Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
JOB > SEC Filings for JOB > Form 10-K on 29-Mar-2013All Recent SEC Filings

Show all filings for GENERAL EMPLOYMENT ENTERPRISES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for GENERAL EMPLOYMENT ENTERPRISES INC


29-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion in conjunction with our consolidated financial statements and related notes included elsewhere in this report.

Overview

The Company provides staffing services through a network of branch offices located in major metropolitan areas throughout the United States. The Company's professional staffing services provide information technology, engineering and accounting professionals to clients on either a regular placement basis or a temporary contract basis. The Company's agricultural staffing services provide agricultural workers for farms and groves. The Company's industrial staffing business provides weekly temporary staffing for light industrial clients in Ohio and Pennsylvania.


Table of Contents

The Company's professional staffing services 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 7.8% in September 2012 and 9.1% in September 2011. In the past 12 months the unemployment rate has slowly decreased by approximately 1%; overall the trend has been flat over the past several years.

Results of Operations

Net Revenues
Consolidated net revenues are comprised of the following:

                                         Year Ended September 30
(In Thousands)                            2012                2011

Agricultural contract services   $       7,852       $      12,412
Industrial contract services            28,206              12,349
Professional contract services           9,132               7,160
Direct hire placement services           7,215               4,430
Management services                          -                 838

Consolidated net revenues        $      52,405       $      37,189

Consolidated net revenues for the year ended September 30, 2012 increased by approximately 41% to approximately $52 million compared with the prior year of approximately $37 million. The increase in revenue was due to a significant increase in revenue from contract services and direct placement, which was partially offset by the loss of a major customer in the Agriculture division and the termination of the management services agreement. Contract service revenues, including On-Site Services, Inc., RFFG of Cleveland, LLC, DMCC, LLC and Ashley Ellis, LLC increased by approximately 42%, and direct hire placement service revenues increased by approximately 63%.

Cost of Contract Services

Consolidated cost of contract services are comprised of the following:

                                                 Year Ended September 30
(In Thousands)                                    2012                2011

Agricultural contract services           $       7,506       $      11,835
Industrial contract services                    23,368              10,551
Professional contract services                   7,362               5,019

Consolidated cost of contract services   $      38,236       $      27,405

Cost of contract services for the year ended September 30, 2012 increased by approximately 40% to approximately $38 million compared with the prior year of approximately $27 million. Cost of contract services, as a percentage of contract revenue, for the year ended September 30, 2012 decreased approximately 1%. The overall increase in cost of contract services was directly related to the increase in revenue. The decrease of approximately 1% of cost of contract services as a percentage of contract services revenue was related to the decrease in the agricultural business.


Table of Contents

Selling, General and Administrative Expenses

Selling, general and administrative expenses include the following categories:

Compensation in the operating divisions, which includes commissions earned by the Company's employment consultants and branch managers on permanent and temporary placements. It also includes salaries, wages, unrecovered advances against commissions, payroll taxes and employee benefits associated with the management and operation of the Company's staffing offices.

Administrative compensation, which includes salaries, wages, payroll taxes and employee benefits associated with general management and the operation of the finance, legal, human resources and information technology functions.

Occupancy costs, which includes office rent, depreciation and amortization, and other office operating expenses.

Recruitment advertising, which includes the cost of identifying job applicants.

Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes.

The Company's largest selling, general and administrative expense is for compensation in the operating divisions. Most of the Company's employment consultants are paid on a commission basis and receive advances against future commissions. When commissions are earned, prior advances are applied against them and the consultant is paid the net amount. At that time, the Company recognizes the full amount as commission expense, and advance expense is reduced by the amount recovered. Thus, the Company's advance expense represents the net amount of advances paid, less amounts applied against commissions.

Selling, general and administrative expenses for the year ended September 30, 2012 increased by approximately $6 million to approximately $15 million as compared to the prior year of approximately $9 million. The increase in selling, general and administrative expense was primarily related to the increase business; however there were also significant increases in stock compensation expense, bad debt expense, certain compensation expense related to the change of control, impairment of long-term assets and some general onetime expenses. Selling, general and administrative expenses are not expected to continue to grow at a higher pace than revenue as the Company is able to eliminate many of the onetime expenses incurred in fiscal 2012 and the Company is able to capitalize on the consolidation of the acquisitions.

For the year ended September 30, 2012 there was a decrease in the amortization of intangible assets of approximately $143,000, which was primarily due to the impairment of long term intangible assets and a reduction of earn-out liabilities in the prior year.

