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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, 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 (IRS Employer Identification No.)
incorporation or organization)
TWO BALA PLAZA, SUITE 800
BALA CYNWYD, PENNSYLVANIA 19004
(Address of principal executive offices, including zip code)
(610) 667-7700
(Registrant's telephone number, including area code)
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 SmallCap 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The approximate aggregate market value of Common Stock held by
non-affiliates of the registrant was $5,126,000 as of June 28, 2002, the last
business day of the registrant's most recently completed second fiscal quarter.
The number of shares of the registrant's Common Stock outstanding as of
March 4, 2003 was 14,097,652 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions, as expressly described in this Report, of the
registrant's Proxy Statement for the 2003 Annual Meeting of its stockholders, to
be filed within 120 days of December 31, 2002, are incorporated by reference
into Part II, Item 5, and 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 ("SEC"). 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 SEC.
We urge you to carefully review and consider the disclosure found in our filings
with the SEC, all of which are available in the SEC's EDGAR database at
www.sec.gov and from us.
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 maintain an integrated database containing over 500,000 candidates for either
contract or permanent placements. Our recruiters utilize a flexible search
program to pre-qualify candidates based on a clients' specific needs.
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 design, project consulting,
project management, Help Desk management, and clinical research analysis.
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. In 2002, we provided approximately 1,500 technical consultants to
approximately 490 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 7 offices in 6 states. In 2002, we
placed approximately 680 candidates with more than 390 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. 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.
2
OPERATIONS
We have provided professional and engineering personnel on a permanent
basis since we were founded in 1970. Permanent placements generated revenues of
$14.4 million, $14.0 million, and $10.0 million in 2000, 2001 and 2002,
respectively, representing 12.6%, 13.6%, and 12.5% 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; and Laguna Hills, California. Approximately 65% of
permanent placement revenues are from the food processing, distribution, and
retail industries, approximately 27% from the pharmaceutical industry, and
approximately 8% from IT industries. In 2002, we placed approximately 680
professionals with more than 390 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 $95.6 million, $85.1 million, and $66.8
million in fiscal 2000, 2001 and 2002, respectively, representing 83.7%, 82.5%,
and 83.2% 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; Oak Brook, Illinois; and nationally
through our National Division based in Providence. In 2002, we placed
approximately 1,500 consultants with approximately 490 clients. Typical
engagements range in duration from three to nine 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.
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", who 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.
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 $12.3 million, $10.5 million, and $8.3 million in 2000, 2001, and 2002,
respectively, representing 10.8%, 10.2% and 10.3% 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 $4.3 million, $4.0 million, and $3.6
million in 2000, 2001, and 2002, respectively, which represented 3.8%, 3.8%, and
4.5% of our consolidated net revenues during such periods. We provide IT
training services at various off-site locations nationwide. We deliver certified
training for all Microsoft products. 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. 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.
3
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.
CUSTOMERS
The primary industries we serve include financial services, manufacturing,
defense, software/computers, government, food, biotechnical, and pharmaceutical.
In 2002, 2001, or 2000, 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.
4
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.
AVAILABLE INFORMATION
We will make available free of charge on or through our internet website
at www.judge.com our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file such material with,
or furnish it to, the SEC.
EMPLOYEES
As of December 31, 2002, we had 192 full-time, non-consultant employees.
On that date, there were also approximately 485 IT consultants working on
full-time assignments for our clients, of which approximately 78% were treated
as employees of ours and 22% 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. As of December 31, 2002 we leased offices
in the following locations:
SQUARE LEASE SERVICES OFFERED AS OF
OFFICE FEET EXPIRATION DECEMBER 31, 2002
------ ---- ---------- -----------------
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 4,300 February 28, 2006 Contract Placement; Permanent
Placement
Alexandria, Virginia 3,900 December 31, 2005 Contract Placement
Tampa, Florida 4,800 April 30, 2007 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 Contract Placement
Jacksonville, Florida 2,900 November 30, 2003 Permanent Placement
Raleigh, North Carolina 3,900 January 31, 2005 Contract Placement
Laguna Hills, California 3,300 August 30, 2004 Permanent Placement
5
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, 2002.
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
SmallCap Market under the symbol JUDG. During the two most recent fiscal years
that our Common Shares have been publicly traded, they were traded on the NASDAQ
National Market until November 21, 2002, when they began trading on the NASDAQ
SmallCap Market. The per share closing quotation for our Common Shares on March
4, 2003 was $0.77. As of March 4, 2003, there were 216 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 2001
First Quarter $ 1.50 $ 1.00
Second Quarter $ 1.65 $ 1.05
Third Quarter $ 1.75 $ 0.64
Fourth Quarter $ 0.84 $ 0.47
Fiscal 2002
First Quarter $ 0.74 $ 0.59
Second Quarter $ 1.15 $ 0.54
Third Quarter $ 0.95 $ 0.56
Fourth Quarter $ 0.99 $ 0.58
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.
With respect to securities authorized for issuance under our equity
compensation plans, we incorporate by reference the information contained under
the caption "Other Forms of Compensation" in our Definitive Proxy Statement
related to our 2003 Annual Meeting of our stockholders to be filed within 120
days after the end of the year covered by this Report pursuant to Section 14(a)
of the Securities Exchange Act of 1934.
There are several requirements that we must satisfy in order for our
Common Shares to continue to be listed on the NASDAQ SmallCap Market. These
requirements include, but are not limited to, maintaining a minimum per share
price of our Common Shares of one dollar. The per share price of our Common
Shares does not currently satisfy requirements to remain listed on the NASDAQ
SmallCap Market. We have received notification from The Nasdaq Stock Market,
Inc. that our Common Shares will be delisted from the NASDAQ SmallCap Market
unless the stock closes at or above one dollar per share for at least ten
consecutive days by July 18, 2003. In addition, in the future we may not comply
with other listing requirements, which might result in the delisting of our
Common Shares. If our Common Shares are delisted from the NASDAQ SmallCap
Market, we may list the Common Shares for trading over-the-counter. Delisting
from the NASDAQ SmallCap Market could adversely affect the liquidity and the
price of our Common Shares and could have a long-term adverse impact on our
ability to raise future capital through a sale of our Common Shares. In
addition, delisting could make it more difficult for investors to obtain
quotations as to the market value of or trade our Common Shares.
6
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 and the related notes included herein.
