<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NO. 0-21963
THE JUDGE GROUP, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1726661
(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
TWO BALA PLAZA, SUITE 405
BALA CYNWYD, PENNSYLVANIA 19004
(Address of principal executive offices, including zip code)
(610) 667-7700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 1, 1998, 13,487,576 shares of the Registrant's
Common Stock, $0.01 par value, were outstanding.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
THE JUDGE GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE(S)
-------
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 5
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13-19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20-22
2
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................................... $ 118,578 $ 1,684,482
Short-term investments............................................................. -- 5,500,000
Accounts receivable, net........................................................... 21,878,169 14,415,926
Inventories........................................................................ 1,430,205 1,468,902
Prepaid income taxes and deferred taxes............................................ 818,003 286,000
Other.............................................................................. 1,552,255 712,416
------------ ------------
TOTAL CURRENT ASSETS............................................................... 25,797,210 24,067,726
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment............................................................. 7,743,592 5,007,416
Less: accumulated depreciation and amortization................................... 2,851,481 2,121,034
------------ ------------
NET PROPERTY AND EQUIPMENT......................................................... 4,892,111 2,886,382
------------ ------------
OTHER ASSETS
Deposits and other................................................................. 714,051 275,608
Covenant not to compete, net of accumulated amortization of $ 26,243, 1998......... 63,733 ---
Goodwill, net of accumulated amortization of $845,815, 1998 and $405,944, 1997..... 15,090,150 4,703,855
------------ ------------
TOTAL OTHER ASSETS................................................................. 15,867,934 4,979,463
------------ ------------
TOTAL ASSETS....................................................................... $ 46,557,255 $ 31,933,571
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt.................................................. $ 340,000 $ 237,721
Accounts payable and accrued expenses.............................................. 8,451,008 3,647,048
Payroll and sales taxes............................................................ 482,097 437,788
Other liabilities.................................................................. 1,882,288 ---
Income taxes payable............................................................... --- 291,515
Deferred revenue................................................................... 1,457,683 928,324
------------ ------------
TOTAL CURRENT LIABILITIES.......................................................... 12,613,076 5,542,396
------------ ------------
LONG-TERM LIABILITIES
Note Payable, Bank................................................................. 6,400,000 ---
Deferred rent obligation........................................................... 235,664 116,879
Debt obligations, net of current portion........................................... 375,309 ---
------------ ------------
TOTAL LONG-TERM LIABILITIES........................................................ 7,010,973 116,879
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock: $.01 par value, 50,000,000 shares authorized;
at September 30, 1998, 13,531,302 shares issued and outstanding;
at December 31, 1997, 13,347,969 shares issued and outstanding..................... 135,312 133,479
Preferred stock, $.01 par value, 10,000,000 shares authorized...................... -- ---
Additional paid-in capital......................................................... 23,624,391 22,758,517
Retained earnings.................................................................. 3,393,503 3,382,300
------------ ------------
27,153,206 26,274,296
Less treasury stock, 40,000 shares at September 30, 1998; at cost.................. 220,000 ---
------------ ------------
TOTAL SHAREHOLDERS' EQUITY......................................................... 26,933,206 26,274,296
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................................... $ 46,557,255 $ 31,933,571
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
NET REVENUES....................................................................... $ 83,225,523 $ 74,859,743
------------ ------------
COSTS AND EXPENSES
Cost of sales (exclusive of items shown separately below).......................... 57,268,382 53,030,201
Selling and operating.............................................................. 16,186,783 12,371,706
General and administrative......................................................... 9,670,745 6,195,190
------------ ------------
Total costs and expenses........................................................... 83,125,910 71,597,097
------------ ------------
INCOME FROM OPERATIONS............................................................ 99,613 3,262,646
OTHER INCOME (EXPENSES), NET....................................................... (80,942) 9,404
------------ ------------
INCOME BEFORE INCOME TAX EXPENSE................................................... 18,671 3,272,050
INCOME TAX EXPENSE................................................................. 7,468 1,458,208
------------ ------------
NET INCOME......................................................................... $ 11,203 $ 1,813,842
============ ============
NET INCOME PER SHARE
BASIC.................................................................... $ 0.00 $ 0.14
====== ======
WEIGHTED AVERAGE SHARES OUTSTANDING...................................... 13,536,116 12,563,316
========== ==========
DILUTED.................................................................. $ 0.00 $ 0.14
====== ======
WEIGHTED AVERAGE SHARES OUTSTANDING...................................... 13,552,783 12,650,019
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
NET REVENUES....................................................................... $ 30,359,528 $ 25,318,768
------------ ------------
COSTS AND EXPENSES
Cost of sales (exclusive of items shown separately below).......................... 21,446,610 17,470,386
Selling and operating.............................................................. 6,375,254 3,824,364
General and administrative......................................................... 3,884,205 2,129,513
------------ ------------
Total costs and expenses........................................................... 31,706,069 23,424,263
------------ ------------
INCOME (LOSS) FROM OPERATIONS ..................................................... (1,346,541) 1,894,505
OTHER INCOME (EXPENSES), NET....................................................... (132,122) 62,048
------------ ------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT).................................. (1,478,663) 1,956,553
INCOME TAX EXPENSE (BENEFIT)...................................................... (617,217) 784,125
------------ ------------
NET INCOME (LOSS)................................................................. (861,446) $ 1,172,428
========= ===========
NET INCOME (LOSS) PER SHARE
BASIC.................................................................... ($ 0.06) $ 0.09
======== ======
WEIGHTED AVERAGE SHARES OUTSTANDING 13,491,302 13,347,969
========== ==========
DILUTED.................................................................. ($ 0.06) $ 0.09
======== ======
WEIGHTED AVERAGE SHARES OUTSTANDING 13,491,302 13,347,969
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Common Stock Additional
------------ Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
------ ------ ------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997............. 13,347,969 $ 133,479 $22,758,517 $3,382,300 $ -- $ 26,274,296
Acquisition Transactions............... 183,333 1,833 865,874 -- -- 867,707
Purchase treasury stock................ -- -- -- -- (220,000) (220,000)
Net income............................. -- -- -- 11,203 -- 11,203
---------- --------- ----------- ------------ ---------- ------------
Balance, September 30, 1998............ 13,531,302 $ 135,312 $23,624,391 $ 3,393,503 ($ 220,000) $ 26,933,206
========== ========= =========== =========== ========== ============
</TABLE>
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Common Stock Additional
