Attached files
file | filename |
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EX-32 - FORTUNE INDUSTRIES, INC. | ex32-1.htm |
EX-31 - FORTUNE INDUSTRIES, INC. | ex31-2.htm |
EX-31 - FORTUNE INDUSTRIES, INC. | ex31-1.htm |
EX-32 - FORTUNE INDUSTRIES, INC. | ex32-2.htm |
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, 2009
o 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 16, 2010, 12,196,156 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, 2009
INDEX
Page
|
|||
PART I. Financial
Information
|
|||
ITEM
1. Financial Statements
|
|||
Consolidated Balance Sheets as of
December 31, 2009 (unaudited) and June 30,
2009
|
3
|
||
Consolidated
Statements of Operations for the three and six month periods ended
December 31, 2009 (unaudited) and February 28, 2009
(unaudited)
|
5
|
||
Consolidated
Statement of Changes in Shareholders’ Equity for the six month period
ended December 31, 2009 (unaudited)
|
6
|
||
Consolidated
Statements of Cash Flows for the six month periods ended December 31, 2009
and February 28, 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
|
16
|
||
ITEM
3. Quantitative and Qualitative Disclosures About Market
Risk
|
23
|
||
ITEM
4. Controls and Procedures
|
23
|
||
PART
II. Other Information
|
|||
ITEM
1. Legal Proceedings
|
23
|
||
ITEM
1A. Risk Factors
|
24
|
||
ITEM
2. Unregistered Sales of Equity Securities and Use
of Proceeds
|
24
|
||
ITEM
3. Defaults Upon Senior
Securities
|
24
|
||
ITEM
4. Submission of Matters to a Vote of Security
Holders
|
24
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||
ITEM
5. Other Information
|
24
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||
ITEM
6. Exhibits
|
24
|
||
Signatures
|
24
|
2
PART
1 - FINANCIAL INFORMATION
Item
1. Financial Statements.
FORTUNE
INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(DOLLARS
IN THOUSANDS)
December
31,
|
June
30,
|
|||||||
2009
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and equivalents
|
$ | 3,506 | $ | 1,686 | ||||
Restricted
cash (Note 1)
|
3,342 | 3,142 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $22 and
$137
|
2,779 | 2,622 | ||||||
Deferred
tax asset
|
1,750 | 1,750 | ||||||
Prepaid
expenses and other current assets
|
1,213 | 1,496 | ||||||
Assets
of discontinued operations, net
|
41 | 112 | ||||||
Total
Current Assets
|
12,631 | 10,808 | ||||||
OTHER
ASSETS
|
||||||||
Property,
plant & equipment, net of accumulated depreciation of $2,373 and
$2,193
|
625 | 764 | ||||||
Term
note receivable related party (Note 2)
|
2,527 | 2,546 | ||||||
Deferred
tax asset
|
1,000 | 750 | ||||||
Goodwill
|
12,339 | 12,339 | ||||||
Other
intangible assets, net
|
3,060 | 3,263 | ||||||
Other
long-term assets
|
43 | 43 | ||||||
Total
Other Assets
|
19,594 | 19,705 | ||||||
TOTAL
ASSETS
|
$ | 32,225 | $ | 30,513 |
See
Accompanying Notes to the Unaudited Interim Consolidated Financial
Statements
3
FORTUNE
INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
(DOLLARS
IN THOUSANDS)
December
31,
|
June
30,
|
|||||||
2009
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Short-term
debt and current maturities of long-term debt (Note 3)
|
$ | 274 | $ | 275 | ||||
Accounts
payable
|
1,040 | 1,037 | ||||||
Health
and workers' compensation reserves
|
2,673 | 4,125 | ||||||
Accrued
expenses
|
7,822 | 5,376 | ||||||
Other
current liabilities
|
806 | 1,003 | ||||||
Liabilities
of discontinued operations, net
|
- | 1 | ||||||
Total
Current Liabilities
|
12,615 | 11,817 | ||||||
LONG-TERM
LIABILITIES
|
||||||||
Long-term
debt, less current maturities (Note 3)
|
- | 11 | ||||||
Total
Long-Term Liabilities
|
- | 11 | ||||||
Total
Liabilities
|
12,615 | 11,828 | ||||||
SHAREHOLDERS'
EQUITY (NOTE 5)
|
||||||||
Common
stock, $0.10 par value; 150,000,000 authorized; 12,196,156 and
12,082,173 issued and outstanding at December 31, 2009 and June 30,
2009, respectively
|
1,198 | 1,187 | ||||||
Series
C Preferred stock, $0.10 par value; 1,000,000 authorized; 296,180
issued and outstanding at December 31, 2009 and June 30, 2009,
respectively
|
29,618 | 29,618 | ||||||
Additional
paid-in capital and warrants outstanding
|
19,321 | 19,253 | ||||||
Accumulated
deficit
|
(30,527 | ) | (31,373 | ) | ||||
Total
Shareholders' Equity
|
19,610 | 18,685 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 32,225 | $ | 30,513 |
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
|
Six
Month Period Ended
|
|||||||||||||||
December
31,
|
February
28,
|
December
31,
|
February
28,
|
|||||||||||||
2009
|
2009
|
2009
|
2009
|
|||||||||||||
REVENUES
|
||||||||||||||||
Service
revenues
|
$ | 14,985 | $ | 16,428 | $ | 29,814 | $ | 34,664 | ||||||||
Product
revenues
|
- | - | - | 17,929 | ||||||||||||
TOTAL
REVENUES
|
14,985 | 16,428 | 29,814 | 52,593 | ||||||||||||
COST
OF REVENUES
|
||||||||||||||||
Service
cost of revenues
|
11,799 | 13,119 | 23,227 | 27,228 | ||||||||||||
Product
cost of revenues
|
- | - | - | 14,944 | ||||||||||||
TOTAL
COST OF REVENUES
|
11,799 | 13,119 | 23,227 | 42,172 | ||||||||||||
GROSS
PROFIT
|
3,186 | 3,309 | 6,587 | 10,421 | ||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Selling,
general and administrative expenses
|
2,707 | 2,807 | 5,383 | 9,176 | ||||||||||||
Depreciation
and amortization
|
182 | 215 | 383 | 591 | ||||||||||||
Total
Operating Expenses
|
2,889 | 3,022 | 5,766 | 9,767 | ||||||||||||
OPERATING
INCOME
|
297 | 287 | 821 | 654 | ||||||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Interest
income
|
28 | 72 | 56 | 70 | ||||||||||||
Interest
expense
|
(4 | ) | - | (8 | ) | (112 | ) | |||||||||
Loss
on disposal of assets
|
- | (24 | ) | - | (21 | ) | ||||||||||
Exchange
rate gain
|
- | - | - | 1 | ||||||||||||
Other
income (expense)
|
- | (39 | ) | - | 34 | |||||||||||
Total
Other Income (Expense)
|
24 | 9 | 48 | (28 | ) | |||||||||||
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
321 | 296 | 869 | 626 | ||||||||||||
Provision
for income taxes
|
(21 | ) | 16 | (292 | ) | 44 | ||||||||||
NET
INCOME FROM CONTINUING OPERATIONS
|
342 | 280 | 1,161 | 582 | ||||||||||||
DISCONTINUED
OPERATIONS
|
||||||||||||||||
