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EX-32.2 - FORTUNE INDUSTRIES, INC.v202348_ex32-2.htm
EX-31.1 - FORTUNE INDUSTRIES, INC.v202348_ex31-1.htm
EX-32.1 - FORTUNE INDUSTRIES, INC.v202348_ex32-1.htm
EX-31.2 - FORTUNE INDUSTRIES, INC.v202348_ex31-2.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x                                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

¨                                TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-19049

FORTUNE INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)

INDIANA
20-2803889
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification Number)

6402 Corporate Drive
46278
Indianapolis, IN
(Zip Code)
(Address of principal executive offices)
 

(317) 532-1374
(Registrant’s telephone number, including area code)

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 of 1934 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 ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer      ¨
Accelerated filer                                ¨
   
Non-accelerated filer        ¨
Smaller reporting company               x
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x

As of November 15, 2010, 12,235,790 shares of the Company’s $0.10 per share par value common stock were outstanding.

 
 

 


FORTUNE INDUSTRIES, INC.
FORM 10-Q
For The Quarterly Period Ended September 30, 2010

INDEX

 
Page
PART I. Financial Information
 
 
ITEM 1. Financial Statements
 
   
Consolidated Balance Sheets as of September 30, 2010 (unaudited) and June 30, 2010
3
   
Consolidated Statements of Operations for the three-month periods ended September 30, 2010 (unaudited) and September 30, 2009 (unaudited)
5
   
Consolidated Statement of Changes in Shareholders’ Equity for the three-month period ended September 30, 2010 (unaudited)
6
   
Consolidated Statements of Cash Flows for three-month periods ended September 30, 2010 (unaudited) and September 30, 2009 (unaudited)
7
   
Notes to the Unaudited Interim Consolidated Financial Statements
9
 
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
11
 
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
15
 
ITEM 4. Controls and Procedures
16
PART II. Other Information
 
 
ITEM 1. Legal Proceedings
16
 
ITEM 1A. Risk Factors
16
 
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
16
 
ITEM 3 Defaults Upon Senior Securities
16
 
ITEM 4.  Submission of Matters to a Vote of Security Holders
16
 
ITEM 5. Other Information
16
 
ITEM 6. Exhibits
16
Signatures
17

 
2

 

PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

   
September 30,
   
June 30,
 
   
2010
   
2010
 
   
(Unaudited)
   
(Audited)
 
             
ASSETS
           
CURRENT ASSETS
           
Cash and equivalents
  $ 5,334     $ 2,324  
Restricted cash (Note 1)
    2,517       2,820  
Accounts receivable, net of allowance for doubtful accounts of $6 and $29
    2,472       2,247  
Deferred tax asset
    1,750       1,750  
Prepaid expenses and other current assets
    802       943  
Assets of discontinued operations, net
    -       8  
Total Current Assets
    12,875       10,092  
                 
OTHER ASSETS
               
Property, plant & equipment, net of accumulated depreciation of $2,425 and $2,353
    407       455  
Term note receivable related party
    2,563       2,536  
Deferred tax asset
    1,000       1,000  
Goodwill
    12,339       12,339  
Other intangible assets, net of accumulated amortization of $1,897 and $1,796
    2,755       2,857  
Other long-term assets
    62       62  
Total Other Assets
    19,126       19,249  
                 
TOTAL ASSETS
  $ 32,001     $ 29,341  

See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements

 
3

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)

LIABILITIES AND SHAREHOLDERS' EQUITY
           
CURRENT LIABILITIES
           
Short-term debt and current maturities of long-term debt (Note 3)
  $ 504     $ 511  
Accounts payable
    986       909  
Health and workers' compensation reserves
    1,604       1,696  
Customer deposits
    3,247       -  
Accrued expenses
    4,707       5,530  
Other current liabilities
    154       234  
Total Current Liabilities
    11,202       8,880  
                 
LONG-TERM LIABILITIES
               
Health and workers' compensation reserves
    592       435  
Long-term debt, less current maturities (Note 3)
    292       417  
Total Long-Term Liabilities
    884       852  
                 
Total Liabilities
    12,086       9,732  
                 
SHAREHOLDERS' EQUITY (NOTE 5)
               
