Attached files
file | filename |
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EX-31.2 - FORTUNE INDUSTRIES, INC. | v211373_ex31-2.htm |
EX-32.2 - FORTUNE INDUSTRIES, INC. | v211373_ex32-2.htm |
EX-31.1 - FORTUNE INDUSTRIES, INC. | v211373_ex31-1.htm |
EX-32.1 - FORTUNE INDUSTRIES, INC. | v211373_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, 2010
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
o
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 o | Accelerated filer o |
Non-accelerated filer o | 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 o No x
As of
February 14, 2011, 12,235,790 shares of the Company’s $0.10 per share par value
common stock were outstanding.
FORTUNE
INDUSTRIES, INC.
FORM
10-Q
For
The Quarterly Period Ended December 31, 2010
INDEX
Page
|
||||
PART
I. Financial Information
|
||||
ITEM
1. Financial Statements
|
||||
Consolidated
Balance Sheets as of December 31, 2010 (unaudited) and June 30,
2010
|
2 | |||
Consolidated
Statements of Operations for the three and six month periods ended
December 31, 2010 (unaudited) and December 31, 2009
(unaudited)
|
4 | |||
Consolidated
Statement of Changes in Shareholders’ Equity for the six month period
ended December 31, 2010 (unaudited)
|
5 | |||
Consolidated
Statements of Cash Flows for the six month periods ended December 31, 2010
(unaudited) and December 31, 2009 (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
|
11 | |||
ITEM
3. Quantitative and Qualitative Disclosures About Market
Risk
|
16 | |||
ITEM
4. Controls and Procedures
|
||||
PART
II. Other Information
|
||||
ITEM
1. Legal Proceedings
|
16 | |||
ITEM
1A. Risk Factors
|
16 | |||
ITEM
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
16 | |||
ITEM
3 Defaults Upon Senior
Securities
|
16 | |||
ITEM
4. (Removed and Reserved)
|
16 | |||
ITEM
5. Other Information
|
16 | |||
ITEM
6. Exhibits
|
17 | |||
Signatures
|
18 |
PART
1 - FINANCIAL INFORMATION
Item
1. Financial Statements.
FORTUNE
INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(DOLLARS
IN THOUSANDS)
December
31
|
June
30,
|
|||||||
2010
|
2010
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and equivalents
|
$ | 2,816 | $ | 2,324 | ||||
Restricted
cash (Note 1)
|
2,452 | 2,820 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $9 and
$29
|
3,182 | 2,247 | ||||||
Deferred
tax asset
|
1,750 | 1,750 | ||||||
Prepaid
expenses and other current assets
|
853 | 943 | ||||||
Assets
of discontinued operations, net
|
- | 8 | ||||||
Total
Current Assets
|
11,053 | 10,092 | ||||||
OTHER
ASSETS
|
||||||||
Property,
plant & equipment, net of accumulated depreciation of $1,650 and
$2,353
|
312 | 455 | ||||||
Term
note receivable related party
|
- | 2,536 | ||||||
Deferred
tax asset
|
1,000 | 1,000 | ||||||
Goodwill
|
12,339 | 12,339 | ||||||
Other
intangible assets, net of accumulated amortization of $1,999 and
$1,796
|
2,654 | 2,857 | ||||||
Other
long-term assets
|
55 | 62 | ||||||
Total
Other Assets
|
16,360 | 19,249 | ||||||
TOTAL
ASSETS
|
$ | 27,413 | $ | 29,341 |
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,
|
|||||||
2010
|
2010
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Short-term
debt and current maturities of long-term debt (Note 3)
|
$ | 500 | $ | 511 | ||||
Accounts
payable
|
628 | 909 | ||||||
Health
and workers' compensation reserves
|
1,801 | 1,696 | ||||||
Customer
deposits
|
214 | - | ||||||
Accrued
expenses
|
5,823 | 5,530 | ||||||
Other
current liabilities
|
45 | 234 | ||||||
Total
Current Liabilities
|
9,011 | 8,880 | ||||||
LONG-TERM
LIABILITIES
|
||||||||
Health
and workers' compensation reserves
|
592 | 435 | ||||||
Long-term
debt, less current maturities (Note 3)
|
167 | 417 | ||||||
Total
Long-Term Liabilities
|
759 | 852 | ||||||
Total
Liabilities
|
9,770 | 9,732 | ||||||
SHAREHOLDERS'
EQUITY (NOTE 5)
|
||||||||
Common
stock, $0.10 par value; 150,000,000 authorized;
|
||||||||
12,235,790
and 12,224,290 issued and outstanding at December 31, 2010
|
||||||||
and
June 30, 2010, respectively
|
1,224 | 1,206 | ||||||
Series
C Preferred stock, $0.10 par value; 1,000,000 authorized;
|
||||||||
296,180
issued and outstanding at December 31, 2010
|
||||||||
and
June 30, 2010, respectively
|
27,118 | 29,618 | ||||||
Treasury
stock, at cost, 214,444 and 48,263 shares at
|
||||||||
December
31, 2010 and June 30, 2010, respectively
|
(809 | ) | (186 | ) | ||||
Additional
paid-in capital and warrants outstanding
|
20,126 | 19,515 | ||||||
Accumulated
deficit
|
(30,016 | ) | (30,544 | ) | ||||
Total
Shareholders' Equity
|
