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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 (IRS Employer
or organization) Identification No.)
TWO BALA PLAZA, SUITE 800
BALA CYNWYD, PENNSYLVANIA 19004
(Address of principal executive offices) (zip code)
(610) 667-7700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 9, 2002, 14,097,652 shares of the registrant's Common
Stock, $0.01 par value per share, were outstanding.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
THE JUDGE GROUP, INC. AND SUBSIDIARIES
INDEX
NUMBER PAGE(S)
- ------ -------
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2002 AND DECEMBER 31, 2001 1
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001 3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5- 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 - 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
- ------------------------------------------------------------------------------------------------------------------------------------
FORWARD LOOKING INFORMATION
This Report on Form 10-Q includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements and information
are based on beliefs of, and information currently available to, our management
as well as estimates and assumptions made by our management. 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
accompanying 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 stockholders, customers,
suppliers, business partners, competitors, and legislative, regulatory, judicial
and other governmental authorities and officials. Should one or more of these
risks or uncertainties materialize, or should the underlying assumptions prove
incorrect, actual results may vary significantly from those anticipated,
believed, estimated, expected, intended or planned. A non-exclusive list of
factors that may affect future performance can be found in our Report on Form
10-K for the year ended December 31, 2001.
i
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
June 30, 2002 December 31, 2001
(Unaudited)
- ---------------------------------------------------------------------------------- -------------------- --------------------
ASSETS
CURRENT ASSETS
Cash $ --- $ ---
Accounts receivable, net 11,630,930 12,663,173
Prepaid income taxes and deferred taxes 2,052,258 2,161,847
Other 1,161,904 1,171,422
----------- -----------
TOTAL CURRENT ASSETS 14,845,092 15,996,442
----------- -----------
PROPERTY AND EQUIPMENT, NET 2,632,856 3,161,441
----------- -----------
OTHER ASSETS
Deposits and other 373,092 378,251
Deferred taxes 1,433,000 1,433,000
Other receivables, officers and employees 696,429 669,552
Goodwill 6,423,781 6,423,781
----------- -----------
TOTAL OTHER ASSETS 8,926,302 8,904,584
----------- -----------
TOTAL ASSETS $26,404,250 $28,062,467
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 236,940 $ 569,117
Accounts payable and accrued expenses 4,574,891 3,837,079
Payroll and sales taxes 261,963 285,329
Deferred revenue 133,830 132,016
----------- -----------
TOTAL CURRENT LIABILITIES 5,207,624 4,823,541
----------- -----------
LONG-TERM LIABILITIES
Note payable, Bank 2,615,763 4,436,541
Deferred rent obligation 434,754 541,267
Debt obligations, net of current portion 244,488 397,748
----------- -----------
TOTAL LONG-TERM LIABILITIES 3,295,005 5,375,556
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares authorized; at June
30, 2002 and December 31, 2001, 14,141,373 shares issued and
13,504,228 shares outstanding 141,413 141,413
Preferred stock, $.01 par value, 10,000,000 shares authorized; at June
30, 2002, no shares issued and outstanding --- ---
Additional paid-in capital 24,176,111 24,176,111
Accumulated deficit (5,048,250) (5,086,501)
----------- -----------
19,269,274 19,231,023
Less treasury stock, 637,145 shares; at cost 1,367,653 1,367,653
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 17,901,621 17,863,370
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $26,404,250 $28,062,467
=========== ===========
See Notes to Consolidated Financial Statements.
1
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
2002 2001
---- ----
NET REVENUES $40,237,043 $58,714,007
------------ -----------
COSTS AND EXPENSES
Cost of sales 26,473,811 37,435,200
Selling and operating 8,331,359 11,613,456
General and administrative 5,246,399 6,883,636
------------ -----------
TOTAL COSTS AND EXPENSES 40,051,569 55,932,292
------------ -----------
OPERATING INCOME 185,474 2,781,715
Other income (expense), net (115,800) (381,887)
------------ -----------
INCOME BEFORE INCOME TAX EXPENSE 69,674 2,399,828
Income tax expense 31,423 1,007,928
------------ -----------
NET INCOME $38,251 $ 1,391,900
============ ===========
NET INCOME PER SHARE:
BASIC
Weighted Average Shares Outstanding 13,504,228 13,500,709
========== ===========
Income per share $0.00 $0.10
====== =====
DILUTED
Weighted Average Shares Outstanding 13,561,392 13,557,666
========== ===========
Income per share $0.00 $0.10
===== =====
See Notes to Consolidated Financial Statements.
