U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 30, 2006
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 1-05707
GENERAL EMPLOYMENT ENTERPRISES, INC.
(Name of small business issuer in its charter)
Illinois 36-6097429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Tower Lane, Suite 2200, Oakbrook Terrace, IL 60181
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (630) 954-0400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, no par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer is not required to file reports pursuant to Section
13 or 15(d) of the Exchange Act. [ ]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The issuer's revenues for the most recent fiscal year were $20,068,000.
The aggregate market value of the common stock held by non-affiliates computed
by reference to the price at which the common stock was sold as of October 31,
2006 was $7,753,000.
The number of shares outstanding of the issuer's common stock as of
October 31, 2006 was 5,148,265.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the General Employment Enterprises, Inc. Proxy Statement for the
annual meeting of shareholders to be held on February 26, 2007 are
incorporated by reference into Part III of this Form 10-KSB.
Transitional small business disclosure format: Yes [ ] No [X]
2
PART I
Item 1, Description of Business.
General
General Employment Enterprises, Inc. (the "Company") was incorporated in the
State of Illinois in 1962 and is the successor to employment offices doing
business since 1893. In 1987 the Company established Triad Personnel
Services, Inc., a wholly-owned subsidiary, incorporated in the State of
Illinois. The principal executive office of the Company is located at One
Tower Lane, Suite 2200, Oakbrook Terrace, Illinois.
Services Provided
The Company operates in one industry segment, providing professional staffing
services. The Company offers its customers both placement and contract
staffing services, specializing in the placement of information technology,
engineering and accounting professionals.
The Company's placement services include placing candidates into regular,
full-time jobs with client-employers. The Company's contract services include
placing its professional employees on temporary assignments, under contracts
with client companies. Contract workers are employees of the Company,
typically working at the client location and at the direction of client
personnel for periods of three months to one year. Management believes that
the combination of these two services provides a strong marketing opportunity,
because it offers customers a variety of staffing alternatives that includes
direct hire, temporary staffing and a contract-to-hire approach to hiring.
The percentage of revenues derived from these services is as follows:
Year Ended September 30
2006 2005
Contract services 51% 58%
Placement services 49% 42%
Marketing
The Company markets its services using the trade names General Employment
Enterprises, Omni One, Business Management Personnel, Triad Personnel Services
and Generation Technologies. As of September 30, 2006, it operated 20 branch
offices located in downtown or suburban areas of major U.S. cities in 10
states. The offices were concentrated in Illinois (4) and California (3),
with two offices each in Arizona, Indiana, Massachusetts, Ohio and Texas, and
one office each in Florida, Georgia and North Carolina.
The Company markets its services to prospective clients primarily through
telephone marketing by its employment consultants and through mailing of
employment bulletins listing candidates available for placement and contract
employees available for assignment.
The Company has a diverse customer base, and no single customer accounted for
more than 5% of its revenues during either of the last two fiscal years.
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Recruiting
The success of the Company is highly dependent on its ability to obtain
qualified candidates. Prospective employment candidates are generally
recruited through telephone contact by the Company's employment consultants or
through postings on the Internet. For Internet postings, the Company
maintains its own web page at www.generalemployment.com and uses other
Internet job posting bulletin board services. The Company uses a computer
program to track applicants' skills and match them with job openings. The
Company screens and interviews applicants who are presented to its clients.
Billing Practices
When applicants accept employment, the Company charges its clients a placement
fee that is based on a percentage of the applicant's projected annual salary,
and the Company provides its clients with a guarantee under which the fee is
refundable if the applicant does not remain employed during the guarantee
period. Fees for contract services are billed on an hourly basis each week.
The Company expects payment by its customers upon receipt of its invoices.
Typical of the staffing industry, working capital is required to finance the
wages of contract workers before the related customer accounts are collected.
Competition
The staffing industry is highly competitive. There are relatively few
barriers to entry by firms offering placement services, while significant
amounts of working capital typically are required for firms offering contract
services. The Company's competitors include a large number of sole-
proprietorship operations, as well as regional and national organizations.
Many of them are large corporations with substantially greater resources than
the Company.
Because the Company focuses its attention on professional staffing positions,
it competes by providing services that are dedicated to quality. This is done
by providing highly qualified candidates who are well matched for the
position, by responding quickly to client requests, and by establishing
offices in convenient locations. As part of its service, the Company provides
reference checking, scrutiny of candidates' work experience and optional
background checks. In general, pricing is considered to be secondary to
quality of service as a competitive factor. During slow hiring periods,
however, competition can put pressure on the Company's pricing.
