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EX-31.2 - EXHIBIT 31.2 - FORTUNE INDUSTRIES, INC.v301720_ex31-2.htm
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EX-32.2 - EXHIBIT 32.2 - FORTUNE INDUSTRIES, INC.v301720_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - FORTUNE INDUSTRIES, INC.v301720_ex32-1.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 December 31, 2011

 

¨                               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 February 13, 2012, 12,270,790 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 December 31, 2011

 

INDEX

 

  Page
PART I.    Financial Information  
  ITEM 1.  Financial Statements 2
    Consolidated Balance Sheets as of December 31, 2011 (unaudited) and June 30, 2011 2
    Consolidated Statements of Operations for the three and six month periods ended December 31 , 2011 (unaudited) and December 31, 2010 (unaudited) 4
    Consolidated Statement of Changes in Shareholders’ Equity for the six month period ended December 31, 2011 (unaudited) 5
    Consolidated Statements of Cash Flows for the six month periods ended December 31, 2011 (unaudited) and December 31, 2010 (unaudited) 6
    Notes to the Unaudited Interim Consolidated Financial Statements 8
  ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations 9
  ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk 14
  ITEM 4.  Controls and Procedures 14
PART II.    Other Information  
  ITEM 1.  Legal Proceedings 14
  ITEM 1A. Risk Factors 15
  ITEM 2.   Unregistered Sales of Equity Securities and Use of Proceeds 15
  ITEM 3    Defaults Upon Senior Securities 15
  ITEM 4.   (Removed and Reserved) 15
  ITEM 5.    Other Information 15
  ITEM 6.    Exhibits 15
Signatures 15

 

 
 

 

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements.

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS)

 

   December 31,   June 30, 
   2011   2011 
         
ASSETS          
CURRENT ASSETS          
Cash and equivalents  $6,153   $6,036 
Restricted cash (Note 1)   2,395    2,394 
Accounts receivable, net of allowance for doubtful accounts of $29 and $0   3,313    2,639 
Deferred tax asset   1,500    1,500 
Prepaid expenses and other current assets   528    866 
Total Current Assets   13,889    13,435 
           
OTHER ASSETS          
Property, plant & equipment, net of accumulated depreciation of $1,757 and $1,716   188    245 
Deferred tax asset   1,250    1,250 
Goodwill   12,379    12,339 
Other intangible assets, net of accumulated amortization of $2,405 and $2,203   2,247    2,450 
Other long-term assets   72    78 
Total Other Assets   16,136    16,362 
           
TOTAL ASSETS  $30,025   $29,797 

 

See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements

 

2
 

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(DOLLARS IN THOUSANDS)

 

   December 31,   June 30, 
   2011   2011 
         
LIABILITIES AND SHAREHOLDERS' EQUITY          
CURRENT LIABILITIES          
Current maturities of long-term debt (Note 2)  $167   $417 
Accounts payable   685    497 
Workers' compensation reserves   1,180    945 
Customer deposits   85    2,511 
Accrued expenses   8,406    6,394 
Other current liabilities   40    40 
Total Current Liabilities   10,563    10,804 
           
LONG-TERM LIABILITIES          
Workers' compensation reserves   580    580 
           
Total Liabilities   11,143    11,384 
           
SHAREHOLDERS' EQUITY (NOTE 5)          
Common stock, $0.10 par value; 150,000,000 authorized; 12,270,790 issued and outstanding at December 31, 2011 and June 30, 2011   1,224    1,224 
Series C Preferred stock, $0.10 par value; 1,000,000 authorized; 296,180 issued and outstanding at December 31, 2011 and June 30, 2011   27,133    27,133 
Treasury Stock, at cost, 214,444 shares at Decemer 31, 2011 and June 30, 2011   (809)   (809)
Additional paid-in capital and warrants outstanding   20,376    20,376 
Accumulated deficit   (29,042)   (29,511)
Total Shareholders' Equity   18,882    18,413 
           
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  $30,025   $29,797 

 