17,643 | 19,609 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 27,413 | $ | 29,341 |
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
Month Period Ended
|
Six
Month Period Ended
|
|||||||||||||||
December
31,
|
December
31,
|
December
31,
|
December
31,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
REVENUES
|
$ | 15,860 | $ | 14,985 | $ | 31,431 | $ | 29,814 | ||||||||
DIRECT
COSTS
|
12,716 | 11,799 | 25,089 | 23,227 | ||||||||||||
GROSS
PROFIT
|
3,144 | 3,186 | 6,342 | 6,587 | ||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Selling,
general and administrative expenses
|
2,615 | 2,707 | 5,168 | 5,383 | ||||||||||||
Depreciation
and amortization
|
167 | 182 | 341 | 383 | ||||||||||||
Total
Operating Expenses
|
2,782 | 2,889 | 5,509 | 5,766 | ||||||||||||
OPERATING
INCOME
|
362 | 297 | 833 | 821 | ||||||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Interest
income
|
33 | 28 | 61 | 56 | ||||||||||||
Interest
expense
|
(17 | ) | (4 | ) | (27 | ) | (8 | ) | ||||||||
Other
income
|
- | - | 3 | - | ||||||||||||
Total
Other Income (Expense)
|
16 | 24 | 37 | 48 | ||||||||||||
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
378 | 321 | 870 | 869 | ||||||||||||
Provision
for income tax expense (benefit)
|
2 | (21 | ) | 37 | (292 | ) | ||||||||||
NET
INCOME FROM CONTINUING OPERATIONS
|
376 | 342 | 833 | 1,161 | ||||||||||||
DISCONTINUED
OPERATIONS
|
||||||||||||||||
Loss
from discontinued operations
|
(2 | ) | (8 | ) | (9 | ) | (19 | ) | ||||||||
NET
INCOME
|
374 | 334 | 824 | 1,142 | ||||||||||||
Preferred
stock dividends
|
148 | 148 | 296 | 296 | ||||||||||||
NET
INCOME AVAILABLE TO COMMON SHAREHOLDERS
|
$ | 226 | $ | 186 | $ | 528 | $ | 846 | ||||||||
Basic
Income Per Common Share-Continuing Operations
|
$ | 0.02 | $ | 0.02 | $ | 0.04 | $ | 0.07 | ||||||||
Basic
Loss Per Common Share-Discontinued Operations
|
- | - | - | - | ||||||||||||
BASIC
INCOME PER COMMON SHARE
|
$ | 0.02 | $ | 0.02 | $ | 0.04 | $ | 0.07 | ||||||||
Basic
Weighted Average Shares Outstanding
|
12,235,790 | 12,192,859 | 12,228,997 | 12,141,124 | ||||||||||||
Diluted
Income Per Common Share-Continuing Operations
|
$ | 0.02 | $ | 0.01 | $ | 0.04 | $ | 0.06 | ||||||||
Diluted
Loss Per Common Share-Discontinued Operations
|
- | - | - | - | ||||||||||||
DILUTED
INCOME PER COMMON SHARE
|
$ | 0.02 | $ | 0.01 | $ | 0.04 | $ | 0.06 | ||||||||
Diluted
Weighted Average Shares Outstanding
|
14,752,603 | 14,703,022 | 14,744,310 | 14,651,287 |
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
|
Treasury
|
Preferred
|
and
Warrants
|
Accumulated
|
Shareholders'
|
|||||||||||||||||||
Stock
|
Stock
|
Stock
|
Outstanding
|
Deficit
|
Equity
|
|||||||||||||||||||
BALANCE
AT JUNE 30, 2010 (Audited)
|
$ | 1,206 | $ | (186 | ) | $ | 29,618 | $ | 19,515 | $ | (30,544 | ) | $ | 19,609 | ||||||||||
Issuance
of 11,500 shares of common
|
||||||||||||||||||||||||
stock
for compensation
|
1 | - | - | 5 | - | 6 | ||||||||||||||||||
Purchase
of 166,181 shares of common stock
|
17 | (623 | ) | - | 606 | - | - | |||||||||||||||||
for
treasury at cost
|
||||||||||||||||||||||||
Related
party note receivable securitized by
|
||||||||||||||||||||||||
preferred
stock
|
- | - | (2,500 | ) | - | - | (2,500 | ) | ||||||||||||||||
Net
income
|
- | - | - | - | 824 | 824 | ||||||||||||||||||
Preferred
stock dividends
|
- | - | - | - | (296 | ) | (296 | ) | ||||||||||||||||
BALANCE
AT DECEMBER 31, 2010 (Unaudited)
|
$ | 1,224 | $ | (809 | ) | $ | 27,118 | $ | 20,126 | $ | (30,016 | ) | $ | 17,643 |
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)
Six
Months Ended
|
||||||||
December
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
Income
|
$ | 824 | $ | 1,142 | ||||
Adjustments
to reconcile net income to net cash provided by
|
||||||||
operating
activities:
|
||||||||
Depreciation
and amortization
|
341 | 383 | ||||||
Provision
for losses on accounts receivable
|
(20 | ) | 13 | |||||
Stock
based compensation
|
6 | 79 | ||||||
Deferred
income taxes
|
- | (250 | ) | |||||
Changes
in certain operating assets and liabilities:
|
||||||||
Restricted
cash
|
368 | (200 | ) | |||||
Accounts
receivable
|
(915 | ) | (170 | ) | ||||
Prepaid
assets and other current assets
|
90 | 283 | ||||||
Assets
of discontinued operations
|
8 | (57 | ) | |||||
Other
long-term assets
|
43 | - | ||||||
Accounts
payable
|
(281 | ) | 3 | |||||
Health
and workers' compensation reserves
|
262 | (1,452 | ) | |||||
Customer
deposits
|
214 | - | ||||||
Accrued
expenses and other current liabilities
|
352 | 2,151 | ||||||
Liabilities
of discontinued operations
|
- | (1 | ) | |||||
