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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
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 incorporation or organization) (IRS Employer Identification No.)
TWO BALA PLAZA, SUITE 800
BALA CYNWYD, PENNSYLVANIA 19004
(Address of principal executive offices, including zip code)
(610) 667-7700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
------------------- -----------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.01 Par Value NASDAQ National Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 19, 2002, the approximate aggregate market value of the
voting stock held by non-affiliates of the Registrant was $3,831,000 based on
the closing sales price of $0.62 of the Registrant's Common Stock on the NASDAQ
National Market.
As of March 19, 2002, 14,097,652 shares of the Registrant's Common
Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions, as expressly described in this Report, of the
Registrant's Proxy Statement for the 2002 Annual Meeting of the stockholders, to
be filed within 120 days of December 31, 2001, are incorporated by reference
into Part III, Items 10 - 13, of this Report.
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
PART I
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. ALL FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY.
FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FORWARD LOOKING
INFORMATION." READERS SHOULD CAREFULLY REVIEW THE RISKS DESCRIBED IN THIS AND
OTHER DOCUMENTS THAT WE FILE FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE
COMMISSION. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY TO THE DATE OF THIS ANNUAL REPORT
ON FORM 10-K. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO
THE FORWARD-LOOKING STATEMENTS OR REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
OF THIS DOCUMENT.
For the purposes of calculating the aggregate market value of the shares of our
common stock held by nonaffiliates, as shown on the cover page of this Report,
it has been assumed that all the outstanding shares were held by nonaffiliates
except for the shares beneficially owned by our directors and executive
officers. However, this should not be deemed to constitute an admission that all
of our directors and executive officers are, in fact, affiliates of ours, or
that there are not other persons who may be deemed to be affiliates of ours.
Further information concerning shareholdings of officers, directors and
principal shareholders is included in our definitive proxy statement filed or to
be filed with the Securities and Exchange Commission.
ITEM 1. BUSINESS
GENERAL
The Judge Group, Inc., incorporated in Pennsylvania in June 1970, services
the information technology ("IT") and engineering needs of our clients by
providing IT and engineering personnel on both a temporary contract basis
("technical consultants") and on a permanent basis, and by providing standard
and customized IT training for established and emerging software applications.
We provide technical consultants skilled in a variety of fields, such as
software applications programming and development, client/server technology,
legacy systems conversion, software architecture and design, data
communications, systems engineering, Internet/Web-Site design, project
consulting, project management, and Help Desk management. Technical consultants
are provided on a nationwide basis through our National Division, and on a
regional and local level through a network of 7 offices in 7 states. We maintain
a database of approximately 225,000 technical consultants, and in 2001 provided
approximately 1,900 technical consultants to approximately 615 clients.
We provide IT, food processing, pharmaceutical, distribution, retail, and
biotechnical professional and engineering personnel on a permanent basis to our
clients nationwide through a network of 9 offices in 8 states, and maintain a
database of approximately 235,000 candidate professionals. In 2001, we placed
approximately 1,000 candidates with more than 720 clients.
We provide training on a range of software and network applications to our
technical consultants and in-house personnel, as well as to corporate,
governmental, and individual clients. We currently offer licensed diploma
courses, certificate courses, and more than 130 open-enrollment courses, either
in our own computer labs or at client locations. In addition to expanding our
range of technical service offerings, the training business assists us in
identifying emerging technologies and integrating such technologies into our
organization. We offer an Instructor Staffing Service that provides trainers in
many areas of IT to other training schools and centers throughout the country,
allowing us a nationwide IT training presence.
1
Our operations, including our contract placement, permanent placement and
IT training business, were consolidated within the IT Staffing segment in
January 1999 to enable financial analysis that more closely tracks our lines of
business. Previously, we also operated another segment through our Information
Management Solutions ("IMS") business. During 1999, we sold substantially all of
the assets of the IMS business. The results of operations of the IMS business
for 1999 are shown separately in the accompanying consolidated statements of
operations as "loss from discontinued operations".
CONTINUING OPERATIONS
We have provided professional and engineering personnel on a permanent
basis since we were founded in 1970. Permanent placements generated revenues of
$12.2 million, $14.4 million, and $14.0 million in 1999, 2000 and 2001,
respectively, representing 10.7%, 12.6%, and 13.6% of our total revenues for the
respective periods. We provide IT, food processing, pharmaceutical,
distribution, retail, and biotechnical professional and engineering personnel on
a permanent basis nationwide through our regional offices in Bala Cynwyd,
Pennsylvania; Edison, New Jersey; Tampa and Jacksonville, Florida; Arlington,
Texas; Alpharetta, Georgia; Oak Brook, Illinois; and Laguna Hills, California.
In August 2001, we opened our office in Laguna Hills, California to provide
permanent placement services in the greater Los Angeles area. In January 2002,
we began offering permanent placement services of pharmaceutical and
biotechnical professional personnel from our Raleigh, North Carolina office,
which had been opened initially to provide contract placement services.
Approximately 71% of permanent placement revenues are from food processing,
distribution, and retail industries, approximately 16% from pharmaceutical
industry, and approximately 13% from IT industries. We maintain a database of
over 235,000 engineering and IT candidate professionals, and in 2001 we placed
approximately 1,000 professionals with more than 720 clients. As compensation
for our services, we receive a fee based on a percentage of each placed
professional's first year salary, subject to forfeitures if the placed
professional leaves the position during a standard period (typically thirty to
ninety days).
In 1986, we began to provide technical consultants on a temporary contract
basis, which generated revenue of $98.5 million, $95.6 million, and $85.1
million in fiscal 1999, 2000 and 2001, respectively, representing 86.6%, 83.7%,
and 82.5% of our consolidated net revenues in those periods. We provide IT,
engineering, pharmaceutical, scientific, biotechnical and other professional
consultants on a contract basis to organizations with complex technology and
staffing needs through our regional offices in Bala Cynwyd, Pennsylvania;
Edison, New Jersey; Alexandria, Virginia; Providence, Rhode Island; Bloomfield
Hills, Michigan; Raleigh, North Carolina; and nationally through our National
Division based in Providence. During 2001, we discontinued our services offered
through the Needham, Massachusetts office and moved the remaining operations
from that location to our Providence, Rhode Island office. As of December 31,
2001 we discontinued our operations in our Nashville, Tennessee office and
closed that office. We maintain a database of approximately 225,000 technical
consultants, and in 2001 placed approximately 1,900 consultants with
approximately 615 clients. Typical engagements range in duration from six to
twelve months, though some of our technical consultants have been performing
services for our clients for a period of several years. Our technical
consultants and independent contractors often work jointly with clients'
in-house IT personnel. This portion of our operations periodically experiences
diminished revenue growth in the fourth quarter due to the effect of several
holidays. Further, revenues can be depressed in the first quarter due to the
effect of winter weather which can prevent contractors from performing billable
services.
The majority of our contract business is derived from providing technical
consultants skilled in IT and software engineering. In addition to staff
augmentation, we provide project consulting services, which can include project
management, workflow analysis, database design, custom software applications and
system integration. In a project management engagement, which can be on either a
fixed fee or a time and material basis, we typically oversee an entire IT
project from inception to completion, utilizing technical consultants with
specialty skills in the relevant technologies.
2
We have expanded the type of skilled personnel our contract placement
business is capable of providing to such diverse areas as finance, life
sciences, desktop publishing, PC support and help desk, and human resources. We
retain certain technical consultants as "bench employees", which are our full
time employees that receive lower hourly rates than technical consultants who
are retained on a per job basis.
Bench employees are paid their hourly rate even if they are not billed to
a client. The use of bench employees increases our profit margin due to the
lower hourly rate paid the employee. However, there would be an adverse effect
on our net income if bench employees were not fully occupied for clients. We
have focused our efforts on attracting and placing contractors with more
specialized skills thereby enabling us to achieve higher margin placements.
Originally established in 1991, our National Division provides IT,
scientific, and engineering personnel on a contract basis nationwide, primarily
to larger national corporations. Revenue attributable to the National Division
was $13.6 million, $12.3 million, and $10.5 million in 1999, 2000, and 2001,
respectively, representing 12.0%, 10.8% and 10.2% of our total consolidated
revenues for the respective periods.
We have provided IT training since September 1996, when we acquired an IT
training business. We provide training in a variety of software and network
applications and generated revenue of $3.0 million, $4.3 million, and $4.0
million in 1999, 2000, and 2001, respectively, which represented 2.6%, 3.8%, and
3.8% of our consolidated net revenues during such periods. We provide IT
training services at our facility in Bala Cynwyd, Pennsylvania and at various
off-site locations. We deliver certified training for all Microsoft products at
our Bala Cynwyd location. We provide custom IT training for clients across all
hardware and software platforms, dependent on the needs and requirements of the
client. The IT training business is an authorized training center for many major
software manufacturers, including Microsoft Corporation, Adobe Systems
Incorporated and Quark, Inc. We are a Microsoft Solutions Provider and Certified
Technical Education Center. Our diploma programs in Desktop Publishing, Business
Software, Multimedia and Internet are licensed and accredited by the
Pennsylvania Board of Private Licensed Schools and are approved for veterans'
education by the U.S. Veterans Administration. We frequently conduct our courses
at the in-house facilities of our corporate clients and have the ability to
provide the necessary computer equipment at conference centers, hotels and other
off-site locations as requested by our clients.
DISCONTINUED OPERATIONS
In June 1999 we adopted a plan to dispose of our IMS business. Through
sales occurring from June through August 1999, we divested substantially all of
the assets of our IMS business for total consideration of approximately $4.4
million consisting of cash, note receivable, and forgiveness of amounts payable
to the buyer. Assets sold consisted primarily of accounts receivable, inventory,
and property and equipment. Liabilities assumed by the buyer consisted primarily
of trade accounts payable, accrued expenses, and equipment leases payable. We
incurred a loss on disposal of the IMS business of approximately $6.3 million
(net of tax effect of $2.0 million). Included in such loss was the write off of
approximately $7.1 million of goodwill representing the unamortized balance of
goodwill recorded in 1998 when we purchased all or substantially all of the
business of three IMS companies. Also included in such loss was an estimated
loss for operations during the phase out period of approximately $0.1 million
for the remaining business, which was sold in August 1999.
Operating results of the IMS business for the year ended December 31, 1999
are shown separately in the accompanying consolidated statements of operations.
Net revenue of the IMS business for the year ended December 31, 1999 was
approximately $7.0 million.
INTELLECTUAL PROPERTY
While we do not own any patents, registered copyrights or trademarks, we
routinely enter into non-disclosure and confidentiality agreements with
employees, contractors, consultants and customers. Licenses for a number of
software products have been granted to us for our own use or for remarketing to
our customers. In the aggregate, these licenses are material to our business,
but we believe that the loss of any one of these licenses would not materially
affect our results of operations or financial position.
3
CUSTOMERS
The primary industries we serve include financial services, manufacturing,
software/computers, government, food, biotechnical, and pharmaceutical. In 2001,
2000, or 1999, no customer accounted for more than 10% of our consolidated
revenues.
COMPETITION
The IT professional services industry is highly competitive and fragmented
on the local, regional, and national levels. We believe that some of our
competitors are, or will soon be, offering the full range of technical staffing
services that we currently provide. In addition, many companies offer one or
more of our services in all of the geographical markets in which we currently
operate. Many of our competitors have significantly greater name recognition and
financial, technical and other resources and generate greater revenues and
profits than we do.
Within any given geographical or technical specialty market, we compete
for clients with other IT, engineering and professional service providers,
outsourcing and consulting companies and, to a lesser extent, temporary
personnel agencies. The majority of the competition is made up of smaller local
and regional firms with a strong presence in their local markets. We
occasionally compete with nationally franchised firms. 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 our technical consultants; price; client satisfaction; and
overall responsiveness to client needs.
We compete for technical consultants with other professional service
providers, outsourcing and consulting companies, temporary personnel agencies
and client companies. The principal competitive factors for recruiting and
retaining technical consultants include compensation, availability and quality
of benefits, consistent flow of high quality, varied assignments and an
understanding of consultant skills and work preferences.
Within the IT training industry, there is competition among the available
training methods, such as instructor-led training versus computer-based
training. With the instructor-led training methods, some of the major software
and equipment manufacturers maintain their own training programs for both
internal training and public training. We believe our established library of
courses and proprietary course materials that can be updated (or customized for
a particular customer) provide us with a competitive advantage. Moreover, we
believe that the diversity of our course offerings, the quality of our
personnel, our flexibility in the locations at which we provide our services and
our ability to recognize emerging technologies and develop the requisite courses
responsive thereto, permit us to remain competitive with others in the
marketplace. We compete in the IT training business on the basis of our pricing
and the perceived quality and breadth of course offerings.
