UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1999 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number: 1-5707 GENERAL EMPLOYMENT ENTERPRISES, INC. (Exact name of registrant as specified in its charter) Illinois 36-6097429 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One Tower Lane, Suite 2100, Oakbrook Terrace, Illinois 60181 (Address of principal executive offices) (Zip Code) (630) 954-0400 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ The number of shares outstanding of the issuer's common stock as of April 30, 1999 was 4,423,566. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. GENERAL EMPLOYMENT ENTERPRISES, INC. CONSOLIDATED BALANCE SHEET (Unaudited) March 31 September 30 (In Thousands) 1999 1998 ASSETS Current assets: Cash and short-term investments $ 9,881 $ 10,459 Accounts receivable, less allowances (Mar. 1999--$737; Sept. 1998--$565) 4,115 3,639 Total current assets 13,996 14,098 Property and equipment: Furniture, fixtures and equipment 3,439 3,089 Accumulated depreciation (2,500) (2,391) Net property and equipment 939 698 Other assets 968 836 Total assets $15,903 $15,632 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accrued compensation and payroll taxes $ 3,551 $ 4,041 Other current liabilities 523 796 Total current liabilities 4,074 4,837 Long-term obligations 473 460 Shareholders' equity: Common stock, no-par value; authorized -- 20,000 shares; issued and outstanding -- 4,424 shares 44 44 Capital in excess of stated value of shares 4,576 4,576 Retained earnings 6,736 5,715 Total shareholders' equity 11,356 10,335 Total liabilities and shareholders' equity $15,903 $15,632 See notes to consolidated financial statements. GENERAL EMPLOYMENT ENTERPRISES, INC. CONSOLIDATED STATEMENT OF INCOME (Unaudited) Three Months Six Months Ended March 31 Ended March 31 (In Thousands, Except Per Share) 1999 1998 1999 1998 Net revenues: Placement services $5,818 $6,047 $11,561 $12,696 Contract services 4,173 2,794 7,591 5,623 Net revenues 9,991 8,841 19,152 18,319 Operating expenses: Direct costs of contract services 2,784 1,839 5,025 3,636 Selling 3,632 3,754 7,259 7,781 General and administrative 2,588 2,144 5,035 4,510 Total operating expenses 9,004 7,737 17,319 15,927 Income from operations 987 1,104 1,833 2,392 Interest income 108 99 234 198 Income before income taxes 1,095 1,203 2,067 2,590 Provision for income taxes 440 480 825 1,035 Net income $ 655 $ 723 $ 1,242 $ 1,555 Net income per share: Basic $ .15 $ .16 $ .28 $ .35 Diluted $ .15 $ .16 $ .28 $ .34 Average number of shares: Basic 4,424 4,424 4,424 4,413 Diluted 4,451 4,656 4,455 4,633 See notes to consolidated financial statements. GENERAL EMPLOYMENT ENTERPRISES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended March 31 (In Thousands) 1999 1998 Operating activities: Net income $1,242 $1,555 Depreciation and other noncurrent items 109 133 Accounts receivable (476) (450) Accrued compensation and payroll taxes (490) 371 Other current liabilities (273) (376) Net cash provided by operating activities 112 1,233 Investing activities: Acquisition of property and equipment and other noncurrent items (469) (299) Short-term investments 641 657 Net cash provided by investing activities 172 358 Financing activities: Exercises of stock options -- 301 Cash dividend declared (221) (201) Net cash provided (used) by financing activities (221) 100 Increase in cash and cash equivalents 63 1,691 Cash and cash equivalents at beginning of period 4,500 3,188 Cash and cash equivalents at end of period 4,563 4,879 Short-term investments at end of period 5,318 3,902 Cash and short-term investments $9,881 $8,781 See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Interim Financial Statements The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. This financial information should be read in conjunction with the financial statements included in the Company's annual report on Form 10-KSB for the year ended September 30, 1998. Common Stock The Company issued a 10% stock dividend on October 30,1998. All per share amounts for fiscal 1998 have been restated. The Company declared cash dividends of $.05 per common share on November 16, 1998 and $ .05 per share on November 17, 1997. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Corporate Strategies and Economic Factors The Company provides placement and contract staffing services for business and industry, specializing in the placement of professional information technology, engineering and accounting personnel. As of March 31, 1999, the Company operated 48 offices located in major metropolitan and business centers in 16 states. The strong demand for information technology professionals in recent years has had a favorable impact on the Company's results of operations. This demand has resulted in increased contract hours billed to clients, and the average placement fee has risen as the average base salary of individuals placed has grown. For the five fiscal years ended September 30, 1998, the Company's average annual rate of revenue growth was 28%. To accommodate the demand for its services, the Company opened 25 new branch offices since October 1995, including one new office in fiscal 1999 and nine new offices in fiscal 1998. Although the Company's contract service division continued to grow during the first six months of the 1999 fiscal year, the Company experienced a decline in placement service revenues. Management