YEARS ENDED DECEMBER 31,
STATEMENTS OF 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
OPERATIONS DATA (In thousands, except per share data)
Net revenues $80,280 $ 103,067 $ 114,217 $ 113,705 $ 95,218
------- ------- ------- ------- ------
Cost of sales 53,478 66,413 74,356 75,570 64,316
Selling and operating expenses 15,499 21,633 20,400 20,563 18,874
General and administrative expenses 10,800 14,475 13,514 12,535 10,189
Other charges 0 1,531 917 0 1,019
------- ------- ------- ------- ------
Total costs and expenses 79,777 104,052 109,187 108,668 94,398
------- ------- ------- ------- ------
Operating Income (loss) 503 (985) 5,030 5,037 820
Interest income (expense), net (248) (673) (995) (829) (154)
Other income 85 71 48 13 94
------- ------- ------- ------- ------
Income (loss) before income taxes 340 (1,587) 4,083 4,221 760
Income tax expense (benefit) 186 (336) 100 1,877 752
------- ------- ------- ------- ------
Income (loss) from continuing operations 154 (1,251) 3,983 2,344 8
Loss from discontinued operations 0 0 0 (2,153) (5,125)
Loss on disposal of discontinued operations 0 0 0 (6,275) 0
------- ------- ------- ------- ------
Net income (loss) $ 154 ($1,251) $ 3,983 ($ 6,084) ($5,117)
======= ====== ====== ======== ======
Income (loss) from continuing operations
per Common Share:
Basic and Diluted $ 0.01 ($ 0.09) $ 0.29 $ 0.17 $ 0.00
======= ======== ====== ====== ======
Loss from discontinued operations
per Common Share:
Basic and Diluted $ 0.00 $ 0.00 $ 0.00 ($ 0.15) ($0.38)
======= ====== ====== ======== ======
Loss from disposal of discontinued
operations per Common Share:
Basic and Diluted $ 0.00 $ 0.00 $ 0.00 ($ 0.46) $ 0.00
======= ====== ====== ======== ======
Net income (loss) per Common Share:
Basic and Diluted $ 0.01 ($0.09) $ 0.29 ($ 0.44) ($0.38)
======= ====== ====== ======== ======
Basic weighted average shares 13,504 13,502 13,702 13,761 13,458
======= ====== ====== ======== ======
Diluted weighted average shares 13,561 13,502 13,924 13,797 13,458
======= ====== ====== ======== ======
8
AS OF DECEMBER 31,
CONSOLIDATED BALANCE SHEET DATA:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Working capital $ 8,069 $11,172 $ 16,608 $ 14,181 $ 12,213
Total assets 24,880 28,062 37,341 35,086 47,885
Note payable, Bank 1,678 4,437 9,167 9,689 9,882
Other long-term obligations, including
current portion 696 1,508 1,457 2,135 1,996
Shareholders' equity 18,036 17,863 18,992 16,006 23,081
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 operations experienced a decrease in revenue of approximately $22.8
million, or 22.1%, to approximately $80.3 million for the twelve months ended
December 31, 2002 compared to the prior year period. This decrease in revenue
was primarily attributable to a continuing downturn in the general economy that
began in the second half of 2001, which lead to a reduced demand for our
services. Our operating income increased approximately $1.5 million in the year
ended December 31, 2002 over the prior year period, from a loss of approximately
$1.0 million in fiscal 2001 to a profit of approximately $0.5 million in fiscal
2002. Such increase was primarily attributable to lower selling, general and
administrative expenses in fiscal 2002. Included in fiscal 2001 costs and
expenses was approximately $1.5 million of impaired goodwill charges, as more
fully described below, which was not repeated in 2002.
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 three to nine 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, 2002, total hours billed were 1,102,315, with an average
billing rate of $59.72, compared to total hours billed of 1,398,786 with an
average billing rate of $59.87 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 downturn in the general economy
beginning in the second half of 2001 and continuing through 2002. 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.
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 35% 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 680 professionals with an average
placement fee of $14,700 in 2002, compared to approximately 1,000 professionals
placed with an average placement fee of $14,040 for the prior year period. The
decrease in placements was primarily attributable to lower demand for
professionals due to the downturn in the general economy beginning in the second
half of 2001, which continued through 2002. 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.
9
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 various
off-site locations nationwide. 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 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. During 2002 we
continued a focused strategic planning and budgeting process. In 2003, our
internal operating plan reflects marginally higher revenues in view of the slow
growth in the general economy, and continues to control 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 2003.
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,
2002 2001 2000
---- ---- ----
Net revenues 100.0% 100.0% 100.0%
------ ------ ------
Cost of sales 66.6 64.4 65.1
Selling and operating expenses 19.3 21.0 17.9
General and administrative expenses 13.5 14.1 11.8
Other charges 0 1.5 0.8
------ ------ ------
Total costs and expenses 99.4 101.0 95.6
------ ------ ------
Operating income (loss) 0.6 (1.0) 4.4
Other income (expense), net (0.2) (0.6) (0.8)
------ ------ ------
Income (loss) before income taxes 0.4% (1.6%) 3.6%
====== ====== ======
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net Revenues. Consolidated net revenues from operations decreased by $22.8
million, or 22.1%, to approximately $80.3 million for the year ended December
31, 2002 compared to the prior year period. The contract placement business
generated revenues of $66.8 million for the year ended December 31, 2002, a
decrease of $18.3 million, or 21.5%, from revenues of $85.1 million in the prior
year period. This decrease resulted primarily from lower demand for contract
services due to the continuing downturn in the general economy in 2002. Our
permanent placement business generated revenues of $10.0 million in 2002, a
decrease of $4.1 million, or 28.9%, from 2001 revenues of $14.1 million. This
decrease was primarily due to lower demand for professionals due to the
continuing downturn in the general economy in 2002. The IT training business
revenues decreased approximately $0.4 million, or 10.1%, from $4.0 million in
2001 to $3.6 million in 2002. The decrease in revenues in our IT training
business was attributable to lower demand for IT training due to the continuing
downturn in the general economy in 2002.
10
Cost of Sales. Consolidated cost of sales decreased by approximately $12.9
million, or 19.5%, for the year ended December 31, 2002 to $53.5 million from
$66.4 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 increased to 66.6% from 64.4% in the respective periods. In our
contract placement business, cost of sales as a percentage of its net revenues
increased to 76.5% for the year ended December 31, 2002 compared to 75.3% for
the year ended December 31, 2001. 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 net revenue from the permanent
placement business, for which there is no cost of sales, relative to
consolidated net revenues. Our IT training business contributed approximately
$2.4 million in expenses included in cost of sales, approximately the same
amount as the prior year period.