Geographic diversity helps the Company to balance local or regional business
cycles. Multiple offices in the Boston, Chicago, Columbus (Ohio),
Indianapolis, Los Angeles and Phoenix markets help to provide better client
services through convenient office locations and the sharing of assignments.
Employees
As of September 30, 2006, the Company had approximately 150 regular employees
and 170 contract service employees.
4
Item 2, Description of Property.
The Company's policy is to lease commercial office space for all of its
offices. The Company's headquarters are located in a modern 31-story building
near Chicago, Illinois. The Company leases 8,200 square feet of space at that
location, under a lease that will expire in 2015.
The Company's staffing offices are located in downtown metropolitan and
suburban business centers in 10 states. Established offices are operated from
leased space ranging from 800 to 2,200 square feet, generally for periods of
three to five years, with cancellation clauses after certain periods of
occupancy in some cases. Management believes that existing facilities are
adequate for the Company's current needs and that its leasing strategies
provide the Company with sufficient flexibility to open or close offices to
accommodate business needs.
Item 3, Legal Proceedings.
From time to time, the Company is subject to various legal proceedings and
claims arising in the ordinary course of business. As of September 30, 2006,
there were no material legal proceedings pending against the Company.
Item 4, Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5, Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities.
The Company's common stock is traded on the American Stock Exchange under the
trading symbol JOB. The high and low market prices per share of the Company's
common stock were as follows:
Fourth Third Second First
Quarter Quarter Quarter Quarter
Fiscal 2006:
High $ 2.05 $ 1.72 $ 2.10 $ 2.75
Low 1.43 1.41 1.46 1.86
Fiscal 2005:
High $ 2.18 $ 1.67 $ 3.00 $ 3.05
Low 1.18 1.14 1.34 2.00
There were 741 holders of record on October 31, 2006. The Company declared no
cash dividends on its common stock during the last two fiscal years.
Information concerning securities authorized for issuance under equity
compensation plans is presented in Item 11 of this annual report.
During the three months ended September 30, 2006, no equity securities of the
Company were sold by the Company that were not registered under the Securities
Act of 1933, and no equity securities of the Company were purchased by the
Company.
5
Item 6, Management's Discussion and Analysis or Plan of Operation.
Overview
The Company provides contract and placement staffing services for business and
industry, specializing in the placement of information technology, engineering
and accounting professionals. As of September 30, 2006, the Company operated
20 offices located in 10 states.
The Company's business is highly dependent on national employment trends in
general and on the demand for professional staff in particular. As an
indicator of employment conditions, the national unemployment rate was 4.6% in
September 2006 and 5.1% in September 2005. The change indicates a trend
toward fuller employment over the last twelve months.
During the 2006 fiscal year, the Company experienced stronger demand for its
placement services, but weaker demand for its contract services, compared with
the prior year. These conditions led to an increase in the number of
placements, while the number of billable contract hours decreased. Increased
emphasis on higher-paid contract positions resulted in a higher average hourly
billing rate for contract services this year.
Consolidated net revenues for the year ended September 30, 2006 decreased 1%
compared with the prior year. As a result of the changed demand, placement
service revenues were up 14%, while contract services revenues were down 13%.
Although overall revenues were essentially flat, the change in mix resulted in
a 37% increase in income from operations.
Because long-term contracts are not a significant part of the Company's
business, future results cannot be reliably predicted by considering past
trends or by extrapolating past results. While it is difficult to accurately
predict future hiring patterns or the demand for staffing services, management
believes that the Company is well positioned for growth of its operations.
Existing branch offices have the capacity to accommodate additional consulting
staff and a higher volume of business.
The Company had net cash flow of $668,000 for the 2006 fiscal year, and the
balance of cash and cash equivalents increased to $5,904,000 as of
September 30, 2006.
Results of Operations
A summary of operating data, expressed as a percentage of consolidated net
revenues, is presented below.
6
Year Ended September 30
2006 2005
Net revenues:
Contract services 51.1% 57.8%
Placement services 48.9 42.2
Net revenues 100.0 100.0
Operating expenses:
Cost of contract services 36.2 41.0
Selling 30.4 25.8
General and administrative 29.5 30.4
Total operating expenses 96.1 97.2
Income from operations 3.9% 2.8%
Net Revenues
Consolidated net revenues for the year ended September 30, 2006 were down
$280,000 (1%) from the prior year. Placement service revenues increased
$1,221,000 (14%), while contract service revenues decreased $1,501,000 (13%).
National employment levels increased during fiscal 2006. As a result of the
stronger overall demand for placement services, the Company experienced a 12%
increase in the number of placements and a 2% increase in the average
placement fee.
The decrease in contract service revenues was due to a 19% decrease in the
number of billable hours that was partially offset by a 7% increase in the
average hourly billing rate.
