to sell or dispose of any shares owned by them without the consent of the
Representatives for a period of 180 days after the date of this Prospectus. See
"Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales of the Common Shares to any
accounts over which they exercise discretionary authority.
The Underwriters have reserved for sale, at the initial public offering
price, up to 5% of the Common Shares offered hereby for employees of the Company
and certain other individuals who have expressed an interest in purchasing such
Common Shares in this offering. The number of Common Shares available for sale
to the general public will be reduced to the extent such persons purchase such
reserved Common Shares. Any reserved Common Shares not so purchased will be
offered by the Underwriters to the general public on the same basis as the other
Common Shares offered hereby.
Prior to this offering, there has been no public market for the Company's
Common Shares. The initial public offering price for the Common Shares was
determined by negotiation between the Company and the Representatives. The
factors considered in determining the initial public offering price include,
among other things, the history of and the prospects for the industry in which
the Company competes, the capability of the Company's management, the past and
present operations of the Company, the historical results of operations of the
Company and the trend of its earnings, the prospect for future earnings of the
Company, the general condition of the securities markets at the time of the
offering and the prices of similar securities of generally comparable companies.
Janney Montgomery Scott Inc. ("Janney") has rendered an opinion to the
Board of Directors of JIS as to the fairness, from a financial point of view, of
the consideration to be received by JIS stockholders in connection with the
Merger. JIS agreed to pay Janney a financial advisory fee of $40,000, and JIS
has agreed to reimburse Janney for expenses in the amount of $10,000, including
attorney's fees and disbursements, incurred in connection with the preparation
of this opinion. The obligation of JIS to pay such fees was not contingent on
the opinion expressed by Janney.
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LEGAL MATTERS
Drinker Biddle & Reath, Philadelphia, Pennsylvania, has rendered an opinion
that the Common Shares offered hereby by the Company, when issued and paid for
pursuant to the terms of the Underwriting Agreement, will be legally issued,
fully paid and non-assessable. Certain legal matters in connection with this
Offering will be passed upon for the Underwriters by Saul, Ewing, Remick & Saul,
Philadelphia, Pennsylvania.
EXPERTS
The Company's consolidated balance sheets as of June 30, 1996, December 31,
1995 and 1994 and the related consolidated statements of operations and deficit
and statements of cash flows for the six month period ended June 30, 1996 and
each of the three years in the period ended December 31, 1995 included in this
Prospectus have been included herein in reliance on the report of Rudolph,
Palitz LLP, independent accountants, given on the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company has filed with the Securities and Exchange Commission (the "Commission")
a Registration Statement on Form S-1 under the Securities Act with respect to
the registration of the Common Shares offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, omits certain information
contained in the Registration Statement, and reference is made to the
Registration Statement and the exhibits thereto for further information with
respect to the Company and the Common Shares to which this Prospectus relates.
Statements contained herein concerning the provisions of any contract, agreement
or other document are not necessarily complete, and, in each instance, reference
is made to the copy of such document filed as an exhibit to the Registration
Statement for a more complete description of the matter involved, and each such
statement is qualified in its entirety by such reference. The Registration
Statement, including the exhibits and schedules filed therewith, may be
inspected at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at 7 World Trade Center, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60606.
Copies of such materials may be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates.
As a result of this Offering of the Common Shares, the Company will become
subject to the informational requirements of the Exchange Act. The Company
intends to furnish to its shareholders annual reports containing audited
financial information.
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THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
INDEPENDENT AUDITORS' REPORT AS OF DECEMBER 31, 1995 AND 1994 AND FOR EACH OF THE THREE YEARS IN
THE PERIOD ENDED DECEMBER 31, 1995.............................................................. F-2
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994... F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED) AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993.................................... F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED) AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993.................................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED) AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993.................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED) AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993.................................... F-7 - F-27
</TABLE>
F-1
<PAGE>
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. (formerly Judge, Inc.) and Subsidiaries as of December 31, 1995 and
December 31, 1994, 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, 1995. 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. (formerly Judge, Inc.) and Subsidiaries as of December 31, 1995 and
December 31, 1994, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 10 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," as of January 1, 1993.
Rudolph, Palitz LLP
September 30, 1996
Plymouth Meeting, PA
F-2
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------
1996 1995 1994
------------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................................... $ 153,942 $ 35,078 $ 82,928
Accounts receivable, net.................................................. 12,956,917 8,881,059 6,418,697
Inventories............................................................... 912,303 515,099 232,705
Prepaid income taxes and deferred taxes................................... 334,976 347,352 127,000
Other..................................................................... 993,948 508,640 103,997
------------- ----------- ----------
Total current assets.................................................... 15,352,086 10,287,228 6,965,327
------------- ----------- ----------
PROPERTY AND EQUIPMENT
Furniture, office and computer equipment.................................. 3,570,438 1,732,677 1,545,784
Automotive equipment...................................................... 37,936 48,617 40,544
Leasehold improvements.................................................... 46,565 28,069 15,158
------------- ----------- ----------
3,654,939 1,809,363 1,601,486
Less: accumulated depreciation and amortization........................... 1,774,499 875,552 1,009,422
------------- ----------- ----------
Net property and equipment.............................................. 1,880,440 933,811 592,064
------------- ----------- ----------
OTHER ASSETS
Notes receivable, officers and employees.................................. 431,890 222,564 169,738
Other receivable, related party........................................... 155,908 -- --
Deposits.................................................................. 108,183 94,317 45,752
Goodwill.................................................................. 3,259,202 -- --
Covenant not-to-compete, net of accumulated amortization of $602,589,
1996, $508,645, 1995 and $358,131, 1994................................. -- 93,944 244,458
------------- ----------- ----------
Total other assets...................................................... 3,955,183 410,825 459,948
------------- ----------- ----------
Total assets............................................................ $21,187,709 $11,631,864 $8,017,339
------------- ----------- ----------
------------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Note payable, bank........................................................ $ -- $ -- $2,748,666
Current portion of long-term debt......................................... 940,709 280,420 324,427
Convertible notes......................................................... 500,000 -- --
Current portion of payroll tax obligation................................. -- 321,391 230,427
Accounts payable and accrued expenses..................................... 5,669,388 3,277,546 2,344,295
Payroll and sales taxes................................................... 606,438 396,735 463,955
Income taxes payable...................................................... 42,981 6,968 252,727
Other notes payable....................................................... 196,193 -- --
Deferred revenue.......................................................... 1,333,661 297,362 82,151
Advances from shareholders................................................ 105,263 139,906 189,699
------------- ----------- ----------
Total current liabilities............................................... 9,394,633 4,720,328 6,636,347
------------- ----------- ----------
LONG-TERM LIABILITIES
Note payable, bank........................................................ 7,146,185 5,367,516 --
Deferred rent obligation.................................................. 137,038 156,943 117,902
Debt obligations, net of current portion.................................. 3,272,328 496,012 536,273
Convertible notes......................................................... -- 500,000 500,000
Payroll tax obligation, net of current portion............................ -- -- 321,392
------------- ----------- ----------
Total long-term liabilities............................................. 10,555,551 6,520,471 1,475,567
------------- ----------- ----------
MINORITY INTEREST........................................................... 271,248 -- --
------------- ----------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, at September 30, 1996, $.01 par value, 50,000,000 shares
authorized, 8,587,739 shares issued and outstanding; December 31, 1995
and 1994, $.005 par value, 10,000,000 shares authorized, 160,000 shares
issued and outstanding.................................................. 85,877 800 800
Additional paid-in capital................................................ 365,877 626,848 626,848
Retained earnings (deficit)............................................... 514,523 (236,583) (722,223)
------------- ----------- ----------
Total shareholders' equity (deficit).................................... 966,277 391,065 (94,575)
------------- ----------- ----------
Total liabilities and shareholders' equity (deficit).................... $21,187,709 $11,631,864 $8,017,339
------------- ----------- ----------
------------- ----------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------------- -----------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES............................... $58,914,238 $46,876,520 $63,299,353 $45,253,417 $35,068,867
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of sales (Exclusive of items shown
separately below)...................... 43,232,381 35,273,352 47,550,114 34,146,215 26,069,583
Selling and operating.................... 10,022,739 6,841,426 9,797,875 6,509,549 5,853,608
General and administrative............... 4,310,467 3,199,229 4,187,485 3,155,012 2,524,824
----------- ----------- ----------- ----------- -----------
Total costs and expenses............... 57,565,587 45,314,007 61,535,474 43,810,776 34,448,015
----------- ----------- ----------- ----------- -----------
INCOME FROM OPERATIONS..................... 1,348,651 1,562,513 1,763,879 1,442,641 620,852
OTHER EXPENSE, NET, PRINCIPALLY INTEREST
EXPENSE.................................. (599,597) (545,034) (697,339) (419,590) (334,004)
----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE, MINORITY
INTEREST IN NET LOSS OF CONSOLIDATED
SUBSIDIARY AND CUMULATIVE EFFECT
ADJUSTMENT............................... 749,054 1,017,479 1,066,540 1,023,051 286,848
INCOME TAX EXPENSE......................... 614,700 498,336 587,957 679,800 227,460
----------- ----------- ----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST IN NET LOSS
OF CONSOLIDATED SUBSIDIARY AND CUMULATIVE
EFFECT ADJUSTMENT........................ 134,354 519,143 478,583 343,251 59,388
MINORITY INTEREST IN NET LOSS OF
CONSOLIDATED SUBSIDIARY.................. 616,752 -- 7,057 -- --
----------- ----------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT
ADJUSTMENT............................... 751,106 519,143 485,640 343,251 59,388
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................ -- -- -- -- 42,000
----------- ----------- ----------- ----------- -----------
NET INCOME................................. $ 751,106 $ 519,143 $ 485,640 $ 343,251 $ 101,388
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
NET INCOME PER SHARE:
PRIMARY:
Income before cumulative effect
adjustment............................. $0.08 $0.06 $0.06 $0.04 $0.01
Cumulative effect adjustment............. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
$0.08 $0.06 $0.06 $0.04 $0.01
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
FULLY DILUTED:
Income before cumulative effect
adjustment............................. $0.08 $0.06 $0.06 $0.04 $0.01
Cumulative effect adjustment............. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
$0.08 $0.06 $0.06 $0.04 $0.01
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
----------------------- PAID-IN EARNINGS
SHARES ADDITIONAL CAPITAL (DEFICIT) TOTAL
--------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993............................ 160,000 $ 800 $626,848 ($1,166,862) ($539,214)
Net Income.......................................... -- -- -- 101,388 101,388
--------- ---------- ---------- ----------- ---------
Balance, December 31, 1993.......................... 160,000 800 626,848 (1,065,474) (437,826)
Net Income.......................................... -- -- -- 343,251 343,251
--------- ---------- ---------- ----------- ---------
Balance, December 31, 1994.......................... 160,000 800 626,848 (722,223) (94,575)
Net Income.......................................... -- -- -- 485,640 485,640
--------- ---------- ---------- ----------- ---------
Balance, December 31, 1995.......................... 160,000 800 626,848 (236,583) 391,065
Merger transactions (Notes 13 and 17)............... -- -- (175,910) -- (175,910)
Stock split, 52.6 for 1.0 (Note 13)................. 8,256,000 83,360 (83,360) -- --
Exercise of Warrants (Note 13)...................... 171,739 1,717 (1,701) -- 16
Net Income.......................................... -- -- -- 751,106 751,106
--------- ---------- ---------- ----------- ---------
Balance, September 30, 1996......................... 8,587,739 $ 85,877 $365,877 $ 514,523 $ 966,277
--------- ---------- ---------- ----------- ---------
--------- ---------- ---------- ----------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------------- -----------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................................... $ 751,106 $ 519,143 $ 485,640 $ 343,251 $ 101,388
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization.................. 396,414 317,835 421,613 340,708 286,273
Deferred taxes................................. -- -- (103,000) (60,000) (67,000)
Deferred rent.................................. (19,905) 45,678 39,041 117,902 --
Provision for losses on accounts receivable.... 369,528 201,080 300,033 71,697 58,655
Stock compensation............................. -- -- 6,000 -- --
Minority interest in net loss of
consolidated subsidiary...................... (616,752) -- (7,057) -- --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable............................ (3,741,379) (3,161,667) (2,762,395) (2,221,822) (1,145,179)
Inventories.................................... (278,728) (544,311) (282,394) 127,518 (208,551)
Deposits....................................... (2,527) (48,564) (48,565) (16,807) (1,915)
Prepaid taxes.................................. 60,687 (69,712) (117,352) 59,406 96,796
Other current assets........................... (521,312) (67,704) (404,643) (24,796) (50,703)
Other assets................................... (133,350) -- -- --
Increase (decrease) in:
Accounts payable and accrued expenses.......... 1,465,440 932,696 512,251 393,299 131,299
Payroll and sales taxes........................ (150,456) (92,613) (297,648) (168,965) 586,832
Deferred revenue............................... 187,065 (60,187) 215,211 (109,982) 124,882
Income taxes payable........................... 36,013 (322,165) (245,759) 252,727 --
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities........ (2,198,156) (2,350,491) (2,289,024) (895,864) (87,223)
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment.............. (442,930) (270,011) (373,051) (252,286) (91,465)
Purchase/acquisition of companies................ (554,448) -- -- -- --
Proceeds from disposals of property and
equipment...................................... -- 18,778 24,461 -- --
(Increase) in notes receivable, officers and
employees, net................................. (209,326) (2,824) (52,826) (56,743) (17,677)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities........ (1,206,704) (254,057) (401,416) (309,029) (109,142)
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Cash acquired in business combination............ 150,701 -- -- -- --
Proceeds from notes payable, bank, net........... 2,778,669 2,447,396 2,618,850 249,431 522,101
Proceeds from bank overdrafts.................... 321,000 408,000 421,000 917,000 --
Proceeds from (repayment of) long-term debt...... (580,019) 38,000 38,000 556,000 --
Principal payments on long-term debt............. -- (276,916) (386,524) (383,756) (275,462)
Proceeds from issuance of stock and exercise of
warrants....................................... 16 -- 1,057 -- --
Repayments from shareholders..................... (34,643) (31,170) (49,793) (64,028) (43,421)
Issuance of Series A Preferred Shares, net of
costs.......................................... 888,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities.... 3,523,724 2,585,310 2,642,590 1,274,647 203,218
----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH...................... 118,864 (19,238) (47,850) 69,754 6,853
CASH, BEGINNING.................................. 35,078 82,928 82,928 13,174 6,321
----------- ----------- ----------- ----------- -----------
CASH, ENDING..................................... $ 153,942 $ 63,690 $ 35,078 $ 82,928 $ 13,174
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest......................................... $ 600,000 $ 517,000 $ 657,000 $ 405,000 $ 330,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income taxes..................................... $ 300,000 $ 835,000 $ 1,056,000 $ 496,000 $ 214,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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 13. 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 September 30, 1996, 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 is comprised of 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 4).
