UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2005 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-05707 GENERAL EMPLOYMENT ENTERPRISES, INC. (Exact name of small business issuer 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 (Issuer's telephone number) Check whether the issuer (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 issuer's common stock as of April 30, 2005 was 5,140,894. Transitional small business disclosure format Yes [ ] No [X] PART I - FINANCIAL INFORMATION Item 1, Financial Statements. GENERAL EMPLOYMENT ENTERPRISES, INC. CONSOLIDATED BALANCE SHEET March 31 September 30 2005 2004 (In Thousands) (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 4,444 $ 4,437 Accounts receivable, less allowances (Mar. 2005--$328; Sept. 2004--$281) 1,914 1,833 Other current assets 440 486 Total current assets 6,798 6,756 Property and equipment: Furniture, fixtures and equipment 4,623 4,812 Accumulated depreciation and amortization (4,224) (4,274) Net property and equipment 399 538 Total assets $ 7,197 $ 7,294 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accrued compensation and payroll taxes $ 1,458 $ 1,244 Other current liabilities 426 882 Total current liabilities 1,884 2,126 Shareholders' equity: Preferred stock, authorized -- 100 shares; issued and outstanding -- none -- -- Common stock, no-par value; authorized -- 20,000 shares; issued and outstanding -- 5,141 shares in March 2005 and 5,136 shares in September 2004 51 51 Capital in excess of stated value of shares 4,782 4,777 Retained earnings 480 340 Total shareholders' equity 5,313 5,168 Total liabilities and shareholders' equity $ 7,197 $ 7,294 See notes to consolidated financial statements. 2 GENERAL EMPLOYMENT ENTERPRISES, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Six Months Ended March 31 Ended March 31 (In Thousands, Except Per Share) 2005 2004 2005 2004 Net revenues: Contract services $2,771 $2,877 $5,730 $5,936 Placement services 1,981 1,354 3,904 2,525 Net revenues 4,752 4,231 9,634 8,461 Operating expenses: Cost of contract services 1,977 2,120 4,060 4,261 Selling 1,257 866 2,411 1,651 General and administrative 1,510 1,638 3,056 3,392 Total operating expenses 4,744 4,624 9,527 9,304 Income (loss) from operations 8 (393) 107 (843) Investment income 13 6 33 23 Income (loss) from continuing operations 21 (387) 140 (820) Loss from discontinued operations -- (58) -- (87) Net income (loss) $ 21 $ (445) $ 140 $ (907) Average number of shares: Basic 5,141 5,132 5,139 5,127 Diluted 5,383 5,132 5,390 5,127 Per share - basic and diluted: Income (loss) from continuing operations $ -- $ (.08) $ .03 $ (.16) Loss from discontinued operations -- (.01) -- (.02) Net income (loss) $ -- $ (.09) $ .03 $ (.18) See notes to consolidated financial statements. 3 GENERAL EMPLOYMENT ENTERPRISES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended March 31 (In Thousands) 2005 2004 Operating activities: Net income (loss) $ 140 $ (907) Depreciation and other noncurrent items 139 324 Accounts receivable (81) 225 Accrued compensation and payroll taxes 214 116 Other current items, net (410) (311) Net cash provided (used) by operating activities 2 (553) Investing activities: Acquisition of property and equipment -- (5) Net cash used by investing activities -- (5) Financing activities: Exercises of stock options 5 13 Net cash provided by financing activities 5 13 Increase (decrease) in cash and cash equivalents 7 (545) Cash and cash equivalents at beginning of period 4,437 3,905 Cash and cash equivalents at end of period $4,444 $3,360 See notes to consolidated financial statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Basis of Presentation 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-QSB. 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-KSB for the year ended September 30, 2004. Discontinued Operations In September 2004, the Company completed a transaction to sell the assets and business operations of its Pittsburgh, Pennsylvania staffing business ("GenTech"). The results of GenTech are reflected in the consolidated statement of operations as discontinued operations for all periods presented. Income Taxes There were no provisions for income taxes for the periods ended March 31, 2005, because of the utilization of losses carried forward from prior years. There were no credits for income taxes as a result of the pretax losses for the periods ended March 31, 2004, because the losses were carried forward and there was not sufficient assurance that a future tax benefit would be realized. Lease Obligations In January 2005, the Company entered into an amendment of the lease agreement that covers office space for its corporate headquarters in Oakbrook Terrace, Illinois. The amended lease expires in 2015, and may be cancelled by the Company in 2012 under certain conditions. The previous lease was scheduled to expire in January 2006. Under the amended lease, the Company's base annual rent expense is reduced by approximately $120,000. Minimum payments during the non-cancelable term of the lease total approximately $1,600,000. Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations. 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 March 31, 2005, the Company operated 19 offices located in 10 states. 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 Company experienced an increase in the demand for 5 its placement services during the six months ended March 31, 2005, compared with the same period of the prior year, as the U.S. jobs market improved. The national unemployment rate decreased to 5.2% in March 2005 from 5.7% in March 2004. As a result of the increased demand for the Company's services, consolidated net revenues for the six months ended March 31, 2005 were up 14% compared with the prior year. Placement services revenues increased 55% due to increases in both the number of placements and the average placement fee, while contract services revenues declined slightly during the period. As a result of the change in the mix, placement service revenues increased to 41% of consolidated revenues from 30% last year. Due to the growth in revenues, the Company achieved income from operations of $107,000 this year, which was a significant improvement from the $843,000 operating loss last year. The Company had net cash flow of $7,000 for the year to date, and the balance of cash and cash equivalents was $4,444,000 as of March 31, 2005. Results of Operations A summary of operating data, expressed as a percentage of consolidated net revenues, is presented below. Percentages may not add due to rounding. Six Months Ended March 31 2005 2004 Net revenues: Contract services 59.5% 70.2% Placement services 40.5 29.8 Net revenues 100.0 100.0 Operating expenses: Cost of contract services 42.1 50.4 Selling 