2
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
2002 2001
---- ----
NET REVENUES $20,053,893 $28,325,666
----------- -----------
COSTS AND EXPENSES
Cost of sales 13,275,041 17,768,600
Selling and operating 4,018,453 5,736,986
General and administrative 2,554,910 3,505,464
----------- -----------
TOTAL COSTS AND EXPENSES 19,848,404 27,011,050
----------- -----------
OPERATING INCOME 205,489 1,314,616
Other income (expense), net (62,765) (180,178)
----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 142,724 1,134,438
Income tax expense 62,105 495,444
----------- -----------
NET INCOME $80,619 $638,994
=========== ===========
NET INCOME PER SHARE:
BASIC
Weighted Average Shares Outstanding 13,504,228 13,504,151
=========== ===========
Income per share $0.01 $0.05
===== =====
DILUTED
Weighted Average Shares Outstanding 13,603,710 13,570,121
=========== ===========
Income per share $0.01 $0.05
===== =====
See Notes to Consolidated Financial Statements.
3
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
2002 2001
---- ----
OPERATING ACTIVITIES
Net income for the period $ 38,251 $ 1,391,900
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 621,659 606,919
Amortization --- 201,783
Stock warrants issued for services --- 85,406
Deferred rent (106,513) 45,111
Provision for losses on accounts receivable 245,952 88,206
Loss on disposal of equipment 2,977 22,686
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 786,291 1,367,204
Prepaid income taxes and deferred taxes 109,589 785,861
Prepaid expenses and other current assets 9,518 (356,286)
Deposits and other (21,718) (101,858)
Increase (decrease) in:
Accounts payable and accrued expenses 737,824 (1,014,895)
Payroll and sales taxes (23,366) (86,121)
Deferred revenue 1,814 (336,221)
------------ -----------
Net cash provided by operating activities 2,402,278 2,699,695
------------ -----------
INVESTING ACTIVITIES
Net cash used in investing activities, purchases of property
and equipment (72,315) (791,216)
------------ -----------
FINANCING ACTIVITIES
Repayments of notes payable, bank, net (1,820,778) (1,612,096)
Principal payments on long-term debt (509,185) (305,133)
Exercise of stock options --- 8,750
------------ -----------
Net cash used in financing activities (2,329,963) (1,908,479)
------------ -----------
INCREASE (DECREASE) IN CASH --- ---
CASH, BEGINNING --- ---
------------ -----------
CASH, ENDING $ --- $ ---
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for Interest $ 149,000 $ 485,000
============ ===========
Cash paid during the period for Income taxes $ 3,000 $ 370,000
============ ===========
See Notes to Consolidated Financial Statements.
4
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
NOTE 1. DESCRIPTION OF BUSINESS
The Judge Group, Inc. (the "Company"), a Pennsylvania corporation founded in
1970, provides information technology ("IT") and engineering professionals to
its clients on both a temporary basis ("Contract Placement") and a permanent
basis ("Permanent Placement") as well as IT training on a range of software and
network applications to corporate, governmental and individual clients. At June
30, 2002, the Company, headquartered in Bala Cynwyd, Pennsylvania, operated
regional offices in eleven states throughout the United States. A substantial
portion of the Company's revenue is derived from customers located in the
Mid-Atlantic corridor of the United States.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and the Company's wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The financial statements as of June 30, 2002 and for the three months and six
months ended June 30, 2002 and 2001 are unaudited; however, in the opinion of
management, such statements include all adjustments, consisting solely of normal
recurring adjustments, necessary for a fair presentation of the results for the
periods presented.