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 hold, on a fully diluted basis, a majority of the
outstanding common stock of JIS, which remains a public company.
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 14 and 17. In addition, the Company purchased the net assets and
liabilities of Systems Automation, Inc. ("Systems Automation") in September 1996
(see Note 4), a company that provides imaging and document management systems
and services.
During 1996, the Company engaged an investment banking firm to assist it in
a 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. In connection with this proposed public
offering, the Company has incurred approximately $580,000 of accounting, legal,
printing and other costs as of September 30, 1996 and such costs are included in
other current assets in the accompanying consolidated balance sheet.
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"). This Merger is subject to approval by the shareholders
of JIS and the successful public offering of the Company's common shares. The
terms of the Merger call for the conversion of each share of JIS common stock
and Series A preferred stock into $2.50 of value based on the public offering
price of The Judge Group,
F-7
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1. DESCRIPTION OF BUSINESS -- (CONTINUED)
Inc. common stock. Based upon the expected offering price of $10.00 per share,
it is anticipated that approximately 900,000 shares of The Judge Group, Inc.
common stock will be issued to shareholders of JIS.
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 accompanying consolidated financial statements include the accounts of
the Company, JIS and the Company's wholly-owned subsidiaries, which include JTS,
JPS, JTNJ, JESF, Berkeley (as of and from the effective date of the acquisition
- -- see Note 4), JINJ (which had no activity in the period ended December 31,
1994 and December 31, 1993) and Judge Hospitality Services, Inc. and Judge
Electronic Services of Boston, Inc., (which had no activity during the nine
months ended September 30, 1996 or 1995, or during the three years in the period
ended December 31, 1995). JCC (prior to the JCC/DI merger) and JIS (subsequent
to the JCC/DI merger) have been consolidated due to certain elements of common
ownership and control being present. All significant intercompany accounts and
transactions have been eliminated.
The financial statements as of September 30, 1996 and for the nine months
ended September 30, 1995 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.
The interim financial statements should be read in conjunction with the
financial statements for the fiscal year ended December 31, 1995 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, 1996.
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.
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 Imaging and Network 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 costs are not
significant. The system components are assembled and tested in the Company's
facilities prior to delivery. Revenues are recorded in the period in which the
merchandise is shipped or the services are rendered. However, in instances in
which installation and development
F-8
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
costs are significant to the completion of the contract, revenue is recognized
on a percentage of completion basis. 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 on the accompanying consolidated balance sheet as of September
30, 1996 includes approximately $34,000 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 when the classes are held. Payments
received prior to the class commencing are recorded as deferred revenues.
Cash
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.
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
September 30, 1996 include approximately $56,000 of costs and estimated earnings
in excess of billings on contracts-in-progress.
Accounts Receivable and Accounts Payable
Accounts receivable at September 30, 1996, December 31, 1995, 1994 and 1993
were net of allowances for doubtful accounts of $389,000, $174,000, $157,000 and
$132,000, respectively.
Included in accounts receivable was unbilled work-in-process of
approximately $1,344,000, $655,000 and $564,000 at September 30, 1996, December
31, 1995 and 1994, respectively. Included in accounts payable and accrued
expenses was approximately $979,000, $510,000 and $436,000 of accrued employee
and contractor payroll principally relating to unbilled work-in-process at
September 30, 1996, December 31, 1995 and 1994, respectively.
An analysis of the allowance for doubtful accounts follows:
<TABLE>
<CAPTION>
ADDITIONS
CHARGED
BALANCE AT TO BALANCE AT
BEGINNING OF BAD DEBT DEDUCTIONS END OF
YEAR ENDED DECEMBER 31, PERIOD EXPENSE (CHARGE OFFS) PERIOD
----------------------- ------------ -------- ------------- ----------
<S> <C> <C> <C> <C>
1995....................................................... $157,000 $300,000 ($283,000) $ 174,000
------------ -------- ------------- ----------
------------ -------- ------------- ----------
1994....................................................... $132,000 $ 72,000 ($ 47,000) $ 157,000
------------ -------- ------------- ----------
------------ -------- ------------- ----------
1993....................................................... $ 73,000 $ 59,000 -0- $ 132,000
------------ -------- ------------- ----------
------------ -------- ------------- ----------
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C> <C>
1996....................................................... $174,000 $370,000 ($155,000) $ 389,000
------------ -------- ------------- ----------
------------ -------- ------------- ----------
1995....................................................... $157,000 $201,000 ($ 38,000) $ 320,000
------------ -------- ------------- ----------
------------ -------- ------------- ----------
</TABLE>
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.
F-9
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 amounted to
$302,000 and $205,000 for the nine months ended September 30, 1996 and 1995,
respectively, and $271,099 in calendar 1995, $190,192 in calendar 1994 and
$135,758 in calendar 1993.
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.
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, timing differences relating to the restrictive covenant described in
Note 15 (the "Restrictive Covenant"), amounts recorded for inventory
capitalization, 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.
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").
Intangible Assets
The Restrictive Covenant (covenant-not-to-compete) was being amortized on a
straight-line method over the life of the covenant (forty-eight months).
Amortization expense related to the covenant was approximately $94,000 for the
nine months ended September 30, 1996, $113,000 for the nine months ended
September 30, 1995, and approximately $150,000 for each of 1995, 1994 and 1993.
See Note 15.
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 Berkeley. Both acquisitions were effective September 30, 1996;
therefore, amortization of goodwill will begin in October 1996. See Note 4.
F-10
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Deferred Rent Obligation
The Company is party to an operating lease agreement for its principal
office facilities, which contains a provision 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 term, divided by the number of months
of the lease term. The difference between rent expense recorded and the amount
paid is credited or charged to deferred rent obligation in the accompanying
consolidated balance sheets.
Advertising Costs
The Company participates in various advertising programs. All costs related
to advertising are expensed in the period incurred. Advertising expense amounted
to approximately $403,000 and $345,000 for the nine months ended September 30,
1996 and 1995, respectively, and $464,000, $267,000 and $214,000 in 1995, 1994
and 1993, respectively.
Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("Statement 121"). Statement 121
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used, and for long-lived assets and certain identifiable intangibles to
be disposed. Statement 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Measurement of an impairment
loss for long-lived assets and identifiable intangibles that an entity expects
to hold and use should be based on the fair value of an asset. Statement 121
became effective January 1, 1996 and did not have a material effect on the
Company's financial condition or results of operations.
In October 1995, FASB issued Statement No. 123 "Accounting for Stock-Based
Compensation," ("Statement 123"), which provides an alternative method of
accounting for stock-based compensation arrangements, based on fair value of the
stock-based compensation utilizing various assumptions regarding the underlying
attributes of the options and the underlying stock, rather than the existing
method of accounting for stock-based compensation which is provided in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25). FASB encourages entities to adopt the fair value-based
method but does not require adoption of this method. Statement 123 became
effective January 1, 1996 and, based upon information presently available, is
not expected to have a material impact on the Company's financial position or
its results of operations.
Earnings Per Share
The number of shares used in the earnings per share calculation and
convertible note share conversion (see Note 8) 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 8,588,000 for both the nine months ended
September 30, 1996 and 1995, 8,588,000 in 1995 and 1994 and 8,500,000 in 1993.
Fully diluted earnings per share amounts for the nine months ended
September 30, 1996 and 1995 and for calendar years 1995, 1994 and 1993 were
based on the weighted average number of shares
F-11
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
calculated for primary earnings per share purposes increased by the number of
shares that would be outstanding assuming conversion of outstanding convertible
notes (see Note 8). The number of shares used in the computation were
approximately 9,114,000 for the nine months ended September 30, 1996 and 1995,
and approximately 9,114,000 in calendar year 1995, 8,851,000 in 1994 and
8,500,000 in 1993.
Fair Value of Financial Instruments
The estimated fair values of substantially all of the Company's financial
instruments (all of which are held for non trading purposes) are approximately
equal to their carrying values at all periods presented.
NOTE 3. NOTE RECEIVABLE (DI)
In connection with the JCC/DI Merger, JCC provided a $50,000 bridge loan,
with interest at 11% per annum, to DI in September 1995 to fund DI's ongoing
operations and working capital requirements through the date of the expected
closing of the JCC/DI Merger. The loan was collateralized by certain assets of
DI. As a result of the JCC/DI Merger, no interest was charged on this loan. This
receivable was included in "other" current assets in the accompanying December
31, 1995 consolidated balance sheet.
NOTE 4. BUSINESS COMBINATIONS AND PRO-FORMA RESULTS OF OPERATIONS
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 payable principally in cash and notes. In the
event the Company completes an initial public offering of stock before March 31,
1997, $300,000 of the notes payable will be converted into the Company common
stock at the price per share of the public offering. Also within 30 days after
the consummation of a public offering of stock, a portion of the notes payable,
calculated as $1,060,000 less cash payments made to date, will be due and
payable in cash. A portion of the purchase price, $572,200, is contingent on
Berkeley attaining certain pre-tax income amounts in 1996 and/or 1997. The
acquisition was accounted for as a purchase and no results of operations of
Berkeley are included in the earnings of the Company for the nine month period
ended September 30, 1996. The excess of acquisition cost over the fair value of
net assets, assumed to equal its book value, was approximately $2,220,000, which
will be amortized over fifteen years, beginning in October 1996. Operating
results for the Company for the nine months ended September 30, 1996 and year
ended December 31, 1995, on a pro forma basis as though Berkeley had been
acquired as of January 1, 1995 and January 1, 1996, respectively, 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 payable in
cash and notes. In the event that the Company completes an initial public
offering, the remainder of any notes become due and payable in cash within 15
days of the consummation of such public offering. The acquisition was accounted
for as a purchase and no results of operations of Systems Automation are
included in the earnings of the Company for the nine month period ending
September 30, 1996. The excess of acquisition cost over the fair value of net
assets, assumed to equal its book value, was approximately $1,040,000, which
will be amortized over ten years, beginning in October 1996. Operating results
for the Company for the nine months ended
F-12
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 4. BUSINESS COMBINATIONS AND PRO-FORMA RESULTS OF OPERATIONS -- (CONTINUED)
September 30, 1996 and year ended December 31, 1995, on a pro forma basis as
though Systems Automation had been acquired as of January 1, 1995 and January 1,
1996, respectively, are shown below.
The following sets forth the combined results for the Company, DataImage
(see Note 17), Berkeley and Systems Automation for the nine months ended
September 30, 1996 and year ended December 31, 1995, as if the business
combinations occurred at January 1, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Net revenues.............................................................. $61,947,988 $68,095,483
Cost of revenues (Exclusive of items shown separately
below).................................................................. 45,090,712 50,681,751
----------- -----------
Gross Profit.............................................................. 16,857,276 17,413,732
Operating Expenses:
Selling, general and administrative..................................... 15,715,181 15,948,321
----------- -----------
Income from operations.................................................... 1,142,095 1,465,411
Other expenses, net....................................................... 625,667 551,542
----------- -----------
Net income before income tax expense and minority interest................ 516,428 913,869
Income tax expense........................................................ 532,250 511,082
----------- -----------
Income (loss) before minority interest in net loss of consolidated
subsidiary.............................................................. (15,822) 402,787
Minority interest in net loss of consolidated subsidiary.................. 616,752 7,057
----------- -----------
Net Income................................................................ $ 600,930 $ 409,844
----------- -----------
----------- -----------
</TABLE>
Notes to pro-forma results of operations:
(1) Interest expense adjusted due to (a) the conversion of DI stockholders
notes payable to JIS common stock by ($49,219) for the year ended December 31,
1995 and ($3,581) for the nine months ended September 30, 1996, (b) incurring
debt/notes payable in connection with the acquisition of Berkeley by $57,783 and
$46,472 for the respective periods and (c) the conversion of the Company's
convertible notes to common stock by ($50,000) and ($37,500) for the respective
periods.
(2) Amortization expense recorded for goodwill created by the business
combinations of Berkeley of $147,975 for the year ended December 31, 1995 and
$110,981 for the nine months ended September 30, 1996, and Systems Automation of
$103,957 and $77,968 for the respective periods.
(3) Adjustment to provide Federal and state income tax expense (benefit)
attributable to income (loss) of Berkeley of $23,602 for the year ended December
31, 1995 and $80,756 for the nine months ended September 30, 1996, and Systems
Automation of $3,409 and ($85,470) for the respective periods as well as the
amortization of goodwill of ($100,773) and ($75,580) for the respective periods,
and interest expense of ($3,113) and ($2,156) for the respective periods
recognized in (1) and (2) above, all at an effective tax rate of 40%.
The interest expense adjustment (see (1)(b) and (1)(c) above) assumes the
successful completion of the Company's public offering of stock as discussed in
Note 1.
F-13
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 4. BUSINESS COMBINATIONS AND PRO-FORMA RESULTS OF OPERATIONS -- (CONTINUED)
Primary and fully diluted net income per share of common stock is
calculated as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Net income................................................................ $ 600,930 $ 409,844
7% cumulative dividend of Series A preferred stock of consolidated
subsidiary.............................................................. (43,200) (57,600)
----------- -----------
Net income per share attributable to common shareholders.................. $ 557,730 $ 352,244
----------- -----------
----------- -----------
Weighted average number of shares......................................... 12,143,739 12,143,739
----------- -----------
----------- -----------
Net income per share attributable to common shareholders.................. $ 0.05 $ 0.03
----------- -----------
----------- -----------
</TABLE>
Weighted average number of shares includes actual shares outstanding
increased by the number of shares issued in respect to the conversion of Company
convertible notes, the number of shares issued assuming the successful
completion of the Company's public offering of stock, and the number of shares
issued in conjunction with the Berkeley acquisition.
NOTE 5. NOTE PAYABLE, BANK
Note payable, Bank, consists of advances to the Company, JTS and JIS under
a $11,000,000 credit facility at September 30, 1996, of which $10,000,000
represents a line of credit and $1,000,000 represents a term loan (see Note 6).
