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, 2004 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 March 31, 2004 was 5,135,894. 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 2004 2003 (In Thousands) (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 3,360 $ 3,905 Accounts receivable, less allowances (Mar. 2004--$236; Sept. 2003--$238) 1,870 2,095 Other current assets 560 500 Total current assets 5,790 6,500 Property and equipment: Furniture, fixtures and equipment 4,940 5,037 Accumulated depreciation and amortization (4,139) (3,934) Net property and equipment 801 1,103 Goodwill 1,088 1,088 Total assets $ 7,679 $ 8,691 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accrued compensation and payroll taxes $ 1,170 $ 1,054 Other current liabilities 862 1,113 Total current liabilities 2,032 2,167 Shareholders' equity: Preferred stock, authorized -- 100 shares; issued and outstanding -- none -- -- Common stock, no-par value; authorized -- 20,000 shares; issued and outstanding -- 5,136 shares in March 2004 and 5,121 shares in September 2003 51 51 Capital in excess of stated value of shares 4,766 4,736 Retained earnings 830 1,737 Total shareholders' equity 5,647 6,524 Total liabilities and shareholders' equity $ 7,679 $ 8,691 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) 2004 2003 2004 2003 Net revenues: Contract services $ 3,193 $ 3,394 $ 6,585 $ 6,674 Placement services 1,354 1,136 2,525 2,756 Net revenues 4,547 4,530 9,110 9,430 Operating expenses: Cost of contract services 2,367 2,394 4,737 4,611 Selling 878 894 1,681 2,018 General and administrative 1,753 2,348 3,622 4,569 Total operating expenses 4,998 5,636 10,040 11,198 Loss from operations (451) (1,106) (930) (1,768) Investment income 6 6 23 24 Net loss $ (445) $(1,100) $ (907) $(1,744) Average number of shares - basic and diluted 5,132 5,121 5,127 5,121 Net loss per share - basic and diluted $ (.09) $ (.21) $ (.18) $ (.34) See notes to consolidated financial statements. 3 GENERAL EMPLOYMENT ENTERPRISES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended March 31 (In Thousands) 2004 2003 Operating activities: Net loss $ (907) $(1,744) Depreciation and other noncurrent items 324 374 Accounts receivable 225 53 Income tax refunds receivable 2 1,287 Accrued compensation and payroll taxes 116 111 Other current items, net (313) (209) Net cash used by operating activities (553) (128) Investing activities: Acquisition of property and equipment (5) (90) Net cash used by investing activities (5) (90) Financing activities: Exercises of stock options 13 -- Net cash provided by financing activities 13 -- Decrease in cash and cash equivalents (545) (218) Cash and cash equivalents at beginning of period 3,905 4,759 Cash and cash equivalents at end of period $3,360 $ 4,541 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-K for the year ended September 30, 2003. Income Taxes There were no credits for income taxes as a result of the pretax losses in fiscal 2004 and fiscal 2003, because the losses must be carried forward for income tax purposes and there was not sufficient assurance that future tax benefits would be realized. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview of Operations 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, 2004, the Company operated 21 branch offices located in 11 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 demand for the Company's employment services has been adversely affected by the lingering weakness in the employment market caused by economic and political uncertainties that followed the U.S. economic recession and terrorist attacks in 2001. Consolidated net revenues for the second quarter of fiscal 2004 were up fractionally from the second quarter of last year, including a 19% increase in placement service revenues. The improvement is attributable to increases in the number of placements and billable contract hours, despite lower average hourly billing rates. It was the first year-over-year increase in quarterly revenues in over three years. Consolidated net revenues for the first six months of fiscal 2004 were down 3% compared with last year. Soft market conditions and competitive pricing pressures resulted in lower average fees in both operating divisions. However, the effect of lower average fees was partially offset by an increase in the number of billable contract hours. 5 The Company closed six unprofitable branch offices during the last twelve months. These and other actions taken by management to control costs resulted in significant reductions in the Company's operating losses. For the six months ended March 31, 2004, the Company achieved a 10% reduction in total operating expenses, and the loss from operations was reduced by 47%. 