Common stock, $0.10 par value; 150,000,000 authorized; 12,234,290 and 12,224,290 issued and outstanding at September 30, 2010 and June 30, 2010, respectively
    1,207       1,206  
Series C Preferred stock, $0.10 par value; 1,000,000 authorized; 296,180 issued and outstanding at September 30, 2010 and June 30, 2010, respectively
    29,618       29,618  
Treasury stock, at cost, 48,263 shares
    (186 )     (186 )
Additional paid-in capital and warrants outstanding
    19,518       19,515  
Accumulated deficit
    (30,242 )     (30,544 )
Total Shareholders' Equity
    19,915       19,609  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 32,001     $ 29,341  

See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements

 
4

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

   
Three Month Period Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
 
             
REVENUES
  $ 15,571     $ 14,829  
                 
DIRECT COSTS
    12,373       11,428  
                 
GROSS PROFIT
    3,198       3,401  
                 
OPERATING EXPENSES
               
Selling, general and administrative expenses
    2,553       2,676  
Depreciation and amortization
    174       201  
Total Operating Expenses
    2,727       2,877  
                 
OPERATING INCOME
    471       524  
                 
OTHER INCOME (EXPENSE)
               
Interest income
    28       28  
Interest expense
    (10 )     (4 )
Other income
    3       -  
Total Other Income (Expense)
    21       24  
                 
INCOME BEFORE PROVISION FOR INCOME TAXES
    492       548  
                 
Provision for income tax expense (benefit)
    35       (271 )
                 
NET INCOME FROM CONTINUING OPERATIONS
    457       819  
                 
DISCONTINUED OPERATIONS
               
 Loss from discontinued operations
    (7 )     (11 )
                 
NET INCOME
    450       808  
                 
Preferred stock dividends
    148       148  
                 
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
  $ 302     $ 660  
                 
Basic Income Per Common Share-Continuing Operations
  $ 0.02     $ 0.05  
Basic Loss Per Common Share-Discontinued Operations
    -       -  
BASIC INCOME PER COMMON SHARE
  $ 0.02     $ 0.05  
                 
Basic Weighted Average Shares Outstanding
    12,231,543       12,089,380  
                 
Diluted Income Per Common Share-Continuing Operations
  $ 0.02     $ 0.05  
Diluted Loss Per Common Share-Discontinued Operations
    -       -  
DILUTED INCOME PER COMMON SHARE
  $ 0.02     $ 0.05  
                 
Diluted Weighted Average Shares Outstanding
    14,754,108       14,599,543  
 
See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements

 
5

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

                     
Additional
             
                     
Paid-in Capital
         
Total
 
   
Common
   
Treasury
   
Preferred
   
and Warrants
   
Accumulated
   
Shareholders'
 
   
Stock
   
Stock
   
Stock
   
Outstanding
   
Deficit
   
Equity
 
                                     
BALANCE AT JUNE 30, 2010 (Audited)
  $ 1,206     $ (186 )   $ 29,618     $ 19,515     $ (30,544 )   $ 19,609  
Issuance of 10,000 shares of common stock for compensation
    1       -       -       3       -       4  
Net income
    -       -       -       -       450       450  
Preferred stock dividends
    -       -       -       -       (148 )     (148 )
                                                 
BALANCE AT SEPTEMBER 30, 2010 (Unaudited)
  $ 1,207     $ (186 )   $ 29,618     $ 19,518     $ (30,242 )   $ 19,915  

See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements

 
6

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

   
Three Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net Income
  $ 450     $ 808  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    174       201  
Provision for losses on accounts receivable
    (20 )     (116 )
Stock based compensation
    4       79  
Deferred income taxes
    -       (250 )
Changes in certain operating assets and liabilities:
               
Restricted cash
    303       (366 )
Accounts receivable
    (205 )     321  
Inventory, net
    -       3  
Prepaid assets and other current assets
    140       (248 )
Assets of discontinued operations
    8       (82 )
Other long-term assets
    (27 )     -  
Accounts payable
    77       321  
Health and workers' compensation reserves
    64       (1,079 )
Customer deposits
    3,247       -  
Accrued expenses and other current liabilities
    (950 )     (563 )
Liabilities of discontinued operations
    -       (1 )
Net Cash Provided by (Used in) Operating Activities
    3,265       (972 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Capital expenditures
    (24 )     (10 )
Net Cash Used in Investing Activities
    (24 )     (10 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Payments on term debt
    (132 )     (6 )
Dividends paid on preferred stock
    (99 )     -  
Net Cash Used in Financing Activities
    (231 )     (6 )
                 