Net
Cash Provided by Operating Activities
|
1,292 | 1,924 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Capital
expenditures
|
(50 | ) | (43 | ) | ||||
Proceeds
from sale of assets
|
55 | - | ||||||
Net
Cash Provided by (Used in) Investing Activities
|
5 | (43 | ) | |||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Payments
on term debt
|
(261 | ) | (12 | ) | ||||
Repurchase
of common stock for treasury
|
(248 | ) | - | |||||
Dividends
paid on preferred stock
|
(296 | ) | (49 | ) | ||||
Net
Cash Used in Financing Activities
|
(805 | ) | (61 | ) | ||||
NET
INCREASE IN CASH AND EQUIVALENTS
|
492 | 1,820 | ||||||
CASH
AND EQUIVALENTS
|
||||||||
Beginning
of Period
|
2,324 | 1,686 | ||||||
End
of Period
|
$ | 2,816 | $ | 3,506 |
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)
Six
Months Ended
|
||||||||
December
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
SUPPLEMENTAL
DISCLOSURES
|
||||||||
Interest
paid
|
$ | 28 | $ | 8 | ||||
Income
taxes paid
|
$ | 37 | $ | 48 |
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 2010 Annual Report on Form 10-K filed by Fortune Industries, Inc. (which,
together with its subsidiaries unless the context requires otherwise, shall be
referred to herein as the “Company”). The consolidated balance sheet
at June 30, 2010 has been derived from the audited financial statements at that
date, but does not include all of the information or footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. The Company’s consolidated balance sheet at
December 31, 2010, and the consolidated statements of operations, cash flows and
shareholders’ equity for the periods December 31, 2010 have been prepared
by the Company without audit. These unaudited financial statements
contain, in the opinion of management, all adjustments (consisting of normal
accruals and other recurring adjustments) necessary for a fair presentation of
the consolidated financial position, results of operations, and cash flows for
the periods presented in conformity with accounting principles generally
accepted in the United States. The Company has evaluated subsequent events
through the time these financial statements in the Form 10-Q report were filed
with the Securities and Exchange Commission. The operating results
for the six month period ended December 31, 2010 are not necessarily indicative
of the operating results to be expected for the full fiscal year.
Nature of Business: Fortune
Industries, Inc. is an Indiana corporation, originally incorporated in Delaware
in 1988. The Company is comprised of Professional Employer
Organizations (PEOs) which provide full-service human resources outsourcing
services through co-employment relationships with their
clients. Wholly owned subsidiaries operating in this industry include
Professional Staff Management, Inc. and related entities (“PSM”); CSM, Inc. and
related subsidiaries (“CSM”); Precision Employee Management, LLC (“PEM”); and
Employer Solutions Group, Inc. and related entities (“ESG”).
The
Companies bill their clients under Professional Services Agreements as licensed
PEOs. The billing includes amounts for the client’s gross wages,
payroll taxes, employee benefits, workers’ compensation insurance and an
administration fee. The administration fee charged by the companies
in this segment is typically a percentage of the gross payroll and is sufficient
to allow the companies in this segment to provide payroll administration
services, human resources consulting services, worksite safety training, and
employment regulatory compliance for no additional fees.
The
component of the administration fee related to administration varies, in part,
according to the size of the client, the amount and frequency of payroll
payments and the delivery method of such payments. The component of
the administration fee related to health, workers’ compensation and unemployment
insurance is based, in part, on the client’s historical claims
experience. Charges by the Companies in this segment are invoiced
along with each periodic payroll delivered to the client.
Through
the co-employment contractual relationship, the Companies become the employer
and, as such, all payroll-related taxes are filed on these Companies’ federal,
state, and local tax identification numbers. The clients are not
required to file any payroll related taxes on their own behalf. The
calculations of amounts the Companies in this segment owe and pay the various
government and employment insurance vendors are based on the experience levels
and activity of the Companies in this segment.