Operating Expenses
Total operating expenses for the year ended September 30, 2006 were down
$492,000 (2%) compared with the prior year.
The cost of contract services was down $1,079,000 (13%) as a result of the
lower volume of contract business. The gross profit margin on contract
business was 29.2% for the year ended September 30, 2006, which was slightly
higher than 29.1% for the prior year. There are no direct costs associated
with placement service revenues.
Selling expenses increased $848,000 (16%) for the year, primarily due to
higher commission expense resulting from the higher placement service
revenues. Selling expenses represented 30.4% of consolidated net revenues,
which was up 4.6 points from the prior year because of the change in revenue
mix.
General and administrative expenses decreased $261,000 (4%) for the year ended
September 30, 2006. Compensation in the operating divisions decreased 12%,
due to lower salaries and lower advance expense resulting from the higher
commissions. All other general and administrative expenses were down 1%.
General and administrative expenses represented 29.5% of consolidated
revenues, and that was down slightly from the prior year.
7
There was no provision for income taxes in either year, because of the
availability of operating losses carried forward from prior years.
Financial Condition
As of September 30, 2006, the Company had cash and cash equivalents of
$5,904,000, which was an increase of $668,000 from September 30, 2005. Net
working capital at September 30, 2006 was $6,051,000, which was an increase of
$833,000 from September 30, 2005, and the current ratio was 3.5 to 1. The
Company had no long-term debt. Shareholders' equity as of September 30, 2006
was $6,852,000, which represented 74% of total assets.
During the fiscal year ended September 30, 2006, the net cash provided by
operating activities was $1,002,000. Net income for the period, together with
depreciation and other non-cash charges, provided $1,167,000, while working
capital items used $165,000.
Expenditures for the acquisition of property and equipment were $334,000 in
fiscal 2006. The major expenditures were for computer equipment and software
purchased in connection with a program to upgrade the Company's operational
and administrative computer systems. Additional expenditures of approximately
$300,000 are expected to be incurred during fiscal 2007 to complete the
project.
In November 2006, the Company's board of directors declared a special year end
cash dividend in the amount of $.10 per common share, payable in January 2007,
which is expected to result in a total payout of $515,000.
All of the Company's office facilities are leased. Information about future
minimum lease payments and other commitments is presented in the notes to
consolidated financial statements.
The Company's primary source of liquidity is from its operating activities.
The Company's philosophy regarding the maintenance of cash balances reflects
management's views on potential future needs for liquidity. Management
believes that funds generated by operations, together with existing cash
balances, will be adequate to finance current operations and capital
expenditures for the foreseeable future.
As of September 30, 2006 there were approximately $3,000,000 of losses
available to reduce federal taxable income in future years through 2024, and
there were approximately $5,800,000 of losses available to reduce state and
local taxable income in future years, expiring from 2007 through 2024.
Off-Balance Sheet Arrangements
As of September 30, 2006, and during the year then ended, there were no
transactions, agreements or other contractual arrangements to which an
unconsolidated entity was a party, under which the Company (a) had any direct
or contingent obligation under a guarantee contract, derivative instrument or
variable interest in the unconsolidated entity, or (b) had a retained or
contingent interest in assets transferred to the unconsolidated entity.
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States.
8
Management makes estimates and assumptions that can affect the amounts of
assets and liabilities reported as of the date of the financial statements, as
well as the amounts of reported revenues and expenses during the periods
presented. Those estimates and assumptions typically involve expectations
about events to occur subsequent to the balance sheet date, and it is possible
that actual results could ultimately differ from the estimates. If
differences were to occur in a subsequent period, the Company would recognize
those differences when they became known. Significant matters requiring the
use of estimates and assumptions include deferred income tax valuation
allowances, accounts receivable allowances, and valuations of property and
equipment. Management believes that its estimates and assumptions are
reasonable, based on information that is available at the time they are made.
The following accounting policies are considered by management to be
"critical" because of the judgments and uncertainties involved, and because
different amounts would be reported under different conditions or using
different assumptions.
Income Taxes
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities, and
are measured using the enacted tax rates and laws that are expected to be in
effect when the differences reverse. A valuation allowance is recorded to
reduce deferred tax assets to the amount that is more likely than not to be
realized as a tax benefit in the future. Judgment is required in assessing
the likelihood that tax assets will be realized. These judgments are based on
estimates about future taxable income, which is inherently uncertain. The
Company maintained a full valuation allowance as of September 30, 2006,
because there was not sufficient assurance that future tax benefits would be
realized.
