UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period 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 Number: 001-05707
GENERAL EMPLOYMENT ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-6097429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Tower Lane, Suite 2100, Oakbrook Terrace, Illinois 60181
(Address of principal executive offices) (Zip Code)
(630) 954-0400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act 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 __
The number of shares outstanding of the registrant's common stock as of
December 31, 2002 was 5,120,776.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
GENERAL EMPLOYMENT ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
December 31 September 30
2002 2002
(In Thousands) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,078 $ 4,759
Accounts receivable, less allowances
(Dec. 2002 --$319; Sept. 2002 --$312) 2,184 2,255
Income tax refunds receivable 1,549 1,540
Other current assets 384 428
Total current assets 8,195 8,982
Property and equipment:
Furniture, fixtures and equipment 6,591 6,575
Accumulated depreciation (4,844) (4,693)
Net property and equipment 1,747 1,882
Goodwill 1,069 1,069
Total assets $11,011 $11,933
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued compensation and payroll taxes $ 872 $ 1,030
Other current liabilities 785 914
Total current liabilities 1,657 1,944
Shareholders' equity:
Preferred stock, authorized -- 100 shares;
issued and outstanding -- none -- --
Common stock, no-par value; authorized --
20,000 shares; issued and outstanding --
5,121 shares 51 51
Capital in excess of stated value of shares 4,704 4,695
Retained earnings 4,599 5,243
Total shareholders' equity 9,354 9,989
Total liabilities and shareholders' equity $11,011 $11,933
See notes to consolidated financial statements.
2
GENERAL EMPLOYMENT ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three Months
Ended December 31
(In Thousands, Except Per Share) 2002 2001
Net revenues:
Placement services $1,620 $1,882
Contract services 3,280 3,627
Net revenues 4,900 5,509
Operating expenses:
Cost of contract services 2,217 2,398
Selling 1,124 1,304
General and administrative 2,221 2,735
Total operating expenses 5,562 6,437
Loss from operations (662) (928)
Interest income 18 48
Loss before income taxes (644) (880)
Credit for income taxes -- (330)
Net loss $ (644) $ (550)
Net loss per share $ (.13) $ (.11)
Average number of shares 5,121 5,104
See notes to consolidated financial statements.
3
GENERAL EMPLOYMENT ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Three Months
Ended December 31
(In Thousands) 2002 2001
Operating activities:
Net loss $ (644) $ (550)
Depreciation and other noncurrent items 189 197
Accounts receivable 71 350
Income tax refunds receivable (9) (359)
Accrued compensation and payroll taxes (158) (648)
Other current items, net (85) (74)
Net cash used by operating activities (636) (1,084)
Investing activities:
Acquisition of property and equipment (45) --
Net cash used by investing activities (45) --
Financing activities:
Exercises of stock options -- 35
Net cash provided by financing activities -- 35
Decrease in cash and cash equivalents (681) (1,049)
Cash and cash equivalents at beginning of period 4,759 7,293
Cash and cash equivalents at end of period $4,078 $ 6,244
See notes to consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Interim Financial Statements
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. This financial information should be read in
conjunction with the financial statements included in the
Company's annual report on Form 10-K for the year ended September
30, 2002.
Significant Accounting Policies
Goodwill
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," as of October 1, 2002. This statement requires that
goodwill no longer be amortized, and it requires instead that
goodwill be tested at least annually for impairment. If the
carrying value of goodwill were determined to be greater than its
estimated fair value under the impairment test, then it would be
written down to its estimated fair value.
The Company completed a transitional impairment test, as required
by Statement No. 142, and determined that there was no impairment
of goodwill as of October 1, 2002. Goodwill amortization expense
was $6,000 for the three months ended December 31, 2001.
Income Taxes
There was no credit for income taxes due to the Company's pretax
loss for the quarter ended December 31, 2002, because the tax
loss must be carried forward, and there is not sufficient
assurance that a future tax benefit will be realized.
For federal income tax purposes, and for certain states, the tax
losses incurred in fiscal 2002 were carried back, and the Company
recorded the benefit of those tax refunds. For all other state
and local income taxes, the losses were carried forward. As of
September 30, 2002, the Company had recorded the tax benefit of
all available loss carrybacks, and there were approximately
$2,400,000 of losses available to reduce state and local taxable
income in future years. Under current income tax regulations,
any losses incurred by the Company in fiscal 2003 will be carried
forward.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The Company provides placement and contract staffing services for
business and industry, specializing in the placement of
professional information technology, engineering and accounting
professionals. As of December 31, 2002, the Company operated 31
offices located in major metropolitan business centers in 12
states.