REGULATION
Our operations, as currently conducted, are subject to governmental
regulation in New Jersey, where the permanent placement business is a licensed
employment agency, and the contract placement business has registered with the
Temporary Help Service Section of the Bureau of Employment and Personnel
Services, part of the Division of Consumer Affairs of the Department of Law and
Public Safety of New Jersey, and in Massachusetts where the contract placement
business is registered as a service firm with the Massachusetts Department of
Labor and Workforce Development. Compliance with New Jersey and Massachusetts
regulations has not and is not expected to have a material effect on our
business. We are unaware of any other jurisdictions in which our operations are
subject to material governmental regulation.
All the jurisdictions in which we operate our training centers regulate
and license certain kinds of vocational, trade, technical or other
post-secondary education. We believe that employer-funded or reimbursed IT
training is exempt from such requirements in many of these states. We are
licensed in each jurisdiction in which we operate training centers.
If we were found to be in violation of a state's licensing or other
regulatory requirements, we could be subject to civil or criminal sanctions,
including monetary penalties. No state educational or regulatory authority has
cited us or commenced any proceeding against us for the violation of any
licensing or other vocational educational requirement.
4
EMPLOYEES
As of December 31, 2001, we had 307 full-time, non-consultant, employees.
On that date, there were also approximately 480 IT consultants working on
full-time assignments for our clients, of which approximately 80% were treated
as employees of ours and 20% were treated as independent contractors for federal
and state tax purposes. We are not a party to any collective bargaining
agreements and consider our relationships with our employees to be good.
ITEM 2. PROPERTIES
We do not own any real property. We have leased offices in the following
locations:
SQUARE LEASE SERVICES OFFERED AS OF
OFFICE FEET EXPIRATION DECEMBER 31, 2001
------ ---- ---------- -----------------
Bala Cynwyd, Pennsylvania 34,700 October 31, 2004 Contract Placement; Permanent Placement;
IT Training
Providence, Rhode Island 7,100 March 30, 2004 Contract Placement
Edison, New Jersey 11,800 February 28, 2006 Contract Placement; Permanent Placement
Alexandria, Virginia 3,900 December 31, 2005 Contract Placement
Tampa, Florida 6,900 May 31, 2003 Permanent Placement
Bloomfield Hills, Michigan 4,300 February 28, 2006 Contract Placement
Alpharetta, Georgia 4,800 September 30, 2003 Permanent Placement
Arlington, Texas 2,800 June 30, 2005 Permanent Placement
Oak Brook, Illinois 3,200 October 31, 2004 Permanent Placement
Jacksonville, Florida 2,900 November 30, 2003 Permanent Placement
Raleigh, North Carolina 3,900 January 31, 2005 Contract Placement; Permanent Placement
Laguna Hills, California 3,300 August 30, 2004 Permanent Placement
ITEM 3. LEGAL PROCEEDINGS
We are involved in legal proceedings from time to time in the ordinary
course of business. As of the date of this Report, there are no legal
proceedings pending against us, which we believe will have a material adverse
effect on our financial position or our results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 2001.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Our Common Shares, $0.01 par value per share, are traded on the NASDAQ
National Market under the symbol JUDG. The per share closing quotation for our
Common Shares on March 19, 2002 was $0.62. As of March 19, 2002, there were 209
shareholders of record of our Common Shares. Because many of such shares are
held by brokers and other institutions on behalf of shareholders, we are unable
to estimate the total number of shareholders represented by these record
holders. The following table sets forth the high and low sales price per share
of our Common Shares for the periods indicated:
Price Range
-----------
High Low
---- ---
Fiscal 2000
First Quarter $ 3.250 $ 1.438
Second Quarter $ 2.250 $ 1.000
Third Quarter $ 1.875 $ 1.219
Fourth Quarter $ 1.563 $ 0.813
Fiscal 2001
First Quarter $ 1.500 $ 1.000
Second Quarter $ 1.650 $ 1.050
Third Quarter $ 1.750 $ 0.640
Fourth Quarter $ 0.840 $ 0.470
We have never paid any cash dividends on our Common Shares and do not
anticipate paying cash dividends on our Common Shares in the foreseeable future
and are prohibited from doing so under the terms of our primary credit facility.
Our ability to pay dividends on our Common Shares is further dependent on the
earnings and cash flow of our operating subsidiaries and the availability of
such cash flow to us.
There are several requirements that we must satisfy in order for our
Common Stock to continue to be listed on the NASDAQ National Market. These
requirements include, but are not limited to, maintaining a minimum per share
price of our Common Stock of one dollar and a minimum aggregate market value of
publicly held shares (MVPHS) of our Common Stock of $5,000,000. We have received
notification from The Nasdaq Stock Market, Inc. that our Common Stock will be
delisted from the NASDAQ National Market unless the stock closes at or above one
dollar per share for at least ten consecutive days by May 15, 2002. The per
share price of our Common Stock and the MVPHS of our Common Stock do not
currently satisfy requirements to remain listed on the NASDAQ National Market.
In addition, in the future we may not comply with other listing requirements,
which might result in the delisting of our Common Stock. If our Common Stock is
delisted from the NASDAQ National Market, we may list the Common Stock for
trading over-the-counter or apply to have the Common Stock listed on the NASDAQ
Smallcap Market, subject to NASDAQ's approval. Delisting from the NASDAQ
National Market could adversely affect the liquidity and the price of our Common
Stock and could have a long-term adverse impact on our ability to raise future
capital through a sale of our Common Stock. In addition, delisting could make it
more difficult for investors to obtain quotations or trade our Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated operating statement
and balance sheet data for the periods indicated. The selected consolidated
operating statement and balance sheet data at and for each of the five fiscal
years presented below are derived from our audited Consolidated Financial
Statements. This data should be read in conjunction with management's discussion
and analysis of financial condition and results of operations and our
Consolidated Financial Statements included herein.
6
YEARS ENDED DECEMBER 31,
STATEMENTS OF 2001 2000 1999 1998 1997
OPERATIONS DATA ---- ----- ---- ---- ----
(In thousands, except per share data)
Net revenues $ 103,067 $ 114,217 $ 113,705 $ 95,218 $ 82,083
--------- --------- --------- -------- --------
Cost of sales 66,413 74,356 75,570 64,316 57,616
Selling and operating expenses 21,633 20,400 20,563 18,874 12,190
General and administrative expenses 14,475 13,514 12,535 10,189 5,931
Other charges 1,531 917 0 1,019 0
--------- --------- --------- -------- --------
Total costs and expenses 104,052 109,187 108,668 94,398 75,737
--------- --------- --------- -------- --------
Operating Income (loss) (985) 5,030 5,037 820 6,346
Interest income (expense), net (673) (995) (829) (154) 141
Other income 71 48 13 94 29
--------- --------- --------- -------- --------
Income (loss) before income taxes (1,587) 4,083 4,221 760 6,516
Income tax expense (benefit) (336) 100 1,877 752 2,373
--------- --------- --------- -------- --------
Income (loss) from continuing operations (1,251) 3,983 2,344 8 4,143
Loss from discontinued operations 0 0 (2,153) (5,125) (1,431)
Loss on disposal of discontinued
operations 0 0 (6,275) 0 0
--------- --------- --------- -------- --------
Net income (loss) ($ 1,251) $ 3,983 ($ 6,084) ($ 5,117) $ 2,712
========= ========= ========= ======== ========
Income (loss) from continuing operations per
Common Share:
Basic ($ 0.09) $ 0.29 $ 0.17 $ 0.00 $ 0.32
======== ====== ====== ====== ======
Diluted ($ 0.09) $ 0.29 $ 0.17 $ 0.00 $ 0.32
======== ====== ====== ====== ======
Loss from discontinued operations per
Common Share:
Basic $ 0.00 $ 0.00 ($ 0.15) ($ 0.38) ($ 0.11)
====== ====== ======= ======= =======
Diluted $ 0.00 $ 0.00 ($ 0.15) ($ 0.38) ($ 0.11)
====== ====== ======= ======= =======
Basic and Diluted loss from disposal of
discontinued operations per Common Share $ 0.00 $ 0.00 ($ 0.46) $ 0.00 $ 0.00
====== ====== ======= ====== ======
Basic and Diluted net income (loss) per
Common Share ($ 0.09) $ 0.29 ($ 0.44) ($ 0.38) $ 0.21
======= ====== ======= ======= ======
Basic weighted average shares 13,502 13,702 13,761 13,458 12,761
======= ====== ======= ======= ======
Diluted weighted average shares 13,502 13,924 13,797 13,458 12,826
======= ====== ======= ======= ======
AS OF DECEMBER 31,
BALANCE SHEET DATA: 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Working capital $ 11,172 $ 16,608 $ 14,181 $ 12,213 $ 18,525
Total assets 28,062 37,341 35,086 47,885 31,934
Notes payable, including current portion 4,437 9,167 9,689 9,882 0
Other long-term obligations, including
current portion 1,508 1,457 2,135 1,996 355
Shareholders' equity 17,863 18,992 16,006 23,081 26,274
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and related notes thereto appearing elsewhere
in this Report.
OVERVIEW
Our continuing operations experienced a decrease in revenue of
approximately $11.2 million, or 9.8%, to approximately $103.1 million for the
twelve months ended December 31, 2001 compared to the prior year period. This
decrease in revenue was primarily attributable to a recession in the general
economy in the second half of 2001, which lead to a reduced demand for contract
services. Our operating income (loss) decreased approximately $6.0 million, or
119.6%, in the year ended December 31, 2001 over the prior year period, from a
profit of approximately $5.0 million in fiscal 2000 to a loss of approximately
$1.0 million in fiscal 2001. Such decrease was primarily attributable to the
decreased revenues discussed earlier and to higher selling, general and
administrative expenses in fiscal 2001. Included in 2001 costs and expenses is
approximately $1.5 million of impaired goodwill charges, as more fully described
below.
Our operations, including our contract placement, permanent placement and
IT training business, were consolidated within the IT Staffing segment in
January 1999 to enable financial analysis that more closely tracks our lines of
business. Previously, we also operated another segment through our Information
Management Solutions ("IMS") business. During 1999, we sold substantially all of
the assets of the IMS business for total consideration of approximately $4.4
million consisting of cash, note receivable, and forgiveness of amounts payable
to the buyer. Assets sold consisted primarily of accounts receivable, inventory,
and property and equipment. Liabilities assumed by the buyer consisted primarily
of trade accounts payable, accrued expenses, and equipment leases payable. We
incurred a loss on disposition of the IMS business of approximately $6.3 million
(net of tax effect of $2.0 million). Included in such loss was the write-off of
approximately $7.1 million of goodwill representing the unamortized balance of
goodwill recorded in 1998 when we purchased all or substantially all of the
business of three IMS companies. Also included in such loss was an estimated
loss for operations during the phase out period of approximately $0.1 million
for the remaining business, which was sold in August 1999.
Operating results of the IMS business for the year ended December 31, 1999
are shown separately in the accompanying consolidated statements of operations.
Net revenues of the IMS business for the year ended December 31, 1999 was
approximately $7.0 million.
REVENUES
Our contract placement revenues are derived from professional service
activities, primarily the placement of skilled IT, engineering, pharmaceutical,
scientific, biotechnical and other professional personnel whose work is billed
at an hourly rate. An engagement of our technical consultants typically lasts
from six to 12 months. Revenues are directly related to the total number of
hours billed to clients and the associated hourly billing rates. Hourly billing
rates are established for each technical consultant based on the technical
consultant's skills, experience and the type of work performed. For the year
ended December 31, 2001, total hours billed were 1,398,786, with an average
billing rate of $59.87, compared to total hours billed of 1,515,374 with an
average billing rate of $59.27 for the prior year period. We believe that the
decrease in the total hours billed for our technical consultants resulted from
lower demand for our services due to the recession in the general economy in the
second half of 2001. Cost of sales in the contract placement business consists
primarily of the compensation expenses related to the consultants, such as
salaries, fringe benefits and payroll taxes. Selling and operating expenses
consist primarily of salaries and fringe benefits for selling representatives,
and also include marketing expenditures and bad debt charges. General and
administrative expenses consist primarily of management and administrative
salaries and related fringe benefits, as well as other overhead, such as rent
and depreciation.