See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements

 

3
 

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

 

   Three Months Ending   Six Months Ending 
   December 31,   December 31,   December 31,   December 31, 
   2011   2010   2011   2010 
REVENUES  $14,836   $15,860   $30,631   $31,431 
                     
COST OF REVENUES   11,726    12,716    24,272    25,089 
                     
GROSS PROFIT   3,110    3,144    6,359    6,342 
                     
OPERATING EXPENSES                    
Selling, general and administrative expenses   2,553    2,615    4,916    5,168 
Depreciation and amortization   133    167    267    341 
Total Operating Expenses   2,686    2,782    5,183    5,509 
                     
OPERATING INCOME   424    362    1,176    833 
                     
OTHER INCOME (EXPENSE)                    
Interest income   6    33    17    61 
Interest expense   (3)   (17)   (7)   (27)
Other income   (4)   -    -    3 
Total Other Income (Expense)   (1)   16    10    37 
                     
INCOME BEFORE PROVISION FOR INCOME TAXES   423    378    1,186    870 
                     
Provision for income taxes   6    2    39    37 
                     
NET INCOME FROM CONTINUING OPERATIONS   417    376    1,147    833 
                     
DISCONTINUED OPERATIONS                    
Loss from discontinued operations   -    (2)   -    (9)
                     
NET INCOME   417    374    1,147    824 
                     
Preferred stock dividends   339    148    678    296 
                     
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS  $78   $226   $469   $528 
                     
Basic Income  Per Common Share-Continuing Operations  $0.01   $0.02   $0.04   $0.04 
Basic Loss Per Common Share-Discontinued Operations   -    -    -    - 
BASIC INCOME PER COMMON SHARE  $0.01   $0.02   $0.04   $0.04 
                     
Basic Weighted Average Shares Outstanding   12,270,790    12,235,790    12,270,790    12,228,997 
                     
Diluted Income Per Common Share-Continuing Operations  $0.01   $0.02   $0.03   $0.04 
Diluted Loss Per Common Share-Discontinued Operations   -    -    -    - 
DILUTED INCOME PER COMMON SHARE  $0.01   $0.02   $0.03   $0.04 
                     
Diluted Weighted Average Shares Outstanding   14,593,290    14,752,603    14,593,290    14,744,310 

 

See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements

 

4
 

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(DOLLARS IN THOUSANDS)

 

               Additional         
               Paid-in Capital       Total 
   Common   Preferred   Treasury   and Warrants   Accumulated   Shareholders' 
   Stock   Stock   Stock   Outstanding   Deficit   Equity 
                         
BALANCE AT JUNE 30, 2011 (Audited)  $1,224   $27,133   $(809)  $20,376   $(29,511)  $18,413 
                               
Net income   -    -    -    -    1,147    1,147 
Preferred stock dividends   -    -    -    -    (678)   (678)
                               
BALANCE AT DECEMBER 31, 2011 (Unaudited)  $1,224   $27,133   $(809)  $20,376   $(29,042)  $18,882 

 

See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements

 

5
 

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

(UNAUDITED)

 

   For the Six Months Ended 
   December 31,   December 31, 
   2011   2010 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net Income  $1,147   $824 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   267    341 
Provision for losses on accounts receivable   29    (20)
Stock based compensation   -    6 
Changes in certain operating assets and liabilities:          
Restricted cash   (1)   368 
Accounts receivable   (703)   (915)
Prepaid assets and other current assets   338    90 
Assets of discontinued operations   -    8 
Other long-term assets   (34)   43 
Accounts payable   188    (281)
Workers' compensation reserves   235    262 
Customer deposits   (2,426)   214 
Accrued expenses and other current liabilities   2,012    352 
Net Cash Provided by Operating Activities   1,052    1,292 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Capital expenditures   (7)   (50)
Proceeds from sale of assets   -    55 
Net Cash Provided By (Used in) Investing Activities   (7)   5 
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Payments on term debt   (250)   (261)
Repurchase of common stock for treasury   -    (248)
Dividends paid on preferred stock   (678)   (296)
Net Cash Used in Financing Activities   (928)   (805)
           