Restricted Cash: Restricted
cash includes certificates of deposits and letters of credit issued to
collateralize its obligations under its workers’ compensation program and
certain general insurance coverage. At December 31, 2010, the Company
had $2,452 in total restricted cash. Of this, $2,182 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 historically elected to perform the annual impairment test of
recorded goodwill and other indefinite-lived intangible assets as of the end of
fiscal first quarter. During fiscal year 2010, the Company performed
an internal analysis after a third-party appraisal group was unable to commit on
a date, using a discounted cash flows approach through the period since the last
analysis was completed in fiscal 2009 by the prior appraiser through September
30, 2009. Our analysis resulted in no evidence of impairment;
however, the Company has elected to have an independent valuation issued by
third quarter ended March 31, 2011.
8
Self
Insurance: The Company’s PSM subsidiary maintains a
loss-sensitive worksite employees’ health and accident benefit
program. Under the insurance policy, PSM’s self-funded liability is
limited to $225 per employee, with an aggregate liability limit of approximately
$7.6. The aggregate liability limits are adjusted monthly based on the number of
participants.
Workers’ Compensation: The
Company’s PSM and CSM subsidiaries maintain partially self-funded workers’
compensation insurance programs. Under the insurance policies
established at each company, PSM and CSM’s deductible liability is limited to
$250 per incident, with an aggregate liability limit of approximately
$2,000. Under the insurance policy established at ESG, the deductible
liability is limited to $350 per incident, with no aggregate liability
limit.
NOTE
2 – MEASUREMENT OF FAIR VALUE
Effective
September 1, 2008, the Company adopted ASC 820, which provides a framework for
measuring fair value under GAAP. As defined in ASC 820, fair value is the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date (exit
price). In determining fair value in accordance with ASC 820, we utilize
market data or assumptions that we believe market participants would use in
pricing the asset or liability that maximize the use of observable inputs and
minimize the use of unobservable inputs to the extent possible, including
assumptions about risk and the risks inherent in the inputs to the valuation
technique. Classification of the financial asset or liability within the
hierarchy is determined based on the lowest level input that is significant to
the fair value measurement.
ASC 820
establishes a fair value hierarchy that prioritizes the inputs used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1 measurement) and
the lowest priority to unobservable inputs (Level 3 measurement). The
three levels of the fair value hierarchy defined by ASC 820 are as
follows:
Level 1
|
Quoted
prices are available in active markets for identical assets or liabilities
as of the reporting date. Active markets are those in which
transactions for the asset or liability occur in sufficient frequency and
volume to provide pricing information on an ongoing
basis.
|
Level 2
|
Financial
instruments lacking unadjusted, quoted prices from active market
exchanges, including over-the-counter traded financial
instruments. The prices for the financial instruments are determined
using prices for recently traded financial instruments with similar
underlying terms as well as directly or indirectly observable inputs, such
as interest rates and yield curves that are observable at commonly quoted
intervals.
|
Level 3
|
Financial
instruments that are not actively traded on a market exchange. This
category includes situations where there is little, if any, market
activity for the financial instrument. The prices are determined using
significant unobservable inputs or valuation
techniques.
|
As of
December 31, 2010 and June 30, 2010, we did not have any financial assets
utilizing Level 1. Financial assets utilizing Level 2 inputs consist of cash
held in certificates of deposit with various financial
institutions. The fair value measurement of these items is determined
by using prices for recently traded CD’s with similar interest rates. The fair
value for the Level 2 financial instruments was $1,344 and $1,745 as of December
31, 2010 and June 30, 2010, respectively. Financial liabilities utilizing Level
3 inputs included put options related to common stock issued in conjunction with
the purchase of ESG. The fair value measurement of this Level 3 item has been
estimated using the stated contractual put price of $3.75 per share. The fair
value for the Level 3 financial instruments was $0 and $247 as of December 31,
2010 and June 30, 2010, respectively.
Term
Note
On May
29, 2009, the Company entered into a $250 term loan note with a bank. The term
loan note matured on October 28, 2009 and incurred interest at the Prime Rate
plus 2.0%. The note was collateralized by certain assets of the Company’s
majority shareholders. The loan required the Company to maintain a minimum debt
service coverage ratio of 1.25 to 1.0 among other covenants. In January 2010,
the Company was held harmless on the note and was released from the obligation
by the bank. The amount forgiven of $250 is included in the Company’s
Consolidated Statement of Operations as other income for the year ended June 30,
2010.
On April
30, 2010, the Company entered into a $1 million term note with a bank. The term
note requires twenty four consecutive monthly payments of principal plus accrued
interest at the Bank’s Prime Rate (not less than 4.5% per annum). The
term note matures on April 30, 2012. The term note is secured by
all assets of the Company and the personal guarantee of the Company’s majority
shareholder. The note is subject to certain covenants including
minimum cash flow coverage and current ratio requirements.
9
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 six month period ended December 31, 2010, 11,500
restricted share units were issued under this plan.
NOTE
5- SHAREHOLDERS’ EQUITY
Common
Stock
The
Company issued 11,500 shares of common stock during the six month period ended
December 31, 2010.