8
Our permanent placement revenues are generated from one-time fees received
upon successful placements of IT, food processing, pharmaceutical, distribution,
retail, and biotechnical professional and engineering personnel with clients.
The standard fee arrangement is 1% of each thousand dollars of salary, up to a
maximum of 33% of the professional's first year salary. Revenue is recognized
upon commencement of the employment, subject to reversal if employment
terminates during a guarantee period (typically 30 - 90 days). The permanent
placement business placed approximately 1,000 professionals with an average
placement fee of $14,040 in 2001, compared to approximately 1,060 professionals
placed with an average placement fee of $13,544 for the prior year period. The
decrease in placements was primarily attributable to lower demand for
professionals due to the recession in the general economy in the second half of
2001. The increase in average placement fee was primarily attributable to our
emphasis on higher salary placements in the food processing, distribution and
pharmaceutical industries. No cost of sales is recorded in the permanent
placement business.
Our IT training business provides training in a variety of software and
network applications. Tuition and fee revenues are recognized when the classes
are held. Payments received prior to the class commencing are recorded as
deferred revenues. The IT training business provides its services at our
facility in Bala Cynwyd, Pennsylvania and at various off-site locations. We
frequently conduct our courses at the in-house facilities of our corporate
clients and have the ability to provide the necessary computer equipment at
conference centers, hotels and other off-site locations as requested by our
clients.
BUSINESS STRATEGY
Our business objectives are to increase market share in existing markets
by offering our services to additional industries, such as our expansion into
the distribution, pharmaceutical and biotechnical industries; to increase
cross-selling opportunities by offering all of our services in each location;
and to continue to strengthen our market position, by expansion through internal
growth. We continue to pursue cost controls by reevaluating our current
operating practices to find ways to improve the productivity of our personnel.
In 2001 we continued a focused strategic planning and budgeting process
resulting in a 2002 internal operating plan that reflects lower revenues in view
of the continuing recession in the general economy, while continuing to lower
costs accordingly. However, this plan is subject to many factors and
contingencies, and we may not be able to realize our goals. If we are able to
achieve our internal operating plan, which relies upon certain assumptions
including, but not limited to, our ability to maintain strict cost controls in
all of our operating units, we believe we can achieve earnings before interest,
taxes, depreciation, and amortization of approximately 4.0% of our revenues.
Failure to achieve the aforementioned assumptions as well as other factors could
prevent us from achieving these goals, which are forward-looking statements. See
"Forward-Looking Information" herein for additional factors that could
materially alter our ability to meet these objectives and our other operational
goals in 2002.
RESULTS OF OPERATIONS
The following table sets forth certain statement of continuing operations
data as a percentage of consolidated net revenues for each of the periods
indicated:
YEARS ENDED DECEMBER 31,
2001 2000 1999
---- ---- ----
Net revenues 100.0% 100.0% 100.0%
------ ------ ------
Cost of sales 64.4 65.1 66.5
Selling and operating expenses 21.0 17.9 18.1
General and administrative expenses 14.1 11.8 11.0
Other charges 1.5 0.8 0.0
----- ----- -----
Total costs and expenses 101.0 95.6 95.6
----- ----- -----
Operating income (loss) (1.0) 4.4 4.4
Other income (expense), net (0.6) (0.8) (0.7)
----- ----- -----
Income (loss) from continuing operations before income
taxes (1.6%) 3.6% 3.7%
===== ====== ======
9
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net Revenues. Consolidated net revenues from continuing operations decreased by
$11.2 million, or 9.8%, to approximately $103.1 million for the year ended
December 31, 2001 compared to the prior year period. The contract placement
business generated revenues of $85.1 million for the year ended December 31,
2001, a decrease of $10.5 million, or 11%, from revenues of $95.6 million in the
prior year period. This decrease resulted primarily from lower demand for
contract services due to the recession in the general economy in the second half
of 2001. Our permanent placement business generated revenues of $14.0 million in
2001, a decrease of $0.4 million, or 2.3%, from 2000 revenues of $14.4 million.
This decrease was primarily due to lower demand for professionals due to the
recession in the general economy in the second half of 2001. The IT training
business revenues decreased approximately $0.3 million, or 7.9%, from $4.3
million in 2000 to $4.0 million in 2001. The decrease in revenues in our IT
training business was attributable to lower demand for IT training due to the
recession in the general economy in the second half of 2001.
Cost of Sales. Consolidated cost of sales decreased by $7.9 million, or 10.7%,
for the year ended December 31, 2001 to $66.4 million from $74.4 million in the
prior year period. The decrease in cost of sales was primarily due to lower cost
of sales in the contract placement business related to lower revenues discussed
above. Cost of sales as a percentage of consolidated net revenues decreased to
64.4% from 65.1% in the respective periods. In our contract placement business,
cost of sales as a percentage of its net revenues decreased to 75.3% for the
year ended December 31, 2001 compared to 75.5% for the year ended December 31,
2000. Contributing to the decrease in cost of sales as a percentage of
consolidated net revenues was the increase in net revenue from the permanent
placement business, for which there is no cost of sales, relative to
consolidated net revenues. The Company's IT training business contributed
approximately $2.4 million in expenses included in cost of sales, an increase of
approximately $0.1 million from the prior year period, primarily due to higher
trainer salaries.
Selling and Operating. Consolidated selling and operating expenses increased by
approximately $1.2 million, or 6.0%, for the year ended December 31, 2001 to
$21.6 million from $20.4 million in the prior year period. Selling and operating
expenses as a percentage of consolidated net revenues for the year ended
December 31, 2001 increased to 21.0% from 17.9% in the prior year period. This
increase was due partially to increased marketing efforts to generate additional
revenues, and partially to marketing costs associated with our discontinued
web-based job board. In our contract placement business, selling and operating
expenses decreased approximately $0.4 million, or 4.3%, over the prior year
period partially due to lower commissions paid on the lower revenues in 2001
discussed earlier, and partially due to lower bad debt expense. In our permanent
placement business, selling and operating expenses increased approximately $0.7
million, or 9.2%, over the prior year period partially due to increased
commission rates paid on revenues in 2001, and partially due to marketing costs
in an attempt to increase revenues. In our IT training business, selling and
operating expenses increased approximately $0.2 million, or 19.7%, over the
prior year period primarily due to higher bad debt expense.
General and Administrative. Consolidated general and administrative expenses
increased by approximately $1.0 million, or 7.1%, for the year ended December
31, 2001 to $14.5 million from $13.5 million in the prior year period. General
and administrative expenses as a percentage of consolidated net revenues for the
year ended December 31, 2001 increased to 14.1% from 11.8% in the prior year
period. Contributing to this increase was an increase of $0.6 million, or 29.0%,
in rent and related expense for the year ended December 31, 2001 compared to the
prior year period. Of this increase approximately $0.3 million was attributable
to anticipated losses in connection with lease commitments related to the
closing of our Needham, Massachusetts office and the discontinuation of our
web-based job board. Also contributing to the increase in general and
administrative expenses was a charge for loss on disposal of equipment and
software of $0.4 million in the year ended December 31, 2001 compared to a
charge of $20,000 in the prior year period. This increase was due primarily to
the write off of obsolete computers and internally developed software, including
the discontinued web-based job board.
Other charges. During 2001, we incurred non-cash other charges of $1.5 million
compared to $0.9 million of other charges in the prior year period. In 2001, the
non-cash charges related to the impairment of purchased goodwill in the IT
training business and the contract placement business. The charge in 2000
primarily represents severance costs related to two former executives. Included
in the 2000 charge is $0.2 million representing the fair value of stock
compensation granted in accordance with a severance agreement executed between
the Company and one former executive.
10
Interest. Interest expense was approximately $673,000 for the year ended
December 31, 2001 compared to approximately $995,000 in the prior year period.
The decrease in interest expense reflects our decreased usage of our line of
credit, as well as a decrease in the interest rate on the line of credit to
4.75% at December 31, 2001 from 9.50% at December 31, 2000. We have historically
allocated interest expense to each operating business based on debt identified
specifically to the operations of that business. Interest and other income
increased to approximately $71,000 for the year ended December 31, 2001 from
$47,000 in the prior year period.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net Revenues. Consolidated net revenues from continuing operations increased by
$0.5 million, or 0.5%, to approximately $114.2 million for the year ended
December 31, 2000 compared to the prior year period. Our permanent placement and
IT training businesses increased revenues in 2000 by $2.2 million and $1.3
million, respectively, over the prior year period. The contract placement
business generated revenues of $95.6 million for the year ended December 31,
2000, a decrease of $2.9 million, or 3%, from revenues of $98.5 million in the
prior year period. Such decrease resulted primarily from more severe winter
weather in the first two months of 2000 compared to the prior year period, which
prevented our IT consultants from performing billable services; the completion
of "Year 2000" projects on which some of our consultants were working; and a
general trend in the IT industry toward more permanent placement business
instead of contract placement business. Our permanent placement business
generated revenues of $14.4 million in 2000, an increase of $2.2 million, or
18.0%, over 1999 revenues of $12.2 million. Approximately $0.9 million of such
increase reflects the operations of our Jacksonville office in 2000 which was
not offering permanent placement services in 1999, and the remainder is
attributable to increased marketing efforts in the other offices that offer
permanent placement services. The IT training business increased revenues
approximately $1.3 million, or 43.3%, from $3.0 million in 1999 to $4.3 million
in 2000. The increase in revenues in our IT training business was attributable
to an increase in trainer brokerage business, in which we act as a broker to
supply contract trainers to client companies at the client's own facility at a
markup over the contract trainer cost. We only supply the contract trainer,
thereby eliminating most direct costs of this revenue. Our trainer brokerage
program generated approximately $1.6 million in revenues in 2000 compared to
approximately $0.1 million in revenues in 1999.
Cost of Sales. Consolidated cost of sales decreased by $1.2 million, or 1.6%,
for the year ended December 31, 2000 to $74.4 million from $75.6 million in the
prior year period. The decrease in cost of sales was primarily due to lower cost
of sales in the contract placement business related to lower revenues discussed
above. Cost of sales as a percentage of consolidated net revenues decreased to
65.1% from 66.5% in the respective periods. In our contract placement business,
cost of sales as a percentage of its net revenues was unchanged at 75.5% for the
years ended December 31, 2000 and 1999. The decrease in cost of sales as a
percentage of consolidated net revenues was primarily attributable to the
increase in net revenue from the permanent placement business discussed above,
the expenses for which are not included in cost of sales, but are included in
other expense categories. Our IT training business contributed approximately
$2.3 million in expenses included in cost of sales, an increase of approximately
$0.6 million from the prior year period, primarily due to additional trainers
required for the trainer brokerage program discussed earlier.
Selling and Operating. Consolidated selling and operating expenses decreased by
approximately $0.2 million, or 0.8%, for the year ended December 31, 2000 to
$20.4 million from $20.6 million in the prior year period. Selling and operating
expenses as a percentage of consolidated net revenues for the year ended
December 31, 2000 decreased to 17.9% from 18.1% in the prior year period. This
decrease was due partially to lower commissions paid on lower revenues in the
contract placement business, and partially to our efforts to control costs in
areas such as office supplies, travel and entertainment, and advertising. In our
contract placement business, selling and operating expenses decreased
approximately $1.3 million, or 11.8%, over the prior year period partially due
to lower commissions paid on the lower revenues in 2000 discussed earlier, and
partially due to our cost control efforts. In our permanent placement business,
selling and operating expenses increased approximately $1.0 million, or 12.9%,
over the prior year period primarily due to increased commissions paid on the
higher revenues in 2000 discussed above. In our IT training business, selling
and operating expenses were relatively unchanged at $0.9 million for the years
ended December 31, 2000 and 1999.
11
General and Administrative. Consolidated general and administrative expenses
increased by approximately $1.0 million, or 7.8%, for the year ended December
31, 2000 to $13.5 million from $12.5 million in the prior year period. General
and administrative expenses as a percentage of consolidated net revenues for the
year ended December 31, 2000 increased to 11.8% from 11.0% in the prior year
period. Contributing to this increase was an increase of $0.6 million, or 8.2%,
in salary expense for the year ended December 31, 2000 compared to the prior
year period. This increase primarily reflects usual and customary salary
increases for existing staff. Also contributing to the increase in general and
administrative expense was an increase in depreciation expense of $0.2 million,
or 27.3%, in the year ended December 31, 2000 compared to the prior year period.