NET INCREASE  IN CASH AND EQUIVALENTS   117    492 
           
CASH AND EQUIVALENTS          
Beginning of Period   6,036    2,324 
           
End of Period   6,153    2,816 

 

See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements

 

6
 

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(DOLLARS IN THOUSANDS)

(UNAUDITED)

 

   For the Six Months Ended 
   December 31,   December 31, 
   2011   2010 
SUPPLEMENTAL DISCLOSURES          
Interest paid  $8   $28 
           
Income taxes paid  $40   $37 

 

See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements

 

7
 

 

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 2011 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, 2011 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 December 31, 2011, and the consolidated statements of operations, cash flows and shareholders’ equity for the period ended December 31, 2011 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 six month period ended December 31, 2011 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 comprised of Professional Employer Organizations (PEOs) which provide full-service human resources outsourcing services through co-employment relationships with its 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 subsidiaries (“ESG”).

 

The Company bills its 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 Company is typically a percentage of the gross payroll and is sufficient to allow the Company 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 Company are invoiced along with each periodic payroll delivered to the client.

 

Through the co-employment contractual relationship, the Company becomes the employer and, as such, all payroll-related taxes are filed on these Company’s 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 Company owes and pays the various government and employment insurance vendors are based on the experience levels and activity of the Company in this segment.

 

Restricted Cash: Restricted cash includes certificates of deposits for letters of credit issued to collateralize the Company’s obligations under its various workers’ compensation programs and certain general insurance coverage. At December 31, 2011, the Company had $2,395 in total restricted cash. Of this amount, $2,125 is restricted for its various workers’ compensation programs in accordance with terms of insurance carrier agreements, and the remainder is restricted for certain standby letters of credit 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’s 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 assessment of recorded goodwill and other indefinite-lived intangible assets as of the end of fiscal first quarter. Management has assessed qualitative factors, to determine whether it is necessary to perform the two-step quantitative impairment test, and determined it is more likely than not that its fair value exceeds the carrying amount.

 

8
 

 

Workers’ Compensation: The Company's PSM, CSM and ESG subsidiaries maintain fully funded, high deductible 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 - DEBT ARRANGEMENTS

 

Term Note

 

In May 2010, the Company entered into a $1.0 million term note with a bank. The term loan matures on April 30, 2012 and bears interest at the fixed rate of 4.5%. The note is amortized equally over a 24 month period and therefore requires monthly principal payments of $42. The note is collateralized by substantially all the assets of the Company and is personally guaranteed by the Company’s chairman and majority shareholder. The loan requires the Company to maintain a minimum cash flow coverage ratio of 1.2 to 1.0 and a minimum current ratio of 1.0 at June 30, 2010, escalating to 1.15 and 1.20 at December 31, 2010 and June 30, 2011, respectively.

 

NOTE 3– 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 six month period ended December 31, 2011, no restricted share units were issued under this plan.

 

NOTE 4- SHAREHOLDERS’ EQUITY

 

Common Stock

 

The Company did not issue any shares of common stock during the six month period ended December 31, 2011.

 

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 $678 and $296 were accrued and/or paid for the six months ended December 31, 2011 and December 31, 2010, respectively.

 

Effective December 31, 2010, the Company revised its estimate regarding the collectability of its $2,500,000 term note receivable with a related party. Based on this change in estimate, the Company reclassified the note receivable as a reduction to its outstanding preferred stock as prescribed by a Security Agreement between the Company and the related party. Under terms of this Security Agreement and in the event of default of the term note receivable, the Company obtains the right to equal value of the preferred stock as defined including but not limited to title, interest and dividends. As of December 31, 2011 and the date of this filing, the Company has no intention to convert the note receivable in the foreseeable future.

 

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, 2011. Readers should carefully review the risk factors referred to above and the other documents filed by the Company with the Securities and Exchange Commission.