Preferred
Stock
On
September 25, 2009, the Company reached an agreement with the Chairman to amend
the dividend rates on the Series C Preferred Stock with an effective date of
July 1, 2009. From the effective date forward the Series C Preferred
Stock will bear an annual dividend of $2 per share in the years ending June 30,
2010 and 2011, $5 per share in the year ending June 30, 2012, $6 per share in
the year ending June 30, 2013 and $7 per share thereafter. All other
items of the Series C Preferred Shares remained unchanged. Dividends
of $296 and $296 were accrued and/or paid for the six months ended December 31,
2010 and December 31, 2009, 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 even 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, 2010 and the date of this filing, the Company has no intention to
convert the note receivable in the foreseeable future.
NOTE
6 - RELATED PARTY TRANSACTIONS
On
September 25, 2009, the Board of Directors approved the Chairman’s request to
utilize approximately $8.15 million of the Company’s capital loss carryforward
for individual tax purposes related to the Chairman’s personal loss on
indebtedness associated with the sales transaction as described in Note 2.
The transaction had no effect on assets, liabilities, shareholders’ equity and
net income as the Company had established that the capital loss carryforwards
presented no material value to the Company and therefore have not been included
in the calculation of deferred tax assets.
10
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Statements
contained in this document, as well as some statements by the Company in
periodic press releases and oral statements of Company officials during
presentations about the Company constitute “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995 (the
“Act”). Forward-looking statements include statements that are
predictive in nature, depend on or refer to future events or conditions, which
include words such as “expect,” “estimate,” “anticipate,” “predict,” “believe”
and similar expressions. These statements are based on the current
intent, belief or expectation of the Company with respect to, among other
things, trends affecting the Company’s financial condition or results of
operations. These statements are not guaranties of future performance
and the Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Actual
events and results involve risks and uncertainties and may differ materially
from those expressed or forecasted in forward-looking statements due to a number
of factors. Factors that might cause or contribute to such
differences, include, but are not limited to, the risks and uncertainties that
are discussed under the heading “Risk Factors” disclosed within Form 10-K for
the year ended June 30, 2010. Readers should carefully review the risk
factors referred to above and the other documents filed by the Company with the
Securities and Exchange Commission.
OVERVIEW
As a
holding company we have historically invested in businesses that we believe are
undervalued or underperforming, and /or in operations that are poised for
significant growth. Management’s strategic focus is to support the growth
of its operations by increasing revenues and revenue streams, managing costs and
creating earnings growth.
Our
operations are largely decentralized from the corporate office. Autonomy is
given to subsidiary entities, and there are few integrated business functions
(i.e. sales, marketing, purchasing and human resources). Day-to-day
operating decisions are made by subsidiary management teams. Our Corporate
management team assists in operational decisions when deemed necessary, selects
subsidiary management teams and handles capital allocation among our
operations.
We were
incorporated in the state of Delaware in 1988, restructured in 2000 and
redomesticated to the state of Indiana in May 2005.
Until
November 30, 2008, we classified our businesses under five operating
segments: Business Solutions; Wireless Infrastructure; Transportation
Infrastructure; Ultraviolet Technologies; and Electronics
Integration. Effective November 30, 2008, we approved the sale of all
of our remaining operating subsidiaries within four of our five segments
(Wireless Infrastructure, Transportation Infrastructure, Ultraviolet
Infrastructure, and Electronics Integration). Consequently, as of the
effective date of the transaction, our Business Solutions segment is the
Company’s remaining operating segment. The sales transaction, combined with
other significant events disclosed in the Companies Form 10-K for the year ended
June 30, 2010, changed the focus of our Company in fiscal 2009 and
thereafter. This operational change in our Company impacts our
comparability of our financial information compared to historical data presented
in past filings.
11
Recent
Developments
Effective
May 2010, Ms. Julia Reed resigned from the Company’s Board of Directors and
Audit Committee. Ms. Reed’s resignation was not due to a disagreement with the
Company on any matter relating to the Company’s operations, policies or
practices. As a result of Ms. Reed’s resignation, the Company does not meet the
minimum audit committee requirements of the NYSE Amex guidelines. Therefore by
letter dated July 2, 2010 the Company was notified by the NYSE Amex that it is
not in compliance with Section 803(B)(2)(c) of the NYSE Amex Company Guide, in
that the Company’s audit committee is not comprised of at least two independent
directors. Pursuant to Section 803(B)(6) of the Company Guide, the Company has
until the earlier of its next annual shareholders’ meeting or one year from the
occurrence of the event that caused the failure to comply with the requirement
to regain compliance. The Company is currently interviewing potential candidates
for the position of independent director and audit committee member and expects
to have this position filled by the required timeframe.
On April
30, 2010, the Company entered into a $1 million term note with a
bank. The term note requires twenty four consecutive monthly
payments of principal plus accrued interest at the Bank’s Prime Rate (not less
than 4.5% per annum). The term note matures on April 30,
2012. The term note is secured by all assets of the Company and
the personal guarantee of the Company’s majority shareholder. The
note is subject to certain covenants including minimum cash flow coverage and
current ratio requirements.