Accounts Receivable Allowances
An allowance for placement falloffs is recorded, as a reduction of revenues,
for estimated losses due to applicants not remaining employed for the
Company's guarantee period. An allowance for doubtful accounts is recorded,
as a charge to bad debt expense, where collection is considered to be doubtful
due to credit issues. These allowances reflect management's estimate of
potential losses inherent in the accounts receivable balances, based on
historical loss statistics.
Property and Equipment
Property and equipment are recorded at cost. Depreciation expense is
calculated on a straight-line basis over estimated useful lives of five years
for computer equipment and two to ten years for office equipment, furniture
and fixtures. The Company capitalizes computer software purchased or
developed for internal use, and amortizes it over an estimated useful life of
five years. The carrying value of property and equipment is reviewed for
impairment whenever events or changes in circumstances indicate that it may
not be recoverable. If the carrying amount of an asset group is greater than
its estimated future undiscounted cash flows, the carrying value is written
down to the estimated fair value. These processes require the use of
estimates and assumptions about the future.
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
9
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. 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.
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 assignments, the possibility of incurring liability for
the Company's business activities, including the activities of its contract
employees and events affecting its contract employees on client premises, and
the ability to attract and retain qualified corporate and branch management.
10
Item 7, Financial Statements.
GENERAL EMPLOYMENT ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEET
As of September 30
(In Thousands) 2006 2005
ASSETS
Current assets:
Cash and cash equivalents $5,904 $5,236
Accounts receivable, less allowances
(2006 -- $280; 2005 -- $270) 1,978 2,028
Other current assets 592 468
Total current assets 8,474 7,732
Property and equipment, net 801 632
Total assets $9,275 $8,364
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued compensation $1,791 $1,834
Other current liabilities 632 680
Total current liabilities 2,423 2,514
Shareholders' equity:
Preferred stock; authorized -- 100 shares;
issued and outstanding -- none -- --
Common stock, no-par value; authorized --
20,000 shares; issued and outstanding -
5,148 shares 4,839 4,839
Retained earnings 2,013 1,011
Total shareholders' equity 6,852 5,850
Total liabilities and shareholders' equity $9,275 $8,364
See notes to consolidated financial statements.
11
GENERAL EMPLOYMENT ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF INCOME
Year Ended September 30
(In Thousands, Except Per Share) 2006 2005
Net revenues:
Contract services $10,253 $11,754
Placement services 9,815 8,594
Net revenues 20,068 20,348
Operating expenses:
Cost of contract services 7,256 8,335
Selling 6,098 5,250
General and administrative 5,925 6,186
Total operating expenses 19,279 19,771
Income from operations 789 577
Investment income 213 94
Net income $ 1,002 $ 671
Average number of shares:
Basic 5,148 5,142
Diluted 5,338 5,355
Net income per share - basic and diluted $ .19 $ .13
See notes to consolidated financial statements.
12
GENERAL EMPLOYMENT ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended September 30
(In Thousands) 2006 2005
Operating activities:
Net income $1,002 $ 671
Depreciation and amortization 165 238
Accounts receivable 50 (195)
Accrued compensation (43) 590
Other current items, net (172) (447)
Net cash provided by operating activities 1,002 857
Investing activities:
Acquisition of property and equipment (334) (69)
Financing activities:
Exercises of stock options -- 11
Increase in cash and cash equivalents 668 799
Cash and cash equivalents at beginning of year 5,236 4,437
Cash and cash equivalents at end of year $5,904 $ 5,236
See notes to consolidated financial statements.
13
GENERAL EMPLOYMENT ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Year Ended September 30
(In Thousands) 2006 2005
Common shares outstanding:
Number at beginning of year 5,148 5,136
Exercises of stock options -- 12
Number at end of year 5,148 5,148
Common stock:
Balance at beginning of year $4,839 $4,828
Exercises of stock options -- 11
Balance at end of year $4,839 $4,839
Retained earnings:
Balance at beginning of year $1,011 $ 340
Net income 1,002 671
Balance at end of year $2,013 $1,011
See notes to consolidated financial statements.
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GENERAL EMPLOYMENT ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company
General Employment Enterprises, Inc. (the "Company") operates in one industry
segment, providing staffing services through a network of branch offices
located in major metropolitan areas throughout the United States. The Company
specializes in providing information technology, engineering and accounting
professionals to clients on either a regular placement basis or a temporary
contract basis. The Company has a diverse customer base, and no single
customer accounted for more than 5% of its revenues during either of the last
two fiscal years.
Significant Accounting Policies and Estimates
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States. The more
significant accounting policies that are followed by the Company are
summarized below.