Loss
from discontinued operations
|
(8 | ) | (18 | ) | (19 | ) | (78 | ) | ||||||||
NET
INCOME
|
334 | 262 | 1,142 | 504 | ||||||||||||
Preferred
stock dividends
|
148 | 247 | 296 | 445 | ||||||||||||
NET
INCOME AVAILABLE TO COMMON SHAREHOLDERS
|
$ | 186 | $ | 15 | $ | 846 | $ | 59 | ||||||||
Basic
Income Per Common Share-Continuing Operations
|
$ | 0.02 | $ | 0.00 | $ | 0.07 | $ | 0.01 | ||||||||
Basic
Loss Per Common Share-Discontinued Operations
|
- | - | - | - | ||||||||||||
BASIC
INCOME PER COMMON SHARE
|
$ | 0.02 | $ | 0.00 | $ | 0.07 | $ | 0.01 | ||||||||
Basic
Weighted Average Shares Outstanding
|
12,192,859 | 12,015,506 | 12,141,124 | 11,700,131 | ||||||||||||
Diluted
Income Per Common Share-Continuing Operations
|
$ | 0.01 | $ | 0.00 | $ | 0.06 | $ | 0.01 | ||||||||
Diluted
Loss Per Common Share-Discontinued Operations
|
- | - | - | (0.01 | ) | |||||||||||
DILUTED
INCOME PER COMMON SHARE
|
$ | 0.01 | $ | 0.00 | $ | 0.06 | $ | 0.00 | ||||||||
Diluted
Weighted Average Shares Outstanding
|
14,703,022 | 14,574,558 | 14,651,287 | 13,306,986 |
See
Accompanying Notes to the Unaudited Interim Consolidated Financial
Statements
5
FORTUNE
INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS
IN THOUSANDS)
(UNAUDITED)
Additional
|
||||||||||||||||||||
Paid-in
Capital
|
Total
|
|||||||||||||||||||
Common
|
Preferred
|
and
Warrants
|
Accumulated
|
Shareholders'
|
||||||||||||||||
Stock
|
Stock
|
Outstanding
|
Deficit
|
Equity
|
||||||||||||||||
BALANCE
AT JUNE 30, 2009
|
$ | 1,187 | $ | 29,618 | $ | 19,253 | $ | (31,373 | ) | $ | 18,685 | |||||||||
Issuance
of 113,983 shares of common stock for compensation
|
11 | - | 68 | - | 79 | |||||||||||||||
Net
income
|
- | - | - | 1,142 | 1,142 | |||||||||||||||
Preferred
stock dividends
|
- | - | - | (296 | ) | (296 | ) | |||||||||||||
BALANCE
AT DECEMBER 31, 2009
|
$ | 1,198 | $ | 29,618 | $ | 19,321 | $ | (30,527 | ) | $ | 19,610 |
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)
Six
Months Ended
|
||||||||
December
31,
|
February
28,
|
|||||||
2009
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
Income
|
$ | 1,142 | $ | 504 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
383 | 759 | ||||||
Provision
for losses on accounts receivable
|
13 | (9 | ) | |||||
Loss
on disposal of assets
|
- | 21 | ||||||
Stock
based compensation
|
79 | 180 | ||||||
Deferred
income taxes
|
(250 | ) | - | |||||
Changes
in certain operating assets and liabilities:
|
||||||||
Restricted
cash
|
(200 | ) | 204 | |||||
Accounts
receivable
|
(170 | ) | 1,323 | |||||
Inventory,
net
|
- | 116 | ||||||
Prepaid
assets and other current assets
|
283 | 452 | ||||||
Assets
of discontinued operations
|
(57 | ) | 322 | |||||
Other
long-term assets
|
- | 5 | ||||||
Accounts
payable
|
3 | 553 | ||||||
Health
and workers' compensation reserves
|
(1,452 | ) | (622 | ) | ||||
Accrued
expenses and other current liabilities
|
2,151 | (2,164 | ) | |||||
Liabilities
of discontinued operations
|
(1 | ) | (23 | ) | ||||
Net
Cash Provided by Operating Activities
|
1,924 | 1,621 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Capital
expenditures
|
(43 | ) | (107 | ) | ||||
Net
Cash Used in Investing Activities
|
(43 | ) | (107 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Payments
on long-term debt majority shareholder
|
- | (300 | ) | |||||
Payments
on long-term debt
|
(12 | ) | (34 | ) | ||||
Payments
on convertible debentures
|
- | (3,405 | ) | |||||
Dividends
paid on preferred stock
|
(49 | ) | (198 | ) | ||||
Net
Cash Used in Financing Activities
|
(61 | ) | (3,937 | ) | ||||
NET
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
|
1,820 | (2,423 | ) | |||||
CASH
AND EQUIVALENTS
|
||||||||
Beginning
of Period
|
1,686 | 4,740 | ||||||
End
of Period
|
$ | 3,506 | $ | 2,317 |
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)
Six
Months Ended
|
||||||||
December
31,
|
February
28,
|
|||||||
2009
|
2009
|
|||||||
SUPPLEMENTAL
DISCLOSURES
|
||||||||
Interest
paid
|
$ | 8 | $ | 77 | ||||
Income
taxes paid
|
$ | 48 | $ | 41 | ||||
Non-cash
investing and financing activities:
|
||||||||
Retirement
of series B preferred stock in exchange for series C
|
- | (7,918 | ) | |||||
Issuance
of series C preferred stock in exchange for series B
|
- | 7,918 | ||||||
Issuance
of series C preferred stock for debt extinguishment
|
- | 21,700 | ||||||
Term
note receivable for disposition of assets
|
- | (3,240 | ) | |||||
Reduction
in term loan in exchange for disposition of assets
|
- | (10,000 | ) | |||||
$ | - | $ | 8,460 |
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 2009 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, 2009 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, 2009, and the consolidated statements of operations, cash flows and
shareholders’ equity for the periods ended December 31, 2009 and February 28,
2009, 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 on
February 16, 2010. The operating results for the six-month period
ended December 31, 2009 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 provides full service human resources
outsourcing services through co-employment relationships with their
clients. As a holding company, the Company has historically invested
in businesses that are undervalued, underperforming, or in operations that are
poised for significant growth. Management’s strategic focus is to
support the revenue and earnings growth of its operations by creating synergies
that can be leveraged to enhance the performance of the Company’s entities and
by investing capital to fund expansion. Effective November 30, 2008,
the Company sold its subsidiaries in its Wireless Infrastructure, Transportation
Infrastructure, Ultraviolet Technologies, and Electronics Integration business
segments to a related party. Refer to Note 2 for further
details. As of this date, management will focus all its financial and
human capital resources on its subsidiaries in the Business Solutions
segment. The effect of this sale will impact the comparability of the
Company’s financial information in future filings.