 

9
 

 

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.

 

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 Company’s Form 10-K for the year ended June 30, 2011, 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.

 

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, 2011. Since June 30, 2011, there have been no material changes to the Company’s critical accounting policies.

 

New Accounting Pronouncements

 

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”.  The objective of this ASU is to simplify how an entity tests goodwill for impairment.  The new guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.  The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.  The Company adopted this amendment on September 15, 2011, and does not anticipate a material effect on its financial position, results of operations or cash flows.

 

In September 2011, the FASB issued ASU 2011-09, “Disclosures about an Employer’s Participation in a Multiemployer Plan”.  This ASU requires that employers provide additional separate disclosures for multiemployer pension plans and other multiemployer postretirement benefit plans.  The amendments in this ASU should be applied retrospectively.  For public entities, the amendments are effective for fiscal years ending after December 15, 2011.  For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012.  Early adoption is permitted.  The Company does not anticipate that 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 December 31, 2011, are not expected to have a significant effect on the Company’s consolidated financial statements.

 

10
 

 

RESULTS OF OPERATIONS: COMPARISON OF THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2011 AND DECEMBER 31, 2010

 

Executive Overview of Financial Results

 

Gross billings for the three month periods ended December 31, 2011 and December 31, 2010 were $137,171 million and $149,377 million, respectively.

 

Results of operations for the three and six month periods ended December 31, 2011 and December 31, 2010 are as follows:

 

 

   Revenue for the   Operating income for the 
   Three Months Ended   Three Months Ended 
   December 31,   December 31,   December 31,   December 31, 
   2011   2010   2011   2010 
   (Dollars in thousands) 
Business Solutions  $14,836   $15,860   $424   $362 
Holding Company   -    -    -    - 
Segment Totals  $14,836   $15,860   $424   $362 
                     
Net Income Available to Common Shareholders            $78   $226 

 

   Revenue for the   Operating income for the 
   Six Months Ended   Six Months Ended 
   December 31,   December 31,   December 31,   December 31, 
   2011   2010   2011   2010 
   (Dollars in thousands) 
Business Solutions  $30,631   $31,431   $1,176   $833 
Holding Company   -    -    -    - 
Segment Totals  $30,631   $31,431   $1,176   $833 
                     
Net Income Available to Common Shareholders            $469   $528 

 

Net income available to common stock shareholders was $0.08 million or $0.01 per diluted share on revenue of $14.8 million for the three month period ended December 31, 2011 compared with net income available to common stock shareholders of $0.23 million or $0.02 per diluted share on revenue of $15.9 million for the three month period ended December 31, 2010. This represents a $1.0 million or 6.3% decrease in revenue and a $0.15 million or 65.2% decrease in net income.

 

Net income available to common stock shareholders was $0.47 million or $0.04 per diluted share on revenue of $30.6 million for the six month period ended December 31, 2011 compared with net income available to common stock shareholders of $0.53 million or $0.04 per diluted share on revenue of $31.4 million for the six month period ended December 31, 2010. This represents a $0.8 million decrease or 2.5% in revenue and a $0.06 million decrease or 11.2% in net income.

 

The decrease in revenue for the three month period ended December 31, 2011 is primarily due to the loss of a major client at CSM effective December 31, 2010. Even though the total consolidated worksite employee count has remained flat, this client generated a higher pro rata share of billings than our average client mix.

 

The decrease in net income available to common shareholders for the three month period ended December 31, 2011 is due to an increase in preferred stock dividends of $0.191 million or 129%.

 

The decrease in revenue for the six month period ended December 31, 2011 is primarily due to the loss of a major client at CSM effective December 31, 2010. Even though total consolidated worksite employee count has remained flat, this client generated a higher pro rata share of billings than our average client mix.

 

The decrease in net income available to common shareholders for the six month period ended December 31, 2011 is due to an increase in preferred stock dividends of $0.38 million which was partially offset by a decrease in operating expenses of $0.33 million.