At September 30, 1996, this line of credit bore interest at the prime rate plus
1% per annum (9.25% at September 30, 1996) and maximum permitted borrowing
thereunder was the lesser of $10,000,000 or 80% 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, is personally
guaranteed by certain shareholders and the wife of a shareholder, and is subject
to certain financial covenants. In addition, the Company and all of its
subsidiaries are jointly and severally responsible for all of the debt
outstanding under the line.
At September 30, 1996 and December 31, 1995 and 1994 the Company was in
violation of certain financial and transactional covenants, which the Bank has
permanently waived or reset effective through these dates. At September 30,
1996, certain financial ratios were reset or redefined and have been
incorporated into several amended loan agreements. At September 30, 1996, the
Bank redefined tangible net worth enabling the Company to meet certain financial
ratios regarding tangible net worth coverage. The Bank also reset the target
ratio of liabilities service coverage at September 30, 1996. At September 30,
1996, the Bank permanently waived a series of restructuring, acquisition,
merger, liquidation, dissolution and related transactional events specifically
related to the Company's contemplated initial public offering more fully
described in Note 1. At December 31, 1995, the Company was in violation and the
Bank waived or reset as of December 31, 1995, the following financial covenants:
effective net worth; total liabilities to effective net worth; total allowed
capital expenditures by the Company; total allowed additional other liens
besides the Bank; and reporting audited financial results to the Bank within 120
days after the end of the fiscal year. At December 31, 1994, the Company was in
violation of certain financial covenants which the Bank waived or reset and
incorporated these changes in an Amended Loan and Security Agreement. The
financial covenants that where reset were: effective net worth; total
liabilities to effective net worth; and limitation on capital expenditures.
Included in accounts payable and accrued expenses at September 30, 1996,
December 31, 1995 and 1994 were approximately $1,659,000, and $1,338,000 and
$917,000, respectively, of bank overdrafts.
F-14
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1996 1995 1994
------------- -------- --------
<S> <C> <C> <C>
Equipment notes payable, bank (repaid in 1995)............... $ -- $ -- $ 13,703
Note payable, Restrictive Covenant; payable in monthly
installments of $13,194, including interest imputed at
8.0%, repaid in full in August 1996 (see Note 15).......... -- 376,759 499,386
Note payable, stock; payable in monthly payments of $2,039,
including interest at 5.0%, repaid in full in August 1996
(see Note 15).............................................. -- 60,961 81,810
Capital lease obligations; payable in monthly installments
currently aggregating $6,283, including interest at various
rates, through March 2000; the leases transfer ownership of
certain office equipment to the Company at the end of the
respective lease terms..................................... 176,113 59,207 31,581
Capital lease obligations; payable in monthly installments
currently aggregating $7,369, including interest at various
rates, through December 1999; the leases transfer ownership
of certain office equipment to the Company at the end of
the respective lease terms................................. 147,725 192,050 136,651
Equipment note payable; payable in monthly installments of
$1,247, including interest at 8.85%, through December 1999;
collateralized by certain equipment........................ 41,291 49,418 --
Equipment note payable; payable in monthly installments of
$5,868, including interest at 8.5%, through March 2001;
collateralized by certain equipment and personally
guaranteed by the Company's majority shareholder........... 262,451 -- --
Term note payable; payable in sixty monthly installments of
$16,667, including interest at prime plus 1.5% through
October 2001; collateralized by substantially all the
Company's assets (see Note 5).............................. 1,000,000 -- --
</TABLE>
F-15
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 6. LONG-TERM DEBT -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1996 1995 1994
------------- -------- --------
<S> <C> <C> <C>
Note payable, purchase of Berkeley; payable in various
monthly installments plus interest at 8%, through August
2000, in the event the Company completes a public offering,
$300,000 will be converted to an equivalent amount of
common stock, up to $735,000 will be immediately due and
payable, $300,000 will be payable over forty-four months
and $572,200 (contingent upon Berkeley achieving certain
income levels) will be payable over thirty-six months...... 1,907,200 -- --
Note payable, purchase of assets and liabilities of Systems
Automation; payable $100,000 plus accrued interest at 8% on
January 2, 1997 plus thirty-six monthly payments of
$11,665, including interest at 8% commencing February 1,
1997; in the event the Company completes a public offering,
any and all remaining amounts due are immediately payable
in cash.................................................... 472,252 -- --
Capital lease obligations; payable in various monthly
installments including interest at various rates through
July 1997; the leases transfer ownership of certain
computer equipment at the end of the respective lease
terms...................................................... 13,461 -- --
Term notes; payable in various monthly installments including
interest at various rates; collaterized by certain
equipment.................................................. 192,544 -- --
Related Parties
Martin E. Judge, Jr. (Founder, Chairman and Chief Executive
Officer of the Company), non-interest bearing, repaid in
1996.................................................... -- 23,000 15,528
Michael A. Dunn (President of Permanent Placement
Business), payable in variable monthly installments plus
interest at prime plus 2%, repaid in full in 1996....... -- 15,037 82,041
------------- -------- --------
4,213,037 776,432 860,700
Less: current portion................................... (940,709) (280,420) (324,427)
------------- -------- --------
Long-term portion....................................... $ 3,272,328 $496,012 $536,273
------------- -------- --------
------------- -------- --------
</TABLE>
F-16
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 6. LONG-TERM DEBT -- (CONTINUED)
The following is a schedule of debt maturities, as of September 30, 1996:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDING SEPTEMBER 30, AMOUNT
-------------------- ---------
<S> <C>
1997........................................................... $ 940,709
1998........................................................... 1,108,153
1999........................................................... 1,128,943
2000........................................................... 799,949
2001........................................................... 235,283
----------
$4,213,037
----------
----------
</TABLE>
The following is a schedule of debt maturities, as of December 31, 1995:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
-------------------- ---------
<S> <C>
1996........................................................... $ 280,420
1997........................................................... 239,777
1998........................................................... 182,451
1999........................................................... 71,780
2000........................................................... 2,004
----------
$ 776,432
----------
----------
</TABLE>
Interest expense charged to operations was approximately $600,000 and
$514,000 for the nine months ended September 30, 1996 and 1995, respectively,
and $670,000, $427,000 and $338,000 for the years ended December 31, 1995, 1994,
and 1993, respectively.
NOTE 7. ADVANCES FROM SHAREHOLDERS
JIS/JCC had advances from shareholders of $105,263 at September 30, 1996,
$139,906 at December 31, 1995 and $189,699 at December 31, 1994. There are no
formal repayment terms, however, interest is charged monthly at various rates
(from prime plus 1% to a fixed rate of 12%). Interest expense related to these
advances was approximately $11,000 for the nine months ended September 30, 1996,
$14,000 for the nine months ended September 30, 1995, $18,000 in 1995, $22,000
in 1994 and $20,000 in 1993.
NOTE 8. 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 which
bear a 10% interest rate per annum and mature in July 1997, are subject to
certain financial covenants and are convertible into 526,000 common shares
(split adjusted) upon the occurrence of certain events. The notes may be
redeemed at any time, subject to certain contingent interest and other
provisions. In addition, should the Company effect a successful initial public
offering before July 31, 1997, the financial advisor who arranged such financing
is entitled to a fee equal to 1% of the proceeds of the initial public offering
(approximately $300,000). The notes are guaranteed by JTS, JESF and Judge, Inc.
Effective through September 30, 1996, December 31, 1995 and 1994, the Company
was in violation of certain covenants, which were permanently waived by the note
holders. The note holders waived the annual limit on capital expenditures, for
all periods presented, the issuance of unsecured notes for the acquisitions
described in
F-17
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 8. CONVERTIBLE NOTES -- (CONTINUED)
Note 4, as of September 30, 1996, and the delivery of the annual audited
financial statements within 120 days after year end for 1995 and 1994. The
Company expects that the notes will be exchanged for 526,000 Company common
shares immediately prior to the Offering.
NOTE 9. SETTLEMENT OF PAYROLL TAX OBLIGATION
During 1994, the Company entered into an agreement with the Internal
Revenue Service (the "IRS") regarding the payment of approximately $882,000 of
past-due payroll taxes, relating principally to the second and third quarters of
1993, and related assessed interest.
The parties agreed to an extended repayment term requiring a $150,000 down
payment and $22,000 per month beginning June 1994 until the total liability,
which had been subordinated to the Company's bank, was paid in full. In
connection with the past due payroll taxes, the Company was disputing certain
related penalty and interest amounts. In July 1996, the Company entered into a
settlement agreement with the IRS and the existing liability at that time,
including penalty and interest, was paid in full.
NOTE 10. INCOME TAXES
In 1991, the Company filed a consolidated Federal income tax return with
its wholly-owned subsidiaries. JTS and JCC were not included in the Company's
consolidated Federal income tax return, as the Company owned less than 80% of
each such Company's outstanding common shares at December 31, 1991. Under
Internal Revenue regulations, JTS and JCC were not part of the consolidated
group for tax purposes and filed their own Federal income tax returns. In 1992,
JTS became a wholly-owned subsidiary of the Company, but continued to file its
own Federal income tax returns. In 1995, JTS filed 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.
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," as of January 1, 1993 by determining the
cumulative effect on prior years of the change in method of accounting for
income taxes. As of January 1, 1993, the cumulative effect on prior years of
adopting SFAS No. 109 was $42,000.
The net deferred tax asset at December 31, 1995 and 1994 included the
following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax asset................................................... $1,175,000 $1,004,000
Valuation allowance for deferred tax asset........................... (945,000) (877,000)
---------- ----------
Net deferred tax asset after valuation allowance..................... $ 230,000 $ 127,000
---------- ----------
---------- ----------
</TABLE>
At December 31, 1995 and 1994, the net deferred assets of $230,000 and
$127,000, respectively, were included in "prepaid income taxes and deferred
taxes" in the accompanying consolidated balance sheets.
F-18
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 10. INCOME TAXES -- (CONTINUED)
The tax effect of major temporary differences that gave rise to the
Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Net operating loss carryforwards..................................... $ 952,000 $ 853,000
Restrictive Covenant payments........................................ 101,000 75,000
Other................................................................ 122,000 76,000
---------- ----------
$1,175,000 $1,004,000
---------- ----------
---------- ----------
</TABLE>
Income tax expense for the years ended December 31, 1995, 1994 and 1993
consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Current tax expense:
Federal.................................................. $531,000 $520,400 $180,000
State.................................................... 159,957 219,400 72,460
Deferred tax (benefit)..................................... (103,000) (60,000) (25,000)
-------- -------- --------
Provision for income taxes................................. $587,957 $679,800 $227,460
-------- -------- --------
-------- -------- --------
</TABLE>
In accordance with APB 28 (interim financial reporting), income taxes for
the nine months ended September 30, 1996 and 1995 are calculated at the
estimated effective annual (Federal and state) rate of approximately 40%.
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 for JTS and
net operating losses for JCC/JIS, which is consolidated for financial reporting
but not tax reporting purposes. A reconciliation of the Company's effective
income tax rate with the statutory federal rate follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------- ----------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Tax at statutory rate (34%)....................... $255,000 $346,000 $363,000 $348,000 $ 98,000
Effect of losses of subsidiary not consolidated
for tax purposes................................ 276,000 28,000 92,000 227,000 75,000
Non-deductible tax penalties and other permanent
differences..................................... -- 68,000 90,000 -- 6,000
Other............................................. -- (23,000) (31,000) (13,000) --
State income taxes, net of Federal tax benefit.... 84,000 90,000 105,000 143,000 48,000
Federal income tax rate differentials due to
surtax exemptions............................... -- (11,000) (31,000) (25,000) --
-------- -------- -------- -------- --------
$615,000 $498,000 $588,000 $680,000 $227,000
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
As a result of operating losses, no provision for income taxes was required
in all periods presented for JIS. For income tax reporting purposes, as of
December 31, 1995, JIS had an unused operating loss carryforward of
approximately $2,355,000, which may be applied against future taxable income of
JIS. These carryforwards expire between 2002 and 2010.
F-19
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 11. COMMITMENTS
The Company and its subsidiaries lease several office facilities under
operating lease agreements that expire at various times through the year 2000.
Rent expense was approximately $604,000 and $409,000 for the nine months ended
September 30, 1996 and September 30, 1995, and $557,000, $394,000 and $381,000,
for the years ended December 31, 1995, 1994 and 1993, respectively. Minimum
annual future rental commitments, at September 30, 1996, exclusive of common
area maintenance costs and utilities, are as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDING SEPTEMBER 30, AMOUNT
-------------------- ----------
<S> <C>
1997........................................................... $1,056,000
1998........................................................... 1,026,000
1999........................................................... 877,000
2000........................................................... 637,000
2001........................................................... 21,000
----------
$3,617,000
----------
----------
</TABLE>
Minimum annual future rental commitments at December 31, 1995, exclusive of
common area maintenance costs and utilities, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ---------
<S> <C>
1996........................................................... $ 769,000
1997........................................................... 741,000
1998........................................................... 717,000
1999........................................................... 703,000
2000........................................................... 302,000
----------
$3,232,000
----------
----------
</TABLE>
Effective January 1994, the Company became self-insured for workers
compensation purposes and is liable for aggregate claims up to approximately
$185,000 for calendar 1996, $78,000 for calendar 1995 and $116,000 for calendar
1994. In addition, the Company is responsible for certain fixed costs including
underwriting, brokerage, reinsurance and administration costs.
The Company is partially self-insured for health care claims for eligible
active employees. The Company is currently liable for aggregate claims up to
approximately $418,000 annually. Self-insurance costs are accrued based upon the
aggregate of the liability for reported claims and an estimated liability for
claims incurred but not reported.
NOTE 12. RETIREMENT PLANS
The Company had various 401(k) retirement plans (the "Plans") covering
substantially all employees. Employees may 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. The Company charged $-0-, $-0-, $40,000
and $15,000 to operations related to the Plans in 1996, 1995, 1994 and 1993,
respectively. Effective July 1, 1996, all the Plans were merged into one Plan.
The new Plan has no Company contribution provision.
F-20
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 13. SHAREHOLDERS' EQUITY (DEFICIT) AND EARNINGS PER SHARE
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 5).
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 14 and 17).
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) and to adjust the par value per share from $.005 to
$.01, (iii) authorized the issuance of 10,000,000 preferred shares with a par
value of $.01 per share, (iv) authorized a 52.6 for 1.0 split of the outstanding
common shares for shareholders of record on September 23, 1996, (v) authorized a
change in the Company's name from "Judge, Inc." to "The Judge Group, Inc." and
(vi) authorized 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.