Principles of Consolidation
The consolidated financial statements include the accounts and transactions of
the Company and its wholly-owned subsidiary. All significant intercompany
accounts and transactions are eliminated in consolidation.
Estimates and Assumptions
Management makes estimates and assumptions that can affect the amounts of
assets and liabilities reported as of the date of the financial statements, as
well as the amounts of reported revenues and expenses during the periods
presented. Those estimates and assumptions typically involve expectations
about events to occur subsequent to the balance sheet date, and it is possible
that actual results could ultimately differ from the estimates. If
differences were to occur in a subsequent period, the Company would recognize
those differences when they became known. Significant matters requiring the
use of estimates and assumptions include deferred income tax valuation
allowances, accounts receivable allowances, and valuations of property and
equipment. Management believes that its estimates and assumptions are
reasonable, based on information that is available at the time they are made.
Revenue Recognition
Placement service revenues are recognized when applicants accept offers of
employment, less a provision for estimated losses due to applicants not
remaining employed for the Company's guarantee period. Contract service
revenues are recognized when services are rendered.
Cost of Contract Services
The cost of contract services includes the wages and the related payroll taxes
and benefits of the Company's employees while they work on contract
assignments.
Income Taxes
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities, and
are measured using the enacted tax rates and laws that are expected to be in
effect when the differences reverse. A valuation allowance is recorded to
reduce deferred tax assets to the amount that is more likely than not to be
realized as a tax benefit in the future.
15
Income Per Share
Basic income per share is based on the average number of common shares
outstanding. Diluted income per share is based on the average number of common
shares and the dilutive effect of stock options. Diluted income per share
does not include the effect of 50,000 stock options in fiscal 2006 and 2005,
because the exercise price of those options was greater than the average
market value of the common stock during the year and including them would have
had an anti-dilutive effect on income per share.
Cash Equivalents
Highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Accounts Receivable Allowances
An allowance for placement falloffs is recorded, as a reduction of revenues,
for estimated losses due to applicants not remaining employed for the
Company's guarantee period. An allowance for doubtful accounts is recorded,
as a charge to bad debt expense, where collection is considered to be doubtful
due to credit issues. These allowances together reflect management's estimate
of the potential losses inherent in the accounts receivable balances, based on
historical loss statistics.
Property and Equipment
Property and equipment are recorded at cost. Depreciation expense is
calculated on a straight-line basis over estimated useful lives of five years
for computer equipment and two to ten years for office equipment, furniture
and fixtures. The Company capitalizes computer software purchased or
developed for internal use, and amortizes it over an estimated useful life of
five years. The carrying value of property and equipment is reviewed for
impairment whenever events or changes in circumstances indicate that it may
not be recoverable. If the carrying amount of an asset group is greater than
its estimated future undiscounted cash flows, the carrying value is written
down to the estimated fair value.
Disposal Activities
A liability is recorded for the cost of exit or disposal activities in the
period when the liability is incurred.
Stock Options
Compensation expense is recorded for the fair value of stock options issued to
employees. The expense is measured as the estimated fair value of the stock
options on the date of grant and is amortized over the vesting periods.
Income Taxes
The components of the provision for income taxes are as follows:
(In Thousands) 2006 2005
Current tax provision $ -- $ --
Deferred tax provision (credit) related to:
Temporary differences 17 143
Loss carryforwards 378 81
Valuation allowance (395) (224)
Provision for income taxes $ -- $ --
16
The differences between income taxes calculated at the 34% statutory U.S.
federal income tax rate and the Company's provision for income taxes are as
follows:
(In Thousands) 2006 2005
Income tax provision at statutory
federal tax rate $ 341 $ 228
Federal valuation allowance (333) (217)
Other (8) (11)
Provision for income taxes $ -- $ --
The net deferred income tax asset balance as of September 30 related to the
following:
(In Thousands) 2006 2005
Temporary differences $ 249 $ 266
Net operating loss carryforwards 1,349 1,727
Valuation allowance (1,598) (1,993)
Net deferred income tax asset $ -- $ --
As of September 30, 2006, there were approximately $3,000,000 of losses
available to reduce federal taxable income in future years through 2024, and
there were approximately $5,800,000 of losses available to reduce state and
local taxable income in future years, expiring from 2007 through 2024.
In fiscal 2006 and 2005, the Company reduced the valuation allowance to the
extent that net income tax benefits were realized. As of September 30, 2006,
an evaluation was performed to determine whether the remaining deferred tax
assets were likely to be realized in the future, considering such factors as
profits and losses in recent years, the market environment in which the
Company operates, and projected future taxable income. It was determined that
there was not sufficient assurance that future tax benefits would be realized,
and a full valuation allowance was maintained.