------------ Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996............. 8,587,739 $ 85,877 $ 365,877 $ 670,360 $ 1,122,114
Merger Transactions.................... 1,194,230 11,942 2,416,498 -- 2,428,440
Initial Public Offerings............... 3,000,000 30,000 19,207,225 -- 19,237,225
Conversion of Debentures............... 526,000 5,260 494,740 -- 500,000
Conversion of Note Payables............ 40,000 400 299,600 -- 300,000
Net income............................. -- -- -- 1,813,842 1,813,842
---------- --------- ----------- ----------- ------------
Balance, September 30, 1997............ 13,347,969 $ 133,479 $22,783,940 $ 2,484,202 $ 25,401,621
========== ========= =========== =========== ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income for the period......................................................... $ 11,203 $ 1,813,842
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation.................................................................. 736,621 461,793
Amortization.................................................................. 518,269 285,581
Deferred rent................................................................. 118,785 (11,770)
Provision for losses on accounts receivable................................... 120,761 153,479
Stock compensation............................................................ --- 29,250
Changes in operating assets and liabilities:
(Increase) decrease in:
Short term investments........................................................ 5,500,000 ---
Accounts receivable........................................................... (5,851,641) (4,154,295)
Inventories................................................................... 510,717 405,631
Deposits and other............................................................ (385,151) (168,534)
Prepaid income taxes......................................................... (532,003) 10,202
Other current assets.......................................................... (777,040) 438,491
Increase (decrease) in:
Accounts payable and accrued expenses......................................... 2,995,556 1,488,756
Payroll and sales taxes....................................................... (33,510) 79,726
Deferred revenue.............................................................. 259,450 (9,539)
Income taxes payable ......................................................... (285,882) 85,457
---------- -----------
Net cash provided by operating activities................................... 2,906,135 908,070
---------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment................................................ (2,458,108) (1,109,012)
(Increase) decrease in notes receivable, officers and employees, net............... --- 577,287
Purchase/acquisition of companies.................................................. (6,998,953) ---
Covenant not to compete............................................................ (89,976) ---
---------- -----------
Net cash used in investing activities....................................... (9,547,037) (531,725)
---------- -----------
FINANCING ACTIVITIES
Cash acquired in business combination.............................................. 159,068 ---
Proceeds from (repayments of) notes payable, bank, net............................. 6,400,000 (9,960,795)
Repayments of bank overdrafts...................................................... --- (1,858,000)
Principal payments on long-term debt............................................... (769,450) (2,144,728)
Repayment of bank note payable related to ISI purchase............................. (175,000) ---
Advances receivable related to On-Site purchase.................................... (319,620) ---
Purchase of Treasury Stock......................................................... (220,000) ---
Proceeds from issuance of stock and exercise of warrants, net...................... --- 19,237,225
Repayments from shareholders....................................................... --- (95,862)
---------- -----------
Net cash provided by financing activities.................................. 5,074,998 5,177,840
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................... (1,565,904) 5,554,185
CASH AND CASH EQUIVALENTS, BEGINNING............................................... 1,684,482 105,069
---------- -----------
CASH AND CASH EQUIVALENTS, ENDING.................................................. $118,578 $ 5,659,254
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for Interest............................................. $ 144,000 $ 295,000
========== ===========
Cash paid during the year for Income taxes......................................... $ 977,000 $ 1,329,000
========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1. DESCRIPTION OF BUSINESS
The Judge Group, Inc. (the "Company") (formerly Judge, Inc.), a Pennsylvania
corporation founded in 1970, provides (i) information technology ("IT") and
engineering professionals to its clients on both a temporary basis (through its
"Contract Placement" business) and a permanent basis (through its "Permanent
Placement" business), (ii) computer network and document management system
integration, implementation, maintenance and training (through its "Information
Management Solutions" business) and (iii) IT training (through its "IT Training"
business) on a range of software and network applications to corporate,
governmental and individual clients. At September 30, 1998, the Company,
headquartered in Bala Cynwyd, Pennsylvania, operated regional offices in fifteen
states throughout the United States. A substantial portion of the Company's
revenues are derived from customers located in the Mid-Atlantic corridor of the
United States.
The Contract Placement business includes the operations of two of the Company's
wholly-owned subsidiaries, Judge Technical Services, Inc. ("JTS"), and Judge
Technical Services of N.J., Inc. ("JTNJ").
The Permanent Placement business includes the operations of three of the
Company's wholly-owned subsidiaries, Judge, Inc., Judge Electronic Services of
Florida, Inc. ("JESF") and Judge Inc. of New Jersey ("JINJ").
The IT Training business is comprised of the operations of The Berkeley
Associates Corp. ("Berkeley").
The Information Management Solutions business includes the operations of Judge
Imaging Systems, Inc. ("JIS") which became a wholly owned subsidiary of the
Company at the closing of the Company's initial public offering in 1997. Prior
to that time, JIS was a public company, a majority of whose shares was owned by
the Company and certain officers and directors of the Company, and which was
consolidated for financial reporting purposes.
During 1996, the Company engaged an investment banking firm to assist it in an
initial public offering of its common stock. On September 30, 1996, the Company
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission under the Securities Act of 1933, as amended. The Company
successfully completed its initial public offering of common shares on February
20, 1997. The Company sold 3,000,000 common shares at a price of $7.50 per
share, realizing approximately $20,906,000 in proceeds net of underwriting
discounts and commissions. Immediately prior to the initial public offering, the
holders of $500,000 of convertible notes exchanged them for 526,000 Company
common shares. The Company issued 40,000 common shares in lieu of $300,000 of
notes payable to Berkeley, in accordance with the purchase agreement with
Berkeley. In connection with the initial public offering, the Company incurred
approximately $1,694,000 of accounting, legal, printing and other costs as of
December 31, 1997 and such costs have been charged to additional paid-in capital
as a reduction of the proceeds from the initial public offering.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company, and the Company's wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The financial statements as of September 30, 1998 and for the three and nine
months ended September 30, 1998 and 1997 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, 1997 and the notes
thereto.
The results of operations for the interim periods are not necessarily indicative
of the results that might be expected for future interim periods or for the full
year ended December 31, 1998.
8
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Risks and Uncertainties
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Intangible Assets
Goodwill represents the excess of the cost of companies acquired over the fair
value of their net assets at the date of acquisition and is being amortized on
the straight-line method over terms ranging from ten years to twenty five years.
Amortization of goodwill is based upon management's estimates for which it is
reasonably possible that such estimates may change in the near term.