Selling and Operating. Consolidated selling and operating expenses decreased by
approximately $6.1 million, or 28.4%, for the year ended December 31, 2002 to
$15.5 million from $21.6 million in the prior year period. Selling and operating
expenses as a percentage of consolidated net revenues for the year ended
December 31, 2002 decreased to 19.3% from 21.0% in 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. In
our contract placement business, selling and operating expenses decreased
approximately $2.2 million, or 22.7%, from the prior year period partially due
to lower commissions paid on the lower revenues in 2002 discussed earlier, and
partially due to lower bad debt expense. In our permanent placement business,
selling and operating expenses decreased approximately $2.1 million, or 24.5%,
from the prior year period partially due to decreased commissions paid on the
lower revenues in 2002, and partially due to management's attempts to control
costs in the areas noted above. In our IT training business, selling and
operating expenses decreased approximately $0.3 million, or 27.2%, from the
prior year period due to lower commissions paid on the lower revenues, lower
salaries following staff reductions, and management's attempts to control costs
in the areas noted above.
General and Administrative. Consolidated general and administrative expenses
decreased by approximately $3.7 million, or 25.4%, for the year ended December
31, 2002 to $10.8 million from $14.5 million in the prior year period. General
and administrative expenses as a percentage of consolidated net revenues for the
year ended December 31, 2002 decreased to 13.5% from 14.1% in the prior year
period. This decrease in general and administrative expenses was due primarily
to salaries and related expenses that decreased by approximately $3.2 million
following staff reductions to reflect our lower volume of revenue. Also
contributing to the decrease in general and administrative expenses was the
discontinuation of amortization of goodwill in accordance with Statement of
Financial Accounting Standards No. 142. In the comparable period of 2001,
goodwill amortization was approximately $0.4 million.
Other charges. During 2001, we incurred non-cash other charges of $1.5 million
compared to no such charges in 2002. In 2001, the non-cash charges related to
the impairment of purchased goodwill in the IT training business and the
contract placement business.
Interest. Interest expense was approximately $248,000 for the year ended
December 31, 2002 compared to approximately $673,000 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
4.25% at December 31, 2002 from 4.75% at December 31, 2001. Interest and other
income increased to approximately $85,000 for the year ended December 31, 2002
from $71,000 in the prior year period.
11
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net Revenues. Consolidated net revenues from operations decreased by
approximately $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 approximately $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. Our 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.
12
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.
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.
INCOME TAXES
We follow the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." In 2002, our income tax expense
was approximately $0.2 million, or 54.6% of pre-tax income. This effective tax
rate is higher than the applicable federal statutory rate of 34% primarily due
to certain expenses that are not deductible for tax purposes, as well as the
effects of various state income taxes. In 2001, our income tax benefit was
approximately $0.3 million, or 21.2% of pre-tax income. 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 was approximately $0.1 million, or 2.4% of pre-tax income.
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, in 2000 we
reduced our valuation allowance relating to the net operating loss portion of a
deferred tax asset.
SEASONALITY AND QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly statements of
data from 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
consolidated 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.
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun.30, Sept. 30, Dec. 31,
(Dollars in thousands) 2001 2001 2001 2001 2002 2002 2002 2002
---- ---- ---- ---- ---- ---- ---- ----
Net Revenues $ 30,388 $ 28,326 $ 23,248 $ 21,105 $ 20,221 $ 20,054 $ 20,055 $19,950
-------- -------- -------- -------- -------- -------- -------- -------
Gross Profit 10,721 10,557 7,820 7,554 7,022 6,779 6,849 6,190
-------- -------- -------- -------- -------- -------- -------- -------
Operating Income (Loss) 1,467 1,315 (2,434) (1,332) (20) 205 223 95
-------- -------- -------- -------- -------- -------- -------- -------
Net Income (Loss) $ 753 $ 639 ($1,544) ($1,099) ($42) $ 81 $ 93 $23
======== ======== ======== ======== ======== ======== ======== =======
Basic and Diluted Net
Income (Loss) per share $ 0.05 $ 0.05 ($ 0.11) ($ 0.08) $ 0.00 $ 0.00 $ 0.01 $ 0.00
======== ======== ======== ======== ======== ======== ======== =======
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, 2002 and 2001, the
increased number of holidays and vacation days slightly affected revenues in the
contract placement business. During the third and fourth quarters of 2001, we
recorded non-cash charges to write off impaired goodwill.
13
LIQUIDITY AND CAPITAL RESOURCES
We have used borrowings under our credit facility to fund our working
capital needs. 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, 2002 and 2001.
We provided cash from operating activities in 2002 of approximately $3.5
million compared to approximately $6.5 million provided in 2001, and
approximately $3.6 million in 2000. The primary source of cash from operating
activities in 2002, after adding back approximately $1.2 million in non-cash
depreciation and amortization, was collection of approximately $1.1 million in
accounts receivable and a reduction in prepaid income taxes of approximately
$0.6 million. 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.
Cash purchases of fixed assets for the fiscal years ended December 31,
2002, 2001, and 2000 were $0.1 million, $1.2 million, and $0.7 million,
respectively. These purchases were related primarily to the purchases of
computers, software, and imaging equipment to upgrade our technology
infrastructure. In 2001 we financed the purchase of $0.4 million of equipment by
entering into capital lease obligations. We plan to spend approximately $0.5
million for capital expenditures in 2003.
We repaid, net of borrowings, approximately $2.8 million of our line of
credit at December 31, 2002, compared to net repayments of approximately $4.7
million in 2001 and approximately $0.5 million in 2000. We repaid approximately
$0.6 million of our long-term debt in each of the years ended December 31, 2002
and 2001 compared to approximately $1.0 million in the period ended December 31,
2000. 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. 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.
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. We are negotiating with the Bank to amend the existing Line of
Credit to extend the facility on similar terms for an additional three-year
period, however, no assurances can be given that such an extension will be
consummated. Failure to extend or replace the existing Line of Credit would have
a material adverse effect on our business. This facility allows us to borrow the
lesser of 85% of eligible accounts receivable, or $15.0 million. As of December
31, 2002, we had approximately $1.7 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 4.25% at December 31, 2002, or 200 basis
points over the London Inter-Bank Offering Rate.