This increase was due primarily to computer equipment and software installed in
late 1999 and early 2000 to upgrade our technology infrastructure.
Other charges. During 2000, we incurred non-recurring charges of $0.9 million
compared to no such charges in the prior period. The increase primarily
represented severance costs related to two former executives. Included in such
charge is $0.2 million representing the fair value of stock compensation granted
in accordance with a severance agreement executed between us and one former
executive.
Interest. Interest expense was approximately $995,000 for the year ended
December 31, 2000 compared to approximately $829,000 in the prior year period.
Additionally, in the year ended December 31, 1999 we had allocated approximately
$333,000 of interest expense to the discontinued IMS business, which is included
in "loss from discontinued operations" in the accompanying consolidated
statements of operations. We have historically allocated interest expense to
each operating business based on debt identified specifically with the
operations of that business. The decrease in total interest expense reflects our
decreased usage of our line of credit, which had been used in 1999 to fund the
IMS losses. The interest rate on our line of credit increased from 8.50% at
December 31, 1999 to 9.50% at December 31, 2000, partially offsetting the
decreased total interest expense. Interest and other income increased to
approximately $47,000 for the year ended December 31, 2000 from $13,000 in the
prior year period.
INCOME TAXES
We follow the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes." In 2001, our income tax benefit was
approximately $0.3 million, or 21.2% of pre-tax income from continuing
operations. This effective tax benefit rate is lower than the applicable federal
statutory rate of 34% primarily due to certain expenses, including the write-off
of certain goodwill as a non-cash charge, that are not deductible for tax
purposes. In 2000 our income tax expense from continuing operations was
approximately $0.1 million, or 2.4% of pre-tax income from continuing
operations. This effective tax rate is lower than the applicable federal
statutory rate of 34% primarily due to our use of certain net operating loss
carryforwards, for which we previously provided a valuation allowance. In
addition we reduced our valuation allowance relating to the net operating loss
portion of the deferred tax asset. The effective tax rate was 44.4% with respect
to continuing operations for fiscal year 1999. The effective tax rate for 1999
was higher than the applicable federal statutory tax rate of 34%, primarily due
to our state tax liabilities and certain expenses, including the write-off of
certain goodwill as a non-recurring charge, that are not deductible for tax
purposes.
SEASONALITY AND QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly statements of
data from continuing operations for each of our last eight fiscal quarters. In
our opinion, this quarterly information has been prepared on the same basis as
the audited financial statements appearing elsewhere in this Report and includes
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the unaudited quarterly results set forth herein. Our 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.
12
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31,
-------- -------- --------- -------- -------- -------- --------- --------
(Dollars in thousands) 2000 2000 2000 2000 2001 2001 2001 2001
---- ---- ---- ---- ---- ---- ---- ----
Net Revenues $ 27,320 $ 28,067 $ 28,828 $ 30,002 $ 30,388 $ 28,326 $ 23,248 $ 21,105
-------- -------- -------- -------- -------- -------- -------- --------
Gross Profit 9,427 9,970 10,098 10,366 10,721 10,557 7,820 7,554
-------- -------- -------- -------- -------- -------- -------- --------
Operating Income (Loss) 1,209 1,749 1,516 556 1,467 1,315 (2,434) (1,332)
-------- -------- -------- -------- -------- -------- -------- --------
Net Income (Loss) $ 919 $ 1,232 $ 1,218 $ 614 $ 753 $ 639 ($ 1,544) ($ 1,099)
======== ======== ======== ======== ======== ======== ======== ========
Basic and Diluted Net
Income (Loss) per share $ 0.06 $ 0.09 $ 0.09 $ 0.05 $ 0.06 $ 0.05 ($ 0.11) ($ 0.08)
====== ====== ====== ====== ====== ====== ======== ========
Because we derive revenue in our contract placement business only when our
consultants are actually working, our revenues and operating results are
adversely affected when our clients' facilities close due to holidays or
inclement weather. During the quarters ended December 31, 2001 and 2000, the
number of holidays and vacation days slightly affected revenues in the contract
placement business. In addition, as companies approached the Y2K turnover they
postponed some non-Y2K projects, which was reflected in decreased revenues
during the first quarter of 2000. During the fourth quarter of 2000, we recorded
non-recurring charges for severance costs related to two former executives.
During the third and fourth quarters of 2001, we recorded non-cash charges to
write off impaired goodwill.
LIQUIDITY AND CAPITAL RESOURCES
We have used borrowings under our credit facility to fund our working
capital needs as our business has expanded. We utilize a cash management program
to minimize non-earning cash assets, including a zero balance disbursement
account as reflected in the balance of $0 in cash and cash equivalents as of
December 31, 2001.
We provided cash from operating activities in 2001 of approximately $6.5
million compared to approximately $3.6 million provided in 2000, and
approximately $0.1 million in 1999. In 2001 a large portion of our net loss was
caused by non-cash charges, which helped to offset a decrease in accounts
payable of $2.9 million, a use of funds. The primary source of cash from
operating activities in 2001 was the collection of $7.5 million of accounts
receivable. In 2000 the cash provided from operating activities primarily
reflects our net income of approximately $4.0 million. Our net loss in 1999
consisted of large non-cash charges, which also helped offset an increase in
accounts receivable and a decrease in accounts payable, both of which are uses
of funds.
Cash purchases of fixed assets for the fiscal years ended December 31,
2001, 2000, and 1999 were $1.2 million, $0.7 million, and $1.0 million
respectively. In 2001 we financed the purchase of $0.4 million of equipment by
entering into capital lease obligations. These purchases were related primarily
to the purchases of computers, software, and imaging equipment to upgrade our
technology infrastructure. We plan to spend approximately $0.6 million for
capital expenditures in 2002. In 1999 we received approximately $2.8 million in
cash proceeds from the disposition of our IMS business.
We repaid, net of borrowings, approximately $4.7 million of our line of
credit at December 31, 2001, compared to net repayments of approximately $0.5
million in 2000 and approximately $0.2 million at December 31, 1999. At December
31, 2001 we had approximately $0.9 million outstanding in connection with our
overdraft facility compared to approximately $2.0 million outstanding at
December 31, 2000 and approximately $1.9 million at December 31, 1999. Such
overdrafts represent the amount of checks we issued prior to being funded by our
line of credit through the zero balance disbursement account discussed above. We
repaid approximately $0.6 million of our long-term debt in the year ended
December 31, 2001 compared to approximately $1.0 million each in the periods
ended December 31, 2000 and 1999. In the year ended December 31, 2000 we paid
approximately $0.3 million related to our guarantee that common shares issued in
connection with two of our 1998 acquisitions would equal or exceed a specified
price at the anniversary date of the issuance, compared to approximately $2.1
million in the year ended December 31, 1999. We repurchased 597,145 shares of
our common stock, for approximately $1.1 million, in the year ended December 31,
2000, in market transactions at prices ranging from $1.50 to $1.97 per share,
which stock is considered treasury stock. In the year ended December 31, 1999,
we completed a sale/lease back of certain of our fixed assets with an affiliate
of PNC Bank, N.A. The lease obligation was approximately $1.4 million repayable
in 36 equal monthly rental payments.
13
Since April 1998, we have had available a revolving advance facility, the
Line of Credit, with PNC Bank, N.A., the Bank. The Line of Credit expires on
April 30, 2003. This facility allows us to borrow the lesser of 85% of eligible
accounts receivable, or $15.0 million. As of December 31, 2001, we had
approximately $4.4 million outstanding against the Line of Credit. The Line of
Credit is secured by substantially all of our assets and contains customary
restrictive covenants which from time to time have been reset by the Bank,
including limitations on loans we may extend to officers and employees, the
incurrence of additional debt and the payment of dividends on our common shares.
The Line of Credit bears interest, at the Company's option, at either the Bank's
prime rate, which was 4.75% at December 31, 2001, or 225 basis points over the
London Inter-Bank Offering Rate.
A continued recession in the United States economy at large could
potentially lead to further decreases in our revenue in future periods. While no
one customer represents greater than 10% of our total revenue, a continuing
general economic recession in the United States could adversely impact our
clients and cause them to further curtail the use of staffing services. Our
management continues to monitor general economic conditions and expects to make
adjustments to our operations as needed.
We anticipate that our primary uses of capital in future periods will be
to fund increases in accounts receivable, to support internal growth by
financing new offices, and to finance additional acquisitions. We believe that
our Line of Credit, or other credit facilities, which may be available to us in
the future, will be sufficient to meet our capital needs for at least the next
twelve months.
The following table reflects our contractual cash obligations payable in
the future, in the respective periods in which they are due:
Payments Due By Period
----------------------
Contractual Cash Less Than
Obligations Total One Year 1 -3 Years 4 - 5 Years After 5 Years
- ----------- ------------ --------- ---------- ---------- -------------
Long-term debt including
capital lease obligations $ 967,000 $ 569,000 $ 398,000 $ -- $ --
Note payable, bank 4,437,000 -- 4,437,000 -- --
Operating leases 6,270,000 2,162,000 3,561,000 547,000 --
------------ ----------- ----------- --------- ------
Total $ 11,674,000 $ 2,731,000 $ 8,396,000 $ 547,000 $ --
============ =========== =========== ========= ======
Note payable, bank consists of advances under a line of credit facility
expiring April 30, 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition and bad debts, intangible assets
and income taxes. Our estimates are based on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making our judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
14
Revenue Recognition, Allowance for Doubtful Accounts and Bad Debts
We record permanent placement revenue at the date employment of the placed
professional commences, net of an allowance for estimated adjustments during the
guarantee period. We record revenues related to temporary placement services on
a weekly basis as the services are performed.
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Goodwill
We have recorded goodwill related to various acquisitions we made in 1998.
We record an impairment charge when we believe an asset has experienced a
decline in value that is other than temporary. Future adverse changes in market
conditions or poor operating results of the acquired business could result in
losses or an inability to recover the carrying value of goodwill that may not be
reflected in the current carrying value, thereby requiring an impairment charge
in the future.
Deferred Taxes
We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of our net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made. Likewise,
should we determine that we would not be able to realize all or part of our net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such determination was made.
INFLATION
We do not believe that the rates of inflation prevailing in the United
States in recent years have had a significant effect on our operations.
FORWARD LOOKING INFORMATION
This report and other reports and statements filed by us 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, our management
as well as estimates and assumptions made by our management. When used in SEC
Filings, and in oral statements by us the words "anticipate," "believe,"
"estimate," "expect," "future," "intend," "plan" and similar expressions as they
relate to us or our management, identify forward-looking statements. Such
statements reflect our current views with respect to future events and are
subject to certain risks, uncertainties and assumptions relating to our
operations and results of operations, competitive factors and pricing pressures,
shifts in market demand, the performance and needs of the industries served by
us, 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 our shareholders, customers, suppliers, business
partners, competitors, and legislative, regulatory, judicial and other
governmental authorities and officials. Should one or more of these risks or
uncertainties materialize, or should the underlying assumptions prove incorrect,
actual results may vary significantly from those anticipated, believed,
estimated, expected, intended or planned.
15
Dependence on Availability of Qualified Technical Consultants. We are
dependent upon our ability to attract and retain technical consultants who
possess the skills and experience necessary to meet the staffing requirements of
our clients. To keep pace with rapidly evolving information technologies and
changing client needs, we must continually evaluate and upgrade our database of
available qualified technical consultants. Competition for individuals with
proven technical skills is intense, and, as is currently customary in the
industry, we do not have any exclusive contracts with our consultants. We
compete 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 we expand into new geographic areas, we 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 us in sufficient numbers to meet
our current and anticipated growth requirements.
Ability to Manage Growth. Although our 2002 internal operating plan
forecasts that we will have lower revenues in 2002, if we achieve sustained or
significant growth, we will subject ourselves to risks by placing a substantial
strain our available managerial, sales, recruiting, financial and other
resources. Specifically, such growth will require us to: (i) hire, integrate and
retain qualified managers, recruiters and sales personnel in existing markets as
well as markets in which we have no prior operating experience; (ii) develop and
maintain relationships with an increasingly large number of highly qualified
technical consultants; (iii) maintain cost controls in all of our businesses;
and (iv) apply our management practices to a significantly larger organization.