Amortization of goodwill for the nine months ended September 30, 1998 and 1997
was approximately $492,000 and $286,000, respectively, and is included in
general and administrative expense in the consolidated statements of operations.
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").
Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. However, this Statement need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This Statement is
required to be adopted for fiscal years beginning after December 15, 1997.
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128 ("FAS
128"), Earnings Per Share, beginning in the fourth quarter of 1997. Prior period
earnings per common share were recomputed to conform to the provisions of FAS
128. The recomputations did not result in any restatement in earnings per share
previously reported.
Basic earnings per share amounts are computed based on net income, reduced by
dividends earned on preferred stock outstanding on JIS through February 1997
($6,700), and divided by the weighted average number of shares actually
outstanding reduced by Treasury Shares. The number of shares used in the
computation for the nine months ended September 30, 1998 and 1997 were
approximately 13,536,000, and 12,563,000, respectively. The number of shares
used in the computation for the three months ended September 30, 1998 and 1997
were approximately 13,491,000 and 13,348,000, respectively.
Diluted earnings per share amounts for the three and nine months ended September
30, 1998 and 1997 are based on the weighted average number of shares calculated
for basic earnings per share purposes increased by the number of shares that
would be outstanding assuming exercise of outstanding stock options. The number
of shares used in the computation for the nine months ended September 30, 1998
and 1997 were approximately 13,553,000 and 12,650,000, respectively. The number
of shares used in the computation for the three months ended September 30, 1998
and 1997 were approximately 13,491,000 and 13,348,000, respectively. Options to
purchase 1,467,000 common shares in 1998 and 584,000 common shares in 1997 were
not included in the computation of diluted earnings per share because the option
exercise price was greater than the average market price of common stock.
9
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Earnings Per Share -- (Continued)
On February 26, 1998 the Company repurchased 40,000 shares of its common stock
at a price of $5.50 per share, which shares are held as treasury stock.
Reclassifications
Certain items in the consolidated statement of operations for the three and nine
months ended September 30, 1997 have been reclassified to conform to the 1998
presentation.
NOTE 3. BUSINESS COMBINATIONS
In the nine months ended September 30, 1998 the Company, through its
subsidiaries, consummated several acquisitions which were accounted for as
purchase transactions, with the results of their operations only included in the
accompanying financial statements since the respective purchase dates. In each
acquisition the excess cost over the fair value of net assets, assumed to equal
their carrying value, is considered goodwill and is being amortized over terms
ranging from fifteen years to twenty-five years beginning with the month
following the acquisition. In some instances a portion of the acquisition cost
is included in other liabilities on the accompanying condensed consolidated
financial statements, the payment terms of which are dependent on the Company's
common stock price on future dates. Following is a list of the acquisitions:
Effective March 5, 1998, JTS purchased substantially all of the assets of
Information Systems, Inc. and ISI Systems, Inc. (together "ISI"), a company
engaged in the IT placement business in the Detroit, Michigan area, for total
original acquisition cost of $6,290,000, payable in cash, notes and Company
stock. An additional amount of up to $500,000 is contingent on ISI attaining
certain pre-tax income amounts in calendar year 1998.
Effective March 31, 1998, Judge, Inc. purchased substantially all of the assets
of Cella Associates of Atlanta, Inc. ("Cella"), a company engaged in the
placement of personnel with offices in Connecticut, Georgia, Texas and Illinois,
for total acquisition cost of $1,529,000, payable in cash and Company stock.
Effective May 11, 1998, JIS purchased all of the outstanding common stock of
On-Site Solutions, Inc. ("On-Site"), a company engaged in the systems
integration business in the Irvine, California area, for total original
acquisition cost of the assumption of approximately $663,000 in liabilities.
Additional amounts are contingent on On-Site attaining certain pre-tax income
amounts in the periods April 1, 1998 through December 31, 1998 and January 1,
1999 through December 31, 1999.
Effective May 29, 1998, JIS purchased substantially all of the assets of AOP
Solutions ("AOP"), a company engaged in the Information Management Solutions
business in the Buffalo, New York area, for total acquisition cost of
$3,240,000, payable in cash and Company stock. Additional amounts are contingent
on AOP attaining certain pre-tax income amounts in the periods January 1, 1998
through December 31, 1998 and January 1, 1999 through December 31, 1999.
Effective June 8, 1998, JIS purchased all of the outstanding common stock of
Systems Solutions, Inc. d/b/a Corebridge Technologies, Inc. ("Corebridge"), a
company engaged in document management, imaging and workflow solutions in the
Seattle, Washington area, for total acquisition cost of $155,000, payable in
cash. Additional amounts are contingent on Corebridge attaining certain pre-tax
income amounts in the periods May 1, 1998 through December 31, 1998 and January
1, 1999 through December 31, 1999.
NOTE 4. NOTE PAYABLE, BANK
Note payable, Bank consists of advances to the Company under a $25,000,000 line
of credit facility. The line of credit bears interest at the prime rate or, at
the option of the Company, a portion of the outstanding balance bears interest
at 200 basis points over the London Inter-Bank Offering Rate. Maximum permitted
borrowings thereunder is the lesser of $25,000,000 or 85% of qualified accounts
receivable, as defined in the line of credit agreement.
10
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 5. INCOME TAXES
The Company files a consolidated Federal income tax return with its wholly-owned
subsidiaries. In prior years, JIS was not included in the Company's consolidated
Federal income tax return, as the Company owned less than 80% of JIS'
outstanding common shares. Under Internal Revenue regulations, JIS was not part
of the consolidated group for tax purposes and filed their own Federal income
tax return. Effective February 20, 1997, JIS began filing as part of the
consolidated group. State income taxes are determined on the basis of filing
separate returns for each company as required by the applicable state
regulations.
In accordance with APB 28 (Interim Financial Reporting), income taxes are
calculated at the estimated effective annual (federal and state) tax rate.
The effective tax rate for 1998 and 1997 is higher than the applicable federal
statutory tax rate of 34% due to the Company's state tax liabilities, certain
expenses that were not deductible for tax purposes, and net operating losses for
JIS, which is consolidated for financial reporting but not tax reporting
purposes (prior to the merger of the Company and JIS in February 1997).
As a result of operating losses, no provision for income taxes was required for
the period prior to February 20, 1997 for JIS. JIS operating losses subsequent
to February 20, 1997 have been used in the consolidated tax accrual. For income
tax reporting purposes, as of December 31, 1997, JIS had an unused operating
loss carryforward of approximately $4,200,000, which may be applied against
future taxable income of JIS, subject to certain Federal income tax limitations.