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. No options have been
granted under the Incentive Plan.
NOTE 14. CAPITAL STRUCTURE OF JIS
Common Stock
In 1993, JCC issued to a financial advisor warrants to purchase common
shares of JCC equal to 2% of its outstanding common shares at a purchase price
of $.005 per share. JCC issued 211,327 common shares to the financial adviser in
1995 upon the exercise of these warrants.
Preferred Shares
During 1991, the capital structure of JCC was modified to authorize
10,000,000 $.10 par value preferred shares. During 1991, $100,000 of debentures
and $266,577 of investor loans payable were converted to 1,000,000 and 2,665,770
preferred shares, respectively. Accrued interest of approximately $97,000
relating to these payables was contributed to capital.
F-21
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 14. CAPITAL STRUCTURE OF JIS -- (CONTINUED)
The JCC preferred shares bore cumulative dividends at an annual rate of
$.005 per share. Cumulative dividends in arrears at December 31, 1995 and 1994
were approximately $74,000 and $55,000, respectively. No dividends were declared
or paid in 1996, 1995, 1994 or 1993. 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.
At December 31, 1995, 1994 and 1993, these preferred shares were eliminated
in consolidation and were presented at no value in minority interest, due to the
extent of JCC's shareholders' deficit at December 31, 1995, 1994 and 1993.
In February 1996, JCC's Board of Directors authorized 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. The JCC
Series A Preferred shares are convertible into JCC common shares at the holder's
option, and conversion is mandatory at the time of a subsequent public offering
of common shares by JCC in excess of $5 million. The JCC Series A Preferred
shares carry a cumulative dividend of 7% per year, and holders have a
liquidation preference prior to the common shareholders and all other existing
classes. 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") with essentially the same rights and privileges. In the event JIS
does not complete a public offering by the eighth anniversary of the JCC/DI
Merger, then JIS will have the right to redeem the outstanding JCC Series A
preferred shares. See Note 17. At September 30, 1996, the JIS Series A Preferred
stock is presented at $271,248 as "minority interest" in the accompanying
consolidated balance sheet. Approximately $617,000 of JIS losses have been
allocated to this minority interest in the accompanying consolidated statements
of operations for the nine months ended September 30, 1996. It is expected that
each outstanding share of JIS Series A Preferred stock will be converted into
one share of JIS common stock pursuant to the Merger.
In February 1996, and at the effective time of the JCC/DI Merger, advances
from the Company to JCC in the aggregate of $1,520,000 were converted into 1,500
Series B preferred shares of JCC, which were immediately converted into the same
number of shares of Series B preferred stock of JIS. The JIS Series B preferred
stock carries a cumulative annual dividend of 10%, are not convertible, do not
have a liquidation preference and are subject to mandatory redemption. These
shares are eliminated in consolidation. These shares are expected to be
cancelled pursuant to the Merger (see Note 1).
F-22
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 15. STOCK REDEMPTION (JTS)
An employee of JTS (the "Minority Shareholder") acquired an aggregate of
400 common shares of JTS over a period of time ending in 1990. The aggregate
purchase price for these shares was paid by the Minority Shareholder in the form
of unsecured promissory notes. At December 31, 1991, the aggregate outstanding
principal amount of these notes was $66,409.
On August 12, 1992, JTS redeemed the Minority Shareholder's shares for
$266,000 (of which $40,000 was paid in cash, $59,405 represented debt
forgiveness, and $126,595 was payable in 72 equal monthly installments). In
connection with this redemption, JTS agreed to pay the Minority Shareholder
$13,527 per month for six years ($950,000 in the aggregate). The restrictive
covenant set forth in the agreement and the related liability were recorded at
the net present value of the payments, at an assumed interest rate of 8% (or
$752,539). During August 1996, JTS reached a settlement agreement with the
minority shareholder. Two outstanding notes were settled at less than face value
for $322,000, which resulted in a gain of approximately $27,000.
NOTE 16. STATEMENT OF CASH FLOWS
Supplemental disclosure of non-cash investing and financing transactions:
During the nine months ended September 30, 1996, the Company entered into
the following non-cash transactions:
o incurring long-term debt ($2,379,452) for certain business combinations
(see Note 4); and
o termed out $1,000,000 of the existing line of credit into long-term debt
(see Notes 5 and 6).
During the nine months ended September 30, 1996 and 1995, the Company
entered into certain financing arrangements for the purchase of property and
equipment in the amounts of approximately $432,000 and $61,000, respectively.
Effective February 29, 1996, JCC and DI effected a Business Combination
(see Note 17) and effective September 1996, the Company and Berkeley and Systems
Automation effected business combinations (see Note 4):
Acquisition of Business:
<TABLE>
<CAPTION>
SYSTEMS
DI BERKELEY AUTOMATION
--------- -------- ----------
<S> <C> <C> <C>
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)
--------- -------- ----------
--------- -------- ----------
</TABLE>
F-23
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 16. STATEMENT OF CASH FLOWS -- (CONTINUED)
During 1995, the Company entered into certain financing arrangements for
the purchase of property and equipment in the amount of approximately $264,000.
During 1994, the Company entered into certain capital lease arrangements
for the purchase of property and equipment in the amount of approximately
$228,000.
NOTE 17. BUSINESS COMBINATION (THE JCC/DI MERGER)
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. In
connection with the merger, the Certificate of Incorporation of JIS was amended
to increase its authorized capital by 1,125,000 shares of $.01 value JIS Series
A Preferred stock, 1,500 shares of $1,000 stated value Series B preferred stock
(the "JIS Series B Preferred") and 3,873,500 shares of "blank check" preferred
stock (for an aggregate of 5,000,000 shares of new preferred stock). The JIS
Series A Preferred and JIS Series B Preferred stock have essentially the same
rights and privileges as the JCC Series A Preferred shares and JCC Series B
Preferred shares existing immediately prior to the merger.
In the JCC/DI Merger, each stockholder of DI received one share of JIS
common stock for every 31.96 shares of DI common stock held thereby immediately
prior to the merger, and each shareholder of JCC received one share of JIS
common stock for every 2.83 common shares of JCC held thereby immediately prior
to the merger. In addition, the JCC Series A Preferred shares and the JCC Series
B Preferred shares outstanding prior to the JCC/DI Merger were converted into
the same numbers of JIS Series A Preferred and JIS Series B Preferred shares,
respectively.
The conversion ratios were calculated so that, after giving effect to
certain reserved shares for issuance to employees following the merger and
assuming the sale of the maximum of 1,125,000 JCC Series A Preferred shares
offered in JCC's 1995 private offering (822,628 were actually sold) and the
conversion of such maximum number of JCC Series A Preferred shares into JCC
common shares, there would be approximately 5,000,000 shares of common stock of
JIS outstanding immediately following the merger, of which holders of DI common
stock immediately prior to the merger were to receive in the aggregate
approximately 5% (approximately 250,000 shares) and the holders of JCC common
shares and JCC Series A Preferred shares immediately prior to the merger were to
receive in the aggregate approximately 95% (approximately 4,750,000 shares). The
JCC Series B Preferred stock was not included in the foregoing percentage
calculations.
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 DataImage, Inc. (which changed its name to Judge Imaging
Systems, Inc. immediately after the JCC/DI merger) for the period subsequent to
the merger.
F-24
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 18. 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 Imaging and Network Services
segment, and the Information Technology Training segment. The information
technology training segment was purchased effective September 30, 1996.
Therefore, no results of operation are included below. The following represents
financial information for each of the Company's reportable industry segments:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------
CONTRACT AND IMAGING AND INFORMATION
PERMANENT NETWORK TECHNOLOGY
PLACEMENT SERVICES TRAINING ELIMINATIONS TOTAL
------------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers... $ 48,887,484 $10,026,754 $ -- $ -- $58,914,238
Intersegment sales................ -- 44,520 -- 44,520
------------- ----------- ------------ ------------ -----------
Total revenues.................. $ 48,887,484 $10,071,274 $ -- 44,520 $58,914,238
------------- ----------- ------------ ------------ -----------
------------- ----------- ------------ ------------ -----------
Income (loss) from
operations...................... $ 2,013,477 ($ 664,826) $ -- $ -- $ 1,348,651
------------- ----------- ------------ ------------ -----------
------------- ----------- ------------ ------------ -----------
Net income (loss)................. $ 947,389 ($ 813,035) $ -- ($ 616,752) $ 751,106
------------- ----------- ------------ ------------ -----------
------------- ----------- ------------ ------------ -----------
Depreciation and amortization..... $ 315,026 $ 81,388 $ -- $ -- $ 396,414
------------- ----------- ------------ ------------ -----------
------------- ----------- ------------ ------------ -----------
Identifiable assets............... $ 17,468,731 $ 4,955,134 $786,824 $ 2,022,980 $21,187,709
------------- ----------- ------------ ------------ -----------
------------- ----------- ------------ ------------ -----------
Capital expenditures.............. $ 581,702 $ 292,774 $ -- $ -- $ 874,476
------------- ----------- ------------ ------------ -----------
------------- ----------- ------------ ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995
----------------------------------------------------------
CONTRACT AND IMAGING AND
PERMANENT NETWORK
PLACEMENT SERVICES ELIMINATIONS TOTAL
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers................... $ 41,076,152 $ 5,800,368 $ -- $46,876,520
Intersegment sales................................ -- 360,000 360,000 --
------------ ----------- ------------ -----------
Total revenues.................................. $ 41,076,152 $ 6,160,368 $ 360,000 $46,876,520
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Income from operations............................ $ 1,472,960 $ 89,553 $ -- $ 1,562,513
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net income (loss)................................. $ 599,979 ($ 80,836) $ -- $ 519,143
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Depreciation and amortization..................... $ 290,848 $ 26,987 $ -- $ 317,835
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Identifiable assets............................... $ 10,947,371 $ 2,525,544 $ 1,786,988 $11,685,927
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Capital expenditures.............................. $ 258,848 $ 71,888 $ -- $ 330,736
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
F-25
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 18. SEGMENT INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------
CONTRACT AND IMAGING AND
PERMANENT NETWORK
PLACEMENT SERVICES ELIMINATIONS TOTAL
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers................... $ 55,079,572 $ 8,219,781 $ -- $63,299,353
Intersegment sales................................ -- 480,000 480,000 --
------------ ----------- ------------ -----------
Total revenues.................................. $ 55,079,572 $ 8,699,781 $ 480,000 $63,299,353
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Income (loss) from operations..................... $ 1,810,035 ($ 46,156) $ -- $ 1,763,879
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net income (loss)................................. $ 751,041 ($ 272,458) ($ 7,057) $ 485,640
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Depreciation and amortization..................... $ 384,419 $ 37,194 $ -- $ 421,613
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Identifiable assets............................... $ 10,900,309 $ 2,530,930 $ 1,799,375 $11,631,864
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Capital expenditures.............................. $ 474,100 $ 163,207 $ -- $ 637,307
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------------------------------------
CONTRACT AND IMAGING AND
PERMANENT NETWORK
PLACEMENT SERVICES ELIMINATIONS TOTAL
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers................... $ 41,480,081 $ 3,773,336 $ -- $45,253,417
Intersegment sales................................ -- 402,000 402,000 --
------------ ----------- ------------ -----------
Total revenues.................................. $ 41,480,081 $ 4,175,336 $ 402,000 $45,253,417
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Income (loss) from operations..................... $ 1,956,082 ($ 513,441) $ -- $ 1,442,641
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net income (loss)................................. $ 1,009,858 ($ 666,607) $ -- $ 343,251
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Depreciation and amortization..................... $ 307,090 $ 33,618 $ -- $ 340,708
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Identifiable assets............................... $ 8,655,125 $ 1,050,453 $ 1,688,239 $ 8,017,339
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Capital expenditures.............................. $ 457,213 $ 22,756 $ -- $ 479,969
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
F-26
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 18. SEGMENT INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------------------------------------
CONTRACT AND IMAGING AND
PERMANENT NETWORK
PLACEMENT SERVICES ELIMINATIONS TOTAL
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers................... $ 30,667,821 $ 4,401,046 $ -- $35,068,867
Intersegment sales................................ 90,000 -- 90,000 --
------------ ----------- ------------ -----------
Total revenues.................................. $ 30,757,821 $ 4,401,046 $ 90,000 $35,068,867
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Income (loss) from operations..................... $ 757,424 ($ 136,572) $ -- $ 620,852
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Net income (loss)................................. $ 321,546 ($ 220,158) $ -- $ 101,388
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Depreciation and amortization..................... $ 256,748 $ 29,525 $ -- $ 286,273
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Identifiable assets............................... $ 6,105,562 $ 1,023,455 $ 1,442,240 $ 5,686,777
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Capital expenditures.............................. $ 69,784 $ 21,681 $ -- $ 91,465
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
See Note 2 for summary of significant accounting policies.
F-27
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
INDEPENDENT AUDITORS' REPORT AS OF AND FOR SIX MONTHS ENDED JUNE 30, 1996......................... F-29
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996.................................................... F-30
CONSOLIDATED STATEMENTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995
UNAUDITED)...................................................................................... F-31
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR
SIX MONTHS ENDED JUNE 30, 1996.................................................................. F-32
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) FOR SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)..................................................................................... F-33
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995
UNAUDITED)...................................................................................... F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995
UNAUDITED)...................................................................................... F-35 - F-49
</TABLE>
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Judge Group, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheet of The Judge Group,
Inc. (formerly Judge, Inc.) and Subsidiaries as of June 30, 1996, and the
related consolidated statements of operations, shareholders' equity, and of cash
flows for the six months ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Judge Group,
Inc. (formerly Judge, Inc.) and Subsidiaries as of June 30, 1996, and the
consolidated results of their operations and their cash flows for the six months
ended June 30, 1996, in conformity with generally accepted accounting
principles.
