XASE:FFI Annual Report 10-K Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

RANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

¨TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the period from July 1, 2011 to June 30, 2012  

 

Commission file number: 1-32543

 

Fortune Industries, Inc.

(Exact name of registrant as specified in its charter)

 

  Indiana   20-2803889  
  (State or other jurisdiction of   (I.R.S. Employer Identification No.)  
  incorporation or organization)      

 

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

 

(317) 532-1374

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock ($0.10 par value per share) (“Common Stock”);   NYSE Amex
(Title of Class)   (Name of Exchange on Which Registered)

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No þ

 

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 þ No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

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

 

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

 

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

 

 
 

 

As of December 31, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s Common Stock and Preferred Stock held by non-affiliates, based upon the closing price per share for the registrant’s common stock as reported on the NYSE Amex, was approximately $2.2 million.

 

The number of shares of the registrant’s Common Stock, outstanding as of September 24, 2012 was 12,287,290. The number of shares of the registrant’s Preferred Stock, outstanding as of September 24, 2012 was 296,180.

 

For the purpose of calculating the aggregate market value of the Company’s Common Stock held by non-affiliates, the Company utilized the definition of “affiliates” provided by Rule 12b-2 of the Exchange Act. In applying that definition, the Company has considered all individual members of the “Control Group” as designated in the Schedule 13D filed by the Company on August 7, 2000 and on any amendments thereto to be affiliates, as well as all then current directors and officers. As used for purposes of determining the aggregate market value of the Voting Common Stock held by non-affiliates, “beneficial ownership” of securities means the sole or shared power to vote, or to direct the voting of, such securities, or the sole or shared investment power with respect to such securities, including the power to dispose of, or to direct the disposition of, such securities. In addition, for purposes of this calculation, a person is deemed to have beneficial ownership of any security that such person had the right to acquire within 60 days after December 31, 2011. The Company then multiplied the beneficial ownership of the non-affiliates by the closing price of the Company’s Common Stock, as of the date stated above, to derive the market value, or ‘float.’

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 
 

 

TABLE OF CONTENTS

 

  PART I  
Item 1. Business 4
     
Item 1A. Risk Factors 7
     
Item 1B. Unresolved Staff Comments 11
     
Item 2. Properties 11
     
Item 3. Legal Proceedings 11
     
Item 4. Mine Safety Disclosures 12
     
  PART II  
     
Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 12
     
Item 6. Selected Financial Data 13
     
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
     
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 19
     
Item 8. Financial Statements and Supplementary Data 20
     
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 39
     
Item 9A. Controls and Procedures 39
     
Item 9B. Other Information 40
     
  PART III  
     
Item 10. Directors and Executive Officers of the Registrant and Corporate Governance 40
     
Item 11. Executive Compensation 42
     
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 45
     
Item 13. Certain Relationships and Related Transactions, and Director Independence 46
     
Item 14. Principal Accountant Fees and Services 47
     
  PART IV  
     
Item 15. Exhibits and Financial Statement Schedules 48
     
SIGNATURES 49

 

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PART I

 

Item 1. Business

 

General

 

Fortune Industries, Inc. is a holding company of providers of full service human resources outsourcing services through co-employment relationships with the company’s clients. The terms “we,” “our,” “us,” “the Company,” and “management” as used herein refers to Fortune Industries, Inc. and its subsidiaries unless the context otherwise requires.

 

Our operations are largely decentralized from the corporate office. Autonomy is given to subsidiary entities, and there are few integrated business functions (i.e. , marketing, purchasing and accounting ). 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 re-domesticated to the state of Indiana in May 2005. Prior to 2001, we conducted business mainly in the entertainment industry.

 

Recent Developments

 

On January 15, 2010, the Company entered into a Settlement Agreement with its Chief Executive Officer John F. 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 is current Employment Agreement.

 

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.

 

Operations

 

The Company’s operations are comprised of Professional Employer Organizations (PEOs) which provide full-service human resources outsourcing services primarily through co-employment relationships with their clients. These PEOs include Professional Staff Management, Inc. and related entities (“PSM”); CSM, Inc. and related subsidiaries (“CSM”); and Employer Solutions Group, Inc. and related subsidiaries (“ESG”).

 

The licensed PEOs bill their clients under Professional Services Agreements. 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 PEOs is typically a blend of a percentage of the gross payroll and a flat fee per employee per pay period and is sufficient to allow the companies 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 PEOs are invoiced along with each periodic payroll delivered to the client.

 

Through the co-employment contractual relationship, the PEOs become the statutory employer and, as such, all payroll-related taxes are filed on these PEOs’ 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 PEOs owe and pay the various government and employment insurance vendors are based on the experience levels and activity of the PEOs.

 

Customers

 

Customers represent a wide variety of industries including healthcare, professional services, software development, manufacturing, logistics, telemarketing and construction. Combined, these organizations provide co-employment services to over 13,500 employees in 47 states. Management’s focus is on providing PEO services to small and medium-sized businesses with 10 to 1,000 employees. While worksite employees are located throughout the United States, the client operations are primarily headquartered in Utah, Colorado, Arizona, Indiana, and Tennessee.

 

Competition

 

The Company competes with other PEOs, third-party payroll processing and human resources consulting companies, and in-house human resources divisions. The PEO industry is highly fragmented between local, regional and national PEO operators.

 

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Vendor Relationships

 

The PEOs provide employee benefits to worksite employees under arrangements with a variety of vendors. These PEOs provide group health insurance coverage to the customers’ worksite employees through Humana, United Healthcare Networks and various other fully-insured policies or service contracts.