Restricted Cash: Restricted
cash includes certificates of deposits and letters of credit issued to
collateralize its obligations under its health and accident benefit program, its
workers’ compensation program, and certain general insurance coverage related to
the Company’s Business Solutions segment. At December 31, 2009, the
Company had $3,342 in total restricted cash. Of this, $3,117 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’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 test of recorded goodwill
and other indefinite-lived intangible assets as of the end of fiscal first
quarter. As of February 16, 2010, the annual impairment test is in
process. The Company provided all appropriate information
within the annual requirement; however, delays occurred with completion due to
unforeseen circumstances. The Company expects to receive the final
report within 30 days of the filing date. The results of the last completed
annual impairment test indicated that the fair value of the Business Solutions
segment, as of August 31, 2008, exceeded the carrying, or book value, including
goodwill, and therefore recorded goodwill and other indefinite-lived intangible
assets were not subject to impairment. The required annual impairment
test may result in future periodic write-downs.
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 $200 per employee, with an aggregate liability limit of approximately
$9,400. 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.
9
NOTE
2 – DISPOSITION OF ASSETS AND PRO FORMA RESULTS
On
December 11, 2008, the Company completed a transaction with an effective date as
of November 30, 2008 to sell all of the outstanding shares of common stock of
the following wholly-owned subsidiaries: James H Drew Corporation; Nor-Cote
International, Inc.; Fortune Wireless, Inc.; and Commercial Solutions,
Inc. The subsidiaries were sold to related party entities owned by
the Company’s two majority shareholders, the Chairman of the Board of Directors
(“Chairman”) and the former Chief Executive Officer (“CEO”). The
shares were sold in exchange for a $10,000 reduction in the outstanding balance
of the Term Loan Note due to the Chairman, and a three year Promissory Note
receivable in the amount of $3,240 with a maturity date of November 30,
2011. The Promissory Note bears interest at the prime rate plus
1% and is interest-only for the first twelve months, with $50,000 and $100,000
monthly principal payments due beginning December 30, 2009 and December 30,
2010, respectively. The unpaid balance at maturity is due in a
lump sum payment.
The
Company did not recognize any gain from the sale as the consideration paid by
the two largest shareholders as it was equal to the net book value of the sold
subsidiaries.
As part
of the terms of the sales transaction, the Chairman received 217,000 shares of
Series C Preferred Stock as consideration for cancellation of the Term Note
Balance of $21,700. In addition, the Company converted 79,180 shares of Series B
Preferred Stock previously issued to and held by the Chairman to 79,180 shares
of Series C Preferred Stock. The Series C Preferred Stock with a par value of
$0.10 per share is non-redeemable, non-voting cumulative preferred and bears
annual dividends of $5 per share in years one and two subsequent to the
transaction date, $6 per share in year three subsequent to the transaction date
and $7 per share thereafter. The dividends will be paid on a pro-rata basis
monthly. Additionally, as part of the terms of the sales transaction, the
Company issued the Chairman 2,200,000 warrants with a ten-year term and an
exercise price of $ .40 per share.
On
September 25, 2009, the Company reached 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
annual dividends of $2 per share in years one and two subsequent to the
effective date, $5 per share in year three subsequent to the effective date, $6
per share in year four subsequent to the effective date and $7 per share
thereafter. All other terms of the Series C Preferred Shares remained
unchanged.
At the
request of the independent Directors, the Company received a fairness opinion
from an independent financial advisor concluding that the consideration received
by the Company in connection with the transaction is fair to the Company’s
shareholders as a group from a financial point of view.
The transaction was approved by the
Company’s Board of Directors on December 10, 2008.
The
following is a condensed balance sheet disclosing the amount assigned to each
major asset and liability caption of the sold subsidiaries at the disposition
date:
10
Assets
|
||||
Cash
and equivalents
|
$ | 556 | ||
Accounts
receivable, net
|
12,927 | |||
Costs
and estimated earnings in excess of
|
||||
billings
on uncompleted contracts
|
3,292 | |||
Inventory,
net
|
4,073 | |||
Deferred
tax asset
|
46 | |||
Prepaid
expenses and other current assets
|
790 | |||
Property,
plant & equipment, net
|
3,527 | |||
Goodwill
|
152 | |||
Other
long term assets
|
13 | |||
Total
Assets
|
25,376 | |||
Liabilities
|
||||
Accounts
payable
|
4,248 | |||
Accrued
expenses
|
1,510 | |||
Billings
in excess of costs and estimated
|
||||
earnings
on uncompleted contracts
|
402 | |||
Line
of credit
|
5,500 | |||
Other
liabilities
|
476 | |||
Total
Liabilities
|
12,136 | |||
Net
Assets
|
$ | 13,240 | ||
Cash
considertation - related party term note offset
|
$ | 10,000 | ||
Term
note receivable - three year
|
3,240 | |||
Total
consideration
|
$ | 13,240 |
Pro
Forma Financial Statements
The
accompanying unaudited pro forma consolidated statements of operations for the
six months ended February 28, 2009 is presented as if the sale had been
completed as of the beginning of the periods presented. The unaudited
pro forma consolidated statements of operations is presented for illustrative
purposes only and is not necessarily indicative of the results of operations for
the six months ended February 28, 2009 that would have actually been reported
had the sales transaction occurred at the dates indicated, nor is it indicative
of future financial position or results of operations. The unaudited
pro forma condensed consolidated statements of operations are based upon the
respective historical financial statements of the Company and the
subsidiaries. The pro forma data give effect to actual operating
results as if the previous acquisitions occurred as of the beginning of the
period presented. The pro forma data give effect to actual operating
results prior to the dispositions and adjustments for the
following:
|
·
|
To eliminate the impact of
consolidating Fisbeck-Fortune Development, LLC (“FFD”), which prior to
completion of the sales transaction, was considered a variable interest
entity in conjunction with FIN 46R. With the sale of the
subsidiaries described in Note 2 and the cancellation of the lease
agreement between Fortune Industries, Inc. and FFD, the primary
beneficiary relationship between the entities ceased to
exist.