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
    3,010       (988 )
                 
CASH AND EQUIVALENTS
               
Beginning of Period
    2,324       1,686  
                 
End of Period
  $ 5,334     $ 698  

See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements

 
7

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)

   
Three Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
 
SUPPLEMENTAL DISCLOSURES
           
Interest paid
  $ 10     $ 4  
                 
Income taxes paid
  $ 35     $ (21 )

See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements

 
8

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED,
EXCEPT PER SHARE DATA)
(UNAUDITED)

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

Basis of Presentation: The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in the 2010 Annual Report on Form 10-K filed by Fortune Industries, Inc. (which, together with its subsidiaries unless the context requires otherwise, shall be referred to herein as the “Company”). The consolidated balance sheet at June 30, 2010 has been derived from the audited financial statements at that date, but does not include all of the information or footnotes required by accounting principles generally accepted in the United States for complete financial statements. The Company’s consolidated balance sheet at September 30, 2010, and the consolidated statements of operations, cash flows and shareholders’ equity for the period ended September 30, 2010 have been prepared by the Company without audit. These unaudited financial statements contain, in the opinion of management, all adjustments (consisting of normal accruals and other recurring adjustments) necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States. The Company has evaluated subsequent events through the time these financial statements in the Form 10-Q report were filed with the Securities and Exchange Commission. The operating results for the three-month period ended September 30, 2010 are not necessarily indicative of the operating results to be expected for the full fiscal year.

Nature of Business: Fortune Industries, Inc. is an Indiana corporation, originally incorporated in Delaware in 1988. The Company is comprised of Professional Employer Organizations (PEOs) which provide full-service human resources outsourcing services through co-employment relationships with their clients. Wholly owned subsidiaries operating in this industry include Professional Staff Management, Inc. and related entities (“PSM”); CSM, Inc. and related subsidiaries (“CSM”); Precision Employee Management, LLC (“PEM”); and Employer Solutions Group, Inc. and related entities (“ESG”).

The Companies bill their clients under Professional Services Agreements as licensed PEOs. The billing includes amounts for the client’s gross wages, payroll taxes, employee benefits, workers’ compensation insurance and an administration fee. The administration fee charged by the companies in this segment is typically a percentage of the gross payroll and is sufficient to allow the companies in this segment to provide payroll administration services, human resources consulting services, worksite safety training, and employment regulatory compliance for no additional fees.

The component of the administration fee related to administration varies, in part, according to the size of the client, the amount and frequency of payroll payments and the delivery method of such payments. The component of the administration fee related to health, workers’ compensation and unemployment insurance is based, in part, on the client’s historical claims experience. Charges by the Companies in this segment are invoiced along with each periodic payroll delivered to the client.

Through the co-employment contractual relationship, the Companies become the statutory employer and, as such, all payroll-related taxes are filed on these Companies’ federal, state, and local tax identification numbers. The clients are not required to file any payroll related taxes on their own behalf. The calculations of amounts the Companies in this segment owe and pay the various government and employment insurance vendors are based on the experience levels and activity of the Companies in this segment.

Restricted Cash: Restricted cash includes certificates of deposits and letters of credit issued to collateralize its obligations under its workers’ compensation program and certain general insurance coverage. At September 30, 2010, the Company had $2,517 in total restricted cash. Of this, $2,247 is restricted for various workers’ compensation programs in accordance with terms of insurance carrier agreements, and the remainder is restricted for certain standby letters of credits in accordance with various state regulations.

Goodwill and Other Indefinite-Lived Intangible Assets: Goodwill and other intangible assets with indeterminate lives are assessed for impairment at least annually and more often as triggering events occur. In making this assessment, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and market place data. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of both goodwill and other intangible assets impairment. Since management judgment is involved in performing goodwill and other intangible assets valuation analyses, there is risk that the carrying value of the goodwill and other intangible assets may be overstated or understated.

The Company has elected to perform the annual impairment test of recorded goodwill and other indefinite-lived intangible assets as of the end of fiscal first quarter. As of November 15, 2010, the current annual impairment test is in process. The results of the last completed annual impairment test indicated that the fair value of the Business Solutions segment, as of September 30, 2009, exceeded the carrying, or book value, including goodwill, and therefore recorded goodwill and other indefinite-lived intangible assets were not subject to impairment.