Property and Equipment
Property and equipment consisted of the following as of September 30:
(In Thousands) 2006 2005
Computer equipment and software $ 2,427 $ 2,266
Office equipment, furniture and fixtures 1,596 1,684
Total property and equipment, at cost 4,023 3,950
Accumulated depreciation and amortization (3,222) (3,318)
Property and equipment, net $ 801 $ 632
During fiscal 2005, the Company disposed of leasehold improvements, furniture
and equipment having an original cost of $1,194,000 and negligible book value.
17
Other Current Liabilities
Other current liabilities consisted of the following as of September 30:
(In Thousands) 2006 2005
Accounts payable $151 $ 89
Accrued expenses 252 329
Deferred rent 229 262
Total other current liabilities $632 $680
Lease Obligations
The Company leases space for all of its branch offices, which are located
either in downtown or suburban metropolitan business centers, and space for
its corporate headquarters. Branch offices are generally leased over periods
from three to five years. The corporate office lease expires in 2015, and it
may be cancelled by the Company in 2012 under certain conditions. The leases
generally provide for payment of basic rent plus building real estate taxes,
maintenance costs and utilities.
Rent expense was $985,000 in fiscal 2006 and $964,000 in fiscal 2005. As of
September 30, 2006, future minimum lease payments under lease agreements
having initial terms in excess of one year totaled $3,148,000, as follows:
fiscal 2007 - $894,000, fiscal 2008 - $773,000, fiscal 2009 - $571,000, fiscal
2010 - $447,000, fiscal 2011 - $325,000 and thereafter - $138,000.
Commitments
As of September 30, 2006, the Company had contractual obligations to purchase
approximately $460,000 of recruitment advertising through December 2007.
Retirement Plans
The Company has a 401(k) retirement plan in which all full-time employees may
participate after one year of service. Under the plan, eligible participants
may contribute a portion of their earnings to a trust, and the Company makes
matching contributions, subject to certain limitations. In addition, the
Company has a deferred compensation plan for certain officers. Under the
plan, the Company contributes a percentage of each participant's earnings to a
trust under a defined contribution arrangement. The participants direct the
investments of the trust, and the Company does not guarantee investment
performance. Participant account balances are payable upon retirement or
termination from the Company, subject to certain vesting requirements. The
investments in the trust are included in other current assets on the
consolidated balance sheet, and an offsetting obligation is included in
accrued compensation. The cost of retirement plans was $170,000 in fiscal
2006 and $129,000 in fiscal 2005.
18
Stock Options
As of September 30, 2006, there were stock options outstanding under the
Company's 1995 Stock Option Plan, 1997 Stock Option Plan and 1999 Stock Option
Plan. All three plans were approved by the shareholders. The 1995 Stock
Option Plan expired during fiscal 2006, and no further options may be granted
under that plan. The plans granted specified numbers of options to non-
employee directors, and they authorized the Compensation and Stock Option
Committee of the Board of Directors to grant either incentive or non-statutory
stock options to employees. All stock options outstanding as of September 30,
2006 were non-statutory stock options, had exercise prices equal to the market
price on the date of grant, and had expiration dates ten years after the date
of grant.
A summary of stock option activity is as follows:
(Number of Options in Thousands) 2006 2005
Number of options outstanding:
Beginning of year 435 458
Granted 80 --
Exercised -- (12)
Terminated -- (11)
End of year 515 435
Number of options exercisable
at end of year 435 435
Number of options available for grant
at end of year 203 416
Weighted average option prices per share:
Granted during the year $1.63 $ --
Exercised during the year -- .86
Terminated during the year -- 1.42
Outstanding at end of year 1.16 1.07
Exercisable at end of year 1.07 1.07
The average fair value of stock options granted was estimated to be $0.75 per
share in fiscal 2006. This estimate was made using the Black-Scholes option
pricing model and the following weighted average assumptions: expected option
life of four years, stock price volatility of 54%, risk-free interest rate of
4.5% and no stock dividends. There was no stock option expense in fiscal 2006
because the options were granted at the end of the year. They vest ratably
over two years.
Stock options outstanding as of September 30, 2006 were as follows (number of
shares in thousands):
Weighted Weighted Average
Range of Number Average Number Average Remaining
Exercise Prices Outstanding Price Exercisable Price Life (Years)
At $.86 353 $ .86 353 $ .86 6
$1.25 to $2.45 162 1.81 82 2.00 7
19
Severance Arrangements
The Company has an employment agreement with the chief executive officer that
provides for the continuation of salary and benefits for a period of three
years following the officer's termination of employment by the Company for any
reason other than "cause." The Company also has arrangements covering certain
other officers and key employees that would become effective if their
employment terminated under certain conditions following a change in control
of the Company. Under these circumstances, the Company would be obligated to
continue salary for a period of one year in certain cases, to make lump sum
payments ranging from $20,000 to $50,000 in other cases, and to provide
continued welfare plan benefits for up to one year. As of September 30, 2006,
the potential, aggregate obligation under these arrangements, if all such
officers and employees were terminated, was approximately $2,700,000.