These carryforwards expire between 2002 and 2012.
NOTE 6. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
Stock Option Plan
On September 4, 1996 the Company adopted the 1996 Incentive Stock Option and
Non-Qualified Stock Option Plan (the "Incentive Plan") for key employees and
non-employee directors. Options may be granted under the Incentive Plan to
purchase up to a maximum of 3,500,000 of the Company's common shares, subject to
certain adjustments and restrictions. The price of each option shall be the fair
market value of the shares on the date of the grant. The options granted are
generally subject to a four year vesting schedule in equal increments annually,
and are exercisable any time after vesting up to 10 years from grant date.
During the nine months ended September 30, 1998, the Company granted options to
purchase 925,950 shares at a weighted average exercise price of $4.97. No
options were exercised during the period ended September 30, 1998.
The Company accounts for its Incentive Plan in accordance with Accounting
Principles Board Opinion No. 25 and related interpretations. Accordingly, no
compensation expense has been recognized for the Incentive Plan.
NOTE 7. STATEMENT OF CASH FLOWS
Supplemental disclosure of non-cash investing and financing transactions:
During the nine months ended September 30, 1998, the Company entered into the
following non-cash transactions:
o incurred long-term debt ($890,000) for certain business combinations;
o incurred goodwill of $2,390,000 in the business combination with ISI; and
o incurred goodwill of $750,000 in the business combination with Cella.
o incurred goodwill of $710,000 in the business combination with On-Site.
o incurred goodwill of $998,000 in the business combination with AOP.
During the nine months ended September 30, 1997, the Company entered into the
following non-cash transactions:
o incurred goodwill of $2,399,190 in the business combination with JIS;
o converted $300,000 of long-term debt to equity in accordance with the
Berkeley agreement;
o converted $500,000 of convertible debentures into 526,000 shares of
common stock;
11
<PAGE>
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 8. SUBSEQUENT EVENTS
Effective October 12, 1998, JTS purchased substantially all of the assets of
Tech Stars, Inc. ("Tech Stars"), a company engaged in the IT placement business
with offices in Nashville, Tennessee and Charlotte, North Carolina, for a total
original acquisition cost of $1,330,000 payable in cash, note and Company stock.
An additional amount is contingent on Tech Stars attaining certain pre-tax
income amounts in the period from July 1, 1998 through December 31, 1998.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
1998 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
The following discussion should be read in conjunction with the condensed
consolidated financial statements of The Judge Group, Inc. (the "Company") and
related notes thereto appearing elsewhere in this Report.
OVERVIEW
The Company achieved overall revenue growth rates of 19.9% and 11.2%
for the three months and nine months ended September 30, 1998, respectively,
compared to prior year periods, with three of the Company's businesses
experiencing revenue growth. In the Company's Permanent Placement business
revenues for the nine months ended September 30, 1998 increased by 33% over the
same period in the prior year. In the Company's largest business, Contract
Placement, revenues increased by 9.3% in the nine months ended September 30,
1998 compared to the prior year period. The Information Management Solutions
business increased revenues by 10% in the nine months ended September 30, 1998
compared to the prior year period. However, the IT Training business revenues in
the nine months ended September 30, 1998 were virtually flat compared to the
same period in the prior year. The overall increase was due primarily to
revenues from the Company's acquisitions as well as new office locations. This
growth rate was below Company expectations due to a focus of efforts on
aggressive expansion both internally and through acquisition, which also caused
higher selling and general and administrative expenses. The Company has grown
from 9 locations at year end 1997 to 22 locations as of September 30, 1998. As a
result of the increased expenses the Company experienced a decrease in net
income for the nine months ended September 30, 1998 to $11,203 compared to
$1,813,842 in the prior year period.
Revenue growth in the third quarter of 1998, compared to the same
period in the prior year, of 35% for the Permanent Placement business, 19% for
the Contract Placement business and 21% for the Information Management Solutions
business was due primarily to the same reason stated above. In the IT Training
business revenues decreased 17% in the third quarter of 1998 compared to the
third quarter of 1997. The increased expenses associated with the expansion of
infrastructure to support the acquisitions and new office locations resulted in
a net loss of $861,446 for the quarter ended September 30, 1998 compared to a
net income of $1,172,428 in the same period in the prior year. During the three
months ended September 30, 1998, the Contract Placement business closed its
office in New York City and incurred certain expenses related to this office
closing. Subsequent to September 30, 1998 the Information Management Solutions
business also closed its New York City office and incurred certain expenses
related to this office closing. The Company has decided to dispose of the
Information Management Solutions business and is currently evaluating the
method, valuation, and target date of the disposal in a manner to maximize
shareholder value.
During the third quarter of 1998, Management began implementing budget
controls and cost controls that should be completely in place by the end of the
fourth quarter. Management expects a continuation of revenue growth in the
fourth quarter of 1998, and an improvement in results over the third quarter of
1998.
13
<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 net revenues, for the
periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
--------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenues:
Permanent Placement $ 8,250 9.9% $ 6,201 8.3% $ 2,856 9.4% $ 2,118 8.4%
Contract Placement 58,209 69.9% 53,247 71.1% 20,494 67.5% 17,179 67.9%
Information Management Solutions 14,679 17.6% 13,338 17.8% 6,388 21.0% 5,276 20.8%
IT Training 2,088 2.5% 2,074 2.8% 622 2.0% 746 2.9%
-------- ----- -------- ----- -------- ------ -------- ------
Consolidated Net Revenues $ 83,226 100.0% $ 74,860 100.0% $ 30,360 100.0% $ 25,319 100.0%
======== ====== ======== ===== ======== ====== ======== ======
Income (loss) From Operations:
Permanent Placement $1,186 14.4% $ 1,066 17.2% $ 19 0.7% $ 436 20.6%
Contract Placement 3,431 5.9% 5,091 9.6% 696 3.4% 1,975 11.5%
Information Management Solutions (1,863) (12.7%) (1,322) (9.9%) (1,003) (15.7%) (39) (0.7%)
IT Training (640) (30.7%) (141) (6.8%) (292) (46.9%) (30) (4.0%)
Corporate Overhead Expense (2,014) N/A (1,432) N/A (767) N/A (448) N/A
-------- ------ -------- ----- -------- ------ -------- ------
Consolidated Income From Operations $ 100 0.1% $ 3,262 4.4% ($1,347) (4.4%) $ 1,894 7.5%
======== ====== ======== ===== ======== ====== ======== ======
</TABLE>
Included in corporate overhead expense are salaries, benefits and related costs
for corporate level executive, financial, legal, human resources, management
information systems and marketing personnel.