On
January 15, 2010, our Board of Directors appointed Tena Mayberry to the position
of Chief Executive Officer of the Company. Ms. Mayberry replaced John
F. Fisbeck as the Company’s Chief Executive Officer.
On
January 15, 2010, the Company entered into a Settlement Agreement with its CEO
John Fisbeck which included a) immediate resignation of Mr. Fisbeck as CEO of
the company, b) immediate resignation of Mr. Fisbeck from the Company’s Board of
Directors, and c) waiver of certain severance payments included in his
Employment Agreement.
CRITICAL
ACCOUNTING POLICIES
The
Company’s accounting policies, which are in compliance with accounting
principles generally accepted in the United States, require application of
methodologies, estimates and judgments that have a significant impact on the
results reported in the Company’s financial statements. Those
policies that, in the belief of management, are critical and require the use of
complex judgment in their application, are disclosed on the Company’s Form 10-K
for the year ended June 30, 2010. Since June 30, 2010, there have
been no material changes to the Company’s critical accounting
policies.
New
Accounting Pronouncements
In
January 2010, the FASB issued an amendment to the disclosure requirement related
to fair value measurements. The amendment, FASB ASC 820-10-65 requires new
disclosures related to transfers in and out of Levels 1 and 2 and activity in
Level 3 fair value measurements. A reporting entity is required to disclose
separately the amounts of significant transfers in and out of Level 1 and Level
2 fair value measurements and describe the reasons for the transfers.
Additionally, in the reconciliation for fair value measurements in Level 3, a
reporting entity must present separately information about purchases, sales,
issuances and settlements (on a gross basis rather than a net number). The new
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. The Company
does not anticipate that our adoption of this amendment will have a material
effect on its financial position, results of operations or cash
flows.
Other new
pronouncements issued but not effective until after December 31, 2010, are not
expected to have a significant effect on the company’s consolidated financial
statements.
12
RESULTS
OF OPERATIONS: COMPARISON OF THE THREE MONTH PERIOD ENDED DECEMBER
31, 2010 AND DECEMBER 31, 2009
Executive
Overview of Financial Results
Gross
billings for the three month periods ended December 31, 2010 and December 31,
2009 were $149,377 million and $146,073 million, respectively. Gross
billings for the six month periods ended December 31, 2010 and December 31, 2009
were $281,506 million and $276,227 million, respectively.
Results
of operations for the three and six month periods ended December 31, 2010 and
December 31, 2009 are as follows:
Revenue
for the
|
Operating
income for the
|
|||||||||||||||
Three
Months Ended
|
Three
Months Ended
|
|||||||||||||||
December
31,
|
December
31,
|
December
31,
|
December
31,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Business
Solutions
|
$ | 15,860 | $ | 14,985 | $ | 362 | $ | 297 | ||||||||
Holding
Company
|
- | - | - | - | ||||||||||||
Segment
Totals
|
$ | 15,860 | $ | 14,985 | $ | 362 | $ | 297 | ||||||||
Net
Income Available to Common Shareholders
|
$ | 226 | $ | 186 |
Revenue
for the
|
Operating
income for the
|
|||||||||||||||
Six
Months Ended
|
Six
Months Ended
|
|||||||||||||||
December
31,
|
December
31,
|
December
31,
|
December
31,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Business
Solutions
|
$ | 31,431 | $ | 29,814 | $ | 833 | $ | 821 | ||||||||
Holding
Company
|
- | - | - | - | ||||||||||||
Segment
Totals
|
$ | 31,431 | $ | 29,814 | $ | 833 | $ | 821 | ||||||||
Net
Income Available to Common Shareholders
|
$ | 528 | $ | 846 |
Net income available to common stock shareholders was $0.23 million or $0.02 per diluted share on revenue of $15.9 million for the three month period ended December 31, 2010 compared with net income available to common stock shareholders of $0.19 million or $0.01 per diluted share on revenue of $15.0 million for the three month period ended December 31, 2009. This represents a 6% increase in revenue and a 21% increase in net income.
Net
income available to common stock shareholders was $0.53 million or $0.04 per
diluted share on revenue of $31.4 million for the six month period ended
December 31, 2010 compared with net income available to common stock
shareholders of $0.85 million or $0.07 per diluted share on revenue of $29.8
million for the six month period ended December 31, 2009. This
represents a 5% increase in revenue and a 38% decrease in net
income.
The
increase in revenue for the three month period ended December 31, 2010 is
primarily due to an increase in worksite employees.
The
increase in net income available to common shareholders for the three month
period ended December 31, 2010 is primarily due to a decrease in expenses,
including health claims, internal labor costs and legal fees.
The
increase in revenue for the six month period ended December 31, 2010 is
primarily due to an increase in worksite employees.
The
decrease in net income available to common shareholders for the six month period
ended December 31, 2010 is primarily due to a deferred tax benefit in the amount
of $0.292 million recognized in the six month period ended December 31,
2009.