 

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Results are described in further detail as follows:

 

Operating results for three and six month periods ended December 31, 2011 and December 31, 2010 are as follows:

 

   Three-Month Period Ended   Six-Month Period Ended 
   December 31, 2011   December 31, 2010   December 31, 2011   December 31, 2010 
   (Dollars in thousands)   (Dollars in thousands) 
Revenues  $14,836    100%  $15,860    100%  $30,631    100%  $31,431    100%
Cost of revenues   11,726    79.0%   12,716    80.2%   24,272    79.2%   25,089    79.8%
Gross profit   3,110    21.0%   3,144    19.8%   6,359    20.8%   6,342    20.2%
                                         
Operating expenses                                        
Selling, general and administrative   2,553    17.2%   2,615    16.5%   4,916    16.0%   5,168    16.4%
Depreciation and amortization   133    0.9%   167    1.1%   267    0.9%   341    1.1%
Total operating expenses   2,686    18.1%   2,782    17.5%   5,183    16.9%   5,509    17.5%
                                         
Segment operating income  $424    2.9%  $362    2.3%  $1,176    3.8%  $833    2.7%

 

Revenue

 

Revenue for the three month period ended December 31, 2011 was $14.8 million, compared to $15.8 million for the three month period ended December 31, 2010, a decrease of $1.0 million or 6.3%. Revenue decreased primarily due to the loss of a major client at CSM effective December 31, 2010. Even though total consolidated worksite employee count has remained flat, this client generated a higher pro rata share of billings than our average client mix. ESG reported an increase in worksite employees and revenue which was offset by a decrease in worksite employees, benefit and state unemployment tax revenue at PSM.

 

Revenue for the six month period ended December 31, 2011 was $30.6 million, compared to $31.4 million for the six month period ended December 31, 2010, a decrease of $0.8 million or 2.5%. Revenue decreased primarily due to the loss of a major client at CSM effective December 31, 2010. Even though total consolidated worksite employee count has remained flat, this client generated a higher pro rata share of billings than our average client mix. ESG reported an increase in worksite employees and revenue, which was offset by a decrease in worksite employees, benefit and state unemployment tax revenue at PSM.

 

Gross Profit

 

Gross profit for the three month period ended December 31, 2011 was $3.1 million, representing 21.0% of revenue, compared to $3.1 million, representing 19.8% of revenue for the three month period ended December 31, 2010. Despite a decrease in revenue, gross profit dollars remained flat and our gross profit percentage increased primarily due to an increase in profitability of the ESG and PSM benefit plans compared to the same quarter last year.

 

Gross profit for the six month period ended December 31, 2011 was $6.4 million, representing 20.8% of revenue, compared to $6.3 million, representing 20.2% of revenue for the six month period ended December 31, 2010. Despite a decrease in revenue, gross profit dollars and percentage increased slightly due to increases in admin fees, payroll tax and benefit gross margin at ESG which offset slight declines at PSM and CSM.

 

Operating Income

 

Operating income for the three month period ended December 31, 2011 was $0.42 million, compared to operating income of $0.36 million for the three month period ended December 31, 2010, an increase of $0.06 million or 16.7% due to a decrease in operating expenses from downsizing at the corporate level.

 

Operating income for the six month period ended December 31, 2011 was $1.2 million, compared to operating income of $0.8 million for the six month period ended December 31, 2010, an increase of $0.4 million or 41.2% due to a decrease in operating expenses from downsizing at the corporate level.

 

Interest Expense

 

Interest expense was $0.003 million for the three month period ended December 31, 2011, compared to $0.017 million for the three month period ended December 31, 2010, a decrease of $0.014 million due to the continuing amortization of the remaining term note.

 

Interest expense was $0.007 million for the six month period ended December 31, 2011, compared to $0.027 million for the six month period ended December 31, 2010, a decrease of $0.02 million due to the continuing amortization of the remaining term note.