Shareholder Rights Plan
On February 4, 2000, the Company adopted a shareholder rights plan, and the
Board of Directors declared a dividend of one share purchase right for each
share of outstanding common stock.
The rights will become exercisable if any person or affiliated group (other
than certain "grandfathered" shareholders) acquires, or offers to acquire, 10%
or more of the Company's outstanding common shares. Each exercisable right
entitles the holder (other than the acquiring person or group) to purchase, at
a price of $21.50 per share, common stock of the Company having a market value
equal to two times the purchase price. The purchase price and the number of
common shares issuable on exercise of the rights are subject to adjustment in
accordance with customary anti-dilution provisions.
The Board of Directors may authorize the Company to redeem the rights at a
price of $.01 per right at any time before they become exercisable. After the
rights become exercisable, the Board of Directors may authorize the Company to
exchange any unexercised rights at the rate of one share of common stock for
each right. The rights are nonvoting and will expire on February 22, 2010.
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
General Employment Enterprises, Inc.
Oakbrook Terrace, Illinois
We have audited the accompanying consolidated balance sheets of General
Employment Enterprises, Inc. and subsidiary as of September 30, 2006 and 2005
and the related consolidated statements of income, shareholders' equity, and
cash flows for the years then ended. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, 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 consolidated financial position
of General Employment Enterprises, Inc. and subsidiary at September 30, 2006
and 2005, and the consolidated results of their operations and their cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Chicago, Illinois
November 9, 2006
21
Item 8, Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 8A, Controls and Procedures.
As of September 30, 2006, the Company's management evaluated, with the
participation of its principal executive officer and its principal financial
officer, the effectiveness of the Company's disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation, the
Company's principal executive officer and its principal financial officer
concluded that the Company's disclosure controls and procedures were adequate
as of September 30, 2006 to ensure that information required to be disclosed
in reports filed or submitted by the Company under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 8B, Other Information.
Not applicable.
PART III
Item 9, Directors and Executive Officers of the Registrant.
Information concerning directors and executive officers is set forth in the
Company's Proxy Statement for the annual meeting of shareholders under the
headings "Election of Directors" and "Directors and Officers." That
information is incorporated herein by reference.
The Company has adopted a code of ethics that applies to all of its directors
and employees, including it principal executive officer, principal financial
officer and principal accounting officer. A copy of the code of ethics is
filed as an exhibit to this annual report.
Item 10, Executive Compensation.
Information concerning executive compensation is set forth in the Company's
Proxy Statement for the annual meeting of shareholders under the heading
"Compensation of Directors and Executive Officers." That information is
incorporated herein by reference.
22
Item 11, Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Securities authorized for issuance under equity compensation plans were as
follows as of September 30, 2006 (number of shares in thousands):
Number of securi-
ties remaining
available for
Number of future issuance
securities to under equity
be issued upon Weighted-average compensation
exercise of exercise price plans (excluding
outstanding of outstanding securities
options, warrants options, warrants reflected in
Plan category and rights and rights first column)
Equity compensation
plans approved by
security holders 515 $1.16 203
Equity compensation
plans not approved
by security holders -- -- --
Total 515 $1.16 203
Information concerning security ownership of certain beneficial owners and
management is set forth in the Company's Proxy Statement for the annual
meeting of shareholders under the heading "Security Ownership of Certain
Beneficial Owners and Management." That information is incorporated herein by
reference.
Item 12, Certain Relationships and Related Transactions.
Not applicable.
Item 13, Exhibits.
The following exhibits are filed as a part of this report:
No. Description of Exhibit
3.01 Articles of Incorporation and amendments thereto. Incorporated by
reference to Exhibit 3 to the Company's Quarterly Report on Form 10-
QSB for the quarter ended March 31, 1996, Commission File No.
1-05707.
3.02 By-Laws. Incorporated by reference to Exhibit 3(b) of the Company's
Annual Report on Form 10-KSB for the fiscal year ended September 30,
1997, Commission File No. 1-05707.
23
4.01 Rights Agreement dated as of February 4, 2000, between General
Employment Enterprises, Inc. and Continental Stock Transfer and Trust
Company, as Rights Agent. Incorporated by reference to Exhibit 1 to
the Company's Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on February 7, 2000, Commission
File No. 1-05707.