The interim financial statements should be read in conjunction with the
financial statements for the fiscal year ended December 31, 2001 and the notes
thereto, included in the Company's report on Form 10-K for the year ended
December 31, 2001.
Risks, Uncertainties and Management Estimates
The results of operations for the interim periods are not necessarily indicative
of the results that might be expected for future interim periods or for the full
year ending December 31, 2002.
The preparation of the Company's 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.
Interim Financial Reporting
For interim financial reporting purposes, costs and expenses are accounted for
in accordance with Accounting Principles Board Opinion No. 28 ("APB 28").
Earnings Per Share
Basic earnings per share amounts are computed based on net income divided by the
weighted average number of shares actually issued, reduced by treasury shares.
Diluted earnings per share amounts for the three months and six months ended
June 30, 2002 and 2001 are based on the weighted average number of shares
calculated for basic earnings 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. Outstanding options and warrants to
purchase 2,330,801 and 2,505,070 common shares in 2002 and 2001, respectively,
were not included in the computation of diluted earnings per share because their
per share exercise price was greater than the average per share market price of
the Company's common shares.
5
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
142, Goodwill and Other Intangible Assets. The Company adopted Statement 142
effective January 1, 2002. Statement 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
at least annually for impairment. The Company tested goodwill for impairment
using the two-step process prescribed in Statement 142 in the quarter ended June
30, 2002. The first step was a screen for potential impairment, while the second
step measured the amount of the impairment, if any. Results of the first step,
performed by an independent business valuation company, reflected no potential
impairment in the Company's goodwill. There was no impairment charge resulting
from these transitional impairment tests in the second quarter of 2002. In the
six months and the three months ended June 30, 2001, the Company amortized
approximately $133,000 and $67,000, respectively, of goodwill, net of tax
effect. Had Statement 142 been in effect in those periods, net income would have
increased to approximately $1,525,000, with an increase to reported net income
per share, both basic and diluted, of $0.01 per share for the six months ended
June 30, 2001 and approximately $705,000, with no increase to reported net
income per share, either basic or diluted, for the three months ended June 30,
2001.
In January 2002, the Company adopted Statement 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which superseded Statement 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. Adoption of Statement 144 did not have a material effect on the
Company's results of operations or its financial condition.
Other Receivables, Officers and Employees
During the six months ended June 30, 2002 a portion of the Other Receivables,
Officers and Employees was converted to a note receivable from one of the
Company's officers. The note bears interest at 4.9%, is secured by a pledge of
Company stock, and is payable April 2012.
NOTE 3. INCOME TAXES
The Company files a consolidated Federal income tax return with its wholly owned
subsidiaries. State income taxes are determined on the basis of filing separate
returns for each subsidiary to the extent required by applicable state
regulations.
In accordance with Accounting Principles Board Opinion No. 28 (Interim Financial
Reporting), income taxes are calculated at the estimated effective annual
(federal and state) tax rates.
NOTE 4. SHAREHOLDERS' EQUITY
Tender Offer
In February 2002, the Company commenced a voluntary stock option exchange
program for its employees. Under the program, employees holding options to
purchase the Company's 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. The Company expects the new options to
be granted on or about September 20, 2002. The new options will vest over four
years. The per share exercise price of the new options will be the last reported
per share trading price of the Company's Common Stock on the date on which they
are granted.
6
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
NOTE 5. STATEMENT OF CASH FLOWS
Supplemental disclosure of non-cash investing and financing transactions:
During the six month period ended June 30, 2002, the Company entered into
certain lease agreements for the purchase of equipment in an aggregate amount of
approximately $23,700.
During the six month period ended June 30, 2001, the Company entered into the
following non-cash transactions:
Entered into certain lease agreements for the purchase of equipment in an
aggregate amount of approximately $223,000.