|
|
·
|
To eliminate the results of
operations of the subsidiaries
sold.
|
|
·
|
To adjust the dividends to the
terms of the Series C Preferred shares that were issued in conjunction
with the sales
transaction.
|
11
For the Six
Months Ended
|
||||
February
28,
|
||||
2009
|
||||
Revenues
|
$ | 33,169 | ||
Cost
of Revenues
|
26,459 | |||
Gross
Profit
|
6,710 | |||
Operating
Expenses
|
||||
Selling,
general and administrative expenses
|
5,850 | |||
Depreciation
and amortization
|
335 | |||
Total
Operating Expenses
|
6,185 | |||
Operating
Income
|
525 | |||
Other
Income (Expense)
|
(29 | ) | ||
Income
Before Provision for Income Taxes
|
496 | |||
Provision
for income taxes
|
44 | |||
Net
Income
|
452 | |||
Preferred
stock dividends
|
296 | |||
Net
Loss available to common shareholder
|
$ | 156 | ||
Basic
loss per common share
|
$ | 0.01 | ||
Diluted
loss per common share
|
$ | 0.01 |
Term
Note
Effective
May 29, 2009, the Company entered into a $250 term loan note with a bank. The
term loan note matures on October 28, 2009 and bears interest at the Prime Rate
plus 2.0%. Effective October 27, 2009 the note was extended until December 28,
2009. 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.
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 December 31, 2009, 113,983 restricted
share units were issued under this plan.
NOTE
5- SHAREHOLDERS’ EQUITY
Common
Stock
There
were a total of 113,983 shares issued for the period ended December 31,
2009. There was no share retirements during the period ended December
31, 2009.
12
Preferred
Stock
Effective
November 30, 2008, the Company exchanged the 79,180 shares non-voting Series B
Preferred Stock with $0.10 par value and a dividend of $10.00 per share for
79,180 non-voting Series C Preferred Stock with $0.10 par value and annual
dividends of $5 per share in twelve month period ending November 30, 2009
and 2010, $6 per share in the twelve month period ending November 30, 2011
and $7 per share thereafter. The dividends will be paid on a pro-rata basis
monthly.
Effective
November 30, 2008, the Company issued 217,000 shares of $0.10 par value
non-voting Series C Preferred Stock to the Company’s majority shareholder as
consideration for cancellation of certain debt obligations owed by the Company
under a line of credit promissory note dated June 5, 2008. The shares
are not convertible to common stock and have various restrictions pertaining to
their transferability as they are not registered under the Securities Act of
1933.
The
shares issued are single class and pay on a monthly basis an annual cash
dividend of $5 per share in years ending November 30, 2009 and 2010, $6 per
share in the year ending November 30, 2011 and $7 per share thereafter. 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 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 $296 and $445 were accrued for the six months ended December 31, 2009 and
February 28, 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 net operating 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 gross deferred tax asset of
approximately $3.3 million related to the net operating loss had a net asset
value of $0 due to a corresponding ($3.3) million valuation allowance placed
against the asset by management.
NOTE
7 - SEGMENT INFORMATION
Effective
November 30, 2008, the Company sold or discontinued operations in its Wireless
Infrastructure, Transportation Infrastructure, Ultraviolet Technologies, and
Electronics Integration segments. As a result, the Company currently
has one reportable business segment, Business Solutions. Prior to
December 1, 2008, the Company was organized into five reportable business
segments; Business Solutions, Wireless Infrastructure, Transportation
Infrastructure, Ultraviolet Technologies, and Electronics
Integration. The Company’s reportable business segments are organized
in a manner that reflects how management reviews and evaluates those business
activities. Certain businesses have been grouped together for segment
reporting based upon similar products or product lines, marketing, selling and
distribution characteristics. The segments are organized as
follows:
Segment & Entity
|
Business Activity
|
|
Business
Solutions
|
||
Professional
Staff Management, Inc. and subsidiaries; CSM, Inc. and subsidiaries and
related entities; Employer Solutions Group, Inc. and related entities;
Precision Employee Management, LLC
|
Provider
of outsourced human resource services
|
|
Wireless
Infrastructure
|
||
Fortune
Wireless, Inc.; Magtech Services, Inc.; Cornerstone Wireless Construction
Services, Inc.; James Westbrook & Associates, LLC
|
Provider
turnkey development services for the deployment of wireless
networks
|
|
Transportation
Infrastructure
|
||
James
H. Drew Corp. and subsidiaries
|
Installer
of fiber optic, smart highway systems, traffic signals, street signs, high
mast and ornamental lighting, guardrail, wireless communications, and
fabrications of structural steel
|
|
Ultraviolet
Technologies
|
||
Nor-Cote
International, Inc. and subsidiaries
|
Manufacturer
of UV curable screen printing ink products
|
|
Electronics
Integration
|
||
Kingston
Sales Corporation; Commercial Solutions, Inc.; Telecom Technology,
Corp.
|
Distributor
and installer of home and commercial
electronics
|
13
The
following tables report data by segment and exclude revenues from transactions
with other operating segments:
Business
|
Holding
|
Segment
|
||||||||||
Solutions (1)
|
Company
|
Totals
|
||||||||||
Three
months ended December 31, 2009
|
||||||||||||
Revenue
|
$ | 14,985 | $ | - | $ | 14,985 | ||||||
Cost
of revenue
|
11,799 | - | 11,799 | |||||||||
Gross
profit
|
3,186 | - | 3,186 | |||||||||
Operating
expenses
|
||||||||||||
Selling,
general and administrative
|
2,565 | 142 | 2,707 | |||||||||
Depreciation
and amortization
|
140 | 42 | 182 | |||||||||
Total
operating expenses
|
2,705 | 184 | 2,889 | |||||||||
Segment
operating income (loss)
|
$ | 481 | $ | (184 | ) | $ | 297 |
(1)
Gross
billings of $146,073 less worksite employee payroll costs of
$131,088.