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 THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30
------------------------------------------------
1998 1997 1998 1997
----------- ------------------------ -----------
<S> <C> <C> <C> <C>
Net Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Sales 68.8% 70.8% 70.6% 69.0%
(exclusive of items shown separately below)
Selling and Operating 19.4% 16.5% 21.0% 15.1%
General and Administrative 11.6% 8.3% 12.8% 8.4%
----- ----- ----- -----
Total Cost and Expenses 99.9% 95.6% 104.4% 92.5%
Income (Loss) From Operations .1% 4.4% (4.4%) 7.5%
Interest Income (Expense) and Other, Net (.1%) .0% (.4%) .2%
----- ----- ----- -----
Income (Loss) Before Income Taxes 0.0% 4.4% (4.9%) 7.7%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net Revenues. Consolidated net revenues increased by 19.9%, or $5.0
million, for the three months ended September 30, 1998 compared to the prior
year period. Revenue for the Contract Placement business increased by 19.3%, or
$3.3 million, for the three months ended September 30, 1998, compared to the
prior year period. Revenues for the Contract Placement business increased
primarily due to its acquisition and its new locations which, combined,
14
<PAGE>
generated $2.5 million of the increase. Revenue for the Permanent Placement
business increased by 34.8%, or approximately $738,000, for the three months
ended September 30, 1998, compared to the prior year period due partly to its
acquisition and new offices which generated a combined $480,000 of the increase
and partly to increased sales per recruiter and an increase in average placement
fees. Revenue for the Information Management Solutions business increased by
21.1%, or $1.1 million, for the three months ended September 30, 1998 compared
to the prior year period. This increase in revenues was attributable to the
Company's recent acquisitions which produced $3.4 million of revenues, offset by
decreased revenues in existing offices. As of September 30, 1998, the backlog of
business for the Information Management Solutions business was $5.3 million,
compared to $2.6 million in the prior year period. The IT Training business
generated net revenues of $622,000 for the three months ended September 30,
1998, a decrease of $124,000, or approximately 17%, from the same period in
1997. This decrease was due primarily to the expiration of a government funded
program that requires re-funding every two years. The Company is still awaiting
the re-funding for which it has been approved before scheduling these classes.
Cost of Sales. Consolidated cost of sales increased by 22.8%, or $4.0
million, for the three months ended September 30,1998 compared to the prior year
period. Cost of sales as a percentage of consolidated net revenues increased to
70.6% from 69.0%. In the Company's Contract Placement business, cost of sales as
a percentage of its revenue increased to 78.1% from 76.4% partly as a result of
lower income from permanent placements of its contractors, which has no cost of
sales associated with it, during the quarter ended September 30, 1998 compared
to the prior year period. In the Company's Information Management Solutions
business cost of sales as a percentage of its revenue increased to 80.1% from
75.9%, primarily related to one contract which contributed a 1.9 percentage
point increase in cost of sales for the three months ended September 30, 1998
compared to the prior year period. The IT Training business contributed an
additional $397,000 in cost of sales, representing 63.8% of that business'
revenues, compared to $350,000, or 47.0% of its revenues in the prior year
period.
Selling and Operating. Consolidated selling and operating expenses
increased by 66.7%, or $2.5 million, for the three months ended September 30,
1998 compared to the prior year period. Of such increase $1.8 million, or 72%,
represents costs associated with the acquisition of new offices that did not
exist during the three months ended September 30, 1997. Selling and operating
expenses as a percentage of consolidated net revenues increased to 21.0% from
15.1% for the three months ended September 30, 1998 compared to the prior year
period. Selling and operating expenses as a percentage of revenues for the
Contract Placement business increased to 12.1% from 8.2% for the three months
ended September 30, 1997 compared to the prior year period. This increase was
mainly attributable to the number of sales and recruiting personnel and related
expenses needed to staff the new locations during their start up phase.
Management believes it takes new offices approximately twelve months to generate
sufficient revenues to cover its costs and begin producing operating income.
Selling and operating expenses as a percentage of revenues for the Permanent
Placement business increased to 77.2% from 64.5% for the three months ended
September 30, 1998 compared to the prior year period, which was attributed to
the acquisition and new offices which added 6 percentage points, and to
increased commission expense in existing locations. Selling and operating
expenses as a percentage of revenues for the Information Management Solutions
business increased to 19.8% from 13.7% for the three months ended September 30,
1998 compared to the prior year period. Of the increase of approximately
$540,000, approximately $340,000 was attributable to the three acquisitions made
in the second quarter of 1998, and the remainder was due primarily to increased
sales staff in existing locations. In the IT Training business selling and
operating expenses increased $42,000, or 21.3%, in the three months ended
September 30, 1998 compared to the prior year period.
General and Administrative. Consolidated general and administrative
expenses increased 82.4%, or $1.75 million, for the three months ended September
30, 1998, compared to the prior year period. The amount of increase reflected
a reduction in certain executive salaries which will remain in effect through
the remainder of 1998. Of such increase $1.1 million, or 63%, was attributable
to the acquisitions and new offices. General and administrative expenses as a
percentage of consolidated net revenues, increased to 12.8% from 8.4% for the
three months ended September 30, 1998 compared to the prior year period.
Contributing to this increase was the expansion of the Company's corporate
staff, specifically management information systems, accounting, and human
resources personnel hired throughout 1998 to support the aggressive expansion,
which added to corporate overhead for the three months ended September 30, 1998,
compared to the prior year period. In addition, the amortization of goodwill
related to the acquisitions increased corporate overhead costs by $113,000 in
the three months ended September 30, 1998 compared to the prior year period. As
a result of the additional locations and increased office space in the Bala
Cynwyd, Pennsylvania, Tampa, Florida and Edison, New Jersey offices, rent
expense increased by approximately $361,000 for the three months ended September
30, 1998 compared to the prior year period. The IT Training business incurred
general and administrative expenses for the three months ended September 30,
1998 of approximately $278,000, or 44.8% of its revenues, compared to
approximately $228,000, or 30.6% of its revenues in the prior year period.
Interest. Interest expense was $134,000 and $11,000 for the three
months ended September 30, 1998 and 1997, respectively. Interest income was
$2,000 and $73,000 for the three months ended September 30, 1998 and 1997,
respectively. This decrease in interest income and increase in interest expense
for the quarter ended September 30, 1998 reflects the Company's use of the net
proceeds from the Offering along with increased borrowings on its line of credit
to fund it's aggressive internal expansion and acquisitions.