 
9

 

Self Insurance: The Company’s PSM subsidiary maintains a loss-sensitive worksite employees’ health and accident benefit program. Under the insurance policy, PSM’s self-funded liability is limited to $225 per employee, with an aggregate liability limit of approximately $7.6 million. The aggregate liability limits are adjusted monthly based on the number of participants.

Workers’ Compensation: The Company’s PSM and CSM subsidiaries maintain partially self-funded workers’ compensation insurance programs. Under the insurance policies established at each company, PSM and CSM’s deductible liability is limited to $250 per incident, with an aggregate liability limit of approximately $2,000. Under the insurance policy established at ESG, the deductible liability is limited to $350 per incident, with no aggregate liability limit.

NOTE 2 – MEASUREMENT OF FAIR VALUE

Effective September 1, 2008, the Company adopted ASC 820, which provides a framework for measuring fair value under GAAP. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value in accordance with ASC 820, we utilize market data or assumptions that we believe market participants would use in pricing the asset or liability that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, including assumptions about risk and the risks inherent in the inputs to the valuation technique. Classification of the financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy defined by ASC 820 are as follows:

Level 1
Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2
Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over-the-counter traded financial instruments. The prices for the financial instruments are determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3
Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation techniques.

As of September 30, 2010 and June 30, 2010, we did not have any financial assets utilizing Level 1. Financial assets utilizing Level 2 inputs consist of cash held in certificates of deposit with various financial institutions. The fair value measurement of these items is determined by using prices for recently traded CD’s with similar interest rates. The fair value for the Level 2 financial instruments was $1,448 and $1,745 as of September 30, 2010 and June 30, 2010, respectively. Financial liabilities utilizing Level 3 inputs included put options related to common stock issued in conjunction with the purchase of ESG. The fair value measurement of this Level 3 item has been estimated using the stated contractual put price of $3.75 per share. The fair value for the Level 3 financial instruments was $116 and $247 as of September 30, 2010 and June 30, 2010, respectively.


Term Note

On May 29, 2009, the Company entered into a $250 term loan note with a bank. The term loan note matured on October 28, 2009 and incurred interest at the Prime Rate plus 2.0%. The note was collateralized by certain assets of the Company’s majority shareholders. The loan required the Company to maintain a minimum debt service coverage ratio of 1.25 to 1.0 among other covenants. In January 2010, the Company was held harmless on the note and was released from the obligation by the bank. The amount forgiven of $250 is included in the Company’s Consolidated Statement of Operations as other income for the year ended June 30, 2010.

 
10

 

On April 30, 2010, the Company entered into a $1 million term note with a bank. The term note requires twenty four consecutive monthly payments of principal plus accrued interest at the Bank’s Prime Rate (not less than 4.5% per annum). The term note matures on April 30, 2012. The term note is secured by all assets of the Company and the personal guarantee of the Company’s majority shareholder. The note is subject to certain covenants including minimum cash flow coverage and current ratio requirements.

NOTE 4– EQUITY INCENTIVE PLANS AND OTHER STOCK COMPENSATION

Restricted Share Units

Effective April 13, 2006, the Company’s shareholders approved the 2006 Equity Incentive Plan. Under terms of the 2006 Equity Incentive Plan, the Company may grant options, restricted share units and other stock-based awards to its management personnel as well as other individuals for up to 1.0 million shares of common stock. During the period ended September 30, 2010, 10,000 restricted share units were issued under this plan.

NOTE 5- SHAREHOLDERS’ EQUITY

Common Stock

The Company issued 10,000 shares of common stock during the three-month period ended September 30, 2010.

Preferred Stock

On September 25, 2009, the Company reached an agreement with the Chairman to amend the dividend rates on the Series C Preferred Stock with an effective date of July 1, 2009. From the effective date forward the Series C Preferred Stock will bear an annual dividend of $2 per share in the years ending June 30, 2010 and 2011, $5 per share in the year ending June 30, 2012, $6 per share in the year ending June 30, 2013 and $7 per share thereafter. All other items of the Series C Preferred Shares remained unchanged. Dividends of $148 and $148 were accrued and/or paid for the three months ended September 30, 2010 and September 30, 2009, respectively.