Expansion beyond the geographic areas where our offices are presently located
will further increase demands on our management. Our ability to manage our staff
and facilities growth effectively will require us to continue to expand our
operational, financial and other internal systems. There can be no assurance
that our systems, procedures and controls will be successfully implemented or
adequate to support our expanded operations. Furthermore, an element of our
business strategy is to cross-sell the existing services of our businesses to
new and existing clients. Historically, these businesses have operated
independently, producing only occasional referrals, and there can be no
assurance that we will successfully market such services on an integrated basis.
In addition, if the technology sector of the economy continues a downturn, we
could be affected more so than other businesses.
Dependence on Contract Placement Business. Our contract placement business
was responsible for 86.6%, 83.7% and 82.5% of our total revenues for the years
ended December 31, 1999, 2000 and 2001, respectively. In addition, for the year
ended 2001, one customer of the contract placement business, Merck & Company,
Inc., accounted for approximately 7.9% of total contract placement revenues, and
6.5% of our total revenues. There can be no assurance that we will be able to
retain this level of revenue from this client. Our ability to sustain or
increase revenues in the contract placement business is subject to various
factors, including our ability to attract and retain qualified technical
consultants, to hire, integrate and retain qualified managers, recruiters and
sales personnel in existing and new markets, to apply our management practices
to a significantly larger organization and to consummate acquisitions of and to
successfully integrate profitable staffing companies. Our inability to
successfully manage these factors would have a material adverse effect on the
revenues of the contract placement business. There can be no assurance that we
will be able to sustain or increase our contract placement revenues.
Furthermore, a decline in the level of contract placement revenues would have a
material adverse effect on us.
Risk of NASDAQ Delisting. There are several requirements that we must
satisfy in order for our Common Stock to continue to be listed on the NASDAQ
National Market. These requirements include, but are not limited to, maintaining
a minimum per share price of our Common Stock of one dollar and a minimum
aggregate market value of publicly held shares (MVPHS) of our Common Stock of
$5,000,000. We have received notification from The Nasdaq Stock Market, Inc.
that our Common Stock will be delisted from the NASDAQ National Market unless
the stock closes at or above one dollar per share for at least ten consecutive
days by May 15, 2002. The per share price of our Common Stock and the MVPHS of
our Common Stock do not currently satisfy requirements to remain listed on the
NASDAQ National Market. In addition, in the future we may not comply with other
listing requirements, which might result in the delisting of our Common Stock.
If our Common Stock is delisted from the NASDAQ National Market, we may list the
Common Stock for trading over-the-counter or apply to have the Common Stock
listed on the NASDAQ Smallcap Market, subject to NASDAQ's approval. Delisting
from the NASDAQ National Market could adversely affect the liquidity and the
price of our Common Stock and could have a long-term adverse impact on our
ability to raise future capital through a sale of our Common Stock. In addition,
delisting could make it more difficult for investors to obtain quotations or
trade our Common Stock.
16
Acquisition Risks. We from time to time evaluate the possible acquisition
of companies that will complement and expand our existing businesses,
principally in new geographic markets. The successful implementation of this
strategy is dependent on our ability to identify suitable acquisition
candidates, acquire such companies on suitable terms and integrate their
operations with ours. There can be no assurance that we will be able to identify
suitable acquisition candidates or that, if identified, we 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 our reported
operating results, including interest expense; (ii) diversion of management
attention; (iii) risks associated with unanticipated problems, liabilities or
contingencies; (iv) difficulties and higher than expected costs related to the
integration of the acquired business; and (v) dilution of existing shareholders.
The occurrence of some or all of the events described in these risks could have
a material adverse effect on our business, financial condition and results of
operations.
SUBSEQUENT EVENTS
On or about February 14, 2002 we received notification from The Nasdaq
Stock Market, Inc. that our Common Stock will be delisted from the NASDAQ
National Market unless the stock closes at or above one dollar per share for at
least ten consecutive days by May 15, 2002. The per share price of our Common
Stock and the MVPHS of our Common Stock do not currently satisfy requirements to
remain listed on the NASDAQ National Market. In addition, in the future we may
not comply with other listing requirements, which might result in the delisting
of our Common Stock. If our Common Stock is delisted from the NASDAQ National
Market, we may list the Common Stock for trading over-the-counter or apply to
have the Common Stock listed on the NASDAQ Smallcap Market, subject to NASDAQ's
approval. Delisting from the NASDAQ National Market could adversely affect the
liquidity and the price of our Common Stock and could have a long-term adverse
impact on our ability to raise future capital through a sale of our Common
Stock. In addition, delisting could make it more difficult for investors to
obtain quotations or trade our Common Stock.
On February 7, 2002, we announced the commencement of a voluntary stock
option exchange program for our employees. Under the program, employees holding
options to purchase our Common Stock were given an opportunity to exchange
certain of their existing options, with exercise prices equal to or greater than
$2.10 per share, for new options. Employees will receive one new option for
every three eligible options surrendered. We expect the new options to be
granted on or about September 20, 2002. The new options will vest over four
years. The exercise price of the new options will be the last reported trading
price of our Common Stock on their grant date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk due to the variable interest rates on our
Line of Credit discussed above. The interest rates vary primarily due to changes
in short term interest rates promulgated by the Federal Reserve Bank in its
efforts to control general economic conditions. During 2001, the Federal Reserve
Bank caused such interest rates to decline, and further rate decreases would
likely decrease our interest cost. Assuming our indebtedness under our Line of
Credit is approximately $4.4 million, and we continue to have approximately
13,500,000 common shares outstanding, a 1% decrease in our interest rate will
increase our annual earnings per share by less than 1 cent. Correspondingly a 1%
increase in our interest rate will decrease our annual earnings per share by
less than 1 cent.
We have not entered into derivative financial or commodity instrument
transactions. We do not believe that our exposure to market risk from other
types of financial instruments, such as accounts receivable and accounts
payable, is material.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE JUDGE GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE(S)
-------
INDEPENDENT AUDITOR'S REPORTS 19 - 20
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000 21
CONSOLIDATED STATEMENTS OF OPERATIONS FOR YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999 22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR YEARS
ENDED DECEMBER 31, 2001, 2000 AND 1999 23
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999
25 - 35
18
INDEPENDENT AUDITOR'S REPORT
Board of Directors
The Judge Group, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheets of The Judge Group,
Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, shareholders' equity, and of cash flows
for each of the two years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Judge Group,
Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
MCGLADREY & PULLEN, LLP
February 22, 2002
Blue Bell, Pennsylvania
19
INDEPENDENT AUDITOR'S REPORT
Board of Directors
The Judge Group, Inc.
Bala Cynwyd, Pennsylvania
We have audited the consolidated statements of operations, shareholders' equity,
and cash flows of The Judge Group, Inc. and Subsidiaries for the year ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations, shareholder's
equity and cash flows of The Judge Group, Inc. and Subsidiaries for the year
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II "Valuation and Qualifying Accounts and
Reserves" is presented for purposes of additional analysis and is not a required
part of the basic financial statements. This information has been subjected to
the auditing procedures applied in our audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
RUDOLPH PALITZ, LLC
February 25, 2000
Blue Bell, Pennsylvania
20
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
---- ----
ASSETS
CURRENT ASSETS
Cash $ -- $ --
Accounts receivable, net 12,663,173 20,777,480
Prepaid income taxes and deferred taxes 2,161,847 3,162,983
Prepaid expenses and other 1,171,422 976,061
------------ ------------
TOTAL CURRENT ASSETS 15,996,442 24,916,524
------------ ------------
PROPERTY AND EQUIPMENT, NET 3,161,441 3,183,062
------------ ------------
OTHER ASSETS
Deposits and other assets 378,251 355,282
Deferred taxes 1,433,000 --
Other receivables, officers and employees 669,552 539,069
Goodwill, net of accumulated amortization of $2,802,169, 2001 and $1,998,879, 6,423,781 8,347,384
2000 ------------ ------------
TOTAL OTHER ASSETS 8,904,584 9,241,735
------------ ------------
TOTAL ASSETS $ 28,062,467 $ 37,341,321
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 569,117 $ 583,384
Accounts payable and accrued expenses 3,837,079 6,737,719
Payroll and sales taxes 285,329 495,809
Deferred revenue 132,016 491,883
------------ ------------
TOTAL CURRENT LIABILITIES 4,823,541 8,308,795
------------ ------------
LONG-TERM LIABILITIES
Note payable, bank 4,436,541 9,166,902
Deferred rent obligation 541,267 318,416
Debt obligations, net of current portion 397,748 555,610
------------ ------------
TOTAL LONG-TERM LIABILITIES 5,375,556 10,040,928
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares authorized; at December 31,
2001, 14,141,373 shares issued and 13,504,228 shares outstanding; at
December 31, 2000, 14,134,373 shares issued and 13,497,228 shares outstanding 141,413 141,343
Preferred stock, at December 31, 2001 and 2000, $.01 par value, 10,000,000
shares authorized -- --
Additional paid-in capital 24,176,111 24,053,557
Accumulated deficit (5,086,501) (3,835,649)
------------ ------------
19,231,023 20,359,251
Less: Treasury Stock, 637,145 shares; at cost 1,367,653 1,367,653
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 17,863,370 18,991,598
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,062,467 $ 37,341,321
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
NET REVENUES $ 103,066,972 $ 114,217,453 $ 113,704,958
------------- ------------- -------------
COSTS AND EXPENSES
Cost of sales 66,412,910 74,356,097 75,569,731
Selling and operating 21,632,634 20,400,612 20,562,479
General and administrative 14,474,927 13,513,519 12,535,158
Other charges (Note 2) 1,531,249 916,719
------------- ------------- -------------
Total costs and expenses 104,051,720 109,186,947 108,667,368
------------- ------------- -------------
OPERATING INCOME (LOSS) (984,748) 5,030,506 5,037,590
OTHER INCOME (EXPENSE), NET, PRINCIPALLY
INTEREST EXPENSE (602,182) (947,594) (815,925)
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (1,586,930) 4,082,912 4,221,665
INCOME TAX EXPENSE (BENEFIT) (336,078) 99,990 1,877,115
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (1,250,852) 3,982,922 2,344,550
LOSS FROM DISCONTINUED OPERATIONS (NET OF TAX BENEFIT OF
$1,089,056) --- --- (2,153,372)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS (NET OF TAX EFFECT
OF $1,994,830) --- --- (6,275,056)
------------- ------------- -------------
NET INCOME (LOSS) ($ 1,250,852) $ 3,982,922 ($6,083,878)
============= ============= =============
NET INCOME (LOSS) PER SHARE:
BASIC
INCOME (LOSS) FROM CONTINUING OPERATIONS ($ 0.09) $ 0.29 $ 0.17
LOSS FROM DISCONTINUED OPERATIONS --- --- (0.61)
------- ------ ------
NET INCOME (LOSS) ($ 0.09) $ 0.29 ($ 0.44)
======= ====== ======
DILUTED
INCOME (LOSS) FROM CONTINUING OPERATIONS ($ 0.09) $ 0.29 $ 0.17
LOSS FROM DISCONTINUED OPERATIONS --- --- (0.61)
------- ------ ------
NET INCOME (LOSS) ($ 0.09) $ 0.29 ($ 0.44)
======= ====== ======
WEIGHTED AVERAGE SHARES USED IN NET INCOME (LOSS) PER SHARE
CALCULATIONS:
BASIC 13,502,000 13,702,000 13,761,000
========== ========== ==========
DILUTED 13,502,000 13,924,000 13,797,000
========== ========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Common Stock Additional
------------ Paid In Accumulated Treasury
Shares Amount Capital Deficit Stock Total
------ ------ ------- ------- ----- -----
Balance, December 31, 1998 13,541,302 $135,412 $24,900,474 ($1,734,693) ($ 220,000) $23,081,193
Acquisition/disposition transactions 443,071 4,431 (995,417) --- --- (990,986)
Net Loss --- --- --- (6,083,878) --- (6,083,878)
---------- -------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 13,984,373 139,843 23,905,057 (7,818,571) (220,000) 16,006,329
Purchase of Treasury Stock --- --- --- --- (1,147,653) (1,147,653)
Issuance of common stock in
connection with severance agreement 150,000 1,500 148,500 --- --- 150,000
Net Income --- --- --- 3,982,922 --- 3,982,922
---------- -------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 14,134,373 141,343 24,053,557 (3,835,649) (1,367,653) 18,991,598
Issuance of shares for exercise of
stock options 7,000 70 8,680 --- --- 8,750
Issuance of Stock Warrants --- --- 113,874 --- --- 113,874
Net Loss --- --- --- (1,250,852) --- (1,250,852)
---------- -------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 14,141,373 $141,413 $24,176,111 ($5,086,501) ($1,367,653) $17,863,370
========== ======== =========== =========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
OPERATING ACTIVITIES
Net income (loss) ($ 1,250,852) $ 3,982,922 ($ 6,083,878)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,676,278 1,529,162 1,762,973
Impairment of goodwill 1,531,249 --- ---
Provision for losses on lease 258,395 --- ---
Loss on disposal of discontinued operations --- --- 6,275,056
Deferred taxes (311,000) (137,000) (9,000)
Deferred rent (35,544) (81,121) (342,342)
Provision for losses on accounts receivable 624,467 957,771 927,951
Stock compensation and warrants 113,874 150,000 ---
Loss on disposal of equipment 366,635 20,830 204,393
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 7,489,840 (3,150,543) (1,526,105)
Inventories --- --- (144,853)
Deposits and other (153,452) 94,630 (148,008)
Prepaid income taxes (120,864) (224,738) 1,112,504
Prepaid expenses and other current assets (195,361) (308,430) (146,536)
Increase (decrease) in:
Accounts payable and accrued expenses (2,900,640) 714,535 (1,751,356)
Payroll and sales taxes (210,480) 73,792 (154,545)
Deferred revenue (359,867) 17,816 108,377
----------- ----------- -----------
Net cash provided by operating activities 6,522,678 3,639,626 84,631
----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (1,179,680) (682,727) (958,286)
Proceeds from disposition of businesses --- --- 2,788,000
----------- ----------- -----------
Net cash provided by (used in) investing activities (1,179,680) (682,727) 1,829,714
----------- ----------- -----------
FINANCING ACTIVITIES
Repayments of notes payable, bank, net (4,730,361) (522,023) (192,670)
Principal payments on long-term debt (621,387) (956,008) (1,040,672)
Exercise of Stock options 8,750 --- ---
Proceeds from lease payable, bank --- --- 1,425,000
Contingent amounts paid - acquisitions --- (335,786) (2,145,000)
Purchase of treasury stock --- (1,147,653) ---
----------- ----------- -----------
Net cash used in financing activities (5,342,998) (2,961,470) (1,953,342)
----------- ----------- -----------
DECREASE IN CASH --- (4,571) (38,997)
CASH, BEGINNING --- 4,571 43,568
----------- ----------- -----------
CASH, ENDING $ --- $ --- $ 4,571
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 760,000 $ 921,000 $ 1,142,000
=========== =========== ===========
Income taxes $ 381,000 $ 568,000 $ 768,000
=========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 1. DESCRIPTION OF BUSINESS
The Judge Group, Inc (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), and (ii) information technology training (through its "IT Training"
business) on a range of software and network applications to corporate,
governmental and individual clients. At December 31, 2001, the Company,
headquartered in Bala Cynwyd, Pennsylvania, operated regional offices in eleven
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 Company also formerly provided computer network and document
management system integration, implementation, maintenance and training (through
its "Information Management Solutions" business ("IMS")). In 1999, the Company
disposed of the IMS business through the sale of substantially all of the assets
of that business (See Note 3).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation. The accompanying
consolidated financial statements include the accounts of the Company, and the
Company's wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates. The preparation of the consolidated financial statements
in conformity with accounting principles generally accepted in the United States
of America 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. The
Company records an allowance for estimated adjustments during the guarantee
period. Revenues related to temporary placement services are recognized on a
weekly basis as the services are performed.