15
<PAGE>
Income Taxes. The effective tax benefit rate for the three months ended
September 30, 1998 is higher than the applicable federal statutory tax rate of
34% due primarily to the Company's state tax operating loss benefits. If the
Information Management Solutions business is able to achieve profitability, it
will be able to utilize approximately $4.2 million (as of December 31, 1997) in
federal tax operating loss carryforwards, which will expire between 2002 and
2012.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net Revenues. Consolidated net revenues increased by 11.2%, or $8.4
million, for the nine months ended September 30, 1998 compared to the prior year
period. Revenue for the Contract Placement business increased by 9.3%, or $5.0
million, for the nine months ended September 30, 1998, compared to the prior
year period. Contributing to the increase was $5.5 million in revenues from the
acquisition and new offices, offset by decreased revenues from the New England
and National offices of 24.1% and 3.2% respectively. This decrease was a direct
result of sales and recruiting staffing turnover in those offices that occurred
during the second quarter of 1997. While the Contract Placement business has
increased its sales and recruiting staffs to 1997 levels and substantially
reduced its rate of turnover in the first nine months of 1998, the replacement
personnel are not yet as productive as those who left. Revenue for the Permanent
Placement business increased by 33.0%, or $2.0 million, for the nine months
ended September 30, 1998, compared to the prior year period. Of this increase
$1.2 million or 60%, was attributable to its acquisition and new offices.
Revenue for the Information Management Solutions business increased by 10.0%, or
$1.3 million, for the nine months ended September 30, 1998 compared to the prior
year period. The business' acquisitions generated $5.1 million of revenues in
the quarter ended September 30, 1998 which was mostly offset by decreased
revenues in existing locations. The IT Training business generated net revenues
of $2.1 million for the nine months ended September 30, 1998, virtually the same
amount as the comparable period in 1997.
Cost of Sales. Consolidated cost of sales increased by 8.0%, or $4.2
million, for the nine months ended September 30,1998 compared to the prior year
period. Cost of sales as a percentage of consolidated net revenues decreased to
68.8% from 70.8%. In the Company's Contract Placement business, cost of sales as
a percentage of its revenue decreased to 77.6% from 78.3% primarily as a result
of the Contract Placement business focusing its sales efforts on higher margin
services. The decline in cost of sales as a percentage of consolidated net
revenues was also attributable to an increase in revenue for the Permanent
Placement business, which has no cost of sales. In the Company's Information
Management Solutions business, cost of sales as a percentage of its revenue
decreased to 75.2% from 77.8% for the nine months ended September 30, 1998
compared to the prior year period. The IT Training business also contributed an
additional $1.3 million in cost of sales, representing 60.7% of that business'
revenues, in the nine months ended September 30, 1998 compared to $988,000, or
46.2% of its revenues, in the comparable period in 1997.
Selling and Operating. Consolidated selling and operating expenses
increased by 30.8%, or $3.8 million, for the nine months ended September 30,
1998 compared to the prior year period. Of such increase approximately $2.6
million, or 68% represented costs associated with the acquisition and new
offices that did not exist in the nine months ended September 30, 1997. Selling
and operating expenses as a percentage of consolidated net revenues increased to
19.5% from 16.5% for the nine months ended September 30, 1998 compared to the
prior year period. Selling and operating expenses as a percentage of revenues
for the Contract Placement business increased to 10.9% from 9.0% for the nine
months ended September 30, 1998 compared to the prior year period. Of the
increase of $1.6 million, $1.2 million, or 75%, was attributable to the
acquisition and new offices. Selling and operating expenses as a percentage of
revenues for the Permanent Placement business decreased to 68.1% from 68.6% for
the nine months ended September 30, 1998 compared to the prior year period,
attributable primarily to management's efforts to control selling costs. Selling
and operating expenses as a percentage of revenues for the Information
Management Solutions business increased to 21.3% from 18.4% for the nine months
ended September 30, 1998 compared to the prior year period. Of the increase of
$671,000 approximately $441,000, or 66%, was due to selling costs incurred by
the acquired companies. In the IT Training business selling and operating
expenses increased approximately $26,000, or 4.3%, in the nine months ended
September 30, 1998 compared to the prior year period.
<PAGE>
General and Administrative. Consolidated general and administrative
expenses increased 56.1%, or $3.5 million, for the nine months ended September
30, 1998 compared to the prior year period. The amount of increase reflected
a reduction in certain executive salaries, effective July 1, 1998, which will
remain in effect through the remainder of 1998. Of this increase $1.5 million
relates to the acquisitions and new offices. General and administrative expenses
as a percentage of consolidated net revenues, increased to 11.6% from 8.3% for
the nine months ended September 30, 1998 compared to the prior year period.
Contributing to this increase was the expansion of the Corporate staff,
primarily management information systems, human resource and accounting
personnel to support the aggressive expansion. In addition, the amortization of
goodwill related to the acquisitions increased corporate overhead costs by
$206,000 in the nine months ended September 30, 1998 compared to the prior year
period. As a result of the acquisitions and new offices, along with increased
office space in the Bala Cynwyd, Pennsylvania, Tampa, Florida, and Edison, New
Jersey offices, rent expense increased by approximately $672,000 for the nine
months ended September 30, 1998 compared to the prior year period. The IT
Training business incurred general and administrative expenses for the nine
months ended September 30, 1998 of approximately $823,000, or 39.3%, of that
business' revenues, compared to $678,000, or 31.7% of its revenues, in the prior
year period.
16
<PAGE>
Interest. Interest expense was $165,000 and $202,000 for the nine
months ended September 30, 1998 and 1997, respectively. Interest income was
$84,000 and $211,000 for the nine months ended September 30, 1998 and 1997,
respectively. This decrease in interest expense and in interest income was
attributable to the Company's usage of the proceeds from it's Offering, along
with additional borrowing to fund the aggressive expansion in locations.