Rudolph, Palitz LLP
September 17, 1996, except for Note 17, which is as of September 30, 1996
Plymouth Meeting, PA
F-29
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
JUNE 30,
1996
-----------
<S> <C>
ASSETS
CURRENT ASSETS
Cash............................................................................................. $ 28,433
Accounts receivable, net......................................................................... 11,368,815
Inventories...................................................................................... 679,366
Prepaid income taxes and deferred taxes.......................................................... 476,076
Other............................................................................................ 310,676
-----------
Total current assets........................................................................... 12,863,366
-----------
PROPERTY AND EQUIPMENT
Furniture, office and computer equipment......................................................... 2,711,775
Automotive equipment............................................................................. 42,224
Leasehold improvements........................................................................... 33,879
-----------
2,787,878
Less: accumulated depreciation and amortization.................................................... 1,236,625
-----------
Net property and equipment....................................................................... 1,551,253
-----------
OTHER ASSETS
Notes receivable -- officers and employees....................................................... 375,774
Other receivable, related party.................................................................. 106,812
Deposits......................................................................................... 102,384
Covenant not-to-compete, net of accumulated amortization of $581,293............................. 21,296
-----------
Total other assets............................................................................... 606,266
-----------
Total assets................................................................................... $15,020,885
-----------
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt................................................................ $ 303,291
Current portion of payroll tax obligation........................................................ 199,554
Accounts payable and accrued expenses............................................................ 4,517,019
Payroll and sales taxes.......................................................................... 610,025
Deferred revenue................................................................................. 571,414
Advances from shareholders....................................................................... 115,723
-----------
Total current liabilities...................................................................... 6,317,026
-----------
LONG-TERM LIABILITIES
Note payable, bank............................................................................... 6,358,063
Debt obligations, net of current portion......................................................... 646,425
Convertible notes................................................................................ 500,000
Deferred rent obligation......................................................................... 143,672
-----------
Total long-term liabilities.................................................................... 7,648,160
-----------
MINORITY INTEREST.................................................................................. 659,000
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, -- $.005 par value, 10,000,000 shares authorized, 160,000 shares issued and
outstanding.................................................................................... 800
Additional paid-in capital....................................................................... 450,938
Deficit.......................................................................................... (55,039)
-----------
Total shareholders' equity..................................................................... 396,699
-----------
Total liabilities and shareholders' equity..................................................... $15,020,885
-----------
-----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-30
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
NET REVENUES.................................................................. $37,327,166 $29,398,819
----------- -----------
COSTS AND EXPENSES
Cost of sales (Exclusive of items shown separately below)................... 27,587,582 22,291,180
Selling and operating....................................................... 6,363,990 4,562,365
General and administrative.................................................. 2,848,111 2,038,095
----------- -----------
Total costs and expenses................................................. 36,799,683 28,891,640
----------- -----------
INCOME FROM OPERATIONS........................................................ 527,483 507,179
OTHER EXPENSE, NET, PRINCIPALLY INTEREST
EXPENSE..................................................................... (371,439) (317,386)
----------- -----------
INCOME BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST IN NET LOSS OF
CONSOLIDATED SUBSIDIARY..................................................... 156,044 189,793
INCOME TAX EXPENSE............................................................ 203,500 254,911
----------- -----------
LOSS BEFORE MINORITY INTEREST IN NET LOSS OF CONSOLIDATED SUBSIDIARY.......... (47,456) (65,118)
MINORITY INTEREST IN NET LOSS OF CONSOLIDATED SUBSIDIARY...................... 229,000 --
----------- -----------
NET INCOME (LOSS)............................................................. $ 181,544 ($ 65,118)
----------- -----------
----------- -----------
NET INCOME (LOSS) PER SHARE:
PRIMARY..................................................................... $0.02 ($ 0.01)
----------- -----------
----------- -----------
FULLY DILUTED............................................................... $0.02 ($ 0.01)
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-31
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
SIX MONTHS ENDED JUNE 30, 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 (Notes 10, 11 and 15)................. -- -- (175,910) -- (175,910)
Net income................................................ -- -- -- 181,544 181,544
------- ------ ---------- --------- ---------
Balance, June 30, 1996.................................... 160,000 $800 $450,938 ($ 55,039) $ 396,699
------- ------ ---------- --------- ---------
------- ------ ---------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-32
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
--------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994.............................. 160,000 $800 $626,848 ($722,223) ($ 94,575)
Net loss................................................ -- -- -- (65,118) (65,118)
------- ----- ---------- --------- ---------
Balance, June 30, 1995.................................. 160,000 $800 $626,848 ($787,341) ($159,693)
------- ----- ---------- --------- ---------
------- ----- ---------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-33
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................................................................... $ 181,544 ($ 65,118)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization....................................................... 262,108 199,089
Deferred rent....................................................................... (13,271) 52,315
Provision for losses on accounts receivable......................................... 215,040 156,141
Minority interest in net loss of consolidated subsidiary............................ (229,000) --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable................................................................. (2,598,669) (1,481,556)
Inventories......................................................................... (125,166) (77,816)
Deposits............................................................................ (2,527) (14,843)
Prepaid taxes....................................................................... (135,692) (84,178)
Other current assets................................................................ 153,204 8,783
Increase (decrease) in:
Accounts payable and accrued expenses............................................... 740,386 (132,227)
Payroll and sales taxes............................................................. 91,453 96,049
Deferred revenue.................................................................... (87,985) (48,234)
Income taxes payable................................................................ -- (348,316)
---------- ----------
Net cash used in operating activities............................................. (1,548,575) (1,739,911)
---------- ----------
INVESTING ACTIVITIES
Purchases of property and equipment, net.............................................. (308,464) (157,024)
(Increase) in notes receivable, officers and employees, net........................... (260,022) 17,746
---------- ----------
Net cash used in investing activities............................................. (568,486) (139,278)
---------- ----------
FINANCING ACTIVITIES
Cash acquired in business combination................................................. 13,786 --
Proceeds from notes payable, bank, net................................................ 990,547 1,606,069
Proceeds from bank overdrafts......................................................... 417,000 453,000
Principal payments on long-term debt.................................................. (174,734) (207,391)
Repayments from shareholders.......................................................... (24,183) (19,098)
Issuance of Series A Preferred Shares, net of costs................................... 888,000 --
---------- ----------
Net cash provided by financing activities......................................... 2,110,416 1,832,580
---------- ----------
DECREASE IN CASH...................................................................... (6,645) (46,609)
CASH, BEGINNING....................................................................... 35,078 82,928
---------- ----------
CASH, ENDING.......................................................................... $ 28,433 $ 36,319
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the six month period for:
Interest............................................................................ $ 371,000 $ 315,000
---------- ----------
---------- ----------
Income taxes........................................................................ $ 298,000 $ 685,000
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-34
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS
The Judge Group, Inc. (formerly Judge, Inc.), a Pennsylvania corporation
founded in 1970 (the "Company") provides (i) information technology ("IT") and
engineering professionals to its clients on both a temporary basis (through its
"Contract Placement" business) and a permanent basis (through its "Permanent
Placement" business), and (ii) computer network and document management system
integration, implementation, maintenance and training (through its "Imaging and
Network Services" business). At June 30, 1996, the Company had offices in Bala
Cynwyd, Pennsylvania; Hartford, Connecticut; Foxborough, Massachusetts; Tampa,
Florida; and Moorestown and Edison, New Jersey.
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 is comprised of 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").
At June 30, 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 "DataImage"), 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 hold, on a fully diluted basis, a majority of the
outstanding common stock of JIS, which remains a public company.
The Imaging and Network Services business of the Company consists of the
operations of JCC prior to the JCC/DI Merger and JIS subsequent to the merger.
See Notes 11 and 15.
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 accompanying consolidated financial statements include the accounts of
Judge, Inc., JIS and the Company's wholly-owned subsidiaries, which include JTS,
JPS, JTNJ, JESF and JINJ, and Judge Hospitality Services, Inc. and Judge
Electronic Services of Boston, Inc. (which had no activity during the six months
ended June 30, 1996 and 1995). JCC (prior to the JCC/DI merger) and JIS
(subsequent to the JCC/DI merger) have been consolidated due to certain elements
of common ownership and control being present. All significant intercompany
accounts and transactions have been eliminated.
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
F-35
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 Imaging and Network Services Business
Revenues from the sales of network, imaging and document management systems
are recognized at the date of shipment of the system, provided that any work to
complete installation of the system is routine in nature and costs are not
significant. The system components are assembled and tested in the Company's
facilities prior to delivery. Revenues are recorded in the period in which the
merchandise is shipped or the services are rendered. 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.
Cash
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.
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.
Accounts Receivable and Accounts Payable
Included in accounts receivable was unbilled work-in-process of
approximately $1,289,000 at June 30, 1996. Included in accounts payable and
accrued expenses was approximately $941,000 of accrued employee and contractor
payroll principally relating to unbilled work-in-process at June 30, 1996.
F-36
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
An analysis of allowance for doubtful accounts follows:
<TABLE>
<CAPTION>
ADDITIONS
CHARGED
BALANCE AT TO BALANCE AT
BEGINNING OF BAD DEBT DEDUCTIONS END OF
SIX MONTHS ENDED JUNE 30, PERIOD EXPENSE (CHARGE OFFS) PERIOD
------------------------- ------------ -------- ------------- ----------
<S> <C> <C> <C> <C>
1996....................................................... $174,000 $215,000 ($ 92,000) $ 297,000
------------ -------- ------------- ----------
------------ -------- ------------- ----------
1995....................................................... $157,000 $156,000 ($ 47,000) $ 266,000
------------ -------- ------------- ----------
------------ -------- ------------- ----------
</TABLE>
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 amounted to
$189,460 for the six months ended June 30, 1996 and $126,441 for the six months
ended June 30, 1995.
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.
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, timing differences relating to the restrictive covenant described in
Note 12 (the "Restrictive Covenant"), amounts recorded for inventory
capitalization, 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.
F-37
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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").
Intangible Assets
The Restrictive Covenant (covenant-not-to-compete) is being amortized on a
straight-line method over the life of the covenant (forty-eight months).
Amortization expense related to the covenant was approximately $73,000 for the
six months ended June 30, 1996 and $73,000 for the six months ended June 30,
1995. See Notes 4, 12 and 17.
Deferred Rent Obligation
The Company is party to an operating lease agreement for its principal
office facilities, which contains a provision 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 term, divided by the number of months
of the lease term. The difference between rent expense recorded and the amount
paid is credited or charged to deferred rent obligation in the accompanying
consolidated balance sheet.
Advertising Costs
The Company participates in various advertising programs. All costs related
to advertising are expensed in the period incurred. Advertising expense amounted
to approximately $295,000 for the six months ended June 30, 1996 and $223,000
for the six months ended June 30, 1995.
Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("Statement 121"). Statement 121
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used, and for long-lived assets and certain identifiable intangibles to
be disposed of. Statement 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Measurement of an impairment
loss for long-lived assets and identifiable intangibles that an entity expects
to hold and use should be based on the fair value of an asset. Statement 121
became effective January 1, 1996 and did not have a material effect on the
Company's financial condition or results of operations.
In October 1995, FASB issued Statement No. 123 "Accounting for Stock-Based
Compensation," ("Statement 123"), which provides an alternative method of
accounting for stock-based compensation arrangements, based on fair value of the
stock-based compensation utilizing various assumptions regarding the underlying
attributes of the options and the underlying stock, rather than the existing
method of accounting for stock-based compensation which is provided in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25). FASB encourages entities to adopt the fair value-based
method but does not require adoption of this method. Statement 123 became
effective January 1, 1996 and, based upon information presently available, is
not expected to have a material impact on the Company's financial position or
its results of operations.
F-38
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Earnings (Loss) Per Share
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 subsequent to June 30, 1996 (see Note 17).
Primary earnings per share amounts were computed based on the weighted
average number of shares actually outstanding plus the shares that would be
outstanding assuming conversion of outstanding common share warrants (for the
six months ended June 30, 1996) which are considered common share equivalents.
See Note 11. The number of shares used in the computation were approximately
8,588,000 and 8,416,000 for the six months ended June 30, 1996 and 1995,
respectively.
Fully diluted earnings (loss) per share amounts for the six months ended
June 30, 1996 and 1995 were based on the weighted average number of shares
calculated for primary earnings (loss) per share purposes increased by the
number of shares that would be outstanding assuming conversion of outstanding
convertible notes (for the six months ended June 30, 1996) (see Note 6). The
number of shares used in the computation were approximately 9,114,000 and
8,416,000 for the six months ended June 30, 1996 and 1995, respectively.
Fair Value of Financial Instruments
The estimated fair values of substantially all of the Company's financial
instruments (all of which are held for non trading purposes) are approximately
equal to their carrying values at all periods presented.
NOTE 3. NOTE PAYABLE, BANK
Note payable, bank, consisted of advances to the Company, JTS and JIS under
a $6,400,000 line of credit at June 30, 1996. At June 30, 1996, this line of
credit bore interest at the prime rate plus 1% per annum (9.25% at June 30,
1996), and maximum permitted borrowing thereunder was the lesser of $6,400,000
or 80% 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, is personally guaranteed by certain shareholders and the wife
of a shareholder, and is subject to certain financial covenants. In addition,
the Company and all of its subsidiaries are jointly and severally responsible
for all of the debt outstanding under the line. Prior to January 1, 1995, the
line of credit was due on demand. At June 30, 1996, the Company was in violation
of certain financial and transactional covenants on this line. Effective through
June 30, 1996, the Bank waived compliance with the "Liabilities to Tangible Net
Worth" ratio and also allowed the Company to incur additional debt and related
liens be placed on certain property and equipment. In addition, subsequent to
June 30, 1996, the Bank extended the maturity date of the line from May 31, 1997
to May 31, 1998, permanently waived or modified certain financial and
transactional covenants, and increased the maximum permitted borrowings. See
Note 17.
Included in accounts payable and accrued expenses at June 30, 1996, were
approximately $1,755,000 of bank overdrafts.