10.01* Key Manager Plan, adopted May 22, 1990. Incorporated by reference to
Exhibit 10(h) to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1990, Commission File No. 1-05707.
10.02 Agreement with Sheldon Brottman dated October 3, 1991. Incorporated
by reference to Exhibit 10(l) to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1991, Commission File No.
1-05707.
10.03* General Employment Enterprises, Inc. 1995 Stock Option Plan.
Incorporated by reference to Exhibit 4.1 to the Company's Form S-8
Registration Statement dated April 25, 1995, Registration No.
33-91550.
10.04* General Employment Enterprises, Inc. 1997 Stock Option Plan.
Incorporated by reference to Exhibit 10(n) to the Company's Annual
Report on Form 10-KSB for the fiscal year ended September 30, 1998,
Commission File No. 1-05707.
10.05* Resolution of the Board of Directors adopted September 28, 1998,
amending the General Employment Enterprises, Inc. 1997 Stock Option
Plan. Incorporated by reference to Exhibit 10(o) to the Company's
Annual Report on Form 10-KSB for the fiscal year ended September 30,
1998, Commission File No. 1-05707.
10.06* General Employment Enterprises, Inc. 1999 Stock Option Plan.
Incorporated by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, Commission
File No. 1-05707.
10.07* Employment Agreement with Herbert F. Imhoff, Jr. effective as of
August 1, 2001. Incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2001, Commission File No. 1-05707.
10.08* Chief Executive Officer Bonus Plan, adopted September 24, 2001.
Incorporated by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2001,
Commission File No. 1-05707.
10.09* The Corporate Plan for Retirement Select Plan Basic Plan Document.
Incorporated by reference to Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2001,
Commission File No. 1-05707.
10.10* The Corporate Plan for Retirement Select Plan Adoption Agreement dated
September 27, 2001. Incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2001, Commission File No. 1-05707.
24
10.11* First Amendment to the General Employment Enterprises, Inc. Executive
Retirement Plan dated September 27, 2001. Incorporated by reference
to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 2001, Commission File No. 1-05707.
10.12* Form of employment agreement with executive officers. Incorporated by
reference to Exhibit 10.01 to the Company's Quarterly Report of Form
10-Q for the quarterly period ended December 31, 2001, Commission File
No. 1-05707.
10.13* Operational Vice President Bonus Plan effective for fiscal years
beginning on or after October 1, 2004. Incorporated by reference to
Exhibit 10.01 to the Company's Quarterly Report of Form 10-QSB for the
quarterly period ended December 31, 2004, Commission File No. 1-05707.
14.01 General Employment Enterprises, Inc. Code of Ethics for Directors,
Officers and Employees, adopted as of August 16, 2004. Incorporated
by reference to Exhibit 14.01 to the Company's Form 8-K Current Report
dated August 16, 2004, Commission File No. 1-05707.
23.01 Consent of Independent Registered Public Accounting Firm.
31.01 Certification of the principal executive officer required by Rule
13a-14(a) or Rule 15d-14(a) of the Exchange Act.
31.02 Certification of the principal financial officer required by Rule
13a-14(a) or Rule 15d-14(a) of the Exchange Act.
32.01 Certifications required by Rule 13a-14(a) or Rule 15d-14(a) of the
Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United
States Code.
* Management contract or compensatory plan or arrangement.
Item 14, Principal Accountant Fees and Services.
Information concerning principal accountant fees and services is set forth in
the Company's Proxy Statement for the annual meeting of shareholders under the
heading "Relationship with Independent Auditors." That information is
incorporated herein by reference.
25
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
GENERAL EMPLOYMENT ENTERPRISES, INC.
(Registrant)
Date: November 20, 2006 By: /s/ Herbert F. Imhoff, Jr.
Herbert F. Imhoff, Jr.
Chairman of the Board, Chief
Executive Officer and President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: November 20, 2006 By: /s/ Herbert F. Imhoff, Jr.
Herbert F. Imhoff, Jr., Director
Chairman of the Board, Chief
Executive Officer and President
(Principal executive officer)
Date: November 20, 2006 By: /s/ Kent M. Yauch
Kent M. Yauch, Director
Vice President, Chief Financial
Officer and Treasurer (Principal
financial and accounting officer)
Date: November 20, 2006 By: /s/ Dennis W. Baker
Dennis W. Baker, Director
Date: November 20, 2006 By:
Sheldon Brottman, Director
Date: November 20, 2006 By: /s/ Delain G. Danehey
Delain G. Danehey, Director
Date: November 20, 2006 By: /s/ Joseph F. Lizzadro
Joseph F. Lizzadro, Director
26