13
Results
are described in further detail as follows:
Operating
results for three and six month periods ended December 31, 2010 and December 31,
2009 are as follows:
Three-Month
Period Ended
|
Six-Month
Period Ended
|
|||||||||||||||||||||||||||||||
December
31, 2010
|
December
31, 2009
|
December
31, 2010
|
December
31, 2009
|
|||||||||||||||||||||||||||||
(Dollars
in thousands)
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||||||||
Revenues
|
$ | 15,860 | 100 | % | $ | 14,985 | 100 | % | $ | 31,431 | 100 | % | $ | 29,814 | 100 | % | ||||||||||||||||
Cost
of revenues
|
12,716 | 80.2 | % | 11,799 | 78.7 | % | 25,089 | 79.8 | % | 23,227 | 77.9 | % | ||||||||||||||||||||
Gross
profit
|
3,144 | 19.8 | % | 3,186 | 21.3 | % | 6,342 | 20.2 | % | 6,587 | 22.1 | % | ||||||||||||||||||||
Operating
expenses
|
||||||||||||||||||||||||||||||||
Selling,
general and administrative
|
2,615 | 16.5 | % | 2,707 | 18.1 | % | 5,168 | 16.4 | % | 5,383 | 18.1 | % | ||||||||||||||||||||
Depreciation
and amortization
|
167 | 1.1 | % | 182 | 1.2 | % | 341 | 1.1 | % | 383 | 1.3 | % | ||||||||||||||||||||
Total
operating expenses
|
2,782 | 17.5 | % | 2,889 | 19.3 | % | 5,509 | 17.5 | % | 5,766 | 19.3 | % | ||||||||||||||||||||
Segment
operating income
|
$ | 362 | 2.3 | % | $ | 297 | 2.0 | % | $ | 833 | 2.7 | % | $ | 821 | 2.8 | % |
Revenue
Revenue
for the three month period ended December 31, 2010 was $15.9 million, compared
to $15.0 million for the three month period ended December 31, 2009,
an increase of $0.9 million or 6%. Revenue increased primarily
due to an increase in worksite employees.
Revenue
for the six month period ended December 31, 2010 was $31.4 million, compared to
$29.8 million for the six month period ended December 31, 2009, an increase
of $1.6 million or 5%. Revenue increased primarily due to an increase
in worksite employees.
Gross
Profit
Gross
profit for the three month period ended December 31, 2010 was $3.1 million,
representing 20% of revenue, compared to $3.2 million, representing 21% of
revenue for the three month period ended December 31, 2009, a decrease of $0.1
million or 1%. Gross profit remained relatively
unchanged.
Gross
profit for the six month period ended December 31, 2010 was $6.3 million,
representing 20% of revenue, compared to $6.6 million, representing 22% of
revenue for the six month period ended December 31, 2009, a decrease of $0.3
million or 4%. Gross profit decreased due to an increase in
workers’ compensation premiums and reserves.
Operating
Income
Operating
income for the three month period ended December 31, 2010 was $0.36 million,
compared to operating income of $0.30 million for the three month period ended
December 31, 2009, an increase of $0.06 million or 20%. Operating
income increased primarily due to a decrease in expenses, including health
claims, internal labor costs and legal fees.
Operating
income for the six month period ended December 31, 2010 was $0.8 million,
compared to operating income of $0.8 million for the six month period ended
December 31, 2009. Operating income remained relatively
unchanged.
Interest
Expense
Interest
expense was $0.017 million for the three month period ended December 31, 2010,
compared to $0.004 million for the three month period ended December 31, 2009,
an increase of $0.013 million or 325%. The increase was due to
interest payments on the term note entered into on April 30,
2010.
Interest
expense was $0.027 million for the six month period ended December 31, 2010,
compared to $0.008 million for the six month period ended December 31, 2009,
an increase of $0.02 million or 238%. The increase was due to
interest payments on the term note entered into on April 30,
2010.
Income
Taxes
Income
tax expense was $0.002 and ($0.021) million for the three months ended December
31, 2010 and, 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 $6.7 valuation allowance
at December 31, 2010 is necessary to reduce the deferred tax assets to the
amount that will more likely than not be realized.
14
Income
tax expense was $0.04 and ($0.29) million for the six months ended December 31,
2010 and, 2009, respectively. This increase is due to the fact that
the Company recognized a deferred tax benefit of $250,000 in the three month
period ending September 30, 2009 based on Management’s evaluation of the
deferred tax assets and the valuation allowance at that time. A valuation
allowance is necessary to reduce the deferred tax assets, if the Company had a
federal tax operating loss and based on the weight of the evidence; it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Management determined that a $250,000 adjustment to the
valuation allowance for the three month period ending September 30, 2009
was necessary to increase the deferred tax assets to the amount that
will more likely than not be realized. The change in the valuation
allowance for that period resulted in the recognition of a tax benefit of
$250,000.
LIQUIDITY AND CAPITAL RESOURCES
Our
principal sources of liquidity include cash and equivalents and proceeds from
debt borrowings. We had cash and equivalents of $2.8 million at
December 31, 2010 and $2.3 million at June 30, 2010. The increase in cash was a
direct result of the Company’s profitable operations for the six month period
ended December 31, 2010.