A continued downturn 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 period of little or no growth 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.
14
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 $ 355,000 $ 197,000 $ 158,000 $ -- $ --
Note payable, bank 1,678,000 1,678,000 -- -- --
Operating leases 4,041,000 1,903,000 2,102,000 36,000 --
----------- ----------- ----------- -------- ------
Total $ 6,074,000 $ 3,778,000 $ 2,260,000 $ 36,000 $ --
=========== =========== =========== ======== ======
Note payable, bank consists of advances under our Line of Credit, which
expires on April 30, 2003. We are negotiating with the Bank to amend the
existing Line of Credit to extend the facility on similar terms for an
additional three-year period, however, no assurances can be given that such an
extension will be consummated. Failure to extend or replace the existing Line of
Credit would have a material adverse effect on our business.
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.
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 deteriorates, 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.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", we are
required to perform goodwill impairment reviews using a fair-value-based
approach. (See Note 2 to the Consolidated Financial Statements contained in this
Report for further information.) For initial application of SFAS No. 142, an
independent appraisal firm was engaged to value our reporting units. Their
evaluation reflected that the fair value of the reporting units exceeded their
carrying value; accordingly, no goodwill impairment was noted.
15
After initial application of SFAS No. 142, we are required to test for
impairment at least annually. We primarily use a discounted cash flow analysis
in our impairment reviews to estimate fair value. Significant assumptions used
in this analysis include: expected future revenue growth rates, and profit
margins; and a discount rate. The revenue growth rates and profit margins are
based on our expectation of future results. As we discussed previously, our
operating results have been negatively impacted by the recent economic
conditions in the United States. Accordingly, if our expectations of future
operating results change, or if there are changes to other assumptions, our
estimate of the fair value of our reporting units could change significantly.
Such a change could result in a goodwill impairment charge, which could have a
significant impact on our results of operations or our financial position.
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 SEC (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.
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.
16
Economic Conditions in the United States. Our ability to sustain and grow
our business may be adversely affected if economic conditions in the United
States are not favorable. The United States economy has been weakened by, among
other things, a recession, the terrorist attacks of September 11, 2001 and the
response of the United States to such attacks, and the threat of increased
hostilities in the Middle East that may involve the United States armed forces.
These matters, and potential future terrorist attacks or hostilities or economic
deterioration could continue to result in further weakness in the United States
economy, which could negatively affect our business.
Ability to Manage Growth. Although our 2003 internal operating plan
forecasts that we will have marginally higher revenues in 2003, if we achieve
sustained or significant growth, we will subject ourselves to risks by placing a
substantial strain on our available managerial, sales, recruiting, financial and
other resources. Specifically, such growth may require us to take some or all of
the following actions: (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 83.7%, 82.5% and 83.2% of our total revenues for the years
ended December 31, 2000, 2001 and 2002, respectively. In addition, for the year
ended 2002, one customer of the contract placement business, Merck & Company,
Inc., accounted for approximately 6.5% of total contract placement revenues, and
5.4% of our total revenues. There can be no assurance that we will be able to
retain this level of revenue from this client. In addition, revenues in our
contract placement business decreased from approximately $95.6 million in 2000
to $85.1 million in 2001 to $66.8 million in 2002. Our ability to sustain or
increase revenues in the contract placement business is subject to various
factors, including the status of the United States economy and 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. A continuing downturn in the general United
States economy or our inability to successfully manage other factors discussed
above 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 Shares to continue to be listed on the NASDAQ
SmallCap Market. These requirements include, but are not limited to, maintaining
a minimum per share price of our Common Shares of one dollar. The per share
price of our Common Shares does not currently satisfy requirements to remain
listed on the NASDAQ SmallCap Market. We have received notification from The
Nasdaq Stock Market, Inc. that our Common Shares will be delisted from the
NASDAQ SmallCap Market unless the stock closes at or above one dollar per share
for at least ten consecutive days by July 18, 2003. In addition, in the future
we may not comply with other listing requirements, which might result in the
delisting of our Common Shares. If our Common Shares are delisted from the
NASDAQ SmallCap Market, we may list the Common Shares for trading
over-the-counter. Delisting from the NASDAQ SmallCap Market could adversely
affect the liquidity and the price of our Common Shares and could have a
long-term adverse impact on our ability to raise future capital through a sale
of our Common Shares. In addition, delisting could make it more difficult for
investors to obtain quotations as to the market value of or trade our Common
Shares.
17
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.
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 2002, 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 $1.7 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE JUDGE GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE(S)
--------
INDEPENDENT AUDITOR'S REPORT 18
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001 19
CONSOLIDATED STATEMENTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 21
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 23 - 32
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, 2002 and 2001, and the related
consolidated statements of operations, shareholders' equity, and of cash flows
for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
MCGLADREY & PULLEN, LLP
February 19, 2003
Blue Bell, Pennsylvania
19
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
---- ----
ASSETS
CURRENT ASSETS
Cash $ -- $ --
Accounts receivable, net 11,309,575 12,663,173
Prepaid income taxes and deferred taxes 2,076,768 2,161,847
Prepaid expenses and other 1,028,096 1,171,422
------------ ------------
TOTAL CURRENT ASSETS 14,414,439 15,996,442
------------ ------------
PROPERTY AND EQUIPMENT, NET 2,063,544 3,161,441
------------ ------------
OTHER ASSETS
Deposits and other assets 372,792 378,251
Deferred taxes 762,000 1,433,000
Other receivables, officers and employees 696,429 669,552
Goodwill 6,423,781 6,423,781
Intangible asset, net 147,017 --
------------ ------------
--
TOTAL OTHER ASSETS 8,402,019 8,904,584
------------ ------------
TOTAL ASSETS $ 24,880,002 $ 28,062,467
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 197,321 $ 569,117
Note payable, bank 1,678,108 --
Accounts payable and accrued expenses 4,074,687 3,837,079
Payroll and sales taxes 235,067 285,329
Deferred revenue 160,287 132,016
