Attached files

file filename
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