Income Taxes. The effective tax rate for the nine months ended
September 30, 1998 is higher than the applicable statutory tax rate of 34%,
primarily due to the Company's state tax liabilities and certain expenses not
deductible for tax purposes. For the nine months ended September 30, 1997 the
effective tax rate was higher than the federal statutory tax rate due to the net
operating losses for the Information Management Solutions business, which was
consolidated for financial but not for tax reporting purposes for the period of
January 1, 1997 through February 20, 1997, as well as the Company's state tax
liabilities. However, since the Company's merger with JIS (which includes the
Information Management Solutions business) on February 20, 1997, this business
unit is now consolidated for tax purposes and any future losses generated by the
Information Management Solutions business are used in the calculation of income
tax expense or benefit. If the Information Management Solutions business is able
to achieve profitability, it will be able to utilize approximately $4.2 million
(as of December 31, 1997) in federal operating loss carryforwards, which will
expire between 2002 and 2012.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's need for working capital has increased as
its revenues have grown and it has used borrowings under its credit facility to
fund working capital. In February 1997, the Company's working capital increased
substantially as a result of the receipt of the proceeds from its initial public
offering. The Company has used the net proceeds from the Offering as well as its
cash flow from operations to fund its working capital needs. In June 1998 the
Company began using its line of credit to fund the cost of its acquisitions and
for working capital, and as of September 30, 1998 $6,400,000 is owing on the
line. The Company typically maintains minimal cash balances as reflected in the
balance of $119,000 as of September 30, 1998. The Company redeemed its short
term investments of approximately $5.5 million held at December 31, 1997 and
used the proceeds to acquire substantially all of the assets of ISI and Cella.
The Company generated cash from operations of $2.9 million and $0.9
million for the nine months ended September 30, 1998 and 1997, respectively.
This result is primarily due to the redemption of the short term investments
mentioned above, and an increase in accounts payable and accrued expenses
primarily related to the recent acquisitions, offset by an increase in accounts
receivable which is primarily related to the increased sales. As discussed in
Note 3 in the accompanying condensed consolidated financial statements, the
Company has issued common stock as part of the purchase price of some of its
acquisitions with a guarantee that the market price of such stock will equal or
exceed specified prices per share at future dates. If the determination dates
were September 30, 1998, then based on the average market price of the stock
ending on that date, the Company would have to make a cash payment at least
equal to the amount reflected as "Other Liabilities" on its balance sheet to
meet that condition.
Cash purchases of fixed assets for the nine months ended September 30,
1998 and 1997 were $2.5 million and $1.1 million respectively, related primarily
to purchases of computers, software, and imaging equipment to upgrade the
Company's technology infrastructure, as well as the furnishing of new office
facilities. The Company used $7.0 million to complete all of its acquisitions
and an additional $495,000 to repay the bank debts assumed in several of its
acquisitions. In the first quarter of 1997 the Company received repayment of its
loans to officers and related parties in the aggregate amount of $577,000.
In the nine months ended September 30, 1998 the Company repaid the
remaining $238,000 balance outstanding on the notes payable related to the
Berkeley acquisition, and repurchased as treasury stock 40,000 common shares, at
a price of $5.50 per share, which had been issued to the stockholders of
Berkeley in lieu of $300,000 notes payable at the completion of the initial
public offering.
The Company currently has available a $25.0 million revolving advance
facility (the "Line of Credit") with PNC Bank, N.A. The Line of Credit expires
on May 31, 2003. This facility allows the Company to borrow the lesser of 85% of
eligible accounts receivable, or $25.0 million. As of September 30, 1998 the
Company had $6.4 million outstanding against the Line of Credit. The Line of
Credit is secured by substantially all of the Company's assets and contains
customary restrictive covenants, including limitations on loans the Company may
extend to officers and employees, the incurring of additional debt and the
payment of dividends on the Company's common shares. The Line of Credit bears
interest, at the Company's option, at either the bank's prime rate or 200 basis
points over the London Inter-Bank Offered Rate ("LIBOR").
The Company anticipates that its primary uses of capital in future
periods will be to fund increases in accounts receivable, finance acquisitions
and fund internal growth through new office locations. The Company believes that
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.
17
<PAGE>
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is pervasive and complex, as many computer systems will be affected in some way
by the rollover of the two-digit year value to 00. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The "Year 2000" issue creates risk for the Company from unforeseen
problems in its own computer systems and from third parties for whom the Company
implements "Year 2000" solutions on their computer systems.
The Company has received assurance from the vendor that its recently implemented
financial information system is "Year 2000" compliant. Further, the Company is
currently in the process of replacing its candidate and client databases
utilized in its Contract Placement and Permanent Placement business with
software systems that are represented by the vendor to be "Year 2000" compliant.
The Company is analyzing its remaining computer systems to identify any
potential "Year 2000" issues and will take appropriate corrective action based
on the results of such analysis. Management has not yet determined the cost
related to achieving "Year 2000" compliance. Management believes, based on its
available information, that it will be able to manage its total "Year 2000"
transition without any material adverse effects on its business operations or
financial condition.
FORWARD LOOKING INFORMATION
This report and other reports and statements filed by the Company from
time to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain certain forward-looking statements and
information that are based on beliefs of, and information currently available
to, the Company's management as well as estimates and assumptions made by the
Company's management. When used in SEC Filings, the words "anticipate,"
"believe," "estimate," "expect," "future," "intend," "plan" and similar
expressions as they relate to the Company or the Company's management, identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the Company's operations and results
of operations, competitive factors and pricing pressures, shifts in market
demand, the performance and needs of the industries served by the Company, and
other risks and uncertainties, including, in addition to any uncertainties
specifically identified in the text surrounding such statements and those
identified below, uncertainties with respect to changes or developments in
social, economic, business, industry, market, legal and regulatory circumstances
and conditions and actions taken or omitted to be taken by third parties,
including the Company's stockholders, customers, suppliers, business partners,
competitors, and legislative, regulatory, judicial and other governmental
authorities and officials. Should one or more of these risks or uncertainties
materialize, or should the underlying assumptions prove incorrect, actual
results may vary significantly from those anticipated, believed, estimated,
expected, intended or planned.
Dependence on Availability of Qualified Technical Consultants The
Company is dependent upon its ability to attract and retain technical
consultants who possess the skills and experience necessary to meet the staffing
requirements of its clients. To keep pace with rapidly evolving information
technologies and changing client needs, the Company must continually evaluate
and upgrade its database of available qualified technical consultants.
Competition for individuals with proven technical skills is intense, and, as is
currently customary in the industry, the Company does not have any exclusive
contracts with its consultants. The Company competes for such individuals with
other providers of technical staffing services, systems integrators, providers
of outsourcing services, computer systems consultants, clients and temporary
personnel agencies. Factors influencing such competition include compensation,
benefits, growth opportunities and pre-existing relationships with other
companies, particularly specialty staffing companies. As the Company expands
into new geographic areas, it may experience difficulty attracting qualified
technical consultants who have a prior relationship or familiarity with more
established specialty staffing companies in such areas. There can be no
assurance that qualified technical consultants will continue to be available to
the Company in sufficient numbers to meet the Company's current and anticipated
growth requirements.