Revenue Recognition in IT Training Business. Tuition and fee revenues are
recognized when the classes are held. Payments received prior to the class
commencing are recorded as deferred revenues.
Concentration of Credit Risk. 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.
Accounts Receivable. Accounts receivable at December 31, 2001 and 2000
were net of allowances for doubtful accounts of $776,000 and $1,264,000,
respectively, and allowances for placement fee returns of $139,000 and $175,000,
respectively.
Included in accounts receivable was unbilled work-in-process of
approximately $1,488,000 and $168,000 at December 31, 2001 and 2000,
respectively.
The allowance for doubtful accounts is established through charges to
earnings in the form of a charge to bad debt expense. Accounts that are
determined to be uncollectible are charged against the allowance account.
Management makes periodic assessments of the adequacy of the allowance that
requires the Company to recognize additions or reductions to the allowance. It
is reasonably possible that factors may change significantly and, therefore,
affect management's determination of the allowance for doubtful accounts in the
near term.
25
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
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. Amortization of equipment under capital leases is provided over
the shorter of the related lease terms or the estimated useful lives of the
related assets. Leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or estimated useful lives of the
improvements.
At December 31, 2001 and 2000, property and equipment consisted of:
Depreciable Lives 2001 2000
----------------- ---- ----
Office furniture and equipment 5 - 10 years $ 2,110,154 $ 2,275,447
Computer equipment 3 - 5 years 1,103,854 2,080,434
Leasehold improvements 3 - 10 years 286,900 179,456
Equipment under capital lease, principally computer
equipment 3 - 5 years 2,245,400 1,796,142
----------- -----------
5,746,308 6,331,479
Less: accumulated depreciation and amortization (2,584,867) (3,148,417)
----------- -----------
$ 3,161,441 $ 3,183,062
=========== ===========
Depreciation and amortization expense charged to continuing operations
related to property and equipment, including property under capital leases,
amounted to $1,284,000 in 2001, $1,118,000 in 2000, and $878,000 in 1999.
The carrying value of assets under capital leases amounted to
approximately $842,000 and $1,033,000 at December 31, 2001 and 2000,
respectively.
Income Taxes. Deferred taxes are provided utilizing the liability method
as prescribed by SFAS No. 109, "Accounting for Income Taxes," whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
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
has been amortized on the straight-line method over terms ranging from ten years
to twenty-five years. Amortization of goodwill charged to continuing operations
for the periods ended December 31, 2001, 2000 and 1999 was approximately
$392,000, $404,000, and $403,000 respectively, and is included in general and
administrative expenses in the consolidated statements of operations. In 2001,
the Company determined an additional $1,531,000 of goodwill was impaired, in
accordance with SFAS 121 (see "Other charges" below).
Deferred Rent Obligation. The Company is party to operating lease
agreements for certain of its office facilities, which contain provisions for
free rent for a certain period, with subsequent rent increases. In accordance
with accounting principles generally accepted in the United States of America,
the Company records monthly rent expense equal to the total of the payments due
over the lease terms, divided by the number of months of the respective lease
agreements. The difference between rent expense recorded and the amount paid is
credited or charged to deferred rent obligation in the accompanying consolidated
balance sheets. In addition, deferred rent obligation includes a $170,000
accrual for the remaining lease payments related to facilities closed in 2001.
26
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Other Charges. In 2001, the Company recorded pretax non-cash charges of
approximately $1,531,000 to reflect the impairment of goodwill. Approximately
$990,000 was written off in the third quarter of 2001 due to continuing losses
in and closure of its Nashville, Tennessee office. The goodwill was originally
acquired in 1998 when the Company purchased all of the assets of an IT placement
firm with offices in Nashville, Tennessee. The remaining $541,000 charge
recorded for the impairment of goodwill in the fourth quarter of 2001 was the
result of continuing losses in the Company's IT Training business. The goodwill
was originally acquired in 1996 when the Company purchased all of the
outstanding common stock of The Berkeley Associates, Inc., an IT training
business.
The impairment of purchased goodwill was a non-cash charge determined in
accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". The SFAS 121 charge had no impact
on the Company's 2001 cash flow.
In the fourth quarter of 2000, the Company recorded a pretax charge of
approximately $917,000 to reflect severance costs related to two former members
of management.
Advertising Expenses. The Company participates in various advertising
programs. All costs related to advertising are expensed in the period incurred.
Advertising expense charged to continuing operations amounted to approximately
$466,000, $568,000, and $847,000 in 2001, 2000, and 1999, respectively.
Earnings (Loss) Per Share. Earnings (loss) per share are computed in
accordance with SFAS No. 128, "Earnings Per Share".
Basic earnings (loss) per share amounts are computed based on net income
(loss) divided by the weighted average number of shares actually issued, reduced
by treasury shares. The number of shares used in the computation were
approximately 13,502,000 in 2001, 13,702,000 in 2000, and 13,761,000 in 1999.
Diluted earnings (loss) per share amounts for years 2001, 2000 and 1999
are based on the weighted average number of shares calculated for basic earnings
(loss) per share purposes increased by (when dilutive) the number of shares that
would be outstanding assuming the exercise of certain outstanding stock options
or warrants. The number of shares used in the computation was approximately
13,502,000 in 2001, 13,924,000 in 2000, and 13,797,000 in 1999. In computing
diluted earnings (loss) per share, options and warrants to purchase 2,766,000,
1,073,000 and 1,619,000 shares of common stock were excluded from the
computation for the years ended December 31, 2001, 2000, and 1999, respectively.
The options and warrants were excluded from the 2001 computation because the
assumed exercise of the options and warrants would be anti-dilutive in the
calculation of net loss per share. The options were excluded from the 2000 and
1999 computations because the exercise prices of such options were greater than
the average market price of the Company's common stock during that period.
Reclassifications. Certain items in the 2000 and 1999 financial statements
have been reclassified to conform to the 2001 financial statement presentation.
Fair Value of Financial Instruments. The estimated fair values of
substantially all of the Company's financial instruments are approximately equal
to their carrying values for all periods presented.
Accounting Pronouncements Not Yet Adopted. In July 2001, the Financial
Accounting Standards Board ("FASB") issued two statements - Statement 141,
Business Combinations, and Statement 142, Goodwill and Other Intangible Assets,
(the "Statements").
27
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Statement 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Statement 141 also
includes guidance on the initial recognition and measurement of goodwill and
other intangible assets arising from business combinations completed after June
30, 2001. Statement 142 prohibits the amortization of goodwill and intangible
assets with indefinite useful lives. Statement 142 requires that these assets be
reviewed for impairment at least annually. Intangible assets with finite lives,
if any, will continue to be amortized over their estimated useful lives.
The Company will apply Statement 142 beginning in the first quarter of
2002. Application of the non-amortization provisions of Statement 142 is
expected to result in an increase in net income of approximately $182,000 ($0.01
per common share) in 2002. The Company will test goodwill for impairment using
the two-step process prescribed in Statement 142. The first step is a screen for
potential impairment, while the second step measures the amount of the
impairment, if any. The Company expects to perform the first of the required
impairment tests of goodwill and indefinite lived intangible assets as of
January 1, 2002 in the second quarter of 2002. Any impairment charge resulting
from these transitional impairment tests will be reflected as the cumulative
effect of a change in accounting principle in the second quarter of 2002. The
Company has not yet determined what the effect of these tests will be on the
earnings and financial position of the Company.
In August 2001, the FASB issued Statement 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". SFAS No. 144 is effective in the first quarter of 2002. The
Company does not believe that SFAS No. 144 will have a material effect on its
results of operations.
NOTE 3. DISCONTINUED OPERATIONS
On June 15, 1999 the Company adopted a formal plan to dispose of the IMS
business. During 1999 substantially all of the net assets of the IMS business
were disposed of for total consideration of approximately $4,358,000 consisting
of cash, note receivable, and forgiveness of amounts payable to the buyer.
Assets sold consisted primarily of accounts receivable, inventory, and property
and equipment. Liabilities assumed by the respective purchasers consist
primarily of accounts payable, accrued expenses, and equipment leases payable.
The loss on disposal of the IMS business of approximately $6,275,000, net
of tax benefit of $1,995,000, represents the actual and estimated loss on the
disposal of the assets and a provision of $134,000 for operating losses during
the phase-out period. Included in the determination of the loss on disposal was
the write-off of goodwill of $7,063,000 relating to the IMS business.
Operating results of the IMS business for the year ended December 31, 1999
is shown separately in the accompanying consolidated statements of operations,
as "loss from discontinued operations".
Net revenues of the IMS business for the year ended December 31, 1999 were
approximately $7,027,000. This amount is not included in net revenues in the
accompanying consolidated statements of operations for the period ended December
31, 1999.
