U.S. 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 June 30, 2006 [ ] 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 2200, Oakbrook Terrace, Illinois 60181 (Address of principal executive offices) (630) 954-0400 (Issuer's telephone number) Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ] Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections. Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The number of shares outstanding of the issuer's common stock as of June 30, 2006 was 5,148,265. Transitional small business disclosure format: Yes [ ] No [X] PART I - FINANCIAL INFORMATION Item 1, Financial Statements. GENERAL EMPLOYMENT ENTERPRISES, INC. CONSOLIDATED BALANCE SHEET June 30 September 30 2006 2005 (In Thousands) (Unaudited) ASSETS Current assets: Cash and cash equivalents $5,544 $5,236 Accounts receivable, less allowances (Jun. 2006--$359; Sept. 2005--$270) 2,068 2,028 Other current assets 565 468 Total current assets 8,177 7,732 Property and equipment, net 735 632 Total assets $8,912 $8,364 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accrued compensation $1,796 $1,834 Other current liabilities 563 680 Total current liabilities 2,359 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 1,714 1,011 Total shareholders' equity 6,553 5,850 Total liabilities and shareholders' equity $8,912 $8,364 See notes to consolidated financial statements. 2 GENERAL EMPLOYMENT ENTERPRISES, INC. CONSOLIDATED STATEMENT OF INCOME (Unaudited) Three Months Nine Months Ended June 30 Ended June 30 (In Thousands, Except Per Share) 2006 2005 2006 2005 Net revenues: Contract services $2,566 $3,011 $ 7,889 $ 8,741 Placement services 2,755 2,308 7,145 6,212 Net revenues 5,321 5,319 15,034 14,953 Operating expenses: Cost of contract services 1,848 2,133 5,606 6,193 Selling 1,664 1,403 4,354 3,814 General and administrative 1,453 1,548 4,509 4,604 Total operating expenses 4,965 5,084 14,469 14,611 Income from operations 356 235 565 342 Investment income 44 24 138 57 Net income $ 400 $ 259 $ 703 $ 399 Average number of shares: Basic 5,148 5,143 5,148 5,140 Diluted 5,313 5,283 5,340 5,361 Net income per share: Basic $ .08 $ .05 $ .14 $ .08 Diluted $ .08 $ .05 $ .13 $ .07 See notes to consolidated financial statements. 3 GENERAL EMPLOYMENT ENTERPRISES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Nine Months Ended June 30 (In Thousands) 2006 2005 Operating activities: Net income $ 703 $ 399 Depreciation and other noncurrent items 120 200 Accounts receivable (40) (88) Accrued compensation and payroll taxes (38) 460 Other current items, net (214) (521) Net cash provided by operating activities 531 450 Investing activities: Acquisition of property and equipment (223) (51) Financing activities: Exercises of stock options -- 9 Increase in cash and cash equivalents 308 408 Cash and cash equivalents at beginning of period 5,236 4,437 Cash and cash equivalents at end of period $5,544 $4,845 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, 2005. Income Taxes There was no provision for income taxes in either year, because of the availability of operating losses carried forward from prior years. Commitments As of June 30, 2006, the Company had contractual obligations to purchase approximately $620,000 of recruitment advertising through December 2007. 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 June 30, 2006, the Company operated 20 branch 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 June 2006 and 5.0% in June 2005. The change indicates a trend toward fuller employment over the last twelve months. During the nine months ended June 30, 2006, the Company experienced stronger demand for its placement services, but weaker demand for its contract services, compared with the same period last year. These conditions led to an increase in the number of placements, while billable contract hours decreased. Increased emphasis on higher-paid contract positions resulted in a higher average hourly billing rate for contract services this year. 5 Consolidated net revenues for the nine months ended June 30, 2006 were up 1% compared with the prior year. Contract service revenues were down 10%, while placement service revenues were up 15%. As a result of the change in mix of revenues, the Company achieved a 76% increase in consolidated net income, which was $703,000 this year compared with $399,000 the prior year. 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 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 $308,000 for the nine-month period, and the balance of cash and cash equivalents increased to $5,544,000 as of June 30, 2006. Results of Operations A summary of operating data, expressed as a percentage of consolidated net revenues, is presented below. Nine Months Ended June 30 2006 2005 Net revenues: Contract services 52.5% 58.5% Placement services 47.5 41.5 Net revenues 100.0 100.0 Operating expenses: Cost of contract services 37.3 41.4 Selling 29.0 25.5 General and administrative 30.0 30.8 Total operating expenses 96.2 97.7 Income from operations 3.8% 2.3% Net Revenues Consolidated net revenues for the nine months ended June 30, 2006 were up $81,000 (1%) from the prior year. Contract service revenues decreased $852,000 (10%) during the period, while placement service revenues increased $933,000 (15%). The decrease in contract service revenues was due to a 17% decrease in the number of billable hours, which was partially offset by an 8% increase in the average hourly billing rate. Placement service revenues were up for the period because of a 14% increase in the number of placements. 6 Operating Expenses Total operating expenses for the nine months ended June 30, 2006 were down $142,000 (1%) compared with the prior year. The cost of contract services was down $587,000 (9%), as a result of the lower volume of contract business. The gross profit margin on contract business was 28.9% for the period, which was slightly lower than 29.1% for the prior year. There are no direct costs associated with placement service revenues. Selling expenses increased $540,000 (14%) for the period, due to higher commission expense resulting from the higher placement service revenues. Selling expenses represented 29.0% of consolidated net revenues, which was up 3.5 points from the prior year because of the change in revenue mix. General and administrative expenses decreased $95,000 (2%) for the nine months ended June 30, 2006. Compensation in the operating divisions decreased 9% for the period, due to lower advances resulting from the higher commission expense, and all other general and administrative expenses were up 1%. General and administrative expenses represented 30.0% of consolidated revenues, about the same as the prior year. 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 June 30, 2006, the Company had cash and cash equivalents of $5,544,000, which was an increase of $308,000 from September 30, 2005. Net working capital at June 30, 2006 was $5,818,000, which was an increase of $600,000 from September 30, 2005, and the current ratio was 3.5 to 1. The Company had no long-term debt. Shareholders' equity as of June 30, 2006 was $6,553,000, which represented 74% of total assets. During the nine months ended June 30, 2006, the net cash provided by operating activities was $531,000. Net income for the period, together with depreciation and other non-cash charges, provided $823,000, while working capital items used $292,000. Cash used for the acquisition of property and equipment during the period was $223,000. During fiscal 2006, the Company initiated a program to upgrade its operational and administrative computer systems. Capital expenditures for the year to date consisted primarily of computer equipment and software purchased in connection with this program. As of June 30, 2006, the Company expected to spend approximately $400,000 through September 2007 for additional computer equipment and related costs to complete this program. 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. 7 Off-Balance Sheet Arrangements As of June 30, 2006, and during the nine 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 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. Item 3, Controls and Procedures. As of June 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 June 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. 8 PART II - OTHER INFORMATION 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: August 4, 2006 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