Due to an unresolved issue with the Ohio Bureau of Workers Compensation, the former owners of RFFG have ceased operations as of July 15, 2011 and as a result the Management Agreement was effectively terminated and no future cash flows from this agreement are expected. As a result, the Company recorded a loss on impairment of intangible assets of $1,126,000 and a reduction in the associated earn-out liability of $1,276,000, in 2011.

During the year ended September 30, 2012, the Company wrote off the intangible assets and goodwill of approximately $274,000 related to the Agricultural division due to the loss of a large customer in 2012.

Taxes
There were no credits for income taxes as a result of the pretax losses incurred during the periods because there was not sufficient assurance that future tax benefits would be realized.

Liquidity and Capital Resources

As of September 30, 2012, the Company had cash and cash equivalents of $364,000, which was an increase of approximately $50,000 from approximately $314,000 at September 30, 2011. Net working capital at September 30, 2012 was approximately $530,000, which was a decrease of approximately $457,000 from September 30, 2011. The Company's current ratio was approximately 1.1 a decrease of approximately 0.1 from the prior year. Shareholders' equity as of September 30, 2012 was approximately $4,105,000 which represented approximately 37% of total assets.


Table of Contents

During the year ended September 30, 2012, net cash provided by operating activities was approximately $95,000. The net loss for the year ended September 30, 2012 was approximately $1,011,000, adjusting the net loss for depreciation and amortization, stock compensation expense, impairment of goodwill and other non-cash charges; there was approximately $231,000 provided by operations. Considering the changes in current assets and current liabilities, in addition to the significant increase in provision for doubtful accounts of $491,000 there was a net decrease of approximately $136,000, resulting in the positive cash flow from operations.

The Company used $511,000 in investing activities during fiscal 2012. As part of the Ashley Ellis acquisition, and the Company used $200,000 in investing activities. In addition, the Company used cash to acquire equipment in the amount of approximately $261,000.

The Company provided $466,000 of net cash from financing activities in 2012 by the increase in short term debt of approximately $466,000.

During the year ended September 30, 2011, net cash used by operating activities was $2,290,000. The net income for the year ended September 30, 2012, adjusted for depreciation and amortization and other non-cash charges, was $929,000, while the large increase in accounts receivables and accrued compensation caused the working capital items to decrease by $3,219,000. Overall, the increase in cash used in operations during fiscal 2011 is due to the significant increase in accounts receivables generated by the acquisitions of On-Site Services, Inc., RFFG of Cleveland, LLC, DMCC, LLC and Ashley Ellis, LLC.

The Company used $284,000 in investing activities during fiscal 2011. As part of the Ashley Ellis, LLC acquisition, the Company used $200,000 in investing activities. The Company provided $1,943,000 of net cash from financing activities in 2011 by the increase in short term debt and the exercising of stock options.

On August 31, 2011, the Company entered into an asset purchase agreement with Ashley Ellis LLC, an Illinois limited liability company ("Ashley Ellis"), and Brad A. Imhoff, for the purchase of certain assets of Ashley Ellis, including customer lists, comprising Ashley Ellis' services business. Ashley Ellis' services business was operated from offices in Illinois, Texas and Georgia and provided services related to the recruitment and placement of technical personnel. The asset purchase agreement was deemed effective on September 1, 2011. Brad A. Imhoff is the brother of Herbert F. Imhoff, Jr., a former director of the Company and our former President. Mr. Imhoff, Jr. resigned from all positions of the Company effective January 31, 2013. The assets purchased from Ashley Ellis constitute a business and as such, the acquisition of these assets was accounted for as a business combination. The assets purchased related to the Ashley Ellis, LLC acquisition was not considered a significant acquisition. The results of operations of Ashley Ellis, LLC are included in the Company's statement of operations from the effective date of the acquisition, September 1, 2011.

As consideration for the assets, the Company paid Ashley Ellis $200,000 on the date of closing and agreed to pay Ashley Ellis an additional $200,000 within six months of closing. The Company also issued to Ashley Ellis 1,250,000 shares of the Company's common stock

In December 2010, the Company purchased certain assets of RFFG of Cleveland, LLC ("RFFG of Cleveland") and DMCC Staffing, LLC ("DMCC") and entered into a management agreement with RFFG, LLC (the previous parent company of RFFG of Cleveland and DMCC Staffing, LLC) to provide services to RFFG to operate its day-to-day business, including services related to accounting, sales, finance, workers compensation, benefits, physical locations, IT, and employees. Thomas J. Bean, a 10% shareholder of the Company at the time (prior to consideration of common shares issued in this transaction), was the manager of RFFG. The assets purchased related to RFFG of Cleveland and DMCC Staffing constitute businesses and as such the acquisition of these assets will be accounted for as a business combination.