We had
working capital of $2.0 million at December 31, 2010 compared with $1.2 million
at June 30, 2010. The increase in working capital was a direct result
of an additional quarter of profitability and positive EBITDA. Current assets
are primarily comprised of cash and equivalents, net accounts receivable, and
prepaid expenses. Current liabilities are primarily comprised of accounts
payable and accrued expenses.
The
Company is required to collateralize its obligations under its workers’
compensation and certain general insurance coverage. The Company uses its cash
and cash equivalents to collateralize these obligations. Restricted cash was
approximately $2.5 million and $2.8 million at December 31, 2010 and June 30,
2010, respectively.
Total
debt at December 31, 2010 and June 30, 2010 was $0.7 and $0.9 million,
respectively.
Cash
Flows
Cash
flows provided by operations for the six month period ended December 31, 2010
and December 31, 2009 were $1.3 million and $1.9 million,
respectively. This decrease in operating cash flows was due primarily
to an increase in accounts receivable offset by a decrease in other accrued
liabilities and health and workers’ compensation reserves.
Net cash
flow provided by (used in) investing activities was $0.005 million for the six
month period ended December 31, 2010 compared to ($0.04) million for the
six month period ended December 31, 2009. The increase was primarily
due to proceeds from the sale of assets.
Net cash
flow used in financing activities was ($0.805) million for the six month period
ended December 31, 2010 compared to ($0.061) million for the six month period
ended December 31, 2009. The decrease was primarily due to payments
on term debt and the repurchase of common stock for treasury.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
There
have been no material changes to the Company’s contractual obligations from
those disclosed in the Form 10-K for the year ended June 30, 2010 under “Item
7-Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
OFF
BALANCE SHEET ARRANGEMENTS
As is
common in the industries we operate in, we have entered into certain off-balance
sheet arrangements in the ordinary course of business that result in risks not
directly reflected in our balance sheets. Our significant off-balance sheet
transactions include transactions with related parties, liabilities associated
with guarantees, letter of credit obligations and surety
guarantees.
Guarantees
Significant
portions of our letters of credit are personally guaranteed by the Company’s
Chairman. Future changes to these guarantees would affect financing
capacity of the Company.
Restricted
Cash
Certain
states and vendors require us to post letters of credit to ensure payment of
taxes or payments to our vendors under workers’ compensation contracts and to
guarantee performance under our contracts. Such letters of credit are
generally issued by a bank or similar financial institution. The
letter of credit commits the issuer to pay specified amounts to the holder of
the letter of credit if the holder demonstrates that we have failed to perform
specified actions. If this situation were to occur, we would be
required to reimburse the issuer of the letter of credit. Depending
on the circumstances of such a reimbursement, we may also have to record a
charge to earnings for the reimbursement. We do not believe that it
is likely that any claims will be made under a letter of credit in the
foreseeable future. As of December 31, 2010, we had approximately $2.5
million in restricted cash primarily to secure obligations under our PEO
contracts in the Business Solutions segment.
15
Item
3. Quantitative and Qualitative Disclosures about Market Risk
There
have been no material changes from the information previously reported under
“Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the
Form 10-K for the year ended June 30, 2010.
Item
4. Controls and Procedures
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the reports the Company file
pursuant to the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms and that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer as
appropriate, to allow timely decisions regarding required disclosure. The
Company’s management, including the Chief Executive Officer and Chief Financial
Officer recognizes that, because the design of any system of controls is based
in part upon certain assumptions about the likelihood of future events and also
is subject to other inherent limitations, disclosure controls and procedures, no
matter how well designed and operated, can provide only reasonable, and not
absolute, assurance of achieving the desired objectives.
Under the
supervision and with the participation of the Company’s management, including
the Company’s Chief Executive Officer and Chief Financial Officer the
Company has evaluated the effectiveness of the Company’s disclosure controls and
procedures as of December 31, 2010. Based on this evaluation, the Chief
Executive Officer, Chief Financial Officer conclude that as of December 31, 2010
the Company’s Disclosure Controls are effective to provide reasonable assurance
that information relating to the Company that is required to be disclosed by us
in the reports we file or submit, is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and is accumulated and communicated to our
management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
It should
be noted that any control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control system’s
objectives will be met.
PART II--OTHER
INFORMATION.
Item
1. Legal Proceedings.
The
Company is not involved in any legal proceedings or claims that management
believes will have a material adverse effect on the Company's business or
financial condition.
Item
1A. Risk Factors
There
have been no material changes with regard to the risk factors previously
disclosed in our most recent Annual Report on Form 10-K for the year ended June
30, 2010.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item
3. Defaults upon Senior Securities.
None
Item
4. (Removed and Reserved)
Item
5. Other Information.
None
16
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
|
17
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: 02/14/11
|
By:
|
/s/ Tena Mayberry | |
Tena
Mayberry,
|
|||
Chief
Executive Officer
|
|||
Date: 02/14/11
|
By:
|
/s/
Randy E. Butler
|
|
Randy
E. Butler,
|
|||
Chief
Financial Officer
|
18