Business
|
Holding
|
Segment
|
||||||||||
Solutions (1)
|
Company
|
Totals
|
||||||||||
Three
Months Ended February 28, 2009
|
||||||||||||
Revenue
|
$ | 16,428 | $ | - | $ | 16,428 | ||||||
Cost
of revenue
|
13,119 | - | 13,119 | |||||||||
Gross
profit
|
3,309 | - | 3,309 | |||||||||
Operating
expenses
|
||||||||||||
Selling,
general and administrative
|
2,854 | (47 | ) | 2,807 | ||||||||
Depreciation
and amortization
|
166 | 49 | 215 | |||||||||
Total
operating expenses
|
3,020 | 2 | 3,022 | |||||||||
Segment
operating income (loss)
|
$ | 289 | $ | (2 | ) | $ | 287 |
(1) Gross
billings of $141,056 less worksite employee payroll costs of
$124,628.
Business
|
Holding
|
Segment
|
||||||||||
Solutions (1)
|
Company
|
Totals
|
||||||||||
Six
months ended December 31, 2009
|
||||||||||||
Revenue
|
$ | 29,814 | $ | - | $ | 29,814 | ||||||
Cost
of revenue
|
23,227 | - | 23,227 | |||||||||
Gross
profit
|
6,587 | - | 6,587 | |||||||||
Operating
expenses
|
||||||||||||
Selling,
general and administrative
|
5,086 | 297 | 5,383 | |||||||||
Depreciation
and amortization
|
299 | 84 | 383 | |||||||||
Total
operating expenses
|
5,385 | 381 | 5,766 | |||||||||
Segment
operating income (loss)
|
$ | 1,202 | $ | (381 | ) | $ | 821 |
(1)
Gross
billings of $276,226 less worksite employee payroll costs of
$246,412.
14
Business
|
Wireless
|
Transportation
|
Ultraviolet
|
Electronics
|
Holding
|
|||||||||||||||||||||||
Solutions (1)
|
Infrastructure
|
Infrastructure
|
Technologies
|
Integration
|
Company
|
Totals
|
||||||||||||||||||||||
Six
Months Ended February 28, 2009
|
||||||||||||||||||||||||||||
Revenue
|
$ | 33,169 | $ | 3,312 | $ | 12,090 | $ | 2,771 | $ | 1,251 | $ | - | $ | 52,593 | ||||||||||||||
Cost
of revenue
|
26,459 | 2,458 | 10,747 | 1,596 | 912 | - | 42,172 | |||||||||||||||||||||
Gross
profit
|
6,710 | 854 | 1,343 | 1,175 | 339 | - | 10,421 | |||||||||||||||||||||
Operating
expenses
|
||||||||||||||||||||||||||||
Selling,
general and administrative
|
6,014 | 650 | 781 | 1,320 | 238 | 173 | 9,176 | |||||||||||||||||||||
Depreciation
and amortization
|
335 | 11 | 5 | 59 | 1 | 180 | 591 | |||||||||||||||||||||
Total
operating expenses
|
6,349 | 661 | 786 | 1,379 | 239 | 353 | 9,767 | |||||||||||||||||||||
Segment
operating income (loss)
|
$ | 361 | $ | 193 | $ | 557 | $ | (204 | ) | $ | 100 | $ | (353 | ) | $ | 654 |
(1) Gross
billings of $290,604 less worksite employee payroll costs of
$257,435.
Business
|
Electronics
|
Holding
|
||||||||||||||
Solutions
|
Integration
|
Company
|
Totals
|
|||||||||||||
As
of December 31, 2009 (Unaudited)
|
||||||||||||||||
Current
Assets
|
||||||||||||||||
Cash
and equivalents
|
$ | 3,430 | $ | - | $ | 76 | $ | 3,506 | ||||||||
Restricted
cash
|
3,342 | - | - | 3,342 | ||||||||||||
Accounts
receivable, net
|
2,776 | - | 3 | 2,779 | ||||||||||||
Deferred
tax asset
|
1,750 | - | - | 1,750 | ||||||||||||
Prepaid
expenses and other current assets
|
1,250 | - | (37 | ) | 1,213 | |||||||||||
Assets
of discontinued operations, net
|
- | 41 | - | 41 | ||||||||||||
Total
Current Assets
|
12,548 | 41 | 42 | 12,631 | ||||||||||||
Other
Assets
|
||||||||||||||||
Property,
plant & equipment, net
|
434 | - | 191 | 625 | ||||||||||||
Term
note receivable-related party
|
- | - | 2,527 | 2,527 | ||||||||||||
Deferred
tax asset
|
1,000 | - | - | 1,000 | ||||||||||||
Goodwill
|
12,339 | - | - | 12,339 | ||||||||||||
Other
intangible assets, net
|
3,060 | - | - | 3,060 | ||||||||||||
Other
long term assets
|
22 | - | 21 | 43 | ||||||||||||
Total
Other Assets
|
16,855 | - | 2,739 | 19,594 | ||||||||||||
Total
Assets
|
$ | 29,403 | $ | 41 | $ | 2,781 | $ | 32,225 |
15
Business
|
Electronics
|
Holding
|
||||||||||||||
Solutions
|
Integration
|
Company
|
Totals
|
|||||||||||||
As
of June 30, 2009 (Audited)
|
||||||||||||||||
Current
Assets
|
||||||||||||||||
Cash
and equivalents
|
$ | 1,622 | $ | - | $ | 64 | $ | 1,686 | ||||||||
Restricted
cash
|
3,142 | - | - | 3,142 | ||||||||||||
Accounts
receivable, net
|
2,619 | - | 3 | 2,622 | ||||||||||||
Deferred
tax asset
|
1,750 | - | - | 1,750 | ||||||||||||
Prepaid
expenses and other current assets
|
1,506 | - | (10 | ) | 1,496 | |||||||||||
Assets
of discontinued operations, net
|
- | 112 | - | 112 | ||||||||||||
Total
Current Assets
|
10,639 | 112 | 57 | 10,808 | ||||||||||||
Other
Assets
|
||||||||||||||||
Property,
plant & equipment, net
|
489 | - | 275 | 764 | ||||||||||||
Term
note receivable-related party
|
- | - | 2,546 | 2,546 | ||||||||||||
Deferred
tax asset
|
750 | - | - | 750 | ||||||||||||
Goodwill
|
12,339 | - | - | 12,339 | ||||||||||||
Other
intangible assets, net
|
3,263 | - | - | 3,263 | ||||||||||||
Other
long term assets
|
22 | - | 21 | 43 | ||||||||||||
Total
Other Assets
|
16,863 | - | 2,842 | 19,705 | ||||||||||||
Total
Assets
|
$ | 27,502 | $ | 112 | $ | 2,899 | $ | 30,513 |
NOTE
8 – GOING CONCERN
The
accompanying consolidated financials statements have been prepared assuming that
the Company will continue as a going concern. As described in Note 2,
by selling the subsidiaries in four segments that overall have been
underperforming and require a higher level of working capital investment,
management believes they will be able to start generating positive cash flows
immediately. The conversion of the outstanding debt to preferred
stock by the Company’s majority shareholder will also result in a significant
decrease in the debt service requirements in 2010. With the Company’s
human capital and financial resources all focusing on the profitability of a
segment that historically has generated operating income and positive cash flows
from operations, management believes the Company will have adequate cash to fund
anticipated needs through June 30, 2010. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
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 ten months ended June 30, 2009. 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 of various product and service entities, 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.