NOTE 6 - RELATED PARTY TRANSACTIONS

On September 25, 2009, the Board of Directors approved the Chairman’s request to utilize approximately $8.15 million of the Company’s capital loss carryforward for individual tax purposes related to the Chairman’s personal loss on indebtedness associated with the sales transaction as described in Note 2. The transaction had no effect on assets, liabilities, shareholders’ equity and net income as the Company had established that the capital loss carryforwards presented no material value to the Company and therefore have not been included in the calculation of deferred tax assets.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Statements contained in this document, as well as some statements by the Company in periodic press releases and oral statements of Company officials during presentations about the Company constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include statements that are predictive in nature, depend on or refer to future events or conditions, which include words such as “expect,” “estimate,” “anticipate,” “predict,” “believe” and similar expressions. These statements are based on the current intent, belief or expectation of the Company with respect to, among other things, trends affecting the Company’s financial condition or results of operations. These statements are not guaranties of future performance and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Actual events and results involve risks and uncertainties and may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. Factors that might cause or contribute to such differences, include, but are not limited to, the risks and uncertainties that are discussed under the heading “Risk Factors” disclosed within Form 10-K for the year ended June 30, 2010. Readers should carefully review the risk factors referred to above and the other documents filed by the Company with the Securities and Exchange Commission.

OVERVIEW

As a holding company we have historically invested in businesses that we believe are undervalued or underperforming, and /or in operations that are poised for significant growth. Management’s strategic focus is to support the growth of its operations by increasing revenues and revenue streams, managing costs and creating earnings growth.

Our operations are largely decentralized from the corporate office. Autonomy is given to subsidiary entities, and there are few integrated business functions (i.e. sales, marketing, purchasing and human resources). Day-to-day operating decisions are made by subsidiary management teams. Our Corporate management team assists in operational decisions when deemed necessary, selects subsidiary management teams and handles capital allocation among our operations.

We were incorporated in the state of Delaware in 1988, restructured in 2000 and redomesticated to the state of Indiana in May 2005.

 
11

 

Until November 30, 2008, we classified our businesses under five operating segments: Business Solutions; Wireless Infrastructure; Transportation Infrastructure; Ultraviolet Technologies; and Electronics Integration. Effective November 30, 2008, we approved the sale of all of our remaining operating subsidiaries within four of our five segments (Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Infrastructure, and Electronics Integration). Consequently, as of the effective date of the transaction, our Business Solutions segment is the Company’s remaining operating segment. The sales transaction, combined with other significant events disclosed in the Companies Form 10-K for the year ended June 30, 2010, changed the focus of our Company in fiscal 2009 and thereafter. This operational change in our Company impacts our comparability of our financial information compared to historical data presented in past filings.

Recent Developments

Effective May 2010, Ms. Julia Reed resigned from the Company’s Board of Directors and Audit Committee. Ms. Reed’s resignation was not due to a disagreement with the Company on any matter relating to the Company’s operations, policies or practices. As a result of Ms. Reed’s resignation, the Company does not meet the minimum audit committee requirements of the NYSE Amex guidelines. Therefore by letter dated July 2, 2010 the Company was notified by the NYSE Amex that it is not in compliance with Section 803(B)(2)(c) of the NYSE Amex Company Guide, in that the Company’s audit committee is not comprised of at least two independent directors. Pursuant to Section 803(B)(6) of the Company Guide, the Company has until the earlier of its next annual shareholders’ meeting or one year from the occurrence of the event that caused the failure to comply with the requirement to regain compliance. The Company is currently interviewing potential candidates for the position of independent director and audit committee member and expects to have this position filled by the required timeframe.

On April 30, 2010, the Company entered into a $1 million term note with a bank. The term note requires twenty four consecutive monthly payments of principal plus accrued interest at the Bank’s Prime Rate (not less than 4.5% per annum). The term note matures on April 30, 2012. The term note is secured by all assets of the Company and the personal guarantee of the Company’s majority shareholder. The note is subject to certain covenants including minimum cash flow coverage and current ratio requirements.

On January 15, 2010, our Board of Directors appointed Tena Mayberry to the position of Chief Executive Officer of the Company. Ms. Mayberry replaced John F. Fisbeck as the Company’s Chief Executive Officer.