------------ ------------
TOTAL CURRENT LIABILITIES 6,345,470 4,823,541
------------ ------------
LONG-TERM LIABILITIES
Note payable, bank -- 4,436,541
Deferred rent obligation 341,183 541,267
Debt obligations, net of current portion 157,633 397,748
------------ ------------
TOTAL LONG-TERM LIABILITIES 498,816 5,375,556
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares authorized; 14,141,373 shares
issued and 13,504,228 shares outstanding 141,413 141,413
Preferred stock, at December 31, 2002 and 2001, $.01 par value, 10,000,000
shares authorized, and no shares outstanding -- --
Additional paid-in capital 24,193,815 24,176,111
Accumulated deficit (4,931,859) (5,086,501)
------------ ------------
19,403,369 19,231,023
Less: Treasury Stock, 637,145 shares; at cost 1,367,653 1,367,653
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 18,035,716 17,863,370
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 24,880,002 $ 28,062,467
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
NET REVENUES $ 80,279,653 $ 103,066,972 $ 114,217,453
------------ ------------- -------------
COSTS AND EXPENSES
Cost of sales 53,478,166 66,412,910 74,356,097
Selling and operating 15,498,539 21,632,634 20,400,612
General and administrative 10,799,504 14,474,927 13,513,519
Other charges (Note 2) --- 1,531,249 916,719
------------ ------------- -------------
Total costs and expenses 79,776,209 104,051,720 109,186,947
------------ ------------- -------------
OPERATING INCOME (LOSS) 503,444 (984,748) 5,030,506
OTHER INCOME (EXPENSE), NET, PRINCIPALLY INTEREST EXPENSE
(162,976) (602,182) (947,594)
------------ ------------- -------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 340,468 (1,586,930) 4,082,912
INCOME TAX EXPENSE (BENEFIT) 185,826 (336,078) 99,990
------------ ------------- -------------
NET INCOME (LOSS) $ 154,642 ($ 1,250,852) $ 3,982,922
============ ============= =============
NET INCOME (LOSS) PER SHARE:
BASIC $ 0.01 ($ 0.09) $ 0.29
============ ============= =============
DILUTED $ 0.01 ($ 0.09) $ 0.29
============ ============= =============
WEIGHTED AVERAGE SHARES USED IN NET INCOME (LOSS) PER SHARE
CALCULATIONS:
BASIC 13,504,000 13,502,000 13,702,000
============ ============= =============
DILUTED 13,561,000 13,502,000 13,924,000
============ ============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Common Stock Additional
------------------- Paid In Accumulated Treasury
Shares Amount Capital Deficit Stock Total
------ ------ ------- ------- ----- -----
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
Repricing of Stock Warrants --- --- 17,704 --- --- 17,704
Net Income --- --- --- 154,642 --- 154,642
----------- -------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 14,141,373 $141,413 $24,193,815 ($4,931,859) ($1,367,653) $18,035,716
=========== ======== =========== =========== ============ ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22
THE JUDGE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES
Net income (loss) $ 154,642 ($1,250,852) $3,982,922
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,213,272 1,676,278 1,529,162
Impairment of goodwill --- 1,531,249 ---
Provision for losses on lease --- 258,395 ---
Deferred taxes 152,000 (311,000) (137,000)
Deferred rent (200,084) (35,544) (81,121)
Provision for losses on accounts receivable 282,682 624,467 957,771
Stock compensation and warrants 17,704 113,874 150,000
Loss on disposal of equipment 54,968 366,635 20,830
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,070,916 7,489,840 (3,150,543)
Prepaid income taxes 604,079 (120,864) (224,738)
Prepaid expenses and other current assets 143,326 (195,361) (308,430)
Deposits and other (21,418) (153,452) 94,630
Increase (decrease) in:
Accounts payable and accrued expenses 61,188 (2,900,640) 714,535
Payroll and sales taxes (50,262) (210,480) 73,792
Deferred revenue 28,271 (359,867) 17,816
----------- ------------ -----------
Net cash provided by operating activities 3,511,284 6,522,678 3,639,626
----------- ------------ -----------
INVESTING ACTIVITIES
Net cash provided by (used in) investing activities,
Purchases of property and equipment (117,191) (1,179,680) (682,727)
----------- ------------ -----------
FINANCING ACTIVITIES
Repayments of notes payable, bank, net (2,758,433) (4,730,361) (522,023)
Principal payments on long-term debt (635,660) (621,387) (956,008)
Exercise of Stock options --- 8,750 ---
Contingent amounts paid - acquisitions --- --- (335,786)
Purchase of treasury stock --- --- (1,147,653)
----------- ------------ -----------
Net cash used in financing activities (3,394,093) (5,342,998) (2,961,470)
----------- ------------ -----------
DECREASE IN CASH --- --- (4,571)
CASH, BEGINNING --- --- 4,571
----------- ------------ -----------
CASH, ENDING $ --- $ --- $ ---
=========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 227,000 $ 760,000 $ 921,000
=========== ============ ===========
Income taxes $ 36,000 $ 381,000 $ 568,000
=========== ============ ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
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, 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
revenues are 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.
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 are carried at original invoice
amount and at December 31, 2002 and 2001 were net of allowances for doubtful
accounts of $675,000 and $776,000, respectively, and allowances for placement
fee returns of $187,000 and $186,000, respectively.
Included in accounts receivable was unbilled work-in-process of
approximately $2,425,000 and $1,488,000 at December 31, 2002 and 2001,
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 by
regularly evaluating individual customer receivables and considering a
customer's financial condition, credit history, and current economic conditions.
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.
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.
24
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
At December 31, 2002 and 2001, property and equipment consisted of:
Depreciable Lives 2002 2001
----------------- ---- ----
Office furniture and equipment 5 - 10 years $ 2,097,347 $ 2,110,154
Computer equipment 3 - 5 years 1,005,894 1,103,854
Leasehold improvements 3 - 10 years 280,904 286,900
Equipment under capital lease, principally computer
equipment 3 - 5 years 2,269,149 2,245,400
----------- -----------
5,653,294 5,746,308
Less: accumulated depreciation and amortization (3,589,750) (2,584,867)
----------- -----------
$ 2,063,544 $ 3,161,441
=========== ===========
Depreciation and amortization expense charged to continuing operations
related to property and equipment, including property under capital leases,
amounted to $1,184,000 in 2002, $1,284,000 in 2001, and $1,118,000 in 2000.
The carrying value of assets under capital leases amounted to
approximately $397,000 and $842,000 at December 31, 2002 and 2001, 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.
Goodwill and Other Intangible Assets. The Company adopted Financial
Accounting Standards Board ("FASB") Statement 142, "Goodwill and Other
Intangible Assets", 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. Intangible
assets with finite, measurable lives continue to be amortized over their useful
lives until they reach their estimated residual values, and are reviewed for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." As a result, the Company did not incur any
expense for the amortization of goodwill in fiscal year 2002. The Company tested
goodwill for impairment using the two-step process prescribed in Statement 142
as of January 1, 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 2002. As
of October 1, 2002, the Company performed the required annual impairment test of
goodwill and has determined that there was no impairment of recorded goodwill.