F-39
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 4. LONG-TERM DEBT
Long-term debt at June 30, 1996 consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1996
--------
<S> <C>
Note payable, Restrictive Covenant; payable in monthly installments of $13,194, including
interest imputed at 8.0%, through August 1998 (see Note 12); repaid in full subsequent
to June 30, 1996 (see Note 17)......................................................... $311,680
Note payable, stock; payable in monthly payments of $2,039, including interest at 5.0%,
through August 1998 (see Note 12); repaid in full subsequent to June 30, 1996 (see Note
17).................................................................................... 50,140
Capital lease obligations; payable in monthly installments currently aggregating $3,471,
including interest at various rates, through March 2000; the leases transfer ownership
of certain office equipment to the Company at the end of the respective lease terms.... 105,994
Capital lease obligations; payable in monthly installments currently aggregating $7,369,
including interest at various rates, through December 1999; the leases transfer
ownership of certain office equipment to the Company at the end of the respective lease
terms.................................................................................. 160,653
Equipment note payable; payable in monthly installments of $1,247, including interest at
8.85%, through December 1999; collateralized by certain equipment...................... 44,058
Equipment note payable; payable in monthly installments of $5,868, including interest at
8.5%, through March 2001; collateralized by certain computer equipment and personally
guaranteed by the Company's majority shareholder....................................... 274,191
Related Parties:
Martin E. Judge, Jr. (Founder, Chairman and Chief Executive Officer of the Company) --
non-interest bearing................................................................... 3,000
--------
949,716
Less: current portion.................................................................... (303,291)
--------
Long-term portion........................................................................ $646,425
--------
--------
</TABLE>
F-40
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 4. LONG-TERM DEBT -- (CONTINUED)
The following is a schedule of debt maturities:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDING JUNE 30, AMOUNT
--------------- --------
<S> <C>
1997............................................................. $303,291
1998............................................................. 309,332
1999............................................................. 171,701
2000............................................................. 114,577
2001............................................................. 50,815
--------
$949,716
--------
--------
</TABLE>
Subsequent to June 30, 1996, $201,143 of debt obligations related to the
Company's stock redemption (see Note 12) due during the twelve month periods
ending June 30, 1998 and 1999 were paid in full in satisfaction of all amounts
due related to those obligations. See Note 17.
Interest expense charged to operations was approximately $371,000 in 1996
and $307,000 in 1995.
NOTE 5. ADVANCES FROM SHAREHOLDERS
JCC had advances from shareholders of $115,723 at June 30, 1996. There are
no formal repayment terms, however, interest is charged monthly at various rates
(from prime plus 1% to a fixed rate of 12%). Interest expense related to these
advances was approximately $7,000 and $9,000 for the six months ended June 30,
1996 and 1995, 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 which
bear a 10% interest rate per annum and mature in July 1997, are subject to
certain financial covenants and are convertible into 526,000 common shares
(split adjusted) (see Note 2) upon the occurrence of certain events. The notes
may be redeemed at any time, subject to certain contingent interest and other
provisions. In addition, should the Company effect a successful initial public
offering before July 31, 1997, the financial advisor who arranged such financing
is entitled to receive a fee equal to 1% of the proceeds of the initial public
offering (approximately $300,000). The notes are guaranteed by JTS and JESF.
Effective through June 30, 1996, the Company was in violation of the capital
expenditure limitation for which a permanent waiver was received for 1996. The
Company expects that the notes will be exchanged for 526,000 Company Common
Shares immediately prior to the Offering.
NOTE 7. INCOME TAXES
In 1991, the Company filed a consolidated Federal income tax return with
its wholly-owned subsidiaries. JTS and JCC were not included in the Company s
consolidated Federal income tax return, as the Company owned less than 80% of
each such Company's outstanding common shares at December 31, 1991. Under
Internal Revenue regulations, JTS and JCC were not part of the consolidated
group for tax purposes and filed their own Federal income tax returns. In 1992,
JTS became a wholly owned subsidiary of the Company, but continued to file its
own Federal income tax returns. In 1995, JTS filed a consolidated tax return
with its wholly-owned subsidiaries, JPS and JTNJ.
F-41
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 7. INCOME TAXES -- (CONTINUED)
State income taxes are determined on the basis of filing separate returns for
each Company as required by the applicable state regulations.
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," as of January 1, 1993.
In accordance with APB 28 (interim financial reporting), income taxes are
calculated at the estimated effective annual (Federal and state) rate of
approximately 40% for the six months ended June 30, 1996 and 1995.
The effective tax rate for 1996 and 1995 was higher than the applicable
statutory tax rate, due to certain expenses that were not deductible for tax
purposes and net operating losses for JCC, which is consolidated for financial
reporting but not tax purposes. A reconciliation of the Company's effective
income tax rate with the statutory federal rate follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Tax at statutory rate (34%).............................................. $ 53,000 $ 65,000
Effect of losses of subsidiary not consolidated for tax
purposes............................................................... 144,000 85,000
Non-deductible tax penalties and other permanent
differences............................................................ -- 64,000
State income taxes, net of Federal tax benefit........................... 20,500 55,000
Federal income tax rate differentials due to surtax
exemptions............................................................. (14,000) (14,000)
-------- --------
$203,500 $255,000
-------- --------
-------- --------
</TABLE>
As a result of operating losses, no provision for income taxes was required
in 1996 or 1995 for JIS. For income tax reporting purposes, as of December 31,
1995, JIS had an unused operating loss carryforward of approximately $2,355,000,
which may be applied against future taxable income of JIS. These carryforwards
expire between 2002 and 2010.
NOTE 8. COMMITMENTS
The Company and its subsidiaries lease several office facilities under
operating lease agreements that expire at various times through the year 2000.
Rent expense was approximately $392,000 and $251,000 for the six months ended
June 30, 1996 and 1995, respectively. Minimum annual future rental commitments,
exclusive of common area maintenance costs and utilities, are as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDING JUNE 30, AMOUNT
--------------- --------
<S> <C>
1997........................................................... $ 846,000
1998........................................................... 828,000
1999........................................................... 798,000
2000........................................................... 749,000
----------
$3,221,000
----------
----------
</TABLE>
F-42
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 8. COMMITMENTS -- (CONTINUED)
The Company is self-insured for workers' compensation purposes and is
liable for aggregate claims up to approximately $185,000 for calendar 1996 and
$78,000 for calendar 1995. In addition, the Company is responsible for certain
fixed costs including underwriting, brokerage, reinsurance and administration
costs.
The Company is partially self-insured for health care claims for eligible
active employees. The Company is liable for aggregate claims up to approximately
$418,000 annually at June 30, 1996. Self-insurance costs are accrued based upon
the aggregate of the liability for reported claims and an estimated liability
for claims incurred but not reported.
NOTE 9. RETIREMENT PLANS
The Company has various 401(k) retirement plans (the "Plans") covering
substantially all employees. Employees may contribute a percentage of their
pre-tax salary to the Plans. Company contributions to the Plans are at the
discretion of the Board of Directors. The Company charged $-0- to operations
related to the Plans in 1996 and 1995.
Effective July 1, 1996, all the Plans were merged into one Plan. The new
Plan has no Company contribution provision.
NOTE 10. SHAREHOLDERS' EQUITY (DEFICIT) AND EARNINGS PER SHARE
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 3).
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 (see Notes 11 and 15).
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) authorized the issuance of 10,000,000 preferred shares with a par value of
$.01 per share, (iv) authorized a 52.6 to 1.0 split of the outstanding common
shares for shareholders of record on September 23, 1996, (v) authorized a change
of the Company's name from "Judge, Inc." to "The Judge Group, Inc." and (vi)
authorized the formation of a new subsidiary, Judge, Inc., and the contribution
of substantially all the assets related to the Permanent Placement business into
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. Subsequent to June 30,
1996, such warrants were exercised. See Note 17.
F-43
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 10. SHAREHOLDERS' EQUITY (DEFICIT) AND EARNINGS PER SHARE -- (CONTINUED)
Stock Option Plan
Subsequent to June 30, 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. No options have been
granted under the Incentive Plan.
NOTE 11. CAPITAL STRUCTURE OF JIS
Common Stock
In 1993, JCC issued to a financial advisor warrants to purchase common
shares of JCC equal to 2% of its outstanding common shares at a purchase price
of $.005 per share. JCC issued 211,327 common shares to the financial adviser in
1995 upon the exercise of these warrants.
Preferred Shares
During 1991, the capital structure of JCC was modified to authorize
10,000,000 $.10 par value preferred shares. During 1991, $100,000 of debentures
and $266,577 of investor loans payable were converted to 1,000,000 and 2,665,770
preferred shares, respectively. Accrued interest of approximately $97,000
relating to these payables was contributed to capital.
The JCC preferred shares bore cumulative dividends at an annual rate of
$.005 per share. Cumulative dividends in arrears at June 30, 1995 were
approximately $65,000. No dividends were declared or paid in 1995 or 1996. At
June 30, 1995, these preferred shares were eliminated in consolidation and were
presented at no value in minority interest, due to the extent of JCC's
shareholders' deficit at June 30, 1995. 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 additional preferred
shares, consisting of 1,125,000 $.01 par value Series A convertible preferred
shares ("JCC Series A Preferred") and 25,000 $1,000 stated value Series B
preferred shares ("JCC Series B Preferred").
In February 1996, JCC raised approximately $1,097,000 ($888,000, net of
costs) in a private offering of 822,628 JCC Series A Preferred shares at a
purchase price per share of $1.33. The JCC Series A Preferred shares were
convertible into JCC common shares at the holder's option, and conversion was
mandatory at the time of a subsequent public offering of common shares by JCC in
excess of $5 million. The JCC Series A Preferred shares carried a cumulative
dividend of 7% per year, and holders had a liquidation preference prior to the
common shareholders and all other existing classes. At the effective time of the
JCC/DI Merger, these preferred shares were converted into the same number of JIS
Series A convertible preferred shares ("JIS Series A Preferred") with
essentially the same rights and privileges. In the event JIS does not complete a
public offering by the eighth anniversary of the JCC/DI Merger, then JIS will
have the right to redeem the outstanding JIS Series A Preferred shares. See Note
15. At June 30, 1996, the JIS Series A Preferred stock is presented at $659,000
as "minority interest" in the accompanying consolidated balance sheet.
Approximately $229,000 of JIS losses have been allocated to this minority
interest in the June 30, 1996 accompanying
F-44
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 11. CAPITAL STRUCTURE OF JIS -- (CONTINUED)
consolidated statement of operations. It is expected that each outstanding share
of JIS Series A Preferred stock will be converted into one share of JIS common
stock in connection with the Merger (see Note 17).
In February 1996 and at the effective time of the JCC/DI Merger, advances
from the Company to JCC in the aggregate of $1,520,000 were converted into 1,500
JCC Series B Preferred shares, which were immediately converted into the same
number of shares of Series B preferred stock of JIS ("JIS Series B Preferred").
The JIS Series B Preferred stock carries a cumulative annual dividend of 10%,
are not convertible, do not have a liquidation preference and are subject to
mandatory redemption. These shares are eliminated in consolidation.
NOTE 12. STOCK REDEMPTION (JTS)
An employee of JTS (the "Minority Shareholder") acquired an aggregate of
400 common shares of JTS over a period of time ending in 1990. The aggregate
purchase price for these shares was paid by the Minority Shareholder in the form
of unsecured promissory notes. At December 31, 1991, the aggregate outstanding
principal amount of these notes was $66,409.
On August 12, 1992, JTS redeemed the Minority Shareholder's shares for
$266,000 (of which $40,000 was paid in cash, $59,405 represented debt
forgiveness, and $126,595 was payable in 72 equal monthly installments). In
connection with this redemption, JTS agreed to pay the Minority Shareholder
$13,527 per month for six years ($950,000 in the aggregate). The restrictive
covenant set forth in the agreement and the related liability were recorded at
the net present value of the payments, at an assumed interest rate of 8% (or
$752,539). The unpaid portions of the above liabilities were satisfied in full
by JTS subsequent to June 30, 1996. See Notes 4 and 17.
NOTE 13. SETTLEMENT OF PAYROLL TAX OBLIGATION
During 1994, the Company entered into an agreement with the Internal
Revenue Service (the "IRS") regarding the payment of approximately $882,000 of
past-due payroll taxes, relating principally to the second and third quarters of
1993, and related assessed interest.
The parties agreed to an extended repayment term requiring a $150,000 down
payment and $22,000 per month beginning June 1994 until the total liability,
which had been subordinated to the Company's bank, was paid in full. In
connection with the past due payroll taxes, the Company was disputing certain
related penalty and interest amounts. Subsequent to June 30, 1996, the Company
entered into a tentative settlement agreement with the IRS, and at June 30,
1996, approximately $280,000 for penalty and interest is included in accounts
payable and accrued expenses in the accompanying consolidated balance sheet,
bringing the total outstanding liability related to the payroll taxes to
approximately $479,000 at June 30, 1996. In July 1996, the remaining liability
existing at that time, including penalty and interest, was paid in full. See
Note 17.
NOTE 14. STATEMENT OF CASH FLOWS
Supplemental disclosure of non-cash investing and financing transactions:
During the six months ended June 30, 1996 and 1995, the Company entered
into certain financing arrangements for the purchase of property and equipment
in the amounts of approximately $348,000 and $88,000, respectively.
F-45
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 14. STATEMENT OF CASH FLOWS -- (CONTINUED)
Effective February 29, 1996, JCC and DI effected a Business Combination
(see Note 15):
Acquisition of Business:
<TABLE>
<S> <C>
Inventories.................................................................. $ 39,101
Accounts receivable.......................................................... 104,127
Property and equipment....................................................... 150,034
Other assets................................................................. 10,780
---------
304,042
---------
Accounts payable and accrued expenses........................................ (82,087)
Due to the Company........................................................... (100,000)
Deferred revenue and customer deposits....................................... (362,037)
---------
(544,124)
---------
Net assets acquired (liabilities assumed) in business
combination................................................................ ($240,082)
---------
---------
</TABLE>
NOTE 15. BUSINESS COMBINATION (THE JCC/DI MERGER)
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. In
connection with the merger, the Certificate of Incorporation of JIS was amended
to increase its authorized capital by 1,125,000 shares of $.01 value JIS Series
A Preferred stock, 1,500 shares of $1,000 stated value JIS Series B Preferred
stock and 3,873,500 shares of "blank check" preferred stock (for an aggregate of
5,000,000 shares of new preferred stock). The JIS Series A Preferred and JIS
Series B Preferred stock have essentially the same rights and privileges as the
JCC Series A Preferred shares and JCC Series B Preferred shares existing
immediately prior to the merger.
In the JCC/DI Merger, each stockholder of DI received one share of JIS
common stock for every 31.96 shares of DI common stock held thereby immediately
prior to the merger, and each shareholder of JCC received one share of JIS
common stock for every 2.83 common shares of JCC held thereby immediately prior
to the merger. In addition, the JCC Series A Preferred shares and the JCC Series
B Preferred shares outstanding prior to the JCC/DI Merger were converted into
the same numbers of JIS Series A Preferred and JIS Series B Preferred stock,
respectively.