28
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 4. NOTE PAYABLE, BANK
Note payable, Bank, consists of advances to the Company under a
$15,000,000 line of credit facility. The line of credit bears interest at the
Bank's prime rate (4.75% at December 31, 2001) or, at the option of the Company,
a portion of the outstanding balance bears interest at 225 basis points over the
London Inter-Bank Offering Rate (3.91% at December 31, 2001). Maximum permitted
borrowings thereunder are the lesser of $15,000,000 or 85% of qualified accounts
receivable, as defined in the line of credit agreement. The line of credit is
collateralized by substantially all of the Company's assets, expires April 30,
2003 and is subject to certain covenants, including financial covenants
requiring certain levels of net worth, cash flow coverage, and leverage, as well
as limitations on capital expenditures. In addition, the Company and all of its
subsidiaries are jointly and severally responsible for all of the debt
outstanding under the line.
NOTE 5. LONG-TERM DEBT
At December 31, 2001 and 2000, long-term debt consisted of the following:
2001 2000
---- ----
Capital lease obligation, pursuant to a sale/leaseback transaction; payable in
monthly installments of $41,992, including interest imputed at 12.0% and taxes,
through March 2002; and a final payment of $213,750 in April 2002;
collateralized by substantially all of the Company's property and equipment; the
lease transfers ownership of certain office equipment to the Company at the end
of the lease term
$ 328,433 $ 764,110
Capital lease obligations; payable in monthly installments of $6,864, including
interest, plus taxes, through March 2004; collateralized by
certain computer equipment 144,718 189,274
Capital lease obligations; payable in various quarterly installments through
July 2004 currently aggregating $38,983 including interest at rates ranging from
5.8% to 6.9%, over 36 months from the installation date of the equipment, as
defined; collateralized by certain computer
equipment 486,422 123,110
Note payable, other 7,292 62,500
--------- ---------
966,865 1,138,994
Less: Current portion (569,117) (583,384)
--------- ---------
Long-term portion $ 397,748 $ 555,610
========= =========
Approximate maturities of long-term debt are as follows:
Year Ending December 31, Amount
------------------------ ------
2002 $ 569,000
2003 256,000
2004 142,000
---------
$ 967,000
=========
Interest expense charged to continuing operations was approximately
$673,000, $995,000, and $829,000 for the years ended December 31, 2001, 2000 and
1999, respectively.
29
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 6. INCOME TAXES
The Company files a consolidated Federal income tax return with all of its
wholly owned subsidiaries. State income taxes are determined on the basis of
filing separate returns for each company as required by the applicable state
regulations.
The net deferred tax asset at December 31, 2001 and 2000 included the
following:
2001 2000
---- ----
Deferred tax asset $ 3,333,000 $ 3,022,000
Valuation allowance for deferred tax asset (236,000) (236,000)
----------- -----------
Net deferred tax asset after valuation allowance. $ 3,097,000 $ 2,786,000
============ ===========
At December 31, 2001 and 2000, the net deferred tax assets of $3,097,000
and $2,786,000, respectively, were included in "prepaid income taxes and
deferred taxes" in the accompanying consolidated balance sheets.
The tax effect of major temporary differences that gave rise to the
Company's net deferred tax asset are as follows:
2001 2000
---- ----
Net operating loss carryforwards $ 2,969,000 $ 2,419,000
Allowance for doubtful accounts 384,000 576,000
Accrued expenses and lease provision 522,000 530,000
Other 62,000 91,000
Amortization of goodwill (267,000) (201,000)
Depreciation (337,000) (393,000)
----------- -----------
$ 3,333,000 $ 3,022,000
=========== ===========
Income tax expense for continuing operations for the years ended December
31, 2001, 2000 and 1999 consisted of the following:
2001 2000 1999
---- ---- ----
Current tax expense (benefit):
Federal $ --- $ --- $1,184,901
State (25,078) 236,990 701,214
Deferred tax expense (benefit) (311,000) (137,000) (9,000)
--------- -------- ----------
Income tax expense (benefit) ($336,078) $ 99,990 $1,877,115
========= ======== ==========
Current tax expense in 2000 has been reduced by the utilization of certain
federal and state net operating loss carryforwards. At December 31, 1999, the
Company provided a deferred tax valuation allowance of $2,109,000. During 2000,
a portion of the valuation allowance was reversed due to earnings of the Company
and management's assessment that it is more likely than not that a portion of
the deferred tax asset relating to net operating loss carryforwards will be
realized in future years through taxable earnings.
30
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 6. INCOME TAXES - (continued)
A reconciliation of the Company's effective income tax rate with the
statutory Federal rate follows:
Year Ended December 31,
2001 2000 1999
---- ---- ----
Tax expense (benefit) at statutory rate (34%) ($ 539,000) $ 1,389,000 $ 1,436,000
Permanent differences, including non-deductible
goodwill amortization, net 251,000 72,000 73,000
Change in valuation allowance --- (1,873,000) ---
Other, principally adjustments to estimated tax
accruals 5,922 351,990 (3,885)
State income taxes, net of Federal tax benefit (54,000) 160,000 372,000
----------- ----------- -----------
($ 336,078) $ 99,990 $ 1,877,115
=========== =========== ===========
The Company has a federal net operating loss carryforward of approximately
$2,800,000 that is subject to certain Federal income tax limitations. These loss
carryforwards expire between 2007 and 2012. In addition, the Company has net
operating loss carryforwards of approximately $3,800,000, which can be applied
against future federal taxable income of the Company and which expire between
2019 and 2021.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Lease Obligations. The Company and its subsidiaries lease office
facilities under operating lease agreements that expire at various times through
the year 2006. Certain of these leases contain optional provisions for
additional periods of time. Rent expense was approximately $2,537,000,
$2,037,000 and $2,228,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. At December 31, 2001, minimum annual future rental commitments,
exclusive of common area maintenance costs and utilities, are as follows:
Year Ending December 31, Amount
------------------------ ------
2002 $ 2,162,000
2003 1,983,000
2004 1,578,000
2005 491,000
2006 56,000
-----------
$ 6,270,000
===========
Self-Insurance. 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 $2,072,000 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.
31
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At December 31, 2001 and 2000, accounts payable and accrued expenses consist
of:
2001 2000
---- ----
Accrued payroll and commissions $ 1,572,000 $ 2,433,000
Checks outstanding in excess of
bank balance 937,000 2,022,000
Accrued severance costs 260,000 766,000
Accounts payable and other accrued expenses 1,068,000 1,517,000
----------- -----------
$ 3,837,000 $ 6,738,000
=========== ===========
NOTE 9. SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE
Treasury Stock. In June 2000 the Company's Board of Directors authorized a
program to repurchase the Company's common shares on the open market to a
maximum cost of $1,200,000. During 2000, 597,145 common shares at prices ranging
from $1.50 to $1.97 per share were repurchased, and are considered treasury
stock.
Dividends. In accordance with the provisions of its line of credit, the
Company is not permitted to declare or pay any cash dividends on its common
stock.
Warrants. In February 2001, the Company issued warrants to purchase 100,000
shares of common stock to an investment-banking firm for services to be
rendered. Such warrants were valued at approximately $114,000, which has been
credited to additional paid in capital, and was amortized over six months during
2001. The warrants are exercisable any time prior to February 12, 2006 at an
exercise price of $2.25 per share. The fair value of the warrants was estimated
at the date of grant using the Black-Scholes option pricing model with a
weighted average assumption of a risk-free interest rate of 4.9%, an expected
dividend yield of 0%, an expected life of five years from date of grant, and an
expected price volatility of 159%. No warrants were exercised in 2001 and all
warrants issued in 2001 are outstanding at December 31, 2001.
Stock Option Plan. The Company has an Incentive Stock Option and
Non-Qualified Stock Option Plan, most recently amended May 22, 2001, (the
"Incentive Plan"), for key employees, consultants, and non-employee directors.
Options may be granted under the Incentive Plan to purchase up to a maximum of
4,500,000 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 1999, 2000 and 2001, stock options were only granted to employees and
directors.
32
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 9. SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE -- (continued)
A summary of the Company's Incentive Plan activity for common shares for the
years ended December 31, 2001, 2000 and 1999 follows:
Options
Weighted Average Exercisable
Number of Shares Exercise Price at Year End
---------------- ---------------- -----------
Outstanding 12/31/98 1,460,450 $ 5.70 138,541
=========
Granted 1,059,444 1.55
Exercised -0-
Terminated (690,200) 4.24
---------
Outstanding 12/31/99 1,829,694 3.84 362,935
=========
Granted 1,116,500 1.46
Exercised -0-
Terminated (204,500) 2.68
---------
Outstanding 12/31/00 2,741,694 2.96 837,442
=========
Granted 720,116 1.07
Exercised (7,000) 1.25
Terminated (476,000) 3.13
---------
Outstanding 12/31/01 2,978,810 $ 2.46 1,261,256
========= =========
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------------
Number Weighted-Average Number
Range of Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Prices 12/31/01 Contractual Life Exercise Price 12/31/01 Exercise Price
--------------- -------- ---------------- -------------- -------- ----------------
$0.00 - $0.83 131,116 9.8 $ 0.69 0 ---
$0.83 - $1.65 1,997,194 8.1 $ 1.35 578,112 $ 1.40
$1.65 - $2.48 141,000 7.7 $ 1.84 71,957 $ 1.86
$2.48 - $4.95 64,500 6.3 $ 3.95 54,625 $ 4.07
$4.95 - $5.78 384,500 5.4 $ 5.26 296,062 $ 5.23
$5.78 - $8.25 260,500 3.7 $ 7.69 260,500 $ 7.69
--------- ---- ------ --------- ------
2,978,810 7.4 $ 2.46 1,261,256 $ 3.74
========= ==== ====== ========= ======
33
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 9. SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE -- (continued)
The Company accounts for its Incentive Plan in accordance with Accounting
Principles Board Opinion No. 25 and related interpretations. Accordingly, no
compensation expense has been recognized for the Incentive Plan. Had
compensation cost been determined in accordance with the fair value method of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), the Company's pro forma net income (loss) and net
income (loss) per share for the years ended December 31, 2001, 2000 and 1999
would be as follows:
2001 2000 1999
---- ---- ----
Net Income (loss):
As reported ($ 1,250,852) $ 3,982,922 ($ 6,083,878)
Pro forma ($ 2,631,061) $ 1,808,254 ($ 8,022,526)
Basic and diluted earnings (loss)
per share:
As reported ($ 0.09) $ 0.29 ($ 0.44)
Pro forma ($ 0.19) $ 0.13 ($ 0.58)
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 2001, 2000 and 1999, respectively;
risk-free interest rate of 4.70%, 6.20% and 5.50%, expected dividend yields of
0%, expected life of option of five years from date of grant, and expected price
volatility of 138%, 153% and 125%. The weighted average fair value of the
options granted was $0.99 in 2001, $1.19 in 2000 and $1.12 in 1999.
Subsequent to December 31, 2001, the Company filed a Tender Offer Statement
(the "Tender Offer") on Schedule TO with the Securities and Exchange Commission.
The Tender Offer offers employees the option to exchange three stock options
currently held for one stock option to be issued six months and a day after the
date of the Tender Offer. Options issued under the Tender Offer will be issued
at the then market price of the Company stock.
NOTE 10. RELATED PARTY TRANSACTIONS
Other receivables, officers and employees, consists primarily of payments
made by the Company on behalf of certain officers for split dollar life
insurance policies.
NOTE 11. STATEMENT OF CASH FLOWS
Supplemental disclosure of non-cash investing and financing transactions:
During 2001, the Company entered into the following non-cash
transactions:
1. entered into certain capital lease agreements for the
purchase of equipment in the amount of approximately
$449,000.
During 2000, the Company entered into the following non-cash
transactions:
1. placed into service approximately $280,000 of property and
equipment previously classified as "other current assets";
2. entered into certain capital lease agreements for the
purchase of equipment in the amount of approximately
$359,000.
34
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
NOTE 11. STATEMENT OF CASH FLOWS - (continued)
During 1999, the Company entered into the following non-cash
transactions:
1. entered into certain capital lease agreements for the
purchase of equipment in the amount of approximately
$345,700;
2. recorded the following with respect to the disposition of
the IMS segment:
o reduced contingent stock payables which were forgiven in
the amount of approximately $952,000;
o reduced earnouts payable which were forgiven in the
amount of approximately $718,000;
o wrote off approximately $7,063,000 of goodwill.
NOTE 12. SEGMENT INFORMATION
With the sale of the IMS segment in 1999, substantially all of the Company's
revenues and assets are derived from the IT Staffing business. The Company also
generates minor revenues from its IT training subsidiary which amounted to
approximately $3,981,000 in 2001, $4,294,000 in 2000, and $3,039,000 in 1999.
The IT training subsidiary incurred a loss from continuing operations of
approximately $950,000 in 2001, $214,000 in 2000, and $509,000 in 1999.