Issued warrants to purchase 100,000 shares of Common Stock at a value of
approximately $114,000.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE
THREE AND SIX MONTHS ENDED JUNE 30, 2001
The following discussion should be read in conjunction with the consolidated
financial statements of The Judge Group, Inc. and related notes thereto
appearing elsewhere in this Report and in our Annual Report on Form 10-K for the
year ended December 31, 2001.
OVERVIEW
Our operations experienced a decrease in net revenue of approximately $18.5
million, or 31.5%, for the six months ended June 30, 2002 compared to the prior
year period. This revenue decrease was primarily attributable to a decrease in
revenue in all areas of our business caused by a continuing general downturn in
the United States economy, which negatively affected our clients' use of IT and
engineering staffing and training services. Our operating income decreased
approximately $2.6 million, or 93.3%, for the six months ended June 30, 2002
compared to the prior year period due primarily to our lower revenues. Our net
income decreased approximately $1.4 million, or 97.3%, for the six months ended
June 30, 2002 compared to the prior year period. This decrease was due to the
revenue decrease noted above.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of consolidated net revenues for each of the periods indicated:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001 2002 2001
------ ------ ------ ------
Net revenues 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Cost of sales 66.2 62.7 65.8 63.8
Selling and operating expenses 20.0 20.3 20.7 19.8
General and administrative expenses 12.8 12.4 13.0 11.7
----- ----- ----- ------
Total costs and expenses 99.0 95.4 99.5 95.3
----- ----- ----- ------
Operating income 1.0 4.6 0.5 4.7
Interest expense and other, net (0.3) (0.6) (0.3) (0.6)
----- ----- ----- ------
Income before income taxes 0.7% 4.0% 0.2% 4.1%
====== ====== ====== ======
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Net Revenues. Consolidated net revenues decreased by 29.2%, or approximately
$8.3 million, to approximately $20.1 million for the three months ended June 30,
2002 compared to the prior year period. This decrease was due to a decrease in
revenues in all areas of our business, primarily attributable to a continuing
general downturn in the United States economy, which negatively affected our
clients and caused them to reduce their use of IT and engineering staffing and
training services. In our contract placement business, revenues decreased
approximately $6.2 million, or 27.2%, for the three months ended June 30, 2002
compared to the prior year period. For the three months ended June 30, 2002 we
billed approximately 274,000 IT consultant hours compared to approximately
369,000 IT consultant hours in the comparable period of 2001. Our permanent
placement revenues decreased approximately $2.0 million, or 45.0%, to
approximately $2.4 million for the three months ended June 30, 2002 compared to
the prior year period. This decrease in permanent placement revenues was
primarily attributable to a decrease in the number of candidates placed in the
three months ended June 30, 2002 to 181 from 302 in the prior year period. Our
IT training revenues also decreased approximately $0.1 million, or 8.3%, to
approximately $l.0 million for the three months ended June 30, 2002 compared to
the prior year period, which was primarily attributable to a decrease in client
companies' IT training needs in view of the continuing downturn in the United
States economy.
8
Cost of Sales. Consolidated cost of sales decreased by 25.3%, or approximately
$4.5 million, to approximately $13.3 million for the three months ended June 30,
2002 compared to the prior year period. Cost of sales as a percentage of
consolidated net revenues increased to 66.2% from 62.7% in the respective
comparable periods. Cost of sales related to contract placements increased to
75.4% of contract placement revenues for the three months ended June 30, 2002
compared to 74.6% in the prior year period. This increase was attributable to a
marked decrease in the number of IT consultants working on higher billable rate
services, such as client server and web development services. Contributing to
the increase in cost of sales as a percentage of consolidated net revenues was
the decrease in permanent placement revenues, which have no corresponding cost
of sales associated with them. Cost of sales related to IT training revenues
increased less than $0.1 million, or 7.2%, to 69.6% of IT training revenues for
the three months ended June 30, 2002 compared to 59.6% in the prior year period.