Table of Contents

In consideration of the services provided under the management agreement, RFFG was to pay the Company approximately 6% of its gross revenues. Gross revenues of RFFG were expected to approximate $18,000,000 on an annual basis, resulting in an expected management fee of approximately $1,000,000 per year. The Company added employees to provide the services required under the management agreement. In consideration for the assets acquired and the rights under the management agreement, the Company paid $2,400,000 through the issuance of its common stock. In addition, the purchase agreement requires the Company to make additional payments of up to a total of $2,400,000 over the next four years if certain performance targets are achieved. Under the terms of the purchase agreement, the maximum amount payable under the earn-out agreement for fiscal 2011 is $450,000. The Management Agreement was terminated when RFFG's operations were closed and as of September 30, 2012, there are no services being provided. In addition, since the Company was providing certain management services, RFFG and the transactions between the RFFG and the Company were considered to be related party in nature because Thomas Bean, a manager, was a 10% owner of the Company at the time. The Company is currently in discussions with RFFG to amend the original purchase agreement as it relates to the earn-out since the value of the management agreement was of significant value with respect to the original purchase. The Company has made payment of approximately $50,000 related to the earn-out liability and has a current liability of approximately $182,000, net of applicable off-sets at September 30, 2012. At September 30, 2012 there is approximately $834,000 accrued for earn-out payments related to the original purchase agreement.

All of the Company's office facilities are leased. As of September 30, 2012, future minimum lease payments under non-cancelable lease commitments having initial terms in excess of one year, including closed offices, totaled approximately $2,200,000.

In connection with the completion of the sale of shares of common stock to PSQ in fiscal 2009, Herbert F. Imhoff, Jr., the Company's then Chairman and Chief Executive Officer retired from those positions and his employment agreement with the Company was replaced by a new consulting agreement. Under the consulting agreement, the Company became obligated to pay an annual consulting fee of $180,000 over a five-year period and to issue 500,000 shares of common stock to Mr. Imhoff, Jr. for no additional consideration, and the Company recorded a liability for the net present value of the future fee payments in the amount of $790,000. As of September 30, 2012, $280,000 remains payable under this agreement and is included in accrued compensation and long-term obligations on the Company's balance sheet. On January 31, 2013, Mr. Imhoff Jr. retired from all positions with the Company, however he will continue to receive his monthly payments related to the accrued compensation of $280,000.

In December 2010, the Company terminated its agreement with Crestmark Bank and entered into a two-year, $3,000,000 account purchase agreement ("AR Credit Facility") with Wells Fargo Bank N.A. ("Wells Fargo"). The AR Credit Facility has been subsequently amended and provides for borrowings on a revolving basis of up to 85% of the Company's eligible accounts receivable less than 90 days old and bears interest at a rate equal to the three month LIBOR (minimum of .5%) plus 5.25% for a total interest rate of 5.75%. Upon the terms and subject to the conditions in the agreement, Wells Fargo may determine which receivables are eligible receivables, may determine the amount it will advance on any such receivables, and may require the Company to repay advances made on receivables and thereby repay amounts outstanding under the AR Credit Facility. Wells Fargo also has the right to require the Company to repurchase receivables that remain outstanding 90 days past their invoice date. The Company continues to be responsible for the servicing and administration of the receivables purchased. The Company will carry the receivables and any outstanding borrowings on its consolidated balance sheet. The outstanding borrowings at September 30, 2012 are $2,404,000 and the remaining borrowing availability is $596,000.