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On August 1, 2000, we were notified that Rudolph, Palitz LLC had merged with
McGladrey & Pullen, LLP, the successor of that merger, and that Rudolph, Palitz
LLC would no longer be the auditor for the Registrant. McGladrey & Pullen LLP
was engaged as our new auditor effective August 1, 2000. This event is further
described in the auditing firm's press release dated August 2, 2000, and in our
press release dated August 3, 2000, copies of which were filed as exhibits to
our Report on Form 10-K for the year ended December 31, 2000 and as exhibits to
our Report on Form 8-K filed with the Securities and Exchange Commission on
August 3, 2000. Rudolph, Palitz LLC's notice of the merger dated August 1, 2000
was filed as an exhibit to our Report on Form 10-K for the year ended December
31, 2000 and was filed as an exhibit to our Report on Form 8-K filed with the
Securities and Exchange Commission on August 3, 2000.
The auditor's report from Rudolph, Palitz LLC for the year ended December
31, 1999 did not contain an adverse opinion or a disclaimer of opinion, and was
not qualified or modified as to uncertainty, audit scope, or accounting
principles.
The decision to engage McGladrey & Pullen LLP was approved by our board of
directors at a regular meeting held on October 20, 2000.
During the year ended December 31, 1999 and the subsequent interim period
preceding the change, there were no disagreements with Rudolph, Palitz LLC on
any matter of accounting principles or practices, financial disclosure, or
auditing scope or procedure.
We have requested Rudolph, Palitz LLC to furnish a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the statements
made in this Item. Such letter is filed as Exhibit 99.5 to this Report on Form
10-K for the year ended December 31, 2001.
36
PART III
INCORPORATION BY REFERENCE
The information called for by Item 10 "Directors and Executive Officers
of the Registrant," Item 11 "Executive Compensation," Item 12 "Security
Ownership of Certain Beneficial Owners and Management," and Item 13 "Certain
Relationships and Related Transactions" is incorporated herein by reference to
our definitive proxy statement for our 2002 Annual Meeting of Shareholders under
the captions "Nominees for Election as Directors; Identification of Executive
Officers", "Executive Compensation", "Security Ownership of Certain Beneficial
Owners and Management" and "Certain Relationships and Related Transactions". The
definitive proxy statement is expected to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the fiscal year to
which this Report relates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report on
Form 10-K:
Page Number
-----------
1. Consolidated Financial Statements:
Independent Auditor's Reports 19 - 20
Consolidated Balance Sheets 21
Consolidated Statements of Operations 22
Consolidated Statements of Shareholders' Equity 23
Consolidated Statements of Cash Flows 24
Notes to Consolidated Financial Statements 25-35
2. Consolidated Financial Statement Schedules:
See the Schedules set forth below. Other Schedules are omitted
because of the absence of conditions under which they are required.
37
Independent Auditor's Report
Board of Directors
The Judge Group, Inc.
Bala Cynwyd, Pennsylvania
Our audits for the years ended December 31, 2001 and 2000 were made for
the purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The consolidated supplemental Schedule II is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not a part of the basic consolidated financial statements. This schedule has
been subjected to the auditing procedures applied in our audits of the basic
consolidated financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
McGladrey & Pullen, LLP
February 22, 2002
Blue Bell, Pennsylvania
- ------------------------------------------------------------------------------------------------------------
Schedule II - Valuation and Qualifying Accounts
Allowance for Doubtful Accounts
Year Ended Balance at Additions Charged to Balance at
December 31, Beginning of Period Bad Debt Expense Charge Offs End Of Period
- ------------ ------------------- ---------------- ----------- -------------
2001 $ 1,264,000 $ 625,000 ($ 1,113,000) $ 776,000
=========== ========= ============= =========
2000 $ 987,000 $ 958,000 ($ 681,000) $ 1,264,000
========= ========= =========== ===========
1999 $ 511,000 $ 927,000 ($ 451,000) $ 987,000
========= ========= =========== =========
Allowance for Placement Fee Returns
Year Ended Balance at Additions Charged to Balance at
December 31, Beginning of Period Returns and Allowances Returns Charged End Of Period
- ------------ ------------------- ---------------------- --------------- -------------
2001 $ 175,000 $ 1,550,000 ($ 1,586,000) $ 139,000
========= =========== ============= =========
2000 $ 150,000 $ 2,319,000 ($ 2,294,000) $ 175,000
========= =========== ============= =========
1999 $ 17,000 $ 1,442,000 ($ 1,309,000) $ 150,000
========= =========== ============= =========
Deferred Tax Asset Valuation Allowance
2001 2000 1999
---- ---- ----
Deferred tax asset $ 3,333,000 $ 3,022,000 $ 4,758,000
Valuation allowance for deferred tax asset (236,000) (236,000) (2,109,000)
----------- ----------- -----------
Net deferred tax asset after valuation allowance. $ 3,097,000 $ 2,786,000 $ 2,649,000
=========== =========== ===========
38
3. Exhibits
Exhibit
No. Description of Document
- ------- -----------------------
3.1 Amended and Restated Articles of Incorporation. Incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement
on Form S-1 (Reg. No. 333-13109) (the "Form S-l").
3.2 Bylaws. Incorporated by reference to Exhibit 3.2 of the Form S-1.
4.3 Fourth Amended and Restated Loan and Security Agreement dated
December 10, 1996, between the Company and PNC Bank, N.A.
Incorporated by reference to Exhibit 4.3 to the Form S-1.
10.1 Lease of Two Bala Plaza, Bala Cynwyd, Pennsylvania, dated January
21, 1994, between The Prudential Insurance Company of America, as
landlord, and Judge, Inc., as tenant. Incorporated by reference to
Exhibit 10.1 of the Form S-1.
10.2 1996 Stock Option Plan, as amended and restated effective May 22,
2001. Incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q filed on August 10, 2001.
10.3 Professional Services Agreement between Merck & Company, Inc. and
Judge Technical Services, Inc. Incorporated by reference to
Exhibit 10.5 of the Form S-1.
10.4 Split-Dollar Agreement by and between Judge, Inc. and Dennis F.
Judge, Trustee of Irrevocable Agreement of Trust of Martin E.
Judge, Jr., Settlor, Dated December 28, 1995. Incorporated by
reference to Exhibit 10.6 of the Form S-1.
10.5 Split-Dollar Agreement by and between Judge, Inc. and Kathleen
Dunn, Trustee of the Irrevocable Agreement of Trust of Michael
Dunn, Settlor, date June 19, 1996. Incorporated by reference to
Exhibit 10.7 of the Form S-1.
10.6 Split-Dollar Agreement by and between Judge, Inc. and Ann L.
Judge, Trustee of the Irrevocable Agreement of Trust of Martin E.
Judge, Jr., Settlor, dated December 20, 1995. Incorporated by
reference to Exhibit 10.8 of the Form S-1.
10.7 Split-Dollar Agreement by and between Judge, Inc. and D. Michael
Carmody, Trustee of the Irrevocable Agreement of Trust of Michael
Dunn, Settlor, dated June 19, 1996. Incorporated by reference to
Exhibit 10.9 of the Form S-1.
10.8 Stock Option Agreement between the Company and James A. Hahn.
Incorporated by reference to Exhibit 10.11 of the Company's Report
on Form 10-K for the year ended December 31, 1998 filed on April
15, 1999.
10.9 Stock Option Agreement between the Company and Randolph J.
Angermann. Incorporated by reference to Exhibit 10.12 of the
Company's Report on Form 10-K for the year ended December 31, 1998
filed on April 15, 1999.
10.10 Employment Agreement, dated January 1, 2000, by and between the
Company and Robert G. Alessandrini. Incorporated by reference to
Exhibit 10.10 of the Company's Report on Form 10-K for the year
ended December 31, 1999 filed on March 29, 2000.
10.11 Asset Purchase Agreement by and among Judge Imaging Systems, Inc.,
Automated Office Products of Western New York, Inc. d/b/a AOP
Solutions, Paul F. Eckert and Suzanne Eckert. Incorporated by
reference to Exhibit 10.1 of the Company's Report on Form 10-Q
filed on August 16, 1999.
39
Exhibit
No. Description of Document
- ------- -----------------------
10.12 Asset Purchase Agreement by and among Systems Solutions, Inc.,
Judge Imaging Systems, Inc., AOP Acquisition Corp., Paul F. Eckert
and Suzanne Eckert. Incorporated by reference to Exhibit 10.2 of
the Company's Report on Form 10-Q filed on August 16, 1999.
10.13 Asset Purchase Agreement by and among Judge Imaging Systems, Inc.,
The Judge Group, Inc. and AOP Morristown Corp. Incorporated by
reference to Exhibit 10.3 of the Company's Report on Form 10-Q
filed on August 16, 1999.
10.14 Master Lease Agreement dated April 20, 1999, between the Company
and PNC Leasing Corp, a subsidiary of PNC Bank, N.A. Incorporated
by reference to Exhibit 10.14 of the Company's Report on Form 10-K
for the year ended December 31, 1999 filed on March 29, 2000.
10.15 Asset Purchase Agreement between FILENET CORPORATION as Purchaser
and ON-SITE SOLUTIONS, INC. as Seller, dated as of July 31, 1999.
Incorporated by reference to Exhibit 10.15 of the Company's Report
on Form 10-K for the year ended December 31, 1999 filed on March
29, 2000.
10.16 Severance Agreement and General Release, dated December 29, 2000,
by and between the Company and Richard T. Furlano. Incorporated by
reference to Exhibit 10.16 of the Company's Report on Form 10-K
for the year ended December 31, 2000 filed on March 27, 2001.
10.17 Employment Agreement, dated as of January 1, 2001, between The
Judge Group, Inc. and Martin E. Judge, Jr. Incorporated by
reference to Exhibit 10.2 of the Company's Report on Form 10-Q
filed on May 15, 2001.
10.18 Employment Agreement, dated as of January 1, 2001, between The
Judge Group, Inc. and Robert G. Alessandrini. Incorporated by
reference to Exhibit 10.2 of the Company's Report on Form 10-Q
filed on May 15, 2001.
10.19 Employment Agreement, dated as of January 1, 2001, between The
Judge Group, Inc. and Katherine Wiercinski. Incorporated by
reference to Exhibit 10.3 of the Company's Report on Form 10-Q
filed on May 15, 2001.
10.20 Stock Option Agreement between the Company and Robert H. Strouse.*
21.1 Subsidiaries of the Registrant.*
23.1 Consents of Independent Auditors.*
99.1 Rudolph, Palitz LLC Press Release dated August 2, 2000.
Incorporated by reference to Exhibit 99.2 of the Company's Report
on Form 8-K filed on August 3, 2000.
99.2 The Company's Press Release dated August 3, 2000. Incorporated by
reference to Exhibit 99.3 of the Company's Report on Form 8-K
filed on August 3, 2000.
99.3 Notification of merger from Rudolph, Palitz LLC, dated August 1,
2000. Incorporated by reference to Exhibit 99.4 of the Company's
Report on Form 8-K filed on August 3, 2000.
99.4 Letter of agreement from Rudolph, Palitz LLC, dated March 23,
2001. Incorporated by reference to Exhibit 99.4 of the Company's
Report on Form 10-K for the year ended December 31, 2000 filed on
March 27, 2001
99.5 Letter of agreement from Rudolph, Palitz LLC, dated March 23,
2002.*
* Filed herewith
(b) Reports on Form 8-K.
None.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 2002 THE JUDGE GROUP, INC.
By: /s/ Martin E. Judge, Jr.
------------------------
Martin E. Judge, Jr.
Chairman of the Board, President
and Chief Executive Officer
By: /s/ Robert G. Alessandrini
--------------------------
Robert G. Alessandrini
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Martin E. Judge, Jr. Chairman of the Board, March 27, 2002
- ------------------------ Director, President and Chief
Martin E. Judge, Jr. Executive Officer
(Principal Executive Officer)
/s/ Michael A. Dunn Director and Executive March 27, 2002
- ------------------- Vice President
Michael A. Dunn
/s/ Randolph J. Angermann Director March 27, 2002
- -------------------------
Randolph J. Angermann
/s/ James C. Hahn Director March 27, 2002
- -----------------
James C. Hahn
/s/ Robert H. Strouse Director March 27, 2002
- ---------------------
Robert H. Strouse
/s/ John E. Shields Director March 27, 2002
- -------------------
John E. Shields
41