 

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Income Taxes

 

Income tax expense was $0.006 and $0.002 million for the three months ended December 31, 2011 and 2010, respectively. 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 has determined that a $5.7 million valuation allowance at December 31, 2011 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized.

 

Income tax expense was $0.039 and $0.037 million for the six months ended December 31, 2011 and 2010, respectively coinciding with the increase in operating income.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our principal sources of liquidity include cash and equivalents and proceeds from debt borrowings. We had cash and equivalents of $6.1 million at December 31, 2011 and $6.0 million at June 30, 2011. The slight increase is due to net income for the first six months of $1.1 million less the principal debt payments of $0.3 million and the preferred stock dividends of $0.7 million.

 

We had working capital of $3.3 million at December 31, 2011 compared with $2.6 million at June 30, 2011. The increase in working capital was a direct result of an additional six months of profitability and the continued amortization of our term debt. Current assets are primarily comprised of cash and equivalents and net accounts receivable. Current liabilities are primarily comprised of accounts payable, workers compensation reserves 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 $2.4 million and $2.4 million at December 31, 2011 and June 30, 2011, respectively.

 

Total debt at December 31, 2011 and June 30, 2011 was $0.17 and $0.42 million, respectively.

 

Cash Flows

 

Cash flows provided by operations for the six month period ended December 31, 2011 and December, 2010 were $1.1 million and $1.3 million, respectively. The decrease was due a reduction in customer deposits at CSM from June 30, 2011 which was partially offset by an increase in accrued expenses.

 

Cash flows provided by (used in) investing activities for the six month period ended December 31, 2011 and December, 2010 were ($0.007) million and $0.005 million, respectively. The decrease was due to capital expenditures at CSM. There were no sales of assets this fiscal year.

 

Cash flows used in financing activities was $0.9 million for the six month period ended December 31, 2011 compared to $0.8 million for the six month period ended December 31, 2010. The increase was primarily due to the increase in preferred stock dividends paid of $0.6 million for the six months ended December 31, 2011 as compared to $0.3 million for the six months ended December 31, 2011 which was partially offset by the repurchase of common stock for treasury in fiscal year 2011 for $0.2 million.

 

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, 2011 under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

OFF BALANCE SHEET ARRANGEMENTS

 

As is common in the industry 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 liabilities associated with guarantees and letter of credit obligations.

 

Guarantees

 

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

 

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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 December 31, 2011, we had approximately $2.4 million in restricted cash primarily to secure obligations under our PEO contracts.

 

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, 2011.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

  

Under the supervision and with the participation of our management, including our President/Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our President/Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2011.

   

Management Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including the President/Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. 

Based upon this assessment, we determined that our internal control over financial reporting as of December 31, 2011 was effective. 

This Quarterly Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management's report. 

Changes in Internal Controls

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Effectiveness of Controls

 

Our management, including our President/Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Our disclosure controls and procedures and our internal controls over financial reporting have been designed to provide reasonable assurance of achieving their objectives. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

 

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.

 

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Item 1A. Risk Factors

 

Other than the following additional risk factor below, 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, 2011.

 

Our primary shareholder’s 296,180 shares of preferred stock and 7,344,687 shares of common stock are held as collateral by a commercial bank for certain personal debt obligations of our majority shareholder. Future default on these obligations by our majority shareholder could have a material adverse effect on the Company’s (a) operations, (b) capital structure and (c) corporate governance. In addition any other future event that may cause a disruption in our primary shareholder’s ownership of his preferred stock and common stock could also have a material adverse effect on the Company’s (a) operations, (b) capital structure and (c) corporate governance.

 

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

 

None

 

Item 3. Defaults upon Senior Securities.

 

None

 

Item 4. (Removed and Reserved)

 

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

 

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:  February 13, 2012 By: /s/ Tena Mayberry 
  Tena Mayberry,
  Chief Executive Officer
   
Date:  February 13, 2012 By: /s/ Randy E. Butler 
  Randy E. Butler,
  Chief Financial Officer

 

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