During 2001 and 2000, the Company amortized approximately $256,000 and $263,000,
respectively, of goodwill, net of tax effect. In 2001, the Company determined an
additional $1,531,000 of goodwill was impaired, in accordance with SFAS 121 (see
"Other charges" below). Had Statement 142 been in effect in 2001 the impairment
charge would have remained the same. However, without the amortization charge
the reported net
25
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
loss would have been reduced to approximately $995,000, with a decrease to
reported net loss per share, both basic and diluted, from $0.09 to $0.07 for the
year ended December 31, 2001. Similarly, the net income would have been
increased to approximately $4,246,000, with an increase to reported net income
per share, both basic and diluted, from $0.29 to $0.31 for the year ended
December 31, 2000.
Intangible asset represents the cost of acquiring a client list of an IT
contract placement firm in the Chicago, Illinois area. The Company purchased the
asset for approximately $176,000, which is being amortized over a two year
period, the estimated useful life of the asset.
Deferred Rent Obligation. The Company is party to operating lease
agreements for its office facilities, certain of 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 $46,000 accrual
for the remaining lease payments related to facilities closed in 2001.
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
$493,000, $466,000, and $568,000 in 2002, 2001, and 2000, 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 13,504,000 in 2002, 13,502,000 in 2001, and 13,702,000 in 2000.
Diluted earnings (loss) per share amounts for years 2002, 2001 and 2000
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
13,561,000 in 2002, 13,502,000 in 2001, and 13,924,000 in 2000. In computing
diluted earnings (loss) per share, options and warrants to purchase 2,411,000,
2,766,000 and 1,073,000 shares of common stock were excluded from the
computation for the years ended December 31, 2002, 2001, and 2000, 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 2002 and
2000 computations because the
26
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
exercise prices of such options were greater than the average market price of
the Company's common stock during that period.
Stock Option Plan. The Company has an Incentive Stock Option and
Non-Qualified Stock Option Plan (the "Incentive Plan") for key employees and
non-employee directors, as more fully described in Note 8. The Company accounts
for that plan under the recognition and measurement principles of APB Opinion
No. 25, "Accounting for Stock Issued to Employees", and related Interpretations.
No stock-based employee compensation cost is reflected in net income, as all
options granted under the plan had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation", to stock-based employee compensation.
Year ended December 31, 2002 2001 2000
---- ---- ----
Net Income (loss):
As reported $154,642 ($1,250,852) $3,982,922
Less: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects 406,445 828,125 1,304,801
--------- ----------- ----------
Pro forma net income (loss) ($251,803) ($2,078,977) $2,678,121
========= =========== ==========
Basic and diluted earnings (loss) per share:
As reported $ 0.01 ($0.09) $ 0.29
========= =========== ==========
Pro forma ($0.02) ($ 0.15) $ 0.19
========= =========== ==========
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.
NOTE 3. 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 (4.25% at December 31, 2002) or, at the option of the Company,
a portion of the outstanding balance bears interest at 200 basis points over the
London Inter-Bank Offering Rate (3.42% at December 31, 2002). 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 on 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. The Company has been negotiating with the Bank to
amend the existing Line of Credit to extend the facility on similar terms for an
additional three-year period, however, no assurances can be given that such an
extension will be consummated.
27
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 4. LONG-TERM DEBT
At December 31, 2002 and 2001, long-term debt consisted of the following:
2002 2001
---- ----
Capital lease obligation, pursuant to a sale/leaseback transaction; a final
payment of $213,750 was made in April 2002; the lease transferred ownership of
certain office equipment to the Company at the end of the
lease term $ --- $ 328,433
Capital lease obligations; payable in monthly installments of $6,864, including
interest, plus taxes, through March 2004; collateralized by
certain computer equipment 89,151 144,718
Capital lease obligations; payable in various quarterly installments through
April 2005 currently aggregating $53,199 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 265,803 486,422
Note payable, other --- 7,292
--------- ---------
354,954 966,865
Less: Current portion (197,321) (569,117)
--------- ---------
Long-term portion $ 157,633 $ 397,748
========= =========
Approximate maturities of long-term debt are as follows:
Year Ending December 31, Amount
2003 $ 197,000
2004 156,000
2005 2,000
---------
$ 355,000
=========
Interest expense charged to operations was approximately $248,000,
$673,000, and $995,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
NOTE 5. 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, 2002 and 2001 included the
following:
2002 2001
---- ----
Deferred tax asset $ 2,642,000 $ 3,333,000
Valuation allowance for deferred tax asset (236,000) (236,000)
------------ -----------
Net deferred tax asset after valuation allowance. $ 2,406,000 $ 3,097,000
=========== ===========
28
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 5. INCOME TAXES - (continued)
At December 31, 2002 and 2001, the net deferred tax assets of $2,406,000
and $3,097,000, respectively, were included in "prepaid income taxes and
deferred taxes" and "deferred taxes" in the accompanying consolidated balance
sheets.
The tax effects of major temporary differences that gave rise to the
Company's net deferred tax asset are as follows:
2002 2001
---- ----
Net operating loss carryforwards $ 2,578,000 $ 2,969,000
Allowance for doubtful accounts 326,000 384,000
Accrued expenses and lease provision 331,000 522,000
Other 110,000 62,000
Amortization of goodwill (420,000) (267,000)
Depreciation (283,000) (337,000)
----------- -----------
$ 2,642,000 $ 3,333,000
=========== ===========
Income tax expense for continuing operations for the years ended December
31, 2002, 2001 and 2000 consisted of the following:
2002 2001 2000
---- ---- ----
Current tax expense (benefit):
Federal $ --- $ --- $ ---
State 33,826 (25,078) 236,990
Deferred tax expense (benefit) 152,000 (311,000) (137,000)
--------- ---------- ---------
Income tax expense (benefit) $ 185,826 ($ 336,078) $ 99,990
========= ========== =========
Current tax expense in 2002 and 2000 was reduced by the utilization of
certain federal and state net operating loss carryforwards. During 2000, a
portion of the Company's deferred tax 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.