On January 15, 2010, the Company entered into a Settlement Agreement with its CEO John Fisbeck which included a) immediate resignation of Mr. Fisbeck as CEO of the company, b) immediate resignation of Mr. Fisbeck from the Company’s Board of Directors, and c) waiver of certain severance payments included in his Employment Agreement.

CRITICAL ACCOUNTING POLICIES

The Company’s accounting policies, which are in compliance with accounting principles generally accepted in the United States, require application of methodologies, estimates and judgments that have a significant impact on the results reported in the Company’s financial statements. Those policies that, in the belief of management, are critical and require the use of complex judgment in their application, are disclosed on the Company’s Form 10-K for the year ended June 30, 2010. Since June 30, 2010, there have been no material changes to the Company’s critical accounting policies.

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) ASC 820-10 (formerly SFAS 157), “Fair Value Measurements” was issued. ASC 820-10 establishes a framework for measuring fair value by providing a standard definition of fair value as it applies to assets and liabilities. ASC 820-10, which does not require any new fair value measurements, clarifies the application of other accounting pronouncements that require or permit fair value measurements. The standard was effective for fiscal years beginning after November 15, 2007. However, the FASB delayed the effective date of ASC 820-10 for all non-financial assets and non-financials liabilities until fiscal years beginning after November 15, 2008. Accordingly, we adopted ASC 820-10 for our financial assets and liabilities on September 1, 2008 and adopted ASC 820-10 for our non-financial assets and liabilities on July 1, 2009. The adoption did not have a material impact on our consolidated financial statements.

In December 2007, the FASB issued ASC No. 805-10 (formerly SFAS No. 141R) “Business Combinations”. ASC No.805-10 establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statements also provides guidance for recognizing and measuring the goodwill acquired in the business combination and specifies what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC No. 805-10 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Our effective date for ASC 805-10 was July 1, 2009. The adoption of ASC No. 805-10 did not have a material impact on our consolidated financial statements.

In June 2008, the FASB issued ASC 260-10 (formerly FASB Staff Position No. EITF 03-6-1), “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. ASC 260-10 concludes that unvested restricted share awards that pay nonforfeitable cash dividends are participating securities and are subject to the two-class method of computing earnings per share. Our effective date for ASC 260-10 was July 1, 2009. The adoption of ASC 260-10 did not have a material impact on our consolidated financial statements.

 
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In April 2009, the FASB issued ASC No. 825-10-65-1 (formerly FAS 107-1 and APB 28-1), “Interim Disclosures about Fair Value of Financial Instruments. This ASC essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the ASC requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. These additional disclosures will be required beginning with the quarter ending September 30, 2009. The adoption of ASC No. 825-10-65-1 did not have a material impact on our consolidated financial statements.

In May 2009, FASB ASC 855-10 (formerly SFAS No. 165), “Subsequent Events” was issued. ASC 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date (“subsequent events”), but before the financial statements are issued or available to be issued and requires disclosure of the date through which the entity has evaluated subsequent events and the basis for that date. ASC 855-10 is effective for interim and annual periods ending after June 15, 2009; the Company adopted ASC 855-10 for the quarter ended June 30, 2009. The Company evaluated subsequent events through the time we filed our Form 10-Q with the Securities and Exchange Commission and will continue to evaluate subsequent events through the issuance date of future required filings. The adoption did not have a material impact on our consolidated financial statements.

In June 2009, FASB ASC 105-10 (formerly SFAS 168), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” was issued. ASC 105-10 is the single official source of authoritative U.S. GAAP, superseding all other accounting literature except that issued by the Securities and Exchange Commission. As of July 2009, only one level of authoritative U.S. GAAP exists. All other literature will be considered non-authoritative. The Codification does not change U.S. GAAP; instead, it introduces a new referencing system that is designed to be an easily accessible, user-friendly online research system. ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted ASC 105-10 for the quarter ended September 30, 2009. The adoption did not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued an amendment to the disclosure requirement related to fair value measurements. The amendment, FASB ASC 820-10-65 requires new disclosures related to transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. A reporting entity is required to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. Additionally, in the reconciliation for fair value measurements in Level 3, a reporting entity must present separately information about purchases, sales, issuances and settlements (on a gross basis rather than a net number). The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company does not anticipate that our adoption of this amendment will have a material effect on its financial position, results of operations or cash flows.

Other new pronouncements issued but not effective until after September 30, 2010, are not expected to have a significant effect on the company’s consolidated financial statements.