5
A summary of operating data, expressed as a percentage of
consolidated net revenues, is presented below. Percentages may
not add due to rounding.
Three Months
Ended December 31
2002 2001
Net revenues:
Placement services 33.1% 34.2%
Contract services 66.9 65.8
Net revenues 100.0 100.0
Operating expenses:
Cost of contract services 45.2 43.5
Selling 22.9 23.7
General and administrative 45.3 49.6
Total operating expenses 113.5 116.8
Loss from operations (13.5)% (16.8)%
First Quarter Results of Operations
Net Revenues
Consolidated net revenues for the three months ended December 31,
2002 were down $609,000 (11%) from the same period last year.
This was due to the combination of a $262,000 (14%) decrease in
placement service revenues and a $347,000 (10%) decrease in
contract service revenues. Placement services represented 33% of
consolidated net revenues for the period, and contract services
represented 67% of the total.
Placement service revenues were down for the quarter because of a
19% decrease in the average placement fee, despite an 8% increase
in the number of placements. The decrease in contract service
revenues was the result of a 10% decrease in the average hourly
billing rate.
The Company attributes the decline in revenues to the weak demand
for employment placement services, particularly in the
information technology sector, that has lingered since the U.S.
economic recession and terrorist attacks in 2001. The economic
weakness, together with competitive pressures, led to lower
average service fees and billing rates.
Operating Expenses
Total operating expenses for the quarter were down $875,000 (14%)
compared with the same quarter last year.
The cost of contract services was down $181,000 (8%), as a result
of the lower contract service revenues. Due to competitive
market conditions, the gross profit margin on contract services
declined 1.5 points to 32.4% this quarter, compared with 33.9%
the prior year.
Selling expenses decreased $180,000 (14%) this quarter.
Commission expense was down 10% due to the lower placement
service revenues, while payroll taxes and benefits were down 27%
and recruitment advertising expense was 15% lower than the prior
year. Selling expenses represented 22.9% of consolidated net
revenues, which was down 0.8 points from the prior year.
6
General and administrative expenses decreased $514,000 (19%) for
the quarter. Compensation in the operating divisions decreased
30% due to a reduction in the size of the consulting staff, while
administrative compensation was down 15%. Office rent and
occupancy costs were down 13% for the quarter, due to the effect
of office closings during the current and prior year. All other
general and administrative expenses were down 9%. General and
administrative expenses represented 45.3% of consolidated
revenues, and that was down 4.3 points from the prior year
because expenses declined more sharply than revenues.
To control operating costs, the Company closed four unprofitable
branch offices during the last twelve months. As a result of
this and other actions, the Company reduced its in-house
consulting and administrative staff by 30% from the prior-year
level.
Other Items
The loss from operations was $662,000 for the quarter ended
December 31, 2002, which was $266,000 (29%) better than last
year's operating loss of $928,000. The improvement was
accomplished, despite lower revenues in the current year, through
cost reduction actions taken by the Company during the last
twelve months.
There was no credit for income taxes for the quarter ended
December 31, 2002, because the tax loss for the period must be
carried forward, and there is not sufficient assurance that a
future tax benefit will be realized.
After interest and taxes, the net loss for the quarter was
$644,000, compared with a net loss of $550,000 the prior year.
Financial Condition
As of December 31, 2002, the Company had cash and cash
equivalents of $4,078,000. That was a decrease of $681,000 from
September 30, 2002. Net working capital at December 31, 2002 was
$6,538,000, which was a decrease of $500,000 compared with last
September, and the current ratio was 4.9 to 1.
During the three months ended December 31, 2002, the net cash
used by operating activities was $636,000, which was primarily
due to the $644,000 net loss. Depreciation and other non-cash
expenses provided $189,000, while working capital items used
$181,000. As part of the Company's cash conservation measures,
capital expenditures were limited to $45,000 for the quarter, and
there were no cash dividends paid.
All of the Company's office facilities are leased, and
information about future minimum lease payments is presented in
the notes to the consolidated financial statements contained in
the Company's annual report on Form 10-K for the year ended
September 30, 2002.
As of December 31, 2002, the Company had no debt outstanding, and
there were no off-balance sheet arrangements, unconsolidated
subsidiaries, commitments or guarantees of other parties, except
as disclosed in the notes to the consolidated financial
statements. Shareholders' equity at that date was $9,354,000,
which represented 85% of total assets.
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Outlook
The Company's business is highly dependent on national employment
trends in general and on the demand for information technology
and other professional staff in particular. The demand for the
Company's employment services has been adversely affected by the
lingering weakness in the employment market caused by economic
and political uncertainties that followed the U.S. economic
recession and terrorist attacks in 2001.