Selling and Operating. Consolidated selling and operating expenses decreased by
30.0%, or approximately $1.7 million, to approximately $4.0 million for the
three months ended June 30, 2002 compared to the prior year period. Selling and
operating expenses as a percentage of consolidated net revenues decreased to
20.0% from 20.3% for the three months ended June 30, 2002 compared to the prior
year period. This decrease was due primarily to lower commissions paid on the
reduced level of revenues, lower salaries following staff reductions, and
management's attempts to control costs in such areas as advertising, office
supplies, telephone, and travel and entertainment expense.
General and Administrative. Consolidated general and administrative expenses
decreased 27.1%, or approximately $1.0 million, to approximately $2.6 million
for the three months ended June 30, 2002 compared to the prior year period.
General and administrative expenses as a percentage of consolidated net revenues
increased to 12.8% from 12.4% for the three months ended June 30, 2002 compared
to the prior year period. The decrease in general and administrative expenses
was due primarily to lower salaries and related expenses following staff
reductions to reflect our lower volume of business, and to discontinuing
amortization of goodwill in accordance with Statement of Financial Accounting
Standards 142. In the comparable three months of 2001, goodwill amortization was
approximately $0.1 million.
Other. Other expense primarily represents interest expense net of other income.
Interest expense was approximately $77,000 and $192,000 for the three months
ended June 30, 2002 and 2001, respectively. Other income was approximately
$15,000 and $12,000 for the three months ended June 30, 2002 and 2001,
respectively. This decrease in total interest expense reflects our decreased
usage of our bank line of credit during the three months ended June 30, 2002, as
well as a reduced interest rate on such borrowings from a prime rate of 7.0% at
June 30, 2001 to 4.75% at June 30, 2002.
Income Taxes. The effective tax rate of approximately 43.5% for the three months
ended June 30, 2002 is higher than the federal statutory tax rate of 34% due to
state tax provisions and certain book expenses not deductible for tax purposes.
In the comparable period of 2001, the effective tax rate of approximately 43.7%
is higher than the applicable federal statutory tax rate primarily for the same
reasons.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net Revenues. Consolidated net revenues decreased by 31.5%, or approximately
$18.5 million, to approximately $40.2 million for the six months ended June 30,
2002 compared to the prior year period. This decrease was due to a decrease in
revenues in all areas of our business, primarily attributable to a continued
general downturn in the United States economy, which negatively affected our
clients and caused them to reduce their use of IT and engineering staffing and
training services. Contract placement revenues decreased approximately $15.0
million, or 31.1%, for the six months ended June 30, 2002 compared to the prior
year period. In the six months ended June 30, 2002 we billed approximately
549,000 IT consultant hours compared to approximately 779,000 IT consultant
hours in the comparable period of 2001. Our permanent placement revenues
decreased 35.8%, or approximately $2.9 million, in the six months ended June 30,
2002 compared to the prior year period. This decrease in permanent placement
revenues was primarily attributable to a decrease in the number of placements in
the six months ended June 30, 2002 compared to the prior year period. We placed
386 candidates in the six months ended June 30, 2002 compared to 558 candidates
in the prior year period. Revenues in our IT training operations decreased
21.7%, or approximately $0.5 million, to approximately $1.9 million in the six
months ended June 30, 2002 compared to the prior year period. This decrease in
IT training revenues was primarily attributable to a decrease in client
companies' IT training needs in view of the continuing downturn in the general
economy.
9
Cost of Sales. Consolidated cost of sales decreased by 29.3%, or approximately
$11.0 million, to approximately $26.5 million for the six months ended June 30,
2002 compared to the prior year period. Cost of sales as a percentage of
consolidated net revenues increased to 65.8% from 63.8% in the respective
comparable periods. Cost of sales related to contract placements increased to
75.9% of contract placement revenues for the six months ended June 30, 2002
compared to 74.7% in the prior year period. This increase was attributable to a
marked decrease in the number of IT consultants working on higher billable rate
services. Contributing to the increase in cost of sales as a percentage of
consolidated net revenues was the decrease in permanent placement revenues,
which have no corresponding cost of sales associated with them. Cost of sales
related to IT training revenues decreased approximately $0.1 million, or 9.6%,
to 67.4% of IT training revenues in the six months ended June 30, 2002 compared
to the prior year period, primarily due to fewer trainers required for the
reduced number of classes held.