attributes this decline to several factors, including client employers' decisions for increased utilization of contract employees in lieu of full-time employment staffing, more employer emphasis on retention of new hires by increased scrutiny and screening of full-time employee candidates, therefore lengthening the hiring process time, and lower productivity with inexperienced branch office staff at some of the Company's newer locations. Management believes that the underlying demand for information technology professionals in the United States will continue in the foreseeable future. The Company has deferred any new branch office openings for fiscal 1999, while it addresses issues related to the changing marketplace, under-performing branch operations and staff development. Second Quarter Results of Operations For the three months ended March 31, 1999, consolidated revenues of $9,991,000 were up $1,150,000 (13%) from the second quarter last year. Placement service revenues decreased $229,000 (4%), as a result of a 10% decrease in the number of placements, partially offset by a 6% higher average placement fee. Contract service revenues increased $1,379,000 (49%) due to a 39% increase in billable hours and a 7% higher average hourly billing rate. Contract service revenues represented 42% of the Company's consolidated revenues for the quarter, while placement service revenues accounted for 58% of the consolidated total. The direct costs of contract services increased $945,000 (51%) over last year. The gross profit on contract services was $1,389,000 this year, compared with $955,000 last year, and the gross profit margin on contract services was 33.3% this year compared with 34.2% last year. Consistent with staffing industry practices, the direct costs of contract services are considered to be the wages and the related payroll taxes and benefits of contract workers. Selling expenses for the second quarter decreased $122,000 (3%) from last year's second quarter. Commission expense decreased 4% due to the lower placement revenues, while investment in recruitment advertising increased 7%. General and administrative expenses for the quarter increased $444,000 (21%) from last year. This was largely associated with the effects of opening new branch offices during the 1998 fiscal year. Branch office salaries and wages increased 37%, occupancy costs increased 21%, and all other general and administrative expenses increased 10%. As a result, total operating expenses increased $1,267,000 (16%) for the quarter. The Company had income from operations of $987,000, which was a $117,000 (11%) decrease from $1,104,000 in the prior year's second quarter. The operating profit margin of 9.9% this year decreased 2.6 points from 12.5% last year, due to the effects of lower placement revenues combined with higher general and administrative expenses. Interest income for the second quarter increased $9,000 (9%) due to higher investable funds. The Company had pretax income of $1,095,000 for the quarter, which was a decrease of $108,000 (9%) from last year. The effective income tax rate was 40.2% this year and 39.9% last year. After taxes, net income was $655,000 for the quarter ended March 31, 1999, which was a $68,000 (9%) decline compared with net income of $723,000 last year. Diluted net income per share was $ .15 this year, compared with $ .16 last year. Six Months Results of Operations For the six months ended March 31, 1999, consolidated revenues of $19,152,000 were up $833,000 (5%) from last year's six month period. Placement service revenues decreased $1,135,000 (9%), as a result of a 16% decrease in the number of placements, partially offset by a 7% higher average placement fee. Contract service revenues increased $1,968,000 (35%) due to a 26% increase in billable hours and an 8% higher average hourly billing rate. Contract service revenues represented 40% of consolidated revenues for the six-month period, while placement service revenues represented 60% of the total. The direct costs of contract services increased $1,389,000 (38%) over last year. The gross profit on contract services was $2,566,000 this year, compared with $1,987,000 last year, and the gross profit margin on contract services was 33.8% this year compared with 35.3% last year. Selling expenses for the six months decreased $522,000 (7%) from the same period last year. Commission expense decreased 10% due to the lower placement revenues, while investment in recruitment advertising increased 17%. General and administrative expenses for the six months increased $525,000 (12%) from last year. This was largely associated with the effects of opening new branch offices during the 1998 fiscal year. Branch office salaries and wages increased 30% and occupancy costs increased 19% for the period. Administrative compensation was down 14% due to lower corporate earnings, and all other general and administrative expenses increased 6%. As a result, total operating expenses increased $1,392,000 (9%) for the six month period. The Company had income from operations of $1,833,000, which was a $559,000 (23%) decrease from $2,392,000 in the prior year's six month period. The operating profit margin of 9.6% this year decreased 3.5 points from 13.1% last year, due to the effects of lower placement revenues combined with higher general and administrative expenses. Interest income for the six months increased $36,000 (18%) due to higher investable funds. The Company had pretax income of $2,067,000 for the first six months, which was a decrease of $523,000 (20%) from last year. The effective income tax rate was 39.9% this year and 40.0% last year. After taxes, net income was $1,242,000 for the six month period ended March 31, 1999, which was a $313,000 (20%) decline compared with net income of $1,555,000 last year. Diluted net income per share was $ .28 this year, compared with $.34 last year. Financial Condition During the six months ended March 31, 1999, the Company's cash and short-term investments decreased by $578,000 to a balance of $9,881,000. Net cash provided by operating activities was $112,000 for the period. Net income provided $1,242,000, while an increase in accounts receivable required $476,000, a reduction of accrued compensation and payroll tax liabilities required $490,000, and other operating activities required $164,000. The Company used $469,000 during the period for investments in property and equipment and other assets, and the payment of a cash dividend required $221,000. The Company's net working capital was $9,922,000 as of March 31, 1999, compared with $9,261,000 at September 30, 1998, and shareholders' equity was $11,356,000 at March 31, 1999, compared with $10,335,000 last September. During fiscal 1999 the Company initiated a program to spend approximately $1,000,000 for the acquisition of additional computer equipment, applicant retrieval software and new office furniture. As of March 31, 1999, there was approximately $580,000 remaining to be spent under this program, of which approximately $280,000 was committed. Approximately $330,000 is expected to be spent during the second half of fiscal 1999, and $250,000 is expected to be spent in fiscal 2000. All of the Company's facilities are leased, and information about future minimum lease payments is presented in the notes to consolidated financial statements contained in the Company's annual report on Form 10-KSB for the year ended September 30, 1998. As of March 31, 1999, the Company had no debt outstanding, and it had a $1,000,000 line of credit available for working capital purposes. Management believes that existing resources are adequate to meet the Company's anticipated operating needs. Year 2000 Issues Issues surrounding the year 2000 are the result of older computer programs being written using two digits rather than four digits to define a year. As a result, date-sensitive computer software or hardware containing this defect could be susceptible to miscalculations or system failures if not corrected or replaced. As of October 1998, all of the Company's internal software and computer hardware were compliant with the year 2000, and the Company does not anticipate any difficulty in processing transactions or conducting business in the next millennium. The Company is in the process of identifying what effect, if any, that the year 2000 will have on the operations of third parties that could materially affect the operations of the Company. Management is in the process of identifying potentially significant third parties, and expects to complete an assessment of their readiness by September 1999. The potential effect on the Company of non-compliance by third parties is not determinable at this time. However, due to the service nature of the Company's business, management believes that it would be able to readily find alternate suppliers in the event that existing providers might fail. Forward Looking Statements The Company's business, particularly placement services, can be volatile and may fluctuate from quarter to quarter. Operating results for interim periods are not necessarily indicative of results that may be expected for the entire year. This report contains certain forward looking information that is based on management's current expectations and is subject to risks and uncertainties. Actual results could differ significantly. 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, and the ability of the Company to attract and retain qualified personnel for regular full-time placement and contract project assignments. PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. At the annual meeting of shareholders on February 22, 1999, the shareholders approved the Company's 1999 Stock Option Plan. There were 2,276,981 shares voted for the adoption, and there were 1,725,520 share withheld. In addition, 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 election and the number of votes withheld, are presented below: Nominees Votes For Votes Withheld Sheldon Brottman 3,934,259 68,242 Leonard Chavin 3,926,075 76,426 Delain G. Danehey 3,940,132 62,369 Herbert F. Imhoff 3,934,516 67,985 Herbert F. Imhoff, Jr. 3,938,168 64,333 Walter T. Kerwin, Jr. 3,930,668 71,833 Item 6. Exhibits and Reports on Form 8-K. The following exhibits are filed as part of this report: No. Description of Exhibit 10 General Employment Enterprises, Inc. 1999 Stock Option Plan. 27 Financial Data Schedule for the six months ended March 31, 1999. The Company filed no reports on Form 8-K during the quarter. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GENERAL EMPLOYMENT ENTERPRISES, INC. (Registrant) Date: May 5, 1999 By: /s/ Herbert F. Imhoff Herbert F. Imhoff Chairman of the Board and Chief Executive Officer Date: May 5, 1999 By: /s/ Kent M. Yauch Kent M. Yauch Chief Financial Officer and Treasurer