16
We were
incorporated in the state of Delaware in 1988, restructured in 2000 and
redomesticated to the state of Indiana in May 2005. Prior to 2001, we
conducted business mainly in the entertainment industry.
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 Note 2 of our financial statements in Item 1,
will change the focus of our Company in fiscal 2009 and
thereafter. This operational change in our Company will impact the
comparability of our financial information compared to historical data presented
in past filings.
Recent
Developments
On
January 15, 2010, our Board of Directors appointed Tena Mayberry to the position
of Chief Executive Officer of the Company. Ms. Mayberry is replacing
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..
On April
13, 2009, our Board of Directors approved a change in the Company’s fiscal year
end from August 31 st to June
30 th
commencing with our fiscal year 2009. This resulted in a ten
month period for fiscal 2009.
Effective
November 30, 2008, the Company completed a transaction to sell all of the
outstanding shares of common stock of the following wholly-owned subsidiaries:
James H Drew Corporation, Nor-Cote International, Inc., Fortune Wireless, Inc.
and Commercial Solutions, Inc. As of this date, the subsidiaries were
sold to related party entities owned by the Company’s majority shareholders in
exchange for a $10,000,000 reduction in the outstanding balance of the term loan
note due to the majority shareholder and a three-year term note in the amount of
$3,240,000. The transaction also included the conversion of the
remaining term loan note balance to Preferred Stock and the issuance of
additional warrants. For further discussion of this transaction, see
Note 2 – Disposition of Assets in the Notes to the Consolidated Financial
Statements. The Company did not recognize any gain from the sale as
the consideration paid by the two largest shareholders as it was equal to the
net book value of the sold subsidiaries.
Effective
November 30, 2008, the Company no longer operated in the Wireless
Infrastructure, Transportation Infrastructure, Ultraviolet Technologies and
Electronics Integration Segments.
Effective
December 1, 2008, the Company devoted substantially all its resources on the
growth and profitability of the Business Solutions segment.
Business
Solutions Segment
The
Business Solutions segment is comprised of Professional Employer Organizations
(PEOs) which provide full-service human resources outsourcing services through
co-employment relationships with their clients. Companies operating
in the Business Solutions Segment include PSM, CSM, PEM, and ESG. Our
PEOs provide services typically managed by a company’s internal human resources
and accounting departments, including payroll and tax processing and management,
worker’s compensation and risk management, benefits administration, unemployment
administration, human resource compliance services, 401k and retirement plan
administration and employee assessments. Clients represent a wide
variety of industries from healthcare, professional services, software
development, manufacturing logistics, telemarketing and construction. Combined,
these organizations provide co-employment services to approximately 14,000
employees in 48 states.
Wireless
Infrastructure Segment
Through
November 30, 2008, we invested in wireless infrastructure businesses, having
completed six acquisitions primarily related to infrastructure products and
service offerings related to the development, marketing, management, maintenance
and upgrading of wireless telecommunications
sites. Subsidiaries operating in the Company’s Wireless
Infrastructure segment included Fortune Wireless, Magtech Services, Inc.,
Cornerstone Wireless Construction Services, Inc. and James Westbrook &
Associates, LLC.
Effective
November 30, 2008, the Company sold its subsidiaries operating in the Wireless
Infrastructure segment.
17
Transportation
Infrastructure Segment
Through
November 30, 2008, the Company owned subsidiaries in its Transportation
Infrastructure segment that assist customers with the development, maintenance
and upgrading of transportation infrastructure and commercial construction
projects. Transportation infrastructure products and services are
performed by JH Drew. JH Drew was acquired in April 2004 and has been
operating for over fifty years servicing contractors and state departments of
transportation throughout the Midwestern United States. JH Drew is a
leading specialty contractor in the field of transportation infrastructure,
including guardrail, electrical components, and the fabrication and installation
of structural steel for commercial buildings.
Effective
November 30, 2008, the Company sold its subsidiaries operating in the
Transportation Infrastructure segment.
Ultraviolet
Technologies Segment
Through
November 30, 2008, the Company owned subsidiaries in its Ultraviolet (UV)
Technologies segment that manufactured UV curable screen printing
inks. UV Technologies products are manufactured by Nor-Cote, which we
acquired in July 2003. These ink products are printed on many types of plastic,
metals and other substrates that are compatible with the UV curing
process. Typical applications are plastic sheets, point-of-purchase
(POP) signage, banners, decals, cell phones, bottles and containers, CD and DVD,
rotary-screen printed labels, and membrane switch overlays for conductive
ink. Nor-Cote has operating facilities in the United States, United
Kingdom, China, Singapore and Mexico, with worldwide distributors located in
South Africa, Australia, Canada, China, Colombia, Hong Kong, India, Indonesia,
Italy, Japan, Korea, Mexico, New Zealand, Poland, Spain, Taiwan, Thailand and
the United States.
Effective
November 30, 2008, the Company sold its subsidiaries operating in the
Ultraviolet Technologies segment.
Electronics
Integration Segment
Through
November 30, 2008, the Company owned subsidiaries in its Electronics Integration
segment that sell and install a variety of electronic products and equipment,
including video, sound and security products. Subsidiaries included
Kingston, Commercial Solutions and Telecom Technology Corp. (TTC) d/b/a
Audio-Video Revolution, Inc. (AVR).
Effective
November 30, 2008, the Company sold its subsidiary Commercial Solutions and
discontinued operations of its subsidiaries Kingston and TTC d/b/a AVR in its
Electronics Integration segment.
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, 2009. Since June 30, 2009, 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.
18
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 on February 16, 2010 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.
Other new
pronouncements issued but not effective until after December 31, 2009, are not
expected to have a significant effect on the company’s consolidated financial
statements.