Selling and Operating. Consolidated selling and operating expenses decreased by
28.3%, or approximately $3.3 million, to approximately $8.3 million for the six
months ended June 30, 2002 compared to the prior year period. Selling and
operating expenses as a percentage of consolidated net revenues increased to
20.7% from 19.8% for the six months ended June 30, 2002 compared to the prior
year period. The decrease in selling and operating expenses was due primarily to
lower commissions paid on the lower revenues, lower salaries following staff
reductions, and management's attempts to control costs in such areas as
advertising, office supplies, telephone and travel and entertainment expense.
General and Administrative. Consolidated general and administrative expenses
decreased 23.8%, or approximately $1.6 million, to approximately $5.2 million
for the six months ended June 30, 2002 compared to the prior year period.
General and administrative expenses as a percentage of consolidated net revenues
increased to 13.0% from 11.7% for the six months ended June 30, 2002 compared to
the prior year period. This decrease in general and administrative expenses was
due primarily to lower salaries and related expenses following staff reductions
to reflect our lower volume of business, and to discontinuing amortization of
goodwill in accordance with Statement of Financial Accounting Standards 142. In
the comparable six months of 2001, goodwill amortization was approximately $0.2
million.
Other. Other expense primarily represents interest expense net of other income.
Interest expense was approximately $163,000 and $415,000 for the six months
ended June 30, 2002 and 2001, respectively. Other income was approximately
$47,000 and $33,000 for the six months ended June 30, 2002 and 2001,
respectively. This decrease in total interest expense reflects our decreased
usage of our bank line of credit during the six months ended June 30, 2002, as
well as a reduced interest rate on such borrowings from a prime rate of 7.0% at
June 30, 2001 to 4.75% at June 30, 2002.
Income Taxes. The effective tax rate of approximately 45.1% for the six months
ended June 30, 2002 is higher than the federal statutory tax rate of 34% due to
state tax provisions and certain book expenses not deductible for tax purposes.
In the comparable period of 2001 the effective tax rate of approximately 42.0%
was higher than the applicable federal statutory tax rate due primarily to the
same reasons.
10
LIQUIDITY AND CAPITAL RESOURCES
We have borrowed 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 cash balance of $0 as of June 30, 2002.
We provided cash from operations of approximately $2.4 million in the six months
ended June 30, 2002 compared to approximately $2.7 million for the comparable
period of 2001. This result is primarily attributable to decreases in accounts
receivable and prepaid income taxes and deferred taxes coupled with an increase
in accounts payable which provided cash totaling $1.6 million in the six months
ended June 30, 2002, compared to a total of $1.1 million provided by those same
categories in the comparable prior year period.
Cash purchases of fixed assets for the six months ended June 30, 2002 were
approximately $0.1 million compared to purchases of approximately $0.8 million
in the comparable period in the prior year. These purchases were related
primarily to the purchase of computers, related accessories and software to
upgrade our technology infrastructure.
We repaid approximately $1.8 million of our line of credit in the six months
ended June 30, 2002, compared to repayment of approximately $1.6 million in the
six months ended June 30, 2001. We also repaid approximately $0.5 million of our
long-term obligations in the six months ended June 30, 2002 compared to
approximately $0.3 million in the comparable period of 2001.
We have availability under a $15.0 million 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 June 30, 2002 we had approximately
$2.6 million outstanding against the Line of Credit. The Line of Credit is
secured by substantially all of our assets and contains customary restrictive
covenants. The covenants include limitations on loans we may extend to officers
and employees, the incurrence of additional debt and a prohibition of the
payment of dividends on our common shares. The Line of Credit bears interest, at
our option, at either the Bank's prime rate, which was 4.75% at June 30, 2002,
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 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 that may be available to us in the future,
will be sufficient to meet our capital needs for at least the next twelve
months.