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 2004 2003 Net revenues: Contract services 72.3% 70.8% Placement services 27.7 29.2 Net revenues 100.0 100.0 Operating expenses: Cost of contract services 52.0 48.9 Selling 18.5 21.4 General and administrative 39.8 48.5 Total operating expenses 110.2 118.7 Loss from operations (10.2)% (18.7)% Six Months Results of Operations Net Revenues Consolidated net revenues for the six months ended March 31, 2004 were down $320,000 (3%) from the prior year. That was due to the combination of an $89,000 (1%) decrease in contract service revenues and a $231,000 (8%) decrease in placement service revenues. The decrease in contract service revenues occurred because of a 14% decrease in the average hourly billing rate, which was substantially offset by a 14% increase in the number of billable hours. Placement service revenues were down for the period because of a 7% decrease in the number of placements, together with a 2% decrease in the average placement fee. Operating Expenses Total operating expenses for the six months ended March 31, 2004 were down $1,158,000 (10%) compared with the prior year. The cost of contract services was up $126,000 (3%) as a result of the higher number of billable hours. Due to competitive market conditions, the gross profit margin on contract services declined 2.8 points to 28.1% for the six months ended March 31, 2004, compared with 30.9% the prior year. Selling expenses decreased $337,000 (17%) for the period. Commission expense was down 15% due to the lower placement service revenues and lower commissionable profits, while recruitment advertising expense was 38% lower than the prior year. Selling expenses represented 18.5% of consolidated net revenues, which was down 2.9 points from the prior year. 6 General and administrative expenses decreased $947,000 (21%) for the six months ended March 31, 2004. Compensation in the operating divisions decreased 23% due to a reduction in the size of the consulting staff. Office rent and occupancy costs were down 22% for the period, due to the effect of office closings, and all other general and administrative expenses were down 17%. General and administrative expenses represented 39.8% of consolidated revenues, and that was down 8.7 points from the prior year because expenses declined more sharply than revenues. There were no credits for income taxes as a result of the pretax losses in fiscal 2004 and fiscal 2003, because the losses must be carried forward for income tax purposes and there was not sufficient assurance that future tax benefits would be realized. Outlook The Company's current priority is to minimize the impact of the weak labor market, to return the Company to profitability as soon as possible, and to be positioned for growth when the demand for its services improves. Returning the Company to profitability will require an increase in overall revenues. Management believes that the key to returning the Company to profitability will be a sustained increase in national business spending on computer equipment and software, leading to a rebound in hiring in the technology sector of the economy. Management believes that it has taken appropriate actions within its control to reduce costs to date, consistent with positioning the Company for the future. It will continue to evaluate the Company's operations and take appropriate actions to meet the economic challenges ahead. Liquidity and Capital Resources As of March 31, 2004, the Company had cash and cash equivalents of $3,360,000, which was a decrease of $545,000 from September 30, 2003. Net working capital at March 31, 2004 was $3,758,000, which was a decrease of $575,000 from September 30, 2003, and the current ratio was 2.8 to 1. The Company had no long-term debt. Shareholders' equity as of March 31, 2004 was $5,647,000, which represented 74% of total assets. During the six months ended March 31, 2004, the net cash used by operating activities was $553,000. The $907,000 net loss for the period was partially offset by depreciation and other non-cash expenses of $324,000, and working capital items provided $30,000. The Company's primary source of liquidity is normally from its operating activities. Despite recent operating losses, the Company had positive cash flow of $59,000 for the second quarter of fiscal 2004. Management believes that existing cash balances will be adequate to finance current operations for the foreseeable future. Nevertheless, if operating losses were to continue indefinitely, or if the Company's business were to deteriorate, such losses would have a material, adverse effect on the Company's financial condition. External sources of funding are not likely to be available to support continuing losses. 7 Off-Balance Sheet Arrangements As of March 31, 2004, 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, 2004, 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, 2004 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 with its annual report for the fiscal year ending September 30, 2005, and the Company must begin to comply with a requirement to perform a quarterly 8 evaluation of changes to internal control over financial reporting that occur thereafter. The Company maintains a system of internal control over financial reporting. However, as of March 31, 2004, it 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 23, 2004, 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 4,709,873 81,367 Sheldon Brottman 4,655,372 135,868 Delain G. Danehey 4,709,773 81,467 Herbert F. Imhoff, Jr. 4,707,316 83,924 Joseph F. Lizzadro 4,709,556 81,684 Kent M. Yauch 4,707,948 83,292 Item 6. Exhibits and Reports on Form 8-K. Exhibits The following exhibits are filed as a part 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. Reports on Form 8-K The Company filed the following report on Form 8-K during the quarter ended March 31, 2004: The Company reported that it issued a press release on January 27, 2004 containing information regarding its results of operations and financial condition for the quarter ended December 31, 2003. 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 6, 2004 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