It is not known how long the weakness in the U. S. labor market
will continue to have an adverse effect on the Company's
operations. Management believes that the Company's placement
service revenues will continue at depressed levels until there is
an increase in national business spending on computer equipment
and software, leading to a rebound in the technology sector of
the economy.
The Company's current priority is to minimize the impact of the
economy, to return the Company to profitability as soon as
possible, and to be positioned for growth when the demand for its
services returns. Returning the Company to profitability will
require a combination of both increasing revenues and reducing
costs. Since September 2001, management took steps to lower the
Company's infrastructure costs, including closing six
unprofitable branch offices, reducing the in-house consulting and
administrative staff by 37% and reducing other operating
expenses. As a result, the Company reduced its general and
administrative expenses for the December 2002 quarter by 19%
compared with the December 2001 quarter. Management believes
that it took all appropriate actions within its control to reduce
costs to date, consistent with positioning the Company for the
future, and it will continue to evaluate the Company's operations
and take appropriate actions to meet the economic challenges
ahead in fiscal 2003.
The Company had $1,549,000 of income tax refunds receivable as of
December 31, 2002, and it expects to receive those refunds during
fiscal 2003. As of September 30, 2002, the Company had recorded
the tax benefit of all available loss carrybacks, and there were
approximately $2,400,000 of losses available to reduce state and
local taxable income in future years. Under current income tax
regulations, any losses that might be incurred by the Company in
fiscal 2003 would not result in current tax refunds, but would be
carried forward to reduce taxable income in subsequent years.
The Company's primary source of liquidity is normally from its
operating activities. Despite recent losses, management believes
that existing cash and securities, together with the available
income tax refunds, will be adequate to finance current
operations for the foreseeable future. Nevertheless, if
operating losses were to continue indefinitely into the future,
or if the Company's business were to deteriorate further, such
losses would have a material, adverse effect on the Company's
financial condition. External sources of funding are not likely
to be available to support continuing losses.
Risk Factors
Some of the factors that could affect the Company's future
performance include, but are not limited to, general business
conditions, the demand for the Company's services, competitive
market pressures, the ability of the Company to attract and
retain qualified personnel for regular full-time placement and
contract project assignments, and the ability to attract and
retain qualified corporate and branch management.
8
Forward-Looking Statements
As a matter of policy, the Company does not provide forecasts of
future financial performance. However, the Company and its
representatives may from time to time make written or verbal
forward-looking statements, including statements contained in
press announcements, reports to shareholders and filings with the
Securities and Exchange Commission. All statements which address
expectations about future operating performance and cash flows,
future events and business developments, and future economic
conditions are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. This
includes statements relating to business expansion plans,
expectations about revenue and earnings growth, and general
statements of optimism about the future. These statements are
based on management's then-current expectations and assumptions.
Actual outcomes could differ significantly. The Company and its
representatives do not assume any obligation to provide updated
information.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of a date within 90 days of the
filing of this quarterly report on Form 10-Q, the Company's
principal executive officer and its principal financial officer
have concluded that the Company's disclosure controls and
procedures, as defined in Rule 13a-14(c) and Rule 15d-14(c) under
the Securities Exchange Act of 1934 (the "Exchange Act") are
effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the rules and forms for
those reports.
Changes in Internal Controls
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation.
9
PART II - OTHER INFORMATION
Items 1,2,3,4 and 5 of Part II have been omitted because they are
not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
The following exhibit is filed as part of this report:
No. Description of Exhibit
99.01 General Employment Enterprises, Inc. certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
December 31, 2002.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENERAL EMPLOYMENT ENTERPRISES, INC.
(Registrant)
Date: January 30, 2003 By: /s/ Kent M. Yauch
Kent M. Yauch
Vice President, Chief Financial Officer
and Treasurer
(Principal financial and accounting officer
and duly authorized officer)
11
CERTIFICATIONS
I, Herbert F. Imhoff, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of General
Employment Enterprises, Inc;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 (or persons performing the equivalent
functions):
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 quarterly report whether 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: January 30, 2003 By: /s/ Herbert F. Imhoff, Jr.
Herbert F. Imhoff, Jr.
Chairman of the Board,
Chief Executive Officer, and President
(Principal executive officer)
12
I, Kent M. Yauch, certify that:
1. I have reviewed this quarterly report on Form 10-Q of General
Employment Enterprises, Inc;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 (or persons performing the equivalent
functions):
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 quarterly report whether 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: January 30, 2003 By: /s/ Kent M. Yauch
Kent M. Yauch
Vice President, Chief Financial Officer
and Treasurer
(Principal financial officer)
13