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 referrals, and there can be no assurance that the Company will
successfully market such services on an integrated basis.
18
<PAGE>
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.
History of Operating Losses in Information Management Solutions
Business The Company's Information Management Solutions business has had net
operating losses since its commencement in 1988, experienced a loss from
operations of approximately $1.9 million for the nine month period ended
September 30, 1998, and at September 30, 1998 had an accumulated deficit of $6.3
million. The losses have resulted from high marketing and general and
administrative costs associated with building the division's imaging and
document management infrastructure and capabilities, combined with historically
low profit margins related to the hardware component of the networking business
and a slower emergence of the imaging and document management market than
anticipated by the Company. Specifically, the costs associated with building
this division's imaging and document management capabilities have included the
hiring of sales and technical personnel, the opening and closing of a new
office, and the costs associated with the acquisition and integration of two
imaging and document management companies. The Company is currently focusing on
achieving profitability in its Information Management Solutions business and
expanding it through internal growth, new service offerings and acquisitions,
but cannot provide any assurances as to when it will achieve sustained
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
Information Management Solutions business will achieve a pricing and cost
structure that will generate sustained profits, or that the Company will be able
to identify and acquire appropriate acquisition candidates on favorable terms.
Failure of the Information Management Solutions 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 Information Management Solutions
business is unable to achieve sustained profitability, it will not realize the
federal tax benefit of its $4.2 million operating loss carryforward at December
31, 1997 which will expire between 2002 and 2012.
Dependence on Contract Placement Business The Company's Contract
Placement business was responsible for 80.3%, 75.0% and 71.4% of total Company
revenues for the years ended December 31, 1995, 1996 and 1997, respectively. In
addition, for the years ended 1996 and 1997, one customer of the Contract
Placement business, Merck, accounted for approximately 10.0% and 9.8% of total
Contract Placement revenues, respectively, and 7.5% and 7.0% of total Company
revenues, respectively. There can be no assurance that the Company will be able
to retain this level of revenue from this client. The ability of the Company to
sustain or increase revenues in the Contract Placement business is subject to
various factors, including its ability to attract and retain qualified technical
consultants, to hire, integrate and retain qualified managers in existing and
new markets and to apply its management practices to a significantly larger
organization. There can be no assurance that the Company will be able to sustain
or increase its Contract Placement revenues. Furthermore, a decline in the level
of Contract Placement revenues would have a material adverse effect on the
Company.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
19
<PAGE>
PART II
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this Quarterly Report on Form
10-Q.
Exhibit No. Description of Document
11.1 Statement re Computation of Earnings Per Share.
27.1 Financial Data Schedule.
No reports were filed by the Registrant on Form 8-K during the quarter
ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned,
Dated: November 11, 1998
THE JUDGE GROUP, INC. THE JUDGE GROUP, INC.
By: /s/Frank Barrett By: /s/Martin E. Judge, Jr.
----------------------------- -----------------------------
Frank Barrett Martin E. Judge, Jr.
Chief Financial Officer Chairman of the Board and
Chief Executive Officer
<PAGE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
---- ----
<S> <C> <C>
Basic
- -----
Weighted average common shares outstanding (2) 13,491,000 13,348,000
========== ==========
Net income (loss) after adjustment for preferred dividends
earned on JIS stock ($861,446) $ 1,172,428
========= ===========
Basic net income (loss) per common share ($ 0.06) $ 0.09
======= ======
Diluted
- -------
Weighted average common shares outstanding (1) (2) 13,491,000 13,348,000
========== ==========
Net income (loss) after adjustment for preferred dividends
earned on JIS stock and interest saved on conversion of debt ($861,446) $ 1,172,428
========= ===========
Diluted net income per common share ($ 0.06) $ 0.09
======== ======
</TABLE>
(1) Options on 1,483,050 shares and 584,000 shares in 1998 and 1997,
respectively, not included in computing diluted earnings per share because
their effects are anti-dilutive.
(2) Excludes 40,000 shares of Treasury Stock from its date of purchase on
February 28, 1998.
================================================================================
COMPUTATION OF EARNINGS PER SHARE FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---- ----
<S> <C> <C>
Basic
- -----
Weighted average common shares outstanding (1) (4) 13,536,000 12,563,000
========== ==========
Net income after adjustment for preferred dividends earned on
JIS stock $ 11,203 $ 1,807,123
======== ===========
Basic net income per common share $ 0.00 $ 0.14
====== ======
Diluted:
- -------
Weighted average common shares outstanding (2) (3) (4) 13,553,000 12,650,000
========== ==========
Net income after adjustment for preferred dividends earned on
JIS stock and interest saved on conversion of debt $ 11,203 $ 1,810,873
======== ===========
Diluted net income per common share $ 0.00 $ 0.14
====== ======
</TABLE>
(1) Includes 93,000 contingently issuable shares based on estimated earnouts.
(2) Options on 1,466,783 shares and 584,000 shares in 1998 and 1997,
respectively, not included in computing diluted earnings per share because
their effects are anti-dilutive.
(3) Includes 93,000 contingently issuable shares and 16,667 shares representing
dilutive effect of outstanding options.
(4) Excludes 40,000 shares of Treasury Stock from its date of purchase on
February 28, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE JUDGE GROUP, INC. QUARTERLY REPORT ON FORM
10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Sep-30-1998
<CASH> 118,578
<SECURITIES> 0
<RECEIVABLES> 22,232,169
<ALLOWANCES> 354,000
<INVENTORY> 1,430,205
<CURRENT-ASSETS> 25,797,210
<PP&E> 7,743,592
<DEPRECIATION> 2,851,481
<TOTAL-ASSETS> 46,557,255
<CURRENT-LIABILITIES> 12,613,076
<BONDS> 0
0
0
<COMMON> 135,312
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 46,557,255
<SALES> 0
<TOTAL-REVENUES> 83,225,523
<CGS> 57,268,382
<TOTAL-COSTS> 25,857,528
<OTHER-EXPENSES> 80,942
<LOSS-PROVISION> 120,761
<INTEREST-EXPENSE> 80,942
<INCOME-PRETAX> 18,671
<INCOME-TAX> 7,468
<INCOME-CONTINUING> 11,203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,203
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