25.0 19.5 General and administrative 31.7 40.1 Total operating expenses 98.9 110.0 Income (loss) from operations 1.1% (10.0)% Net Revenues Consolidated net revenues for the six months ended March 31, 2005 were up $1,173,000(14%) from the prior year. That was due to the combination of a $206,000 (3%) decrease in contract service revenues and a $1,379,000 (55%) increase in placement service revenues. The decrease in contract service revenues occurred because of a 4% decline in the average hourly billing rate, while the number of billable hours was about even with last year. Reflecting stronger demand during the period, placement service revenues were up because of a 33% increase in the number of placements and a 17% increase in the average placement fee. Operating Expenses Total operating expenses for the six months ended March 31, 2005 were up $223,000 (2%) compared with the prior year. 6 The cost of contract services was down $201,000 (5%), as a result of the lower contract service revenues. The gross profit margin on contract services increased slightly to 29.1% for the six months ended March 31, 2005, compared with 28.2% the prior year. Selling expenses increased $760,000 (46%) for the period. Commission expense was up 58% due to the higher placement service revenues, and recruitment advertising expense was 40% higher than the prior year. Selling expenses represented 25.0% of consolidated net revenues, which was up 5.5 points from the prior year because of the change in revenue mix. General and administrative expenses decreased $336,000 (10%) for the six months ended March 31, 2005. Compensation in the operating divisions decreased 11% due to lower commission advances to consultants. Office rent and occupancy costs were down 20% for the period, while other office operating costs declined 44%. These reductions are attributable to a combination of office closings, lease renegotiations, and lower depreciation and amortization expense. All other general and administrative expenses were up 8%. General and administrative expenses represented 31.7% of consolidated revenues, and that was down 8.4 points from the prior year. There was no provision for income taxes for the six months ended March 31, 2005, because of the utilization of losses carried forward from prior years. There was no credit for income taxes as a result of the pretax losses for the six months ended March 31, 2004, because the losses were carried forward and there was not sufficient assurance that a future tax benefit would be realized. Outlook The improvement in national hiring patterns and the improved demand for the Company's services resulted in improved operating performance for the Company in the first six months of fiscal 2005. Management believes that the Company is well positioned for growth in the future. In recent years, many unprofitable branch operations were closed, and general and administrative expenses were reduced significantly. Existing branch offices have the capacity to accommodate additional consulting staff and higher volumes of business. Management believes that continued improvement for the Company will depend on continued improvement in the U.S. jobs market. Financial Condition As of March 31, 2005, the Company had cash and cash equivalents of $4,444,000, which was an increase of $7,000 from September 30, 2004. Net working capital at March 31, 2005 was $4,914,000, which was an increase of $284,000 from September 30, 2004, and the current ratio was 3.6 to 1. The Company had no long-term debt. Shareholders' equity as of March 31, 2005 was $5,313,000, which represented 74% of total assets. During the six months ended March 31, 2005, the net cash provided by operating activities was $2,000. Net income for the period, together with depreciation and other non-cash charges, provided $279,000, while working capital items used $277,000. The Company's primary source of liquidity is normally from its operating activities. Management believes that existing cash balances will be adequate to finance current operations for the foreseeable future. As of September 30, 2004 there were approximately $4,300,000 of losses available to reduce federal taxable income in future years through 2024, and 7 there were approximately $7,000,000 of losses available to reduce state and local taxable income in future years, expiring from 2006 through 2024. Off-Balance Sheet Arrangements As of March 31, 2005, and during the six months 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. 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. 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 project assignments, and the ability to attract and retain qualified corporate and branch management. Item 3, Controls and Procedures. Disclosure Controls and Procedures As of March 31, 2005, 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 March 31, 2005 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. Internal Control over Financial Reporting Under Rules 13a-15 and 15d-15 of the Exchange Act, companies are required to maintain internal control over financial reporting, as defined, and company managements are required to evaluate and report on internal control over financial reporting. Under an extended compliance period for these rules, the Company must begin to comply with the evaluation and disclosure requirements 8 with its annual report for the fiscal year ending September 30, 2006, and the Company must begin to comply with a requirement to perform a quarterly evaluation of changes to internal control over financial reporting that occur thereafter. As of March 31, 2005, the Company had not performed the required evaluations mentioned above. 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. PART II - OTHER INFORMATION Item 4, Submission of Matters to a Vote of Security Holders. At the annual meeting of shareholders on February 28, 2005, the shareholders elected all of the nominees for election as directors. The name of each director elected, together with the number of votes cast for elections and the number of votes withheld, are presented below: Nominees Votes For Votes Withheld Dennis W. Baker 4,563,295 84,653 Sheldon Brottman 4,577,926 70,022 Delain G. Danehey 4,562,130 85,818 Herbert F. Imhoff, Jr. 4,502,620 145,328 Joseph F. Lizzadro 4,578,838 69,110 Kent M. Yauch 4,562,140 85,808 Item 6, Exhibits. The following exhibits are filed as a part of Part I of this report: No. Description of Exhibit 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. 9 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GENERAL EMPLOYMENT ENTERPRISES, INC. (Registrant) Date: May 5, 2005 By: /s/ Kent M. Yauch Kent M. Yauch Vice President, Chief Financial Officer and Treasurer (Principal financial and accounting officer and duly authorized officer) 10