RESULTS OF OPERATIONS: COMPARISON OF THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2010 AND SEPTEMBER 30, 2009

Executive Overview of Financial Results

Results of operations for the three month periods ended September 30, 2010 and September 30, 2009 are as follows:

   
Revenue for the
   
Operating income (loss) for the
 
   
Three Months Ended
   
Three Months Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Dollars in thousands)
 
Business Solutions
  $ 15,571     $ 14,829     $ 471     $ 721  
Holding Company
    -       -       -       (197 )
Segment Totals
  $ 15,571     $ 14,829     $ 471     $ 524  
                                 
Net Income Available to Common Shareholders
                  $ 302     $ 660  

Net income available to common stock shareholders was $0.3 million or $0.02 per diluted share on revenue of $15.6 million for the three-month period ended September 30, 2010 compared with net income available to common stock shareholders of $0.7 million or $0.05 per diluted share on revenue of $14.8 million for the three-month period ended September 30, 2009. This represents a 5% increase in revenue and a 54% decrease in net income.

 
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The increase in revenue for the three-month period ended September 30, 2010 is primarily due to an increase in worksite employees.

The decrease in net income available to common shareholders for the three-month period ended September 30, 2010 is primarily due to a deferred tax benefit in the amount of $0.271 million recognized in the three-month period ended September 30, 2009.

Results are described in further detail as follows:

Operating results for three-month period ended September 30, 2010 and September 30, 2009 are as follows:

   
Three-Month Period Ended
 
   
September 30, 2010
   
September 30, 2009
 
   
(Dollars in thousands)
 
Revenues
  $ 15,571       100 %   $ 14,829       100 %
Cost of revenues
    12,373       79.5 %     11,428       77.1 %
Gross profit
    3,198       20.5 %     3,401       22.9 %
                                 
Operating expenses
                               
Selling, general and administrative
    2,553       16.4 %     2,676       18.0 %
Depreciation and amortization
    174       1.1 %     201       1.4 %
Total operating expenses
    2,727       17.5 %     2,877       19.4 %
                                 
Segment operating income
  $ 471       3.0 %   $ 524       3.5 %

Revenue

Revenue for the three-month period ended September 30, 2010 was $15.6 million, compared to $14.8 million for the three-month period ended September 30, 2009, an increase of $0.7 million or 5%. Revenue increased primarily due to an increase in worksite employees.

Gross Profit

Gross profit for the three-month period ended September 30, 2010 was $3.2 million, representing 21% of revenue, compared to $3.4 million, representing 23% of revenue for the three-month period ended September 30, 2009, a decrease of $0.2 million or 6%. Gross profit decreased due to an increase in the claims incurred for workers compensation.

Operating Income

Operating income for the three-month period ended September 30, 2010 was $0.5 million, compared to operating income of $0.5 million for the three-month period ended September 30, 2009. Operating income remained relatively unchanged. The decrease in operating income as a percentage of the overall revenue was due to an increase in the claims incurred for workers compensation during the three month period ending September 30, 2010.

Interest Expense

Interest expense was $0.01 million for the three-month period ended September 30, 2010, compared to $0.004 million for the three-month period ended September 30, 2009, an increase of $0.006 million or 150%. The increase was due to interest payments on the term note entered into on April 30, 2010.

Income Taxes

Income tax expense was $0.035 and ($0.271) million for the three months ended September 30, 2010 and, 2009, respectively. This increase is due to the fact that the Company recognized a deferred tax benefit of $250,000 in the three month period ending September 30, 2009 based on Management’s evaluation of the deferred tax assets and the valuation allowance at that time. A valuation allowance is necessary to reduce the deferred tax assets, if the Company had a federal tax operating loss and based on the weight of the evidence; it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management determined that a $250,000 adjustment to the valuation allowance for the three month period ending September 30, 2009 was necessary to increase the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for that period resulted in the recognition of a tax benefit of $250,000.

 
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LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity include cash and equivalents and proceeds from debt borrowings. We had cash and equivalents of $5.3 million at September 30, 2010 and $2.3 million at June 30, 2010. The increase in cash was due to the timing of the quarter end in relation to the timing of our client’s payroll processing cycles. Due to the quarter ending on a Thursday, the Company received approximately $3.2 million in customer deposits to fund our worksite employee payrolls for the Friday payroll cycle. This resulted in an elevated cash balance as well as an increase in current liabilities of approximately $3.2 million as of September 30, 2010.