A reconciliation of the Company's effective income tax rate with the
statutory Federal rate follows:
Year Ended December 31,
--------------------------------------------
2002 2001 2000
---- ---- ----
Tax expense (benefit) at statutory rate (34%) $ 116,000 ($539,000) $1,389,000
Permanent differences, including non-deductible
goodwill amortization, net 44,000 251,000 72,000
Change in valuation allowance --- --- (1,873,000)
Other, principally adjustments to estimated tax
accruals (7,174) 5,922 351,990
State income taxes, net of Federal tax benefit 33,000 (54,000) 160,000
--------- --------- --------
$ 185,826 ($336,078) $ 99,990
========= ========= ========
The Company has federal net operating loss carryforwards of approximately
$1,900,000 that are 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 $3,418,000, which can be
applied against future federal taxable income of the Company and which expire
between 2019 and 2022. The Company also has approximately $10,000,000 in various
state net operating loss carryforwards that are subject to the respective
state's limitations.
29
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 6. 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 2007. Certain of these leases contain optional provisions to extend
them for additional periods of time. Rent expense was approximately $2,385,000,
$2,537,000 and $2,037,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. At December 31, 2002, minimum annual future rental commitments,
exclusive of common area maintenance costs and utilities, are as follows:
Year Ending December 31, Amount
------------------------ ------
2003 $ 1,903,000
2004 1,517,000
2005 451,000
2006 133,000
2007 37,000
-----------
$ 4,041,000
===========
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 $1,890,000 annually. Self-insurance costs
are accrued based upon the aggregate of the liability for reported claims and an
estimated liability for claims incurred but not reported.
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At December 31, 2002 and 2001, accounts payable and accrued expenses consist
of:
2002 2001
---- ----
Accrued payroll and commissions $ 1,332,000 $ 1,572,000
Checks outstanding in excess of bank balance 844,000 937,000
Accrued employee benefits 235,000 235,000
Accrued severance costs 45,000 260,000
Accounts payable and other accrued expenses 1,619,000 833,000
----------- -----------
$ 4,075,000 $ 3,837,000
=========== ===========
NOTE 8. SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE
Treasury Stock. 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 was
credited to additional paid in capital, and amortized over six months during
2001. The warrants are exercisable any time prior to February 12, 2006 and had
an original 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%. On September 1, 2002, the
30
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 8. SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE - (continued)
Company re-priced the warrants to reflect an exercise price of $0.80 per share.
As a result of the re-pricing, an additional consulting expense of approximately
$17,700 was recognized in 2002, based upon the difference in the fair value of
the original warrants and the re-priced warrants as determined by the
Black-Scholes option pricing model. None of the warrants were exercised in 2002
or 2001 and all warrants issued in 2001 were outstanding at December 31, 2002.
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 per share exercise price of each option shall be the fair
market value of a Company Common Share 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 2002, 2001 and 2000, stock options were only granted to employees and
directors.
A summary of the Company's Incentive Plan activity for common shares for the
years ended December 31, 2002, 2001 and 2000 follows:
Options
Weighted Average Exercisable
Number of Shares Exercise Price at Year End
--------------- ---------------- -------------
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 (477,125) 3.13
---------
Outstanding 12/31/01 2,977,685 2.46 1,261,256
=========
Granted 895,242 0.74
Exercised -0-
Terminated/Surrendered (976,069) 3.99
---------
Outstanding 12/31/02 2,896,858 $ 1.42 1,233,812
========== =========
31
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 8. SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE - (continued)
The following table summarizes information about stock options outstanding
at December 31, 2002:
Options Outstanding | Options Exercisable
- ----------------------------------------------------------------------------------- | ------------------------------------
Number Weighted-Average | Number
Range of Outstanding at Remaining Weighted-Average | Exercisable at Weighted-Average
Exercise Prices 12/31/02 Contractual Life Exercise Price | 12/31/02 Exercise Price
--------------- ------------- ---------------- -------------- | ------------- ----------------
|
$0.00 - $0.83 738,039 9.4 $ 0.69 | 24,032 $ 0.68
|
$0.83 - $1.65 1,865,819 6.9 $ 1.32 | 945,780 $ 1.38
|
$1.65 - $2.48 115,500 6.5 $ 1.86 | 90,250 $ 1.87
$2.48 - $4.95 57,500 5.3 $ 3.90 | 53,750 $ 3.99
|
$4.95 - $5.78 85,500 4.9 $ 5.18 | 85,500 $ 5.18
|
$5.78 - $8.25 34,500 3.4 $ 7.50 | 34,500 $ 7.50
---------- ---- ------ | -------- ------
2,896,858 7.4 $ 1.42 | 1,233,812 $ 1.95
========== ==== ====== | ========= ======
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 2002, 2001 and 2000, respectively:
risk-free interest rate of 3.75%, 4.70% and 6.20%, expected dividend yields of
0%, expected life of option of five years from date of grant, and expected price
volatility of 104%, 138% and 153%. The weighted average fair value of the
options granted was $0.55 in 2002, $0.99 in 2001 and $1.19 in 2000.
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 Shares 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. The period during which employees could tender
their options expired on March 14, 2002. Employees received one new option for
every three eligible options surrendered. An aggregate 528,750 eligible options
were surrendered. The Company granted 166,242 new options on September 17, 2002.
The new options vest in equal increments annually over four years. The per share
exercise price of certain of the new options was $0.80, the last reported per
share trading price of the Company's Common Shares on the date on which they
were granted, and of the remaining new options was $0.88, which was 10% higher
than the last reported per share trading price.
NOTE 9. 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. In April 2002, $552,761 of the Other receivables, officers and
employees was converted to a note receivable from the Company's Chief Executive
Officer. The note bears interest at 4.9% annually, is secured by a pledge of
Company stock, and is payable in April 2012. Most of the remainder of Other
receivables, officers and employees have no formal scheduled repayment terms.
32
THE JUDGE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTE 10. STATEMENT OF CASH FLOWS
Supplemental disclosure of non-cash investing and financing transactions:
During 2002, the Company entered into the following non-cash
transactions:
o Entered into certain lease agreements for the purchase of equipment in
the amount of approximately $23,700.
o Re-priced existing warrants to purchase 100,000 shares of Common Stock
at an additional cost of approximately $17,700.
o Entered into an asset purchase agreement for the purchase of a client
list in an aggregate amount of approximately $176,400.