The conversion ratios were calculated so that, after giving effect to
certain reserved shares for issuance to employees following the merger and
assuming the sale of the maximum of 1,125,000 JCC Series A Preferred shares
offered in JCC's 1995 private offering (822,628 were actually sold) and the
conversion of such maximum number of JCC Series A Preferred shares into JCC
common shares, there would be approximately 5,000,000 shares of common stock of
JIS outstanding immediately following the merger, of which holders of DI common
stock immediately prior to the merger were to receive in the aggregate
approximately 5% (approximately 250,000 shares) and the holders of JCC common
shares and JCC Series A Preferred shares immediately prior to the merger were to
receive in the aggregate approximately 95% (approximately 4,750,000 shares). The
JCC Series B Preferred stock was not included in the foregoing percentage
calculations.
F-46
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 15. BUSINESS COMBINATION (THE JCC/DI MERGER) -- (CONTINUED)
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 DataImage, Inc. (which changed its name to Judge Imaging
Systems, Inc. immediately after the JCC/DI merger) for the period subsequent to
the merger.
NOTE 16. SEGMENT INFORMATION
The Company's operations cover two industry segments, the Contract and
Permanent Placement segment (consisting of the Company's Contract Placement
business and Permanent Placement business) and the Imaging and Network Services
segment. The following represents financial information for each of the
Company's reportable industry segments:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
-------------------------------------------------------------
CONTRACT AND IMAGING AND
PERMANENT NETWORK
PLACEMENT SERVICES ELIMINATIONS TOTAL
--------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers................... $31,217,187 $ 6,109,979 $ -- $37,327,166
Intersegment sales................................ -- 44,520 44,520 --
--------------- ----------- ------------ -----------
Total revenues.................................. $31,217,187 $ 6,154,499 $ 44,520 $37,327,166
--------------- ----------- ------------ -----------
--------------- ----------- ------------ -----------
Income (loss) from operations..................... $ 862,784 ($ 335,301) $ -- $ 527,483
--------------- ----------- ------------ -----------
--------------- ----------- ------------ -----------
Net income (loss)................................. $ 377,827 ($ 425,283) ($ 229,000) $ 181,544
--------------- ----------- ------------ -----------
--------------- ----------- ------------ -----------
Depreciation and amortization..................... $ 212,228 $ 49,880 $ -- $ 262,108
--------------- ----------- ------------ -----------
--------------- ----------- ------------ -----------
Identifiable assets............................... $13,412,406 $ 3,477,404 $ 1,868,925 $15,020,885
--------------- ----------- ------------ -----------
--------------- ----------- ------------ -----------
Capital expenditures.............................. $ 511,935 $ 144,924 $ -- $ 656,859
--------------- ----------- ------------ -----------
--------------- ----------- ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1995
-------------------------------------------------------------
CONTRACT AND IMAGING AND
PERMANENT NETWORK
PLACEMENT SERVICES ELIMINATIONS TOTAL
--------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers................... $26,261,472 $ 3,137,347 $ -- $29,398,819
Intersegment sales................................ -- 240,000 240,000 --
--------------- ----------- ------------ -----------
Total revenues.................................. $26,261,472 $ 3,377,347 $ 240,000 $29,398,819
--------------- ----------- ------------ -----------
--------------- ----------- ------------ -----------
Income (loss) from operations..................... $ 631,393 ($ 124,214) $ -- $ 507,179
--------------- ----------- ------------ -----------
--------------- ----------- ------------ -----------
Net income (loss)................................. $ 184,480 ($ 249,598) $ -- ($ 65,118)
--------------- ----------- ------------ -----------
--------------- ----------- ------------ -----------
Depreciation and amortization..................... $ 179,431 $ 19,658 $ -- $ 199,089
--------------- ----------- ------------ -----------
--------------- ----------- ------------ -----------
Identifiable assets............................... $ 9,979,886 $ 1,295,524 $ 1,783,298 $ 9,492,112
--------------- ----------- ------------ -----------
--------------- ----------- ------------ -----------
Capital expenditures.............................. $ 209,581 $ 35,443 $ -- $ 245,024
--------------- ----------- ------------ -----------
--------------- ----------- ------------ -----------
</TABLE>
See Note 2 for summary of significant accounting policies.
F-47
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 17. SUBSEQUENT EVENTS
Subsequent to June 30, 1996, the following occurred:
o The Company (JTS) reached a settlement agreement with the IRS regarding
past due payroll taxes and related interest and penalties (Note 13);
o The Company (JTS) reached an agreement with a former minority shareholder
(Note 12) to settle at less than face value the remaining balances on
certain notes payable (Note 4);
o The Company increased its Bank credit facility to approximately
$11,000,000 (Note 3);
o The Company engaged an investment banking firm to assist it in a public
offering of its common stock;
o The Company adopted an Incentive Stock Option and Non-Qualified Stock
Option Plan for key employees and non-employee directors (Note 10);
o The Company modified its capital structure, authorized a stock split, and
formed a new subsidiary (Note 10);
o The common stock warrants to purchase 171,739 shares (split-adjusted) of
the Company described in Note 10 have been exercised;
o The Boards of Directors of the Company and JIS approved the merger of JIS
into a newly-formed, wholly-owned subsidiary of the Company. This merger
is subject to approval by the stockholders of JIS and a successful public
offering of the Company s common shares. The terms of the merger call for
the conversion of each share of JIS common stock and JIS Series A
Preferred stock into $2.50 of value based on the public offering price of
the Company's common stock. Based upon the expected offering price of
$10.00 per share, it is anticipated that approximately 900,000 shares of
the Company's common stock will be issued to stockholders of JIS;
o Effective September 30, 1996 the Company purchased 100% of the issued and
outstanding stock of The Berkeley Corp. ("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 payable
principally in cash and notes payable. In the event the Company completes
an initial public offering of stock before March 31, 1997, $300,000 of
the notes payable will be converted into the number of shares of the
Company's common stock calculated by using the price per share of the
public offering. Also within 30 days of the consummation of a public
offering of stock, a portion of the notes payable, calculated as
$1,060,000 less cash payments made to date, will be due and payable in
cash. A portion of the purchase price, $572,200, is contingent on
Berkeley attaining certain pre-tax income amounts in 1996 and/or 1997.
The merger was accounted for as a purchase. The excess of acquisition
cost over the fair value of net assets, assumed to equal its book value,
was approximately $2,220,000 which will be amortized over fifteen years,
beginning in October 1996; and
F-48
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
(FORMERLY JUDGE, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (1995 UNAUDITED)
NOTE 17. SUBSEQUENT EVENTS -- (CONTINUED)
o Effective September 30, 1996 the Company purchased substantially all of
the tangible and intangible assets, and assumed significantly all of the
liabilities, of Systems Automation, Inc. ("System 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 payable in cash and
notes payable. In the event that the Company completes an initial public
offering, the remainder of any notes payable become due and payable in
cash within 15 days of the consummation of such public offering. The
acquisition was accounted for as a purchase. The excess of acquisition
cost over the fair value of net assets, assumed to equal its book value,
was approximately $1,040,000 which will be amortized over ten years
beginning in October 1996.
F-49
<PAGE>
THE JUDGE GROUP, INC.
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<S> <C>
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS...................................................... F-51
NOTES TO PRO FORMA CONSOLIDATING BALANCE SHEET,
SEPTEMBER 30, 1996.............................................................................. F-52
PRO FORMA CONSOLIDATING BALANCE SHEET, SEPTEMBER 30, 1996......................................... F-53 - F-54
NOTES TO PRO FORMA CONSOLIDATING STATEMENTS OF OPERATIONS,
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND YEAR ENDED
DECEMBER 31, 1995............................................................................... F-55 - F-56
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS, YEAR
ENDED DECEMBER 31, 1995......................................................................... F-57
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS, NINE
MONTHS ENDED SEPTEMBER 30, 1996................................................................. F-58
</TABLE>
F-50
<PAGE>
THE JUDGE GROUP, INC.
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma consolidating financial statements give
effect to a public offering of common shares of the Company as described
elsewhere in this Prospectus, certain proposed transactions of the Company,
including, a conversion of the Company's convertible notes in the aggregate
principal amount of $500,000 into 526,000 shares of its Common Stock, and a
certain business combination with JIS (a consolidated subsidiary of the
Company). The pro forma balance sheet gives effect to all of the transactions as
if they occurred on September 30, 1996. The pro forma balance sheet is presented
for informational purposes only and does not purport to be indicative of the
financial condition that actually would have resulted if the business
combinations had been consummated at September 30, 1996. The pro forma
statements of operations for 1995 and for the nine months ended September 30,
1996, give effect to all of the business transactions as if they occurred on
January 1, 1995. The pro forma statements of operations are also presented for
informational purposes only and do not purport to be indicative of the results
of operations that actually would have been achieved if the business
combinations had been consummated at January 1, 1995. The pro forma adjustments
relate to various transactions which occurred subsequent to September 30, 1996
and/or which will occur prior to or on the effective date of the proposed public
offering. These pro forma financial statements should be read in conjunction
with the separate historical financial statements of the Company and JIS, and
the notes thereto, which are included elsewhere in this Prospectus.
The pro forma consolidating statements of operations include the results of
operations of The Berkeley Associates Corp. ("Berkeley") (acquired September 26,
1996) and Systems Automation, Inc. ("Systems Automation") (acquired September
30, 1996) on a pro forma basis as though their business combinations with the
Company occurred on January 1, 1995. For a description of those business
combinations see Note 4 of Notes to the September 30, 1996 Consolidated
Financial Statements of The Judge Group, Inc.
The pro forma consolidating statements of operations include the results of
operations of JIS on a pro forma basis as though the JCC/DI Merger (which
actually occurred on February 29, 1996) occurred on January 1, 1995. For a
description of that business combination see Notes 4 and 17 of Notes to the
September 30, 1996 and June 30, 1996 Consolidated Financial Statements of The
Judge Group, Inc., respectively. In addition, as more fully described elsewhere
in this Prospectus, immediately prior to the public offering, JIS will be merged
into a newly organized, wholly-owned subsidiary of the Company. The newly
organized subsidiary will be the surviving corporation and change its name to
Judge Imaging Systems, Inc. As a result, JIS will become a wholly-owned
subsidiary of the Company at the time of the offering. In the Merger, each JIS
common share (not already owned by the Company) or Series A preferred share
outstanding at the time of the Merger will be converted in the Merger into $2.50
of value, payable in the Company Common Shares. 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 are owned by
the Company, Martin E. Judge, Jr. or other owners of the Company securities,
will be 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") will be accounted for in accordance with "purchase
accounting" whereby the pro rata portion of JIS's assets and liabilities as of
September 30, 1996 will be 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 will be
recorded as goodwill.
F-51
<PAGE>
THE JUDGE GROUP, INC.
NOTES TO PRO FORMA CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(1) Adjustment to record $19,810,000 proceeds from the sale of 3,000,000
shares of common stock at $7.50 per share, net of commissions of $1,590,000 and
estimated costs of approximately $1,100,000; record payment of $100,000 for
accounts payable and $735,000 for notes payable to the sellers of Berkeley at
the (assumed) successful completion of the public offering; record payment for
note payable to sellers of Systems Automation of $472,252 cash at the (assumed)
successful completion of the public offering.
(2) Adjustments to record the following equity transactions:
<TABLE>
<S> <C>
Sale and issuance of 3,000,000 shares of common stock of the Company, par
value $.01............................................................... $ 30,000
Issuance of 40,000 shares of common stock of the Company, par value $.01 to
sellers of Berkeley ($300,000/$7.50)..................................... 400
Merger of JIS into a wholly-owned subsidiary of the Company; issuance of
1,190,330 of the Company shares ($.01 par value) in exchange for
2,748,363 common shares and 822,628 preferred shares of JIS.............. 11,903
Conversion of convertible notes (see note 3 below)......................... 5,260
---------------
Pro forma adjustments to common stock...................................... $ 47,563
---------------
---------------
Additional paid in capital from sale of 3,000,000 shares of common stock of
the Company ($19,810,000 proceeds less $30,000 common stock issued
above)................................................................... 19,780,000
Paid in capital from issuance of 40,000 shares of common stock to sellers
of Berkeley.............................................................. 299,600
Merger of JIS into a wholly-owned subsidiary of the Company (see above).... 2,387,287
Conversion of convertible notes (see note 3 below)......................... 494,740
---------------
Pro forma adjustments to additional paid in capital........................ $ 22,961,627
---------------
---------------
Reduction of minority interest due to merger of JIS into a wholly-owned
subsidiary of the Company (see above).................................... ($ 271,248)
---------------
---------------
</TABLE>
(3) Adjustment to record conversion of $500,000 of convertible notes into
526,000 of the Company's Common Shares as more fully explained in Note 8 of
Notes to the September 30, 1996 Consolidated Financial Statements of The Judge
Group, Inc.
F-52
<PAGE>
THE JUDGE GROUP, INC.
PRO FORMA CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
THE JUDGE GROUP, INC. PRO FORMA CONSOLIDATED
SEPTEMBER 30, 1996 ADJUSTMENTS SEPTEMBER 30, 1996
--------------------- ----------- ------------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash............................................... $ 153,942 $18,502,748 $ 18,656,690
Accounts receivable, net........................... 12,956,917 12,956,917
Inventories........................................ 912,303 912,303
Prepaid taxes and deferred tax benefit............. 334,976 334,976
Other.............................................. 993,948 0 993,948
----------- ----------- ------------
TOTAL CURRENT ASSETS............................... 15,352,086 18,502,748 33,854,834
----------- ----------- ------------
PROPERTY AND EQUIPMENT:
Furniture and office equipment..................... 3,570,438 3,570,438
Automotive equipment............................... 37,936 37,936
Leasehold improvements............................. 46,565 0 46,565
----------- ----------- ------------
3,654,939 0 3,654,939
Less: accumulated depreciation and amortization.... 1,774,499 0 1,774,499
----------- ----------- ------------
NET PROPERTY AND EQUIPMENT...................... 1,880,440 0 1,880,440
----------- ----------- ------------
OTHER ASSETS:
Due from subsidiaries/affiliate.................... 0 0 0
Receivables -- officers and employees.............. 431,890 0 431,890
Deposits........................................... 108,183 0 108,183
Investment in subsidiaries, at cost................ 0 0 0
Other.............................................. 155,908 0 155,908
Goodwill........................................... 3,259,202 2,127,942(2) 5,387,144
Covenant not to compete, net of accumulated
amortization.................................... 0 0 0
----------- ----------- ------------
TOTAL OTHER ASSETS.............................. 3,955,183 2,127,942 6,083,125
----------- ----------- ------------
$21,187,709 $20,630,690 $ 41,818,399
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
F-53
<PAGE>
THE JUDGE GROUP, INC.