We had working capital of $1.7 million at September 30, 2010 compared with $1.2 million at June 30, 2010. The increase in working capital was a direct result of an additional quarter of profitability and positive EBITDA. Current assets are primarily comprised of cash and equivalents, net accounts receivable, and prepaid expenses. Current liabilities are primarily comprised of accounts payable and accrued expenses.

The Company is required to collateralize its obligations under its workers’ compensation and certain general insurance coverage. The Company uses its cash and cash equivalents to collateralize these obligations. Restricted cash was approximately $2.5 million and $2.8 million at September 30, 2010 and June 30, 2010, respectively.

Total debt at September 30, 2010 and June 30, 2010 was $0.8 and $0.9 million, respectively.

Cash Flows

Cash flows provided by operations for the three-month period ended September 30, 2010 and September 30, 2009 were $3.3 million and ($1.0) million, respectively. This increase in operating cash flows was due primarily to customer deposits received due to the timing of the end of the period and fluctuations in other accrued liabilities and health and workers’ compensation reserves.

Net cash flow used in investing activities was ($0.02) million for the three-month period ended September 30, 2010 compared to ($0.01) million for the three-month period ended September 30, 2009. The decrease was primarily due to an increase in capital expenditures.

Net cash flow used in financing activities was ($0.231) million for the three-month period ended September 30, 2010 compared to ($0.006) million for the three-month period ended September 30, 2009. The decrease was primarily due to payments on term debt and preferred stock dividends.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

There have been no material changes to the Company’s contractual obligations from those disclosed in the Form 10-K for the year ended June 30, 2010 under “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

OFF BALANCE SHEET ARRANGEMENTS

As is common in the industries we operate in, we have entered into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets. Our significant off-balance sheet transactions include transactions with related parties, liabilities associated with guarantees, letter of credit obligations and surety guarantees.

Guarantees

Significant portions of our letters of credit are personally guaranteed by the Company’s Chairman. Future changes to these guarantees would affect financing capacity of the Company.

Restricted Cash

Certain states and vendors require us to post letters of credit to ensure payment of taxes or payments to our vendors under workers’ compensation contracts and to guarantee performance under our contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder demonstrates that we have failed to perform specified actions. If this situation were to occur, we would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, we may also have to record a charge to earnings for the reimbursement. We do not believe that it is likely that any claims will be made under a letter of credit in the foreseeable future. As of September 30, 2010, we had approximately $2.5 million in restricted cash primarily to secure obligations under our PEO contracts in the Business Solutions segment.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes from the information previously reported under “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the Form 10-K for the year ended June 30, 2010.

 
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Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports the Company file pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, including the Chief Executive Officer and Chief Financial Officer recognizes that, because the design of any system of controls is based in part upon certain assumptions about the likelihood of future events and also is subject to other inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired objectives.

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2010. Based on this evaluation, the Chief Executive Officer, Chief Financial Officer conclude that as of September 30, 2010 the Company’s Disclosure Controls are effective to provide reasonable assurance that information relating to the Company that is required to be disclosed by us in the reports we file or submit, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

It should be noted that any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.

PART II--OTHER INFORMATION.

Item 1. Legal Proceedings.

The Company is not involved in any legal proceedings or claims that management believes will have a material adverse effect on the Company's business or financial condition.

Item 1A. Risk Factors

There have been no material changes with regard to the risk factors previously disclosed in our most recent Annual Report on Form 10-K for the year ended June 30, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults upon Senior Securities.

None

Item 4. Submission of Matters to a Vote of Security Holders.

None

Item 5. Other Information.

None

Item 6. Exhibits

The following exhibits are included herein:

31.1
Rule 15d-14(a) Certification of CEO
31.2
Rule 15d-14(a) Certification of CFO
32.1
Section 1350 Certification of CEO
32.2
Section 1350 Certification of CFO

 
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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.

 
Fortune Industries, Inc.
 
(Registrant)
   
Date:  11/15/10
By:
/s/ Tena Mayberry
 
Tena Mayberry,
 
Chief Executive Officer
   
Date:  11/15/10
By:
/s/ Randy E. Butler
 
Randy E. Butler,
 
Chief Financial Officer

 
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