During the quarter ended June 30, 2002 there was no material change in our
contractual cash obligations payable in future periods.
Information regarding our critical accounting policies which affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements is included in our Annual Report on Form 10-K for the year
ended December 31, 2001.
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On or about July 23, 2002, we received notification from The Nasdaq Stock
Market, Inc. that our Common Stock will be delisted from the Nasdaq National
Market unless the bid price of the stock closes at or above one dollar per share
for at least ten consecutive days by October 21, 2002. The per share price of
our Common Stock does not currently satisfy requirements to remain listed on the
Nasdaq National Market. In addition, in the future we may not satisfy other
listing requirements, which might result in the delisting of our Common Stock.
If we fail to regain compliance with the Nasdaq National Market maintenance
rules by October 21, 2002, and if we fail to appeal any Nasdaq staff
determination of non-compliance or if any such appeal is decided against us,
then our Common Stock will be delisted from the Nasdaq National Market. However,
we will also be eligible to apply to transfer the listing of our Common Stock to
the Nasdaq SmallCap Market, which application will delay the delisting of our
Common Stock pending the review of our transfer application. If our application
is approved for a listing on the Nasdaq SmallCap Market we will be afforded an
additional 180 calendar day grace period for the minimum bid price requirement,
which would extend the delisting determination until January 21, 2003. We may
also be eligible for an additional 180 calendar day grace period for the minimum
bid price requirement provided we meet the initial listing criteria under the
rules of the Nasdaq SmallCap Market. 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 14, 2002, we had received notification from The Nasdaq Stock Market,
Inc. that our Common Stock did not satisfy certain requirements necessary to
remain listed on the Nasdaq National Market. On May 22, 2002, The Nasdaq Stock
Market, Inc. informed us that our Common Stock satisfied the requirements set
forth in the notification dated February 14, 2002 and that the matter was
closed. There is no assurance that our Common Stock will satisfy the
requirements set forth in the notification dated July 23, 2002.
ITEM 3. 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 those rates have remained at their
lower levels during 2002. Assuming we are indebted on our Line of Credit
approximately $2.6 million and continue to have approximately 13,500,000 common
shares outstanding, a 1% decrease in our interest rate would increase our annual
earnings per share by less than 1 cent. Correspondingly a 1% increase in our
interest rate would 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.
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PART II
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ITEM 1. LEGAL PROCEEDINGS
We are involved in routine litigation incidental to the conduct of our business,
but do not believe that any of the litigation to which we are currently a party
will have a material adverse effect on our results of operations or on our
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On May 22, 2002, we held our Annual Meeting of Shareholders at our offices in
Bala Cynwyd, Pennsylvania. The purpose of the meeting was to elect directors and
to ratify the selection of our independent public accountants for the fiscal
year ended December 31, 2002.
At the meeting, our shareholders voted as follows to elect directors to serve
until our next Annual Meeting of Shareholders:
NOMINEE IN FAVOR AGAINST ABSTAIN
Randolph J. Angermann 10,656,399 0 10,062
Michael A. Dunn 10,564,899 0 101,562
William J. Gladstone 10,564,899 0 101,562
James C. Hahn 10,656,399 0 10,062
Martin E. Judge, Jr. 10,558,899 0 107,562
John E. Shields 10,564,899 0 101,562
Robert H. Strouse 10,656,374 0 10,087
In the vote to ratify the appointment of McGladrey & Pullen, LLP as our
independent public accountants for the fiscal year ended December 31, 2002,
10,643,733 shares were voted in favor of ratification, 7,234 shares were voted
against ratification and 15,494 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are filed as a part of this Quarterly Report on Form 10-Q.
(b) No reports were filed by the Registrant on Form 8-K during the quarter
ended June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 2002
THE JUDGE GROUP, INC. THE JUDGE GROUP, INC.
/s/Robert G. Alessandrini /s/Martin E. Judge, Jr.
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Robert G. Alessandrini Martin E. Judge, Jr.
Chief Financial Officer Chairman of the Board and
Chief Executive Officer
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