RESULTS
OF OPERATIONS: COMPARISON OF THE THREE AND SIX MONTH PERIODS ENDED
DECEMBER 31, 2009 AND FEBRUARY 28, 2009
Executive
Overview of Financial Results
Results
of operations for the three and six month periods ended December 31, 2009 and
February 28, 2009 are as follows:
Revenue
for the
|
Operating
income (loss) for the
|
|||||||||||||||
Three Months Ended
|
Three Months Ended
|
|||||||||||||||
December
31,
|
February
28,
|
December
31,
|
February
28,
|
|||||||||||||
2009
|
2009
|
2009
|
2009
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Business
Solutions
|
$ | 14,985 | $ | 16,428 | $ | 481 | $ | 289 | ||||||||
Holding
Company
|
- | - | (184 | ) | (2 | ) | ||||||||||
Segment
Totals
|
$ | 14,985 | $ | 16,428 | $ | 297 | $ | 287 | ||||||||
Net
Income Available to Common Shareholders
|
$ | 186 | $ | 15 |
19
Revenue
for the
|
Operating
income (loss) for the
|
|||||||||||||||
Six Months Ended
|
Six Months Ended
|
|||||||||||||||
December
31,
|
February
28,
|
December
31,
|
February
28,
|
|||||||||||||
2009
|
2009
|
2009
|
2009
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Business
Solutions
|
$ | 29,814 | $ | 33,169 | $ | 1,202 | $ | 361 | ||||||||
Wireless
Infrastructure
|
- | 3,312 | - | 193 | ||||||||||||
Transportation
Infrastructure
|
- | 12,090 | - | 557 | ||||||||||||
Ultraviolet
Technologies
|
- | 2,771 | - | (204 | ) | |||||||||||
Electronics
Integration
|
- | 1,251 | - | 100 | ||||||||||||
Holding
Company
|
- | - | (381 | ) | (353 | ) | ||||||||||
Segment
Totals
|
$ | 29,814 | $ | 52,593 | $ | 821 | $ | 654 | ||||||||
Net
Income Available to Common Shareholders
|
$ | 846 | $ | 59 |
Net
income available to common stock shareholders was $0.2 million or $0.01 per
diluted share on revenue of $15.0 million for the three month period ended
December 31, 2009 compared with net income available to common stock
shareholders of $0.02 million or $0.00 per diluted share on revenue of $16.4
million for the three month period ended February 28, 2009. This
represents a 9% decrease in revenue and a 1,140% percent increase in net
income.
Net
income available to common stock shareholders was $0.8 million or $0.06 per
diluted share on revenue of $29.8 million for the six month period ended
December 31, 2009 compared with net income available to common stock
shareholders of $0.06 million or $0.00 per diluted share on revenue of $52.6
million for the six month period ended February 28, 2009. This
represents a 43% decrease in revenue and a 1,334% percent increase in net
income.
The
following factors primarily contributed to the decrease in revenue for the three
and six-month periods ended December 31, 2009:
·
|
Decrease in Business Solutions is
due to a decrease in the total number of worksite employees related to
client reductions in a) base payrolls, b) bonus programs, and c) overall
staffing levels, all related to the downturn in economic
conditions.
|
·
|
The
Wireless Infrastructure, Transportation Infrastructure, Ultraviolet
Technologies, and the Electronics Integration decreases are due to the
sale and or discontinuation of operations for the subsidiaries in these
divisions.
|
The
following factors primarily contributed to the increase in segment operating
income for the three and six month periods ended December 31, 2009:
·
|
Increases
in the Business Solutions are due to an overall reduction of internal
staffing and continued efficiency improvements and expense reductions in
all aspects of the companies
operations.
|
·
|
The
Wireless Infrastructure, Transportation Infrastructure, Ultraviolet
Technologies, and the Electronics Integration increases are due to the
sale and or discontinuation of operations for the subsidiaries in these
divisions.
|
Results
by segment are described in further detail as follows:
Business
Solutions
Business
Solutions segment operating results for three and six month periods ended
December 31, 2009 and February 28, 2009 are as follows:
20
Three
Month Period Ended
|
Six
Month Period Ended
|
|||||||||||||||||||||||||||||||
December
31, 2009
|
February
28, 2009
|
December
31, 2009
|
February
28, 2009
|
|||||||||||||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||
Revenues
|
$ | 14,985 | 100 | % | $ | 16,428 | 100 | % | $ | 29,814 | 100 | % | $ | 33,169 | 100 | % | ||||||||||||||||
Cost
of revenues
|
11,799 | 78.7 | % | 13,119 | 79.9 | % | 23,227 | 77.9 | % | 26,459 | 79.8 | % | ||||||||||||||||||||
Gross
profit
|
3,186 | 21.3 | % | 3,309 | 20.1 | % | 6,587 | 22.1 | % | 6,710 | 20.2 | % | ||||||||||||||||||||
Operating
expenses
|
||||||||||||||||||||||||||||||||
Selling,
general and administrative
|
2,565 | 17.1 | % | 2,854 | 17.4 | % | 5,086 | 17.1 | % | 6,014 | 18.1 | % | ||||||||||||||||||||
Depreciation
and amortization
|
140 | 0.9 | % | 166 | 1.0 | % | 299 | 1.0 | % | 335 | 1.0 | % | ||||||||||||||||||||
Total
operating expenses
|
2,705 | 18.1 | % | 3,020 | 18.4 | % | 5,385 | 18.1 | % | 6,349 | 19.1 | % | ||||||||||||||||||||
Segment
operating income
|
$ | 481 | 3.2 | % | $ | 289 | 1.8 | % | $ | 1,202 | 4.0 | % | $ | 361 | 1.1 | % |
Revenue
Revenue
for the three month period ended December 31, 2009 was $15.0 million, compared
to $16.4 million for the three month period ended February 28, 2009, a decrease
of $1.4 million or 9%. Revenue decreased primarily due to
attrition of customers and the impact of the economic slowdown on our
customers.
Revenue
for the six month period ended December 31, 2009 was $29.8 million, compared to
$33.2 million for the six month period ended February 28, 2009, a decrease of
$3.4 million or 10%. Revenue decreased primarily due to
attrition of customers and the impact of the economic slowdown on our
customers.
Gross
Profit
Gross
profit for the three month period ended December 31, 2009 was $3.2 million,
representing 21% of revenue, compared to $3.3 million, representing 20% of
revenue for the three month period ended February 28, 2009. Gross
profit as a dollar amount remained relatively unchanged. Gross profit
as a percentage of revenue increased due to an overall change in the customer
mix and profile.