During 2001, the Company entered into the following non-cash
transaction:
o 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:
o Placed into service approximately $280,000 of property and equipment
previously classified as "other current assets";
o Entered into certain capital lease agreements for the purchase of
equipment in the amount of approximately $359,000.
NOTE 11. SEGMENT INFORMATION
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 $3,578,000 in 2002,
$3,981,000 in 2001, and $4,294,000 in 2000. The IT training subsidiary incurred
a loss from operations of approximately $197,000 in 2002, $950,000 in 2001, and
$214,000 in 2000.
NOTE 12. SELECTED QUARTERLY DATA (UNAUDITED)
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun.30, Sept. 30, Dec. 31,
(Dollars in thousands) 2001 2001 2001 2001 2002 2002 2002 2002
-------- -------- -------- -------- --------- --------- --------- -------
Net Revenues $ 30,388 $ 28,326 $ 23,248 $ 21,105 $ 20,221 $ 20,054 $ 20,055 $19,950
-------- -------- -------- -------- -------- --------- -------- -------
Gross Profit 10,721 10,557 7,820 7,554 7,022 6,779 6,849 6,190
-------- -------- -------- -------- -------- --------- -------- -------
Operating Income (Loss) 1,467 1,315 (2,434) (1,332) (20) 205 223 95
-------- -------- -------- -------- -------- --------- -------- -------
Net Income (Loss) $ 753 $ 639 ($ 1,544) ($ 1,099) ($42) $ 81 $ 93 $23
======== ======== ======== ======== ======== ======== ======== =======
Basic and Diluted Net
Income (Loss) per share $ 0.05 $ 0.05 ($ 0.11) ($ 0.08) $ 0.00 $ 0.00 $ 0.01 $ 0.00
======== ======== ======== ======== ======== ======== ======== =======
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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 Related Stockholder
Matters," and Item 13 "Certain Relationships and Related Transactions" is
incorporated herein by reference to our definitive proxy statement for our 2003
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", "Other Forms
of Compensation" 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.
ITEM 14. CONTROLS AND PROCEDURES.
For the quarterly period ending December 31, 2002 (the "Evaluation
Date"), we carried out an evaluation, under the supervision and with the
participation of our management, including our Chairman of the Board and Chief
Executive Officer and our Chief Financial Officer (the principal finance and
accounting officer), of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon
this evaluation, our Chairman of the Board and Chief Executive Officer and our
Chief Financial Officer concluded that, as of December 31, 2002, our disclosure
controls and procedures were adequate to ensure that information required to be
disclosed by us in the reports filed or submitted by us under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.
Additionally, our Chairman of the Board and Chief Executive Officer and
Chief Financial Officer determined, as of December 31, 2002, that there were no
significant changes in our internal controls or in other factors that could
significantly affect our internal controls subsequent to the date of their
evaluation.
PART IV
ITEM 15. 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 Report 18
Consolidated Balance Sheets 19
Consolidated Statements of Operations 20
Consolidated Statements of Shareholders' Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 23-32
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.
34
Independent Auditor's Report
Board of Directors
The Judge Group, Inc.
Bala Cynwyd, Pennsylvania
Our audits for the years ended December 31, 2002, 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 19, 2003
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
------------ ------------------- ---------------- ----------- -------------
2002 $ 776,000 $ 283,000 ($ 384,000) $ 675,000
=========== ========= =========== ===========
2001 $ 1,264,000 $ 625,000 ($1,113,000) $ 776,000
=========== ========= =========== ===========
2000 $ 987,000 $ 958,000 ($ 681,000) $ 1,264,000
=========== ========= =========== ===========
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
------------ ------------------- ---------------------- --------------- -------------
2002 $ 186,000 $ 1,334,000 ($ 1,333,000) $ 187,000
========= =========== ============ =========
2001 $ 175,000 $ 1,597,000 ($ 1,586,000) $ 186,000
========= =========== ============ =========
2000 $ 150,000 $ 2,319,000 ($ 2,294,000) $ 175,000
========= =========== ============ =========
Deferred Tax Asset Valuation Allowance
2002 2001 2000
---- ---- ----
Deferred tax asset $ 2,642,000 $ 3,333,000 $ 3,022,000
Valuation allowance for deferred tax asset (236,000) (236,000) (236,000)
----------- ----------- -----------
Net deferred tax asset after valuation allowance. $ 2,406,000 $ 3,097,000 $ 2,786,000
=========== =========== ===========
35
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 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
36
Exhibit
No. Description of Document
------- -----------------------
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 Employment Agreement dated as of January 1, 2001, between The Judge Group, Inc. and Martin E.
Judge, Jr. Incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q filed on
May 15, 2001.
10.15 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.
10.16 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.
10.17 Stock Option Agreement between the Company and Robert H. Strouse. Incorporated by reference to
Exhibit 10.20 of the Company's Report on Form 10-K for the year ended December 31, 2001 filed on
March 27, 2002.
10.18 Promissory Note dated April 1, 2002 in favor of The Judge Group, Inc. *
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Independent Auditors. *
99.1 Certification pursuant to 18 U.S.C. Section 1350.*
99.2 Certification pursuant to 18 U.S.C. Section 1350.*
* Filed herewith
(b) Reports on Form 8-K.
None.
37
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 7, 2003 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 7, 2003
- ------------------------ Director, President and Chief
Martin E. Judge, Jr. Executive Officer
(Principal Executive Officer)
/s/ Michael A. Dunn Director and Executive March 7, 2003
- ------------------- Vice President
Michael A. Dunn
/s/ Randolph J. Angermann Director March 7, 2003
- -------------------------
Randolph J. Angermann
/s/ James C. Hahn Director March 7, 2003
- -----------------
James C. Hahn
/s/ Robert H. Strouse Director March 7, 2003
- ---------------------
Robert H. Strouse
/s/ William J. Gladstone Director and President, March 7, 2003
- ------------------------ Permanent Placement Division
William J. Gladstone
CERTIFICATIONS
I, Martin E. Judge, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of The Judge Group, Inc.
("Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls;
and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 7, 2003
/s/ Martin E. Judge, Jr.
- -------------------------
Martin E. Judge, Jr.
Chairman of the Board and
Chief Executive Officer
CERTIFICATIONS (cont'd.)
I, Robert G. Alessandrini, certify that:
1. I have reviewed this annual report on Form 10-K of The Judge Group, Inc.
("Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls;
and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 7, 2003
/s/ Robert G. Alessandrini
- ---------------------------
Robert G. Alessandrini
Chief Financial Officer