On January 14, 2013, the Company and Wells Fargo Bank, National Association entered into a Fifth Amendment (the "Fifth Amendment") to its AR Credit Facility. The Fifth Amendment extended the term of the AR Credit Facility to December 14, 2013. Notwithstanding the foregoing extension, Wells Fargo may issue a written notice to the Company shortening the term of the of the AR Credit Facility to a date 60 days following such notice in the event that (i) the Company is not dismissed without prejudice from a recently brought lawsuit entitled Derby Capital LLC and Derby Capital JOB LLC, as plaintiffs, vs. Trinity HR Services, LLC, et al., as defendants, a lawsuit seeking to establish relative ownership among stockholders which the Company believes it should not be a party to, (ii) the Company fails to furnish Wells Fargo its audited financial statements for its fiscal year ended September 30, 2012 by March 15, 2013 or if the results in such audited financial statements are not satisfactory to Wells Fargo in its sole discretion, (iii) background checks of newly appointed officers of the Company are unsatisfactory to Wells Fargo in its sole discretion, or (iv) significant changes have occurred to the composition of the Company's Board of Directors as determined by Wells Fargo in its sole discretion. In March 2013, the Company and Wells Fargo entered into a Sixth Amendment that extended the required delivery date on certain of the foregoing requirements, such as the audited financial statements, until April 30, 2013. To date, the Company has not received notice from Wells Fargo of any intent to shorten the term of the AR Credit Facility.


Table of Contents

The AR Credit Facility with Wells Fargo Bank includes certain covenants which require compliance until termination of the agreement. As of September 30, 2012, the Company was in compliance with all such covenants.

The Company believes that the borrowing availability under the AR Credit Facility will be adequate to fund the increase in working capital needs resulting from the acquisitions of On-Site, RFFG of Cleveland, DMCC Staffing, and Ashley Ellis. In recent years, the Company has incurred significant losses and negative cash flows from operations. Management has implemented a strategy which included cost reduction efforts as well as identifying strategic acquisitions, financed primarily through the issuance of common stock, to improve the overall profitability and cash flows of the Company. In addition, as discussed above, the Company entered into an AR Credit Facility with Wells Fargo to provide working capital financing.

As of September 30, 2012, there were approximately $8,900,000 of losses available to reduce federal taxable income in future years through 2030, and there were approximately $7,525,000 of losses available to reduce state taxable income in future years, expiring from 2012 through 2031. Due to the sale of shares of common stock to PSQ during fiscal 2009 and the change in ownership of PSQ in November 2010, the Company will be limited by Section 382 of the Internal Revenue Code as to the amount of net operating losses that may be used in future years. The Company is currently evaluating the effects of any such limitation. Future realization of the tax benefits of net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. Based on the weight of available evidence, the Company determined that it is more likely than not that all of the deferred tax assets will not be realized. Accordingly, the Company maintained a full valuation allowance as of September 30, 2012.

Due to the sale of shares of common stock to LEED HR during fiscal 2012 and the resulting change in control, the Company will be limited by Section 382 of the Internal Revenue Code as to the amount of net operating losses that may be used in future years.

Management believes with current cash flow from operations and the availability under the AR Credit Facility, the Company will have sufficient cash for the next 12 months.

Off-Balance Sheet Arrangements

As of September 30, 2012 and 2011, and during the two years 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 conformity with accounting principles generally accepted in the United States of America and the rules of the United States Securities and Exchange Commission.

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, accounting for acquisitions, and evaluation of impairment of long-lived assets. 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.


Table of Contents

Income Taxes

We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized.

We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results. The provision for income taxes includes the effects of any accruals that we believe are appropriate, as well as the related net interest and penalties.

Accounts Receivable
The Company extends credit to its various customers based on evaluation of the customer's financial condition and ability to pay the Company in accordance with the payment terms. 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 and known factors impacting its customers. The nature of the contract service business, where companies are dependent on employees for the production cycle allows for a small accounts receivable allowance. Based on management's review of accounts receivable, an allowance for doubtful accounts of approximately $259,000 and $137,000 is considered necessary as of September 30, 2012 and September 30, 2011, respectively. The Company charges uncollectible accounts against the allowance once the invoices are deemed unlikely to be collectible. The Company does not accrue interest on past due receivables.

Goodwill
Goodwill represents the excess of cost over the fair value of the net assets acquired in the June 1, 2010 acquisition of On-Site Services, Inc., the November 1, 2010 purchase of DMCC Staffing, LLC and RFFG of Cleveland, LLC and Ashley Ellis, LLC on September 1, 2011. The Company early adopted, the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the entity determines that this threshold is not met, then performing the two-step impairment test is unnecessary. An impairment loss would be recognized to the extent the carrying value of goodwill exceeds its implied fair value.

Fair Value Measurement
The Company follows the provisions of the accounting standard which defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.

The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:


. . .
  Add JOB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for JOB - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.