PRO FORMA CONSOLIDATING BALANCE SHEET -- (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PRO FORMA
THE JUDGE GROUP, INC. PRO FORMA CONSOLIDATED
SEPTEMBER 30, 1996 ADJUSTMENTS SEPTEMBER 30, 1996
--------------------- ----------- ------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt................. $ 940,709 ($ 327,285)(1) $ 613,424
Other note payable................................ 196,193 0 196,193
Accounts payable and accrued
expenses....................................... 5,669,388 (100,000)(1) 5,569,388
Payroll and sales taxes........................... 606,438 0 606,438
Income taxes payable.............................. 42,981 0 42,981
Deferred revenue and customer
deposits....................................... 1,333,661 0 1,333,661
Convertible debentures............................ 500,000 (500,000)(3) 0
Advances from shareholders........................ 105,263 0 105,263
----------- ----------- ------------
TOTAL CURRENT LIABILITIES...................... 9,394,633 (927,285) 8,467,348
----------- ----------- ------------
LONG-TERM LIABILITIES:
Note payable, bank................................ 7,146,185 0 7,146,185
Deferred rent obligation.......................... 137,038 0 137,038
Due to subsidiaries............................... 0 0 0
Debt obligations, net of current portion.......... 1,376,886 0 1,376,886
Note payable Systems Automation................... 297,014 (297,014)(1) 0
Note payable, Berkeley shareholders............... 1,598,428 (882,953)(1)(2) 715,475
----------- ----------- ------------
TOTAL LONG-TERM LIABILITIES.................... 10,555,551 (1,179,967) 9,375,584
----------- ----------- ------------
MINORITY INTEREST................................... 271,248 (271,248)(2) 0
-----------
SHAREHOLDERS' EQUITY:
Common stock...................................... 85,877 47,563(2) 133,440
Preferred stock................................... 0 0 0
Additional paid-in capital........................ 365,877 22,961,627 23,327,504
Retained earnings (deficit)....................... 514,523 0 514,523
----------- ----------- ------------
966,277 23,009,190 23,975,467
Less: Treasury stock, at cost..................... 0 0 0
----------- ----------- ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........... 966,277 23,009,190 23,975,467
----------- ----------- ------------
$21,187,709 $20,630,690 $ 41,818,399
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
F-54
<PAGE>
THE JUDGE GROUP, INC.
NOTES TO PRO FORMA
CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(1) Adjustments to reflect amortization from goodwill. Goodwill is
calculated as follows:
Berkeley acquisition --
<TABLE>
<S> <C> <C>
Cash at settlement...................................................... $ 175,000
Cash payments of $50,000 per month from October through
December 1996......................................................... 150,000
Holdback payments, subject to net income tests, payable by issuance of
promissory notes 30 days after net income is finally determined, at 8%
per annum over 36 months.............................................. 572,200
Cash payable within 30 days of consummation of public offering.......... 735,000
40,000 Judge common shares.............................................. 300,000
Notes payable, at 8% per annum interest in 44 equal monthly
installments.......................................................... 300,000
-----------
Purchase price.......................................................... $ 2,232,200
-----------
-----------
Less: Net asset value................................................... 154,055
Plus: Cost of acquisition............................................... 141,484
-----------
Goodwill................................................................ $ 2,219,629 $ 2,219,629
-----------
-----------
</TABLE>
Goodwill to be amortized equally over 15 years in equal monthly
installments of $12,331
Systems Automation acquisition --
<TABLE>
<S> <C> <C>
Cash at settlement...................................................... $ 75,000
Cash payable within 15 days of consummation of the public offering...... 472,252
-----------
Purchase price.......................................................... $ 547,252
-----------
-----------
Less: Net asset value................................................... (479,357)
Plus: Cost of acquisition............................................... 12,964
-----------
Goodwill................................................................ $ 1,039,573 1,039,573
----------- -----------
-----------
Goodwill to be amortized equally over 10 years in equal monthly
installments of $8,663
Total Goodwill, September 30, 1996............................. $ 3,259,202
-----------
-----------
</TABLE>
JIS Merger --
<TABLE>
<S> <C>
Minority interest shares................................................ 959,676
Value per share to be received in Company common shares................. $ 2.50
-----------
Aggregate value of Company common shares to be received by minority
shareholders.......................................................... 2,399,190
Minority interest recorded at September 30, 1996........................ (271,248)
-----------
Goodwill................................................................ $ 2,127,942
-----------
-----------
Goodwill to be amortized equally over 15 years in equal monthly
installments of $11,822.
Total goodwill amortization, all transactions is $32,816 per month.
Amortization for year ended December 31, 1995 is $393,795
Amortization for nine months ended September 30, 1996 is $295,347
</TABLE>
F-55
<PAGE>
(2) Adjustments to reflect interest expense on notes payable, resulting
from business combination with Berkeley of $57,783 in the year ended December
31, 1995 and $46,472 in the nine months ended September 30, 1996.
(3) Adjustments to record reduction in interest expense, relating to
conversion of convertible notes into the Company Common Shares, of $50,000 in
the year ended December 31, 1995 and $37,500 in the nine months ended September
30, 1996.
(4) Adjustment to record merger of JIS into a wholly-owned subsidiary of
the Company as though it occurred at the beginning of each of the pro forma
periods presented. The adjustment represents the elimination of the minority
interest for each of the periods presented.
(5) Adjustments to provide for Federal and state income tax expense
(benefit) attributable to income (loss) of Berkeley and Systems Automation as
well as the amortization of goodwill and interest expense recognized in
adjustments (1), (2) and (3) above, all at an effective rate of 40%.
(6) Primary and fully diluted earnings per share amounts are computed based
on the weighted average number of shares actually outstanding after giving
effect to the stock split (8,587,739 shares) plus the shares that would be
outstanding assuming the successful completion of the public offering (3,000,000
shares), the conversion of convertible notes (526,000 shares (which are expected
to be exchanged for common shares -- See Note 8 in the September 30, 1996
consolidated financial statements included in the Registration Statement)), the
acquisition of Berkeley (40,000 shares), the exercise of outstanding stock
options (3,900 shares), and the completion of the Merger (1,190,330 shares). The
number of shares used in the calculation was approximately 13,347,969 for each
period presented.
(7) Represents two months of DataImage operations which occurred prior to
the JCC/DI merger on February 29, 1996. The remaining seven months of operations
is included in The Judge Group, Inc. consolidated statements of operations.
F-56
<PAGE>
THE JUDGE GROUP, INC.
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
THE JUDGE SYSTEM
GROUP, INC. DATAIMAGE BERKELEY AUTOMATION
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES........................................................ $63,299,353 $1,284,333 $2,324,524 $1,187,273
----------- ---------- ---------- ----------
COSTS AND EXPENSES
Cost of Sales (Exclusive of items shown separately below)..... 47,550,114 800,841 1,807,348 523,448
Selling and Operating......................................... 9,797,875 437,904 0 659,967
General and Administrative.................................... 4,187,485 0 443,181 169,976
----------- ---------- ---------- ----------
Total Costs and Expenses.................................... 61,535,474 1,238,745 2,250,529 1,353,391
----------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS................................... 1,763,879 45,588 73,995 (166,118)
Interest Expense................................................ (670,110) (6,070 ) (16,325) (6,261)
Other Income (expense).......................................... (27,229) 0 1,335 180,901
----------- ---------- ---------- ----------
Income (loss) before Income Tax Expense and Minority Interest... 1,066,540 39,518 59,005 8,522
Income Tax Expense (Benefit).................................... 587,957 0 0 0
----------- ---------- ---------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST.......................... 478,583 39,518 59,005 8,522
MINORITY INTEREST IN NET LOSS OF CONSOLIDATED SUBSIDIARY........ 7,057 0 0 0
----------- ---------- ---------- ----------
NET INCOME (LOSS)............................................... $ 485,640 $ 39,518 $ 59,005 $ 8,522
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
NET INCOME (LOSS) PER COMMON SHARE:
Primary.......................................................
Fully Diluted.................................................
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING.....................................
<CAPTION>
PRO FORMA
CONSOLIDATED
THE JUDGE PRO FORMA YEAR ENDED
GROUP, INC. TOTAL ADJUSTMENTS 31-DEC-95
----------------- ----------- ------------
<S> <C> <C> <C>
REVENUES........................................................ $68,095,483 $ 0 $ 68,095,483
----------------- ----------- ------------
COSTS AND EXPENSES
Cost of Sales (Exclusive of items shown separately below)..... 50,681,751 $ 50,681,751
Selling and Operating......................................... 10,895,746 10,895,746
General and Administrative.................................... 4,800,642 393,795(1) 5,194,437
----------------- ----------- ------------
Total Costs and Expenses.................................... 66,378,139 393,795 66,771,934
----------------- ----------- ------------
INCOME (LOSS) FROM OPERATIONS................................... 1,717,344 (393,795) 1,323,549
Interest Expense................................................ (698,766) (7,783)(2)(3) (706,549)
Other Income (expense).......................................... 155,007 0 155,007
----------------- ----------- ------------
Income (loss) before Income Tax Expense and Minority Interest... 1,173,585 (401,578) 772,007
Income Tax Expense (Benefit).................................... 587,957 (133,620)(5) 454,337
----------------- ----------- ------------
INCOME (LOSS) BEFORE MINORITY INTEREST.......................... 585,628 (267,958) 317,670
MINORITY INTEREST IN NET LOSS OF CONSOLIDATED SUBSIDIARY........ 7,057 (7,057)(4) 0
----------------- ----------- ------------
NET INCOME (LOSS)............................................... $ 592,685 ($275,015) $ 317,670
----------------- ----------- ------------
----------------- ----------- ------------
NET INCOME (LOSS) PER COMMON SHARE:
Primary....................................................... $ 0.02(6)
------------
------------
Fully Diluted................................................. $ 0.02(6)
------------
------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING..................................... 13,347,969
------------
------------
</TABLE>
F-57
<PAGE>
THE JUDGE GROUP, INC.
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THE JUDGE BERKELEY SYSTEM
GROUP INC. DATAIMAGE(7) ASSOCIATES AUTOMATION
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
REVENUES................................................... $58,914,238 $122,692 $2,044,279 $ 866,779
----------- ------------ ---------- ----------
COSTS & EXPENSES
Cost of sales (Exclusive of items shown separately
below)................................................... 43,232,381 60,450 1,439,845 358,036
Selling and operating...................................... 10,022,739 77,829 0 547,020
General and administrative................................. 4,310,467 7,317 389,557 171,303
----------- ------------ ---------- ----------
Total Costs & Expenses................................... 57,565,587 145,596 1,829,402 1,076,359
----------- ------------ ---------- ----------
INCOME (LOSS) FROM OPERATIONS.............................. 1,348,651 (22,904) 214,877 (209,580)
Interest Expense........................................... (599,597) 0 (13,289) (4,202)
Other income (expense)..................................... 0 (3,598) 303 107
----------- ------------ ---------- ----------
Income (loss) before income tax expense (benefit) and
minority interest........................................ 749,054 (26,502) 201,891 (213,675)
Income Tax Expense (benefit)............................... 614,700 0 0 0
----------- ------------ ---------- ----------
Income (loss) before minority interest in net income (loss)
of consolidated subsidiary............................... 134,354 (26,502) 201,891 (213,675)
Minority interest in net income (loss) of consolidated
subsidiary............................................... 616,752 0 0 0
----------- ------------ ---------- ----------
NET INCOME (LOSS).......................................... $ 751,106 ($26,502) $ 201,891 ($213,675)
----------- ------------ ---------- ----------
----------- ------------ ---------- ----------
NET INCOME (LOSS) PER COMMON SHARE:
Primary..................................................
Fully diluted............................................
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING................................
<CAPTION>
PRO FORMA
CONSOLIDATED
THE JUDGE PRO FORMA NINE MONTHS ENDED
GROUP, INC. TOTAL ADJUSTMENTS 30-SEP-96
----------------- ----------- -----------------
<S> <C> <C> <C>
REVENUES................................................... $61,947,988 $ 0 $61,947,988
----------- --------- -----------
COSTS & EXPENSES
Cost of sales (Exclusive of items shown separately
below)................................................... 45,090,712 0 45,090,712
Selling and operating...................................... 10,647,588 0 10,647,588
General and administrative................................. 4,878,644 295,347(1) 5,173,991
----------- --------- -----------
Total Costs & Expenses................................... 60,616,944 295,347 60,912,291
----------- --------- -----------
INCOME (LOSS) FROM OPERATIONS.............................. 1,331,044 (295,347) 1,035,697
Interest Expense........................................... (617,088) (8,972)(2)(3) (626,060)
Other income (expense)..................................... (3,188) 0 (3,188)
----------- --------- -----------
Income (loss) before income tax expense (benefit) and
minority interest........................................ 710,768 (304,319) 406,449
Income Tax Expense (benefit)............................... 614,700 (126,441)(5) 488,259
----------- --------- -----------
Income (loss) before minority interest in net income (loss)
of consolidated subsidiary............................... 96,068 (177,878) (81,810)
Minority interest in net income (loss) of consolidated
subsidiary............................................... 616,752 (616,752)(4) 0
----------- --------- -----------
NET INCOME (LOSS).......................................... $ 712,820 ($794,630) ($ 81,810)
----------- --------- -----------
----------- --------- -----------
NET INCOME (LOSS) PER COMMON SHARE:
Primary.................................................. ($ 0.01)(6)
--------------
--------------
Fully diluted............................................ ($ 0.01)(6)
--------------
--------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING................................ 13,347,969
--------------
--------------
</TABLE>
F-58
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING SHAREHOLDERS, OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON
SHARES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN
ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 13
Dividend Policy................................ 13
Dilution....................................... 14
Capitalization................................. 15
Selected Consolidated Financial Data........... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 17
Business....................................... 26
Management..................................... 40
Principal and Selling Shareholders............. 44
Selling Security Holders....................... 46
Certain Transactions........................... 46
Description of Capital Stock................... 47
Shares Eligible for Future Sale................ 49
Underwriting................................... 51
Legal Matters.................................. 53
Experts........................................ 53
Additional Information......................... 53
Index to Financial Statements.................. F-1
</TABLE>
------------------
UNTIL MARCH 11, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
SHARES OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,650,000 SHARES
[LOGO]
THE JUDGE GROUP, INC.
COMMON SHARES
-------------------
PROSPECTUS
-------------------
JANNEY MONTGOMERY SCOTT INC.
UNTERBERG HARRIS
FEBRUARY 14, 1997