 

The PEOs also provide collateralized high deductible workers compensation insurance coverage for our customers’ worksite employees through Liberty Mutual (“Liberty”) and Lumberman’s Underwriting Alliance (“LUA”) and various other fully insured policies. Under the Liberty policy, the PEOs are liable for the first $250,000 of claims per accident with a $2.0 million annual corporate aggregate. Under the LUA policy, the PEOs are liable for the first $350,000 of claims per accident. The LUA policy has no aggregate coverage.

 

Industry Regulation

 

Numerous federal and state laws and regulations relating to employment matters, benefit plans and employment taxes affect the operations of the Company or specifically address issues associated with co-employment. Many of these federal and state laws were enacted before the development of non-traditional employment relationships, such as professional employer organizations, temporary employment and other employment-related outsourcing arrangements and, therefore, do not specifically address the obligations and responsibilities of a professional employer organization.

 

Other federal and state laws and regulations are relatively new, and administrative agencies and federal and state courts have not yet interpreted or applied these regulations to the Company’s business or its industry. The development of additional regulations and interpretation of those regulations can be expected to evolve over time. In addition, from time to time, states have considered, and may in the future consider, imposing certain taxes on gross revenues or service fees of the Company and its competitors.

 

Many states have passed laws that have licensing, registration or other regulatory requirements for professional employer organizations and several other states are currently considering similar regulations. Such laws vary from state to state, but generally codify the requirements that a professional employer organization must reserve a right to hire, terminate and discipline client employees and secure workers’ compensation insurance coverage. The Company delegates or assigns such rights to the client where allowed under state law. The laws also generally provide for monitoring the fiscal responsibility of professional employer organizations and, in many cases, the licensure of the controlling officers of the professional employer organization.

 

In addition, some states through legislative or other regulatory action may propose to modify the manner in which the Company is allowed to provide services to its clients. Such regulatory action could increase the administrative cost associated with providing such services.

 

ERISA Requirements

 

Employee pension and welfare benefit plans are also governed by the Employee Retirement Income Security Act (ERISA). ERISA defines an “employer” as “any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan.” ERISA defines the term “employee” as “any individual employed by an employer.” The courts have held that the common law test of employment must be applied to determine whether an individual is an employee or an independent contractor under ERISA. However, in applying that test, control and supervision are less important for ERISA purposes when determining whether an employer has assumed responsibility for an individual’s benefits status. A definitive judicial interpretation of “employer” in the context of a professional employer organization or employee leasing arrangement has not been established.

 

If the Company were found not to be an employer for ERISA, Code purposes, or the tax qualification requirements of the Code, the Company would be subject to liabilities, including penalties, with respect to its cafeteria benefits plan for failure to withhold and pay taxes applicable to salary deferral contributions by its clients’ employees. In addition, as a result of such a finding, the Company and its plans would not enjoy, with respect to client employees, the preemption of state laws provided by ERISA and could be subject to varying state laws and regulation, as well as to claims based upon state common laws.

 

Government Regulation

 

The PEOs are subject to various federal, state and local laws and regulations pertaining to various employee benefit plans, employee retirement plans (such as the 401(k)), Section 125 cafeteria plans, group health plans, welfare benefit plans and health care flexible spending accounts.

 

The federal, state, and local regulations also apply to the payment of taxes based upon wages paid to the employees through the payroll process. These taxes include the withholding of income tax, obligations under the Federal Income Contribution Act (“FICA”) which includes both Social Security and Medicare taxes, the Federal Unemployment Tax Act (“FUTA”) and the State Unemployment Tax Act (“SUTA”).

 

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In addition, compliance with COBRA, HIPAA and ERISA (for employee benefit plans sponsored solely by our PEOs) regulations are required. Certain states also have varying regulations regarding licensing, registration or certification requirements for PEOs.

 

Healthcare Reform Legislation

 

The Patient Protection and Affordable Care Act (“PPACA”) became law on March 23, 2010 and amended on March 30, 2010 by the Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act”).  The PPACA and Reconciliation Act (collectively the “Act”) set forth a number of health care reforms, effective between 2010 through 2018.  Until more guidance and information relating to employer responsibilities is determined, the full effect of the Act upon the Company and its customers is unknown at this time.  However, we believe that we will be able to provide a valuable service for our existing and potential customers by providing the necessary expertise to ensure compliance with the new regulations, because most of our customer base consists of small to medium-sized businesses without the in-house proficiency to do so.  

 

Our initial interpretations of the Act include certain requirements that we anticipate to materially affect the Company.  The most immediate provision, effective in 2010, enables eligible small business to receive a tax credit for offering health care coverage to employees.  The Act does not expressly address whether small business that are in co-employer relationships with a PEO would receive these tax credits, but discussion in the Congressional Record leads us to believe our qualifying customers and potential customers would be entitled to such tax credits. 

 

The Act contains a number of mandates for health insurance plans to be implemented starting in 2011.  The Company’s cost of implementing the necessary changes has been passed through to some customers, which may affect our ability to attract and retain customers.  If we are unable to pass those increases along to our customers for any reason, such as contractual obligations, the increases may negatively impact the Company’s earnings.

 

For 2012, the Act requires a mandatory new Form W-2 reporting requirement for informational purposes only that was optional in 2011. This change has not had an adverse impact on our client relationships or operations and the cost to implement this requirement has been minimal.

 

The Act provides for the establishment of state insurance exchanges effective in 2014, which would make health insurance available to individuals and small employers with 100 or less employees.  Tax credits and subsidies will be provided to eligible small businesses, as well as individuals who purchase health insurance through the state insurance exchanges.  Employers with at least 50 full-time employees will incur penalties if they fail to offer the minimal essential coverage as defined in the Act to eligible employees. 