Gross
profit for the six month period ended December 31, 2009 was $6.6 million,
representing 22% of revenue, compared to $6.7 million, representing 20% of
revenue for the six month period ended February 28, 2009. Gross
profit as a dollar amount remained relatively unchanged. Gross profit
as a percentage of revenue increased due to an overall change in the customer
mix and profile.
Operating
Income
Operating
income for the three month period, ended December 31, 2009 was $0.5 million,
compared to $0.3 million for the three month period ended February 28, 2009, an
increase of $0.2 million or 66%. Operating income increased due to
overall efficiency improvements and expense reductions in all areas of the
companies operations including reductions in internal staffing
levels.
Operating
income for the six month period, ended December 31, 2009 was $1.2 million,
compared to $0.4 million for the six month period ended February 28, 2009, an
increase of $0.8 million or 232%. Operating income increased due to
overall efficiency improvements and expense reductions in all areas of the
companies operations including reductions in internal staffing
levels.
Holding
Company
Operating
Expense
The
Holding Company does not have any income producing operating
assets. As such, the operating loss was equal to operating
expenses. Operating expenses consist primarily of legal, accounting
and consulting fees. Operating expenses for the three month period
ended December 31, 2009 were $0.2 million, compared to $0.02 million for the
three month period ended February 28, 2009, an increase of $0.2 million or
9,100%. Operating expense increased due to timing of accruing our
legal, accounting, and consulting expenses.
The
Holding Company does not have any income producing operating
assets. As such, the operating loss was equal to operating
expenses. Operating expenses consist primarily of legal, accounting
and consulting fees. Operating expenses for the six month period
ended December 31, 2009 and February 28, 2009 were $0.4
million.
21
Interest
Expense
Interest
expense was $0.004 million for the three month period ended December 31, 2009,
compared to $0.0 million for the three month period ended February 28, 2009, an
increase of $0.04 million or 100%. The increase was due to obtaining
a term note in May 2009.
Interest
expense was $0.008 million for the six month period ended December 31, 2009,
compared to $0.1 million for the six month period ended February 28, 2009, a
decrease of $0.1 million or 93%. The decrease was primarily due to
the satisfaction of our related party debt.
Income
Taxes
Income
tax expense (benefit) was ($0.02) and $0.02 million for the three months ended
December 31, 2009 and February 28, 2009, 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 $3.3 million valuation
allowance at December 31, 2009 is necessary to reduce the deferred tax assets to
the amount that will more likely than not be realized. The change in
the valuation allowance for the current period is approximately ($0.4)
million.
LIQUIDITY
AND CAPITAL RESOURCES
Our
principal sources of liquidity include cash and equivalents and proceeds from
debt borrowings. We had cash and equivalents of $3.5 million at
December 31, 2009 and $1.7 million at June 30, 2009.
We had
working capital of $0.02 million at December 31, 2009 compared with ($1.0)
million at June 30, 2009. The increase in working capital was
primarily due to the disposition of four of our five operating segments at
November 30, 2008. 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 health benefit plans and certain general insurance coverage.
The Company uses its cash and cash equivalents to collateralize these
obligations. Restricted cash was approximately $3.3 million and $3.1 million at
December 31, 2009 and June 30, 2009, respectively.
Total
debt at December 31, 2009 and June 30, 2009 was $0.3 million.
Cash
Flows
Cash
flows provided by operations for the six month period ended December 31, 2009
and February 28, 2009 were $1.9 million and $1.6 million,
respectively. This increase in operating cash flows was due primarily
to the increase in accrued expenses and other current liabilities.
Net cash
flow used in investing activities was $0.04 million for the six month period
ended December 31, 2009 compared to $0.1 million for the six month period ended
February 28, 2009. The decrease was primarily due to the fact that no
major fixed assets were acquired during the six month period ending December 31,
2009.
Net cash
flow used in financing activities was $0.01 million for the six month period
ended December 31, 2009 compared to $3.9 million for the six month period ended
December 31, 2009. The increase was primarily the result of making
our final balloon payment for the Laurus convertible debt in November
2008.
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 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.
22
Transactions
with Related Parties
We have
entered into various acquisition agreements over the past three years which
contain option agreements or rights between the sellers of the acquired entities
and our two majority shareholders, the Chairman and the former CEO, related to
the Company’s stock provided as consideration under the
acquisitions. The Company entered into an agreement in which the
sellers of ESG may put (put option) the 217,143 shares issued at closing to the
Company during the thirty (30) day period that begins on March 1, 2010. The
Company recorded $814 related to the put options on the 217,143 shares as a
current liability, since the Company is not able to control whether
such options will be put to the Company or sold on the open market during the
required time period.
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 health insurance and 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, 2009, we had approximately $3.3 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.
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 CEO, CFO, and Chief Operating Officer (“COO”) as
appropriate, to allow timely decisions regarding required
disclosure. The Company’s management, including the CEO, CFO, and
COO, 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 CEO, CFO and COO the Company has evaluated the effectiveness of
the Company’s disclosure controls and procedures as of December 31,
2009. Based on this evaluation, the CEO, CFO, and COO have concluded
that, for the reasons more fully set forth below, the Company’s disclosure
controls and procedures were not effective on December 31, 2009 in providing
reasonable assurance that information required to be disclosed in the reports
the Company file pursuant to the Securities Exchange Act of 1934 was recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.
More
specifically, the Company’s management has concluded that: (i) additional
accounting personnel were needed at certain subsidiaries at December 31, 2009 to
ensure that certain disclosure controls and procedures were operating
effectively; (ii) greater segregation of duties was needed in the accounting
functions; and (iii) certain procedures should be documented to ensure that
personnel turnover does not result in a failure of those
procedures. The Company will continue to evaluate the need for
additional staff at the parent and subsidiary levels, but given the size and
location of the Company’s subsidiaries the Company believes it will continue to
face challenges in attracting and retaining qualified
personnel. Additionally, the Company is also in the process of
evaluating ways in which the impact of personnel turnover on the implementation
of disclosure controls and procedures can be reduced. Management
continues to evaluate the effectiveness of this segregation and the need for
additional enhancements, including, but not limited to, the addition of
accounting personnel.
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.
23
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.
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
|
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:
|
By:
/s/ Tena Mayberry
|
|
Tena
Mayberry,
|
||
Chief
Executive Officer
|
||
Date:
|
By:
/s/ Randy E. Butler
|
|
Randy
E. Butler,
|
||
Chief
Financial Officer
|
24