 

The Act includes an excise tax provision which levies a 40% nondeductible tax to the employer on the annual value of health plan costs for employees that exceed $10,200 for single coverage or $27,500 for family coverage in 2018.  The effect this tax will have on the Company and our customers will depend on the benefit plans offered to our customers’ employees.  We believe our expertise will allow us to provide guidance to our customers on the best ways to avoid incurring any such excise taxes.  

 

At this time, we do not know what effect, if any, the Act will have on our business.  The overall interpretation and implementation of the requirements in the Act will likely be determined by future guidance from various governmental entities. Based on our initial research and interpretations, and due to the scheduled implementation of the provisions of the Act, we do not expect the Act to have a material adverse impact on our results of operations in 2013.  

 

Employees

 

As of June 30, 2012, we employed approximately 96 full-time employees. Additionally, within the PEOs, we had approximately 13,500 co-employees under customer-contract relationships. Our in-house staff is supplemented with contract personnel on an as-needed basis. Management believes that its relationships with its employees are generally satisfactory.

 

Additional information with respect to the Company’s businesses

 

Our common stock is traded on the NYSE Amex under the symbol “FFI”. We maintain a website (http://www.ffi.net) where our annual reports, certain corporate governance documents, press releases, interim shareholder reports and links to our subsidiaries’ websites can be found. The Company’s periodic reports filed with the SEC, which include Form 10-K’s, Form 10-Q’s, Form 8-K’s and amendments thereto, are included on our website and may be accessed by the public free of charge from the SEC and through the Company. Electronic copies of these reports can be accessed at the SEC’s website (http://www.sec.gov) and indirectly through our website (http://www.ffi.net). Copies of these reports may also be obtained, free of charge, upon written request to the Company’s principal executive office at: Fortune Industries, Inc., 6402 Corporate Drive, Indianapolis, IN 46278, Attn: Corporate Secretary (1-317-532-1374) or may be obtained from the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549 (1-800-SEC-0330).

 

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Item 1A. Risk Factors

 

Our businesses are subject to a variety of risks and uncertainties which are described below. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not described or not known to management of the Company may also impair business operations. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected.

 

We could have unfavorable workers’ compensation claim experiences.

 

The PEOs calculate reserves for workers’ compensation claims by estimating unpaid losses and loss expenses with respect to claims occurring on or before the balance sheet date, and in certain instances, we carry high deductibles on these policies. Such estimates include provisions for reported claims and provisions for incurred-but-not-reported claims. The estimates of unpaid losses are established and continually reviewed by the Company using a variety of statistical and analytical techniques. Reserve estimates reflect past claims experience, currently known factors and trends and estimates of future claim trends. We cannot be certain that future claims will be consistent with past experience.

 

We could face additional liability for worksite employee payroll and benefits costs.

 

Under our customer service agreements, we become a co-employer of worksite employees and assume the obligations to pay the salaries, wages and related benefits costs and payroll taxes of such worksite employees. Our obligations include responsibility for:

 

§payment of the salaries and wages for work performed by worksite employees, regardless of whether the client timely pays us the associated service fee; and
§providing benefits to worksite employees even if our costs to provide such benefits exceed the fees the client pays us.

 

If a client does not pay us, or if the costs of benefits we provide to worksite employees exceed the fees a client pays us, our ultimate liability for worksite employee payroll and benefits costs could have a material adverse effect on our financial condition or results of operations.

 

We may face operational challenges as a result of changes in federal, state and local regulations.

 

As a major employer, our operations are affected by numerous federal, state and local laws and regulations relating to labor, tax and employment matters. By entering into a co-employer relationship with employees of our clients, we assume certain obligations and responsibilities of an employer under these laws. However, many of these laws (such as ERISA and federal and state employment tax laws) do not specifically address the obligations and responsibilities of non-traditional employers such as PEOs, and the definition of “employer” under these laws is not uniform. In addition, some of the states in which we operate have not addressed the PEO relationship for purposes of compliance with applicable state laws governing the employer/employee relationship. Any adverse application of these other federal or state laws to the PEO relationship with our worksite employees could have a material adverse effect on our results of operations or financial condition. However, due to the strong legislative efforts of the National Association of Professional Employer Organizations (NAPEO), much of this risk is being mitigated, as NAPEO has put in place in many states, via legislation, regulations that satisfy most state legislatures. These self-imposed industry regulations also help to clarify or define the PEO co-employment relationship in various areas of state employment law and have greatly reduced the risk of legislative change negatively affecting PEOs at the state level.

 

While some states do not explicitly regulate PEOs, many states have passed or may be considering passing laws that have licensing or registration requirements for PEOs. Such laws vary from state to state, but generally provide for monitoring the fiscal responsibility of PEOs, and in some cases codify and clarify the co-employment relationship for unemployment, workers’ compensation and other purposes under state law. While we generally support licensing regulation because it serves to validate the PEO relationship, we typically satisfy licensing requirements or other applicable regulations for the states we currently operate in. However, there can be no assurance that we will be able to obtain licenses in all states.

 

We may face additional liabilities as a result of increases in unemployment tax rates and taxable wage thresholds.

 

We record our state unemployment tax expense based on taxable wages and tax rates assigned by each state. State unemployment tax rates and taxable wage thresholds vary by state and are determined, in part, based on prior years’ compensation experience in each state. Should our claim experience increase, our unemployment tax rates could increase. In addition, states have the ability under law to increase unemployment tax rates and taxable wage thresholds to cover deficiencies in the unemployment tax fund. Some states have implemented retroactive cost increases. Some client contractual arrangements limit our ability to incorporate such increases into service fees, which could result in a delay before such increases could be reflected in service fees.

 

7
 

 

Our results of operations could be adversely affected as a result of goodwill impairments.

 

When we acquire a business, we record goodwill equal to the excess amount we pay for the business, including liabilities assumed, over the fair value of the tangible and intangible assets of the business we acquire. FASB ASC 350, “Intangibles - Goodwill and Other” which provides that goodwill and other intangible assets that have indefinite useful lives not be amortized, but instead must be assessed at least annually for impairment, and intangible assets that have finite useful lives should continue to be amortized over their useful lives. ASC 350 also provides specific guidance for the assessment of goodwill and other non-amortized intangible assets for impairment. ASC 350 requires management to make certain estimates and assumptions when allocating goodwill to reporting units and determining the fair value of reporting unit net assets and liabilities, including, among other things, an assessment of market conditions, projected cash flows, investment rates, cost of capital and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. Fair value is determined using a combination of the discounted cash flow, market multiple and market capitalization valuation approaches. We perform our impairment assessment annually. Future impairments, if any, will be recognized as operating expenses.

 

We may not be able to successfully achieve the expected benefits of acquisitions, which expose us to risks associated with these transactions.

 

We have made and may continue to make acquisitions or investments in or engage in strategic partnering relationships with other companies or technologies. We may not be able to successfully achieve expected benefits. Additionally, we may be exposed to factors including but not limited to unanticipated contingent liabilities, additional expenses, loss of key employees or customers, or other contingencies consistent with acquisition risks, which ultimately could result in significantly decreased earnings and material and adverse effects on our business, financial condition and results of operations.

 

The departure of key personnel could disrupt our business, and few of our key personnel have employment contracts requiring a service commitment.

 

We depend on the continued efforts of our executive officers and on the senior management of the businesses we acquire. Although we have entered into an employment agreement with each of our executive officers and certain other key employees, we cannot be certain that any individual will continue in such capacity for any particular period of time. The loss of key personnel, or the inability to hire and retain qualified employees, could adversely affect our business, financial condition and results of operations. We do not carry key-person life insurance on some key employees, including our majority shareholder that guarantees certain debt obligations.

 

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. In the past we have reported material weaknesses in our internal control over financial reporting that, if we do not substantially remedy, could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our stock.

 

Certain businesses we have acquired may have had limited infrastructure and systems of internal controls. Performing assessments of internal controls, implementing necessary changes, and maintaining an effective internal controls process is costly and requires considerable management attention, particularly in the case of newly acquired entities. Internal control systems are designed in part upon assumptions about the likelihood of future events, and all such systems, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

We also cannot assure that we will implement and maintain adequate controls over our financial processes and reporting in the future or that additional material weaknesses or significant deficiencies in our internal controls will not be discovered in the future. Any failure to remediate any future material weaknesses or implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements or other public disclosures. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

 

The requirements of being a public company may strain our resources and require significant management time and attention.

 

As a public company we are subject to the reporting requirements of the Securities Exchange Act of 1934 and the rules of the NYSE Amex. The requirements of these rules and regulations have increased, and may further increase in the future, our legal and financial compliance costs, make some activities more difficult, time consuming or costly and may also place undue strain on our systems and resources. The Securities Exchange Act of 1934 requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. In order to maintain and improve the effectiveness of our disclosure controls and procedures, and internal controls over financial reporting, significant resources and management oversight are required. These rules and regulations could also make it more difficult for us to attract and retain qualified independent members of our Board of Directors and qualified members of our management team.

 

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The financial markets have recently experienced significant turmoil which may negatively impact our liquidity, our ability to obtain financing and our ability to process transactions through the banking system.

 

Our liquidity and our ability to obtain financing may be negatively impacted if one of our Lenders holding our letters of credit, or another financial institution, suffers liquidity issues or ceases operations.  In such an event, we would be forced to find other sources for our letters of credit that were acceptable to our vendors.  Also, if we attempt to obtain future financing, we may be unable to obtain such financing which could materially adversely affect our operations, financial condition and cash flows.

 

Our short-term results may be negatively impacted due to changes in health insurance costs, state unemployment tax rates and workers’ compensation rates, which we may not be able to immediately pass through to our clients.

 

Health insurance costs, workers’ compensation and employment practices liability insurance rates and state unemployment taxes are primarily determined by our claims experience and comprise a significant portion of our actual costs. Should we experience a significant increase in claims activity, due to the current economic downturn or otherwise, we may experience a substantial increase in our health insurance premiums, unemployment taxes, or workers’ compensation and employment practices liability insurance rates. Our ability to pass such increases through to our clients on a timely basis may be delayed and our clients may not agree to the increases, which could have a material adverse effect on our financial condition, results of operations and cash flows.

 

Our insurance-related loss reserves may be inadequate to cover our ultimate liability for losses and as a result our financial results could be materially and adversely affected.

 

We maintain loss reserves to cover our liabilities for the costs of our workers’ compensation programs. These reserves are not an exact calculation of our liability, but rather are estimates based on a number of factors including but not limited to actuarial calculations, current and historical loss trends and payment patterns, the number of open claims, developments relating to the actual claims incurred, medical trend rates and the impact of acquisitions, if any. Variables in the reserve estimation may be affected by both internal and external factors, such as changes in claims handling procedures, fluctuations in the administrative costs associated with the program, economic conditions, fiscal policies, interest rates, legal determinations and legislative and regulatory changes. Although our reserves estimates are regularly refined as historical loss experience develops and additional claims are reported and settled, because of the uncertainties of estimating loss reserves, we cannot assure you that our reserves are adequate, and actual costs and expenses may exceed our reserves. If our reserves are insufficient to cover actual losses we may incur potentially material charges to our earnings.

 

Our ability to manage health care costs affects our profitability.

 

Our profitability depends in part on our ability to appropriately predict and manage future health care costs through underwriting criteria and negotiation of favorable contracts with health care plan providers. The aging of the population and other demographic characteristics, the introduction of new or costly treatments resulting from advances in medical technology and other factors continue to contribute to rising health care costs. Government-imposed limitations on Medicare and Medicaid reimbursements have also caused the private sector to assume a greater share of increasing health care costs. Changes in health care practices, inflation, new technologies, increases in the cost of prescription drugs, direct-to-consumer marketing by pharmaceutical companies, clusters of high cost cases, utilization levels, changes in the regulatory environment such as the health care reform legislation, health care provider or member fraud, and numerous other factors affecting the cost of health care can be beyond any health plan provider’s control and may adversely affect our ability to predict and manage health care costs, as well as our business, financial condition and operating results.

 

We use actuarial data to assist us in analyzing and projecting these amounts, however, we and our carriers may not be successful in managing the cost of our plans. Accordingly, our costs under our health benefit plans could exceed the market’s competitive rates and as a result may have a material adverse effect on our financial condition, due to possible increased client attrition or decreased client acquisition.

 

We operate in a complex regulatory environment and failure to comply with applicable laws and regulations could adversely affect our business.

 

The human resource outsourcing and PEO environment is subject to a number of federal and state laws and regulations, including those applicable to payroll practices, taxes, benefits administration, insurance, wage and hour, employment practices and data privacy.  As many of these laws do not specifically address the obligations and responsibilities of a professional employer organization, assuring compliance with such laws and assessing the financial impact of such compliance can be difficult.

 

9
 

 

Because our clients have employees in states throughout the United States, we must also perform our services in compliance with the legal and regulatory requirements of multiple jurisdictions. Some of these laws and regulations may be difficult to ascertain or interpret, may conflict and may change over time, and the addition of new services may subject us to additional laws and regulations. Many of these laws and regulations were instituted prior to the development of the professional employer organization industry, and therefore can be difficult to interpret or assess and may change over time. As a result of uncertainty and inconsistency in the interpretation and application of many of these laws and regulations, from time to time we have had disagreements with regulatory agencies in various states, some of which have resulted in administrative proceedings between a state agency and us.  If we are unable to continue to provide certain contractual obligations, such as the payment of employment taxes on the salaries and wages paid to client employees, due to an adverse determination regarding our regulatory status as an “employer”, our clients may be held jointly and severally liable for such payments. Violation of these laws and regulations could subject us to fines and penalties, damage our reputation, constitute breach of our client contracts and impair our ability to do business in various jurisdictions or in accordance with established processes.

 

In addition, many states in which we operate have enacted more stringent laws that require licensing or registration of professional employer organizations. We may not be able to satisfy the licensing requirements or other applicable regulations of any particular state, or we may be unable to renew our licenses in the states in which we currently operate upon expiration of such licenses, which could prevent us from providing services to client employees in a certain state. In addition, many of these states have reciprocal disciplinary arrangements under which disciplinary action in one state can be the basis for disciplinary action in one or more other states.  Future changes in or additions to these requirements may require us to modify the manner in which we provide services to our clients, which may increase our costs in providing such services.

 

We are also increasingly affected by legal requirements relating to privacy of information. We anticipate that additional federal and state privacy laws and regulations beyond the federal Health Insurance Portability and Accountability Act of 1996 and the regulations promulgated there under will continue to be enacted and implemented. The scope of any such new laws and regulations may be very broad and entail significant costs for us to be in compliance.

 

As a result of our co-employment relationship with most of our clients and client employees, we may be subject to liabilities as a result of their acts or omissions.

 

We enter into a contractual relationship with each of our clients, whereby the client transfers certain employment-related risks and liabilities to us and retains other risks and liabilities. Many federal and state laws that apply to the employer-employee relationship do not specifically address the obligations and responsibilities of this “co-employment” relationship. Consequently, we may be subject to liability for violations of employment or discrimination laws, including violations of federal and state wage and hour laws, by our clients despite the contractual division of responsibilities between us, even if we do not participate in such violations. In addition, our client employees may also be deemed to be acting as our agents, subjecting us to further liability for the acts or omissions of such client employees. Although our professional services agreement provides that the client will indemnify us for any liability attributable to its own or its employees’ conduct, we may not be able to effectively enforce or collect such contractual indemnification. While we do maintain Employer Practices Liability Insurance (“EPLI”) to mitigate some of this risk, any such liability imposed upon us could have a material adverse impact on our results of operations, financial condition and cash flows.

 

Because we assume the obligation to make wage, tax and regulatory payments on behalf of our clients, we are exposed to certain credit risks with respect to our clients.

 

Under the terms of our professional services agreement, for clients serviced on a co-employed basis we generally assume responsibility for and manage the risks associated with each of our client’s employee payroll obligations, including the payment of salaries, wages and associated taxes, and, at the client’s option, the responsibility for providing group health, welfare and retirement benefits to each client employee. In this “co-employment” relationship, we directly assume these obligations, and unlike payroll processing service providers, we issue payroll checks to each client employee drawn on our own bank accounts. In several states, we are required to pay wages, payroll taxes and other amounts related to payroll regardless of whether the client timely funds such payments to us.  For clients serviced either on a co-employed or non co-employed basis, who meet certain financial underwriting requirements, the Company may issue payroll to a client’s employees prior to irrevocable receipt of payroll, taxes and associated service fees. If we are unable to collect these payments from our larger clients, there may be a material adverse effect on our results of operations, financial condition and cash flows.

 

The estate of our majority shareholder owns a substantial majority of our common stock and 100 percent of the Company’s outstanding preferred stock.

 

As of June 30, 2012, our majority shareholder, Carter M. Fortune owns 6,084,853 shares (or 50%) of our outstanding common stock. In addition to the above shares, Mr. Fortune has dispositive control over 1,259,834 shares (or 10%) of the Company’s Common Stock held by 14 West, LLC as of June 30, 2012. Mr. Fortune passed away on August 25, 2012 and his estate now has control of his personal shares and dispositive control over the shares held by 14 West, LLC.

 

As a result, the estate could have a controlling influence in determining the outcome of any corporate matters submitted to our shareholders for approval, including mergers, consolidations, election of directors and any other significant corporate actions. The interests of the estate may differ from the interests of the Company’s other shareholders and their stock ownership and thereby may limit the ability of other shareholders to influence the management and affairs of the Company.

 

10
 

 

As we discussed in our Forms 10-Q filed on February 13, 2012 and May 14, 2012, our primary shareholder’s 296,180 shares of preferred stock and 7,344,687 shares of common stock are held as collateral by a commercial bank for certain personal debt obligations of our majority shareholder. Future default on these obligations by his estate could have a material adverse effect on the Company’s (a) operations, (b) capital structure and (c) corporate governance. In addition any other future event that may cause a disruption in the estate’s ownership of its preferred stock and common stock could also have a material adverse effect on the Company’s (a) operations, (b) capital structure and (c) corporate governance.

 

In addition and since the filing of our December 31, 2011 and March 31, 2012 Forms 10-Q on February 13, 2012 and May 14, 2012 respectively, we draw your attention to the following matters that have arisen since that date: a) as noted above, Mr. Fortune passed away on August 25, 2012, b) the maturity date of the aforementioned loan between Mr. Fortune and Indiana Bank and Trust Company (“the Bank”) was April 1, 2012 and was extended to August 31, 2012, c) Section 8.8 of Mr. Fortune’s loan currently includes a provision that requires his estate to use its best efforts to sell its interest in the Company in the event his loan remained outstanding on August 31, 2012, d) the estate was unable to pay off his loan to the Bank at August 31, 2012, and e) on January 25, 2012, a larger bank, Old National Bank entered into an agreement to acquire the Bank’s holding company, Indiana Community Bancorp. Negotiations are currently ongoing between the Bank and representatives of Mr. Fortune’s estate to extend the maturity date of the loan past the closing date of the proposed merger agreement with Ide Management, Inc. If the transaction closes, the lien on Mr. Fortune’s preferred and common stock will be released in return for a cash payment from Mr. Fortune’s estate from the proceeds of the sale of Mr. Fortune’s stock to CEP, Inc.

 

The independent members of our board of directors believe that the proposed merger described in Item 12 regarding changes in control addresses, in part, these additional risks.

 

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 2. Properties

 

As of June 30, 2012, we maintained the following operating facilities:

 

Segment   Location(s)   Description   Owned / Leased  

Approximate

Square

Footage

                 
Corporate   Indianapolis, IN   Corporate offices   Leased (1)   10,500
                 
Business Solutions   Richmond, IN   Offices   Leased (2)   10,000
        Brentwood, TN   Offices   Leased   10,000
    Provo, UT   Offices   Leased (3)   13,000
    Tucson, AZ   Offices   Leased   2,700
    Loveland, CO   Offices   Leased   1,400
    Phoenix, AZ   Offices   Leased   1,000
    Indianapolis, IN   Offices   Leased   2,300

 

(1)The leases on these properties are with an entity owned by the estate of the Company’s majority shareholder. Refer to the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.
(2)The leases on this property are with a limited liability company owned by the former Chief Operating Officer of the Company. Refer to the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.
(3)The leases on this property are with a limited liability company in which ESG’s former President is a member of the limited liability company.

 

In the opinion of management of the Company, its properties are adequate for its present needs. We do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities.

 

Item 3. Legal Proceedings

 

The Company is a party to certain pending claims that have arisen in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on the consolidated financial position, results of operations, or cash flows if adversely resolved.

 

11
 

 

On April 9, 2012, a putative class action complaint captioned Mark Haagen, individually v. Tena Mayberry, Carter M. Fortune, Paul J. Hayes, David A. Berry, Richard F. Suja, Fortune Industries, Inc., CEP, Inc., and CEP Merger Sub, Inc. was filed in the Superior Court of Indiana, Marion County Circuit, on behalf of an alleged class of the Company’s shareholders. In each case, the plaintiffs allege that members of the Board breached their fiduciary duties to the Company's stockholders in connection with the proposed Merger (see Item 5, Other Information below) and that the Company aided and abetted the directors' breaches of fiduciary duties. The complaint claims that the proposed Merger between the Company and Merger Sub involves an unfair price, an inadequate sales process, self-dealing and unreasonable deal protection devices. The complaints sought injunctive relief, including to enjoin or rescind the Merger, and an award of other unspecified attorneys’ and other fees and costs, in addition to other relief. On August 16, 2012 a Stipulation of Dismissal with Prejudice was filed in the Superior Court of Indiana, Marion County Circuit whereby both the plaintiff and defendant stipulated to the dismissal of this complaint.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

PART II

 

Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

The Common Stock of Fortune Industries, Inc. is traded on the NYSE Amex (Symbol: FFI). As of December 31, 2011, there were 255 holders of record of the common stock. This number does not include shareholders for whom shares were held in “nominee” or “street name.” Prior to June 23, 2005, our stock traded on the NASD OTC Bulletin Board under the symbol "FDVI" for the period June 17, 2001 through June 1, 2005 and under the symbol "FDVF" for the period June 2, 2005 through June 22, 2005. High and low quotations reported by the NYSE Amex during the periods indicated are shown below. These quotations reflect inter-dealer prices, without retail mark-ups, markdowns or commissions and may not represent actual transactions.

 

   High   Low 
Fiscal Year Ending June 30, 2012          
Fourth Quarter  $0.30   $0.13 
Third Quarter   0.89    0.26 
Second Quarter   0.58    0.38 
First Quarter   0.79    0.45 
           
Fiscal Year Ending June 30, 2011          
Fourth Quarter  $0.90   $0.46 
Third Quarter   0.80    0.50 
Second Quarter   0.62    0.22 
First Quarter   0.44    0.23 

 

The Company has never declared or paid any dividends on its Common Stock. Future dividends, if any, will be at the discretion of the Board of Directors and will depend upon our operating performance, capital requirements, contractual restrictions, and other factors deemed relevant by the Board of Directors.

 

Unregistered Shares Issuances

 

There were no issuances of unregistered shares of Company stock that were not reported by the Company in a Current Report on Form 8-K or in a Quarterly Report on Form 10-Q during the fiscal year ended June 30, 2012.

 

12
 

 

Item 6. Selected Financial Data

 

The following selected financial data as of and for each of the previous five fiscal periods ending June 30 and August 31, which have been derived from our consolidated financial statements.

 

               Ten Months     
   Year Ended June 30,   Ending June
30,
   Year Ended
August 31,
 
   2012   2011   2010   2009   2008 
   (Dollars in thousands, except per share data) 
Total Revenues  $60,891   $64,335   $60,694   $72,906   $158,399 
                          
Net Income (Loss) from Continuing Operations   2,338    1,859    1,190    1,458    (19,035)
Net Income (Loss) from Discontinued Operations   0    (8)   (19)   (74)   0 
Net Income (Loss)   2,283    1,851    1,171    1,384    (19,035)
                          
Net Income (Loss) Available to Common Shareholders   926    1,283    579    446    (19,581)
                          
Basic Income (Loss) per share:                         
Income (Loss) from Continuing Operations  $0.08   $0.10   $0.05   $0.05   $(1.72)
Net Income (Loss) from Discontinued Operations  $0.00   $0.00   $0.00   $(0.01)  $0.00 
Net Income (Loss)  $0.08   $0.10   $0.05   $0.04   $(1.72)
                          
Diluted Income (Loss) per share:                         
Income (Loss) from Continuing Operations  $0.06   $0.09   $0.04   $0.04   $(1.72)
Net Income (Loss) from Discontinued Operations  $0.00   $0.00   $0.00   $(0.01)  $0.00 
Net Income (Loss)  $0.06   $0.09   $0.04   $0.03   $(1.72)
                          
Weighted Average Shares Outstanding:                         
Basic   12,279    12,251    12,178    11,854    11,391 
Diluted   14,600    14,559    14,688    13,825    11,720 
                          
Consolidated Balance Sheet Data:                         
Cash and Equivalents  $5,312   $6,036   $2,324   $1,686   $4,740 
Working Capital   4,094    2,631    1,212    (1,009)   3,694 
Goodwill and Intangibles, net   14,423    14,789    15,196    15,602    16,093 
Total Assets   28,662    29,797    29,341    30,513    66,112 
Long Term Obligations and Preferred Stock   27,757    27,713    30,471    29,629    43,389 
Shareholders' Equity   19,348    18,413    19,609    18,685    (3,413)

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto and the other financial data appearing elsewhere in this Form 10-K.

 

Overview

 

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. marketing, purchasing and accounting). 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 re-domesticated to the state of Indiana in May 2005.

 

13
 

 

Key Factors Affecting or Potentially Affecting Results of Operations and Financial Condition

 

Management considers the following factors, events, trends and uncertainties to be important to understanding its results of operations and financial condition:

 

Holding Company

 

Over the past nine fiscal periods, we have completed four key PEO acquisitions. In February 2007, the Company acquired PEM, a PEO located in Arizona. In March 2007, the Company acquired ESG, a PEO located in Utah and Colorado. The Company’s acquisition of ESG enabled the Company to expand its geographic presence in the PEO marketplace. In April 2005, we acquired CSM, a PEO located in Nashville, Tennessee. This acquisition of the oldest PEO in the state expanded our PEO service offerings. In October 2003 we acquired PSM, a PEO located in Indianapolis, Indiana. This acquisition allowed us to gain entry into the PEO market.

 

There are several key factors that have affected or potentially may affect our results of operations including the following:

 

§Earnings are dependent on a number of factors including our ability to execute operational strategies and integrate acquired companies into our existing operations. Our historical growth has been due to several significant acquisitions in the past. Future growth in revenues and earnings may not increase at the same rate as historical growth.
§Certain expenses, such as wages, benefits and rent, are subject to normal inflationary pressures. Inflation for medical costs can impact our reserves for workers' compensation claims.
§The estate of our majority shareholder effectively owns 60% of the outstanding Common Stock and 100% of the outstanding Preferred Stock of the Company. As a result, it could have a controlling influence in determining the outcome of any corporate matters submitted to our shareholders for approval, including mergers, consolidations, election of directors and any other significant corporate actions. The interests of this shareholder may differ from the interests of the Company’s other shareholders and its stock ownership may thereby limit the ability of other shareholders to influence the management and affairs of the Company.

 

Business Solutions

 

Our PEOs provide services typically managed by a company’s internal human resources and accounting departments, including payroll and tax processing and management, worker’s compensation and risk management, benefits administration, unemployment administration, human resource compliance services, 401k and retirement plan administration and employee assessments.  The majority of customer operations are concentrated in the Arizona, Colorado, Indiana, Tennessee and Utah markets. Financial results may be affected by changes in the state regulatory environments, results under our fully insured high deductible workers’ compensation insurance plans, and economic conditions.

 

Results of Operations

 

Results of operations for the fiscal periods ended June 30, 2012, 2011 and 2010, are as follows:

 

   Revenue for the Year Ended June 30,   Operating income for Year Ended June 30, 
   2012   2011   2010   2012   2011   2010 
   (Dollars in thousands)     
Business Solutions  $60,891   $64,335   $60,694   $2,338   $1,849   $810 
Holding Company   0    0    0    0    0    0 
Segment Totals  $60,891   $64,335   $60,694   $2,338   $1,849   $810 
                               
 Net Income Available to Common Shareholders       $926   $1,283   $579 

 

Fiscal year ended June 30, 2012 versus June 30, 2011

 

Net income allocable to common stock shareholders was $0.9 million, or $0.06 per diluted share on revenues of $60.9 million for the year ended June 30, 2012 compared with net income of $1.3 million, or $0.09 per diluted share on revenues of $64.3 million for the year ended June 30, 2011. The decrease in revenue is due to the loss of two large clients as of December 31, 2011 with approximately 1,200 worksite employees. The increase in operating income is primarily due to an increase in the profitability of the benefit administration and agency commissions programs. The decrease in net income available to common shareholders is due to the increase in dividend expense related to the preferred stock of $0.8 million.

 

14
 

 

Fiscal year ended June 30, 2011 versus June 30, 2010

 

Net income allocable to common stock shareholders was $1.3 million, or $0.09 per diluted share on revenue of $64.3 million for the year ended June 30, 2011 as compared with net income of $0.06 million, or $0.04 per diluted share on revenue of $60.7 million for the year ended June 30, 2010. The increase in revenue is due to an overall increase in worksite employees and billings. The increase in operating income is due to the reduction of losses on the health care plan and continued efficiency improvements and expense reductions in all aspects of the company’s operations.

 

Results by segment are described in further details as follows:

 

Business Solutions

 

Business Solutions segment operating results for the fiscal years ended June 30, 2012, 2011 and 2010 are as follows:

 

   For The Year Ended June 30, 
   2012   2011   2010 
   (Dollars in thousands) 
Revenues  $60,891    100.0%  $64,335    100.0%  $60,694    100.0%
Cost of revenues   47,793    78.5%   51,527    80.1%   48,068    79.2%
Gross profit   13,098    21.5%   12,808    19.9%   12,626    20.8%
                               
Operating expenses                              
Selling, general and admin   10,229    16.8%   10,346    16.1%   11,046    18.2%
Depreciation and amortization   531    0.9%   613    0.9%   770    1.3%
Total operating expenses   10,760    17.7%   10,959    17.0%   11,816    19.5%
                               
Segment operating income  $2,338    3.8%  $1,849    2.9%  $810    1.3%

 

Revenues

 

Revenues for the year ended June 30, 2012 were $60.9 million, compared to $64.3 million for the year ended June 30, 2011, a decrease of $3.4 million, or 5.3%. Revenues decreased primarily due to the loss of two large clients effective December 31, 2011 with approximately 1,200 worksite employees.

 

Revenues for the year ended June 30, 2011 were $64.3 million, compared to $60.7 million for the year ended June 30, 2010, an increase of $3.6 million, or 5.9%. Revenue increased primarily due to an overall increase in worksite employees and billings.

 

Gross Profit

 

Gross profit for the year ended June 30, 2012 was $13.1 million, representing 21.5% of revenue compared to $12.8 million, representing 20% of revenue, an increase of $0.3 million, or 2.3%. Despite the decrease in revenue, gross profit increased due to increased profitability in the benefit administration and agency commissions programs.

 

Gross profit for the year ended June 30, 2011 was $12.8 million, representing 20% of revenue, compared to $12.6 million, representing 21% of revenues for the year ended June 30, 2010. Gross profit did not change significantly.

 

Operating Income

 

Operating income for the year ended June 30, 2012 was $2.3 million, compared to operating income of $1.8 million for the year ended June 30, 2011, an increase of $0.5 million or 28%. Despite the decrease in revenue, operating income increased due to increased profitability in the benefit administration and agency commissions programs which increased gross profit by $0.3 million and continued reduction in selling, general and administration costs of $0.12 million and a decrease in depreciation and amortization expense of $0.08 million.

 

Operating income for the year ended June 30, 2011 was $1.8 million, compared to operating income of $0.8 million for the year ended June 30, 2010, an increase of $1.0 million, or 125%. Operating income increased due to the continued reduction of losses on the health care plan and continued efficiency improvements and expense reductions in all aspects of the company’s operations.

 

Holding Company

 

Interest Expense

 

Interest expense was $0.01 million for the year ended June 30, 2012, compared to $0.04 million for the year ended June 30, 2011. Interest expense decreased due to the reduction in the outstanding principal balance of the Company’s term note which was paid in full in April, 2012.

 

15
 

 

Interest expense was $0.04 million for the year ended June 30, 2011, compared to $0.1 million for the year ended June 30, 2010. Interest expense decreased due to the reduction in the outstanding principal balance of the Company’s term note.

 

Income Taxes

 

There was $0.1 million of income tax expense for each of the years ended June 30, 2012 and June 30, 2011, respectively. A valuation allowance is necessary to reduce the deferred tax assets, if the Company had a federal tax operating loss and based on the weight of the evidence; it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management has determined that a $5.3 million valuation allowance at June 30, 2012 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for the current period is ($0.9) million.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity are cash and equivalents generated from the profitability of our operations. We had $5.3 million and $6.0 million of cash and equivalents at June 30, 2012 and 2011, respectively.

 

We had working capital of $4.1 million at June 30, 2012 compared with $2.6 million at June 30, 2011. The increase in working capital was primarily due to the positive cash flow generated by operations during the current year. Current assets are composed primarily of cash and equivalents, restricted cash and net accounts receivable.

 

The Company is required to collateralize its obligations under its workers’ compensation plans and for certain states’ compliance requirements. The Company uses its cash and cash equivalents to collateralize these obligations. Restricted cash was approximately $2.4 million at both June 30, 2012 and June 30, 2011.

 

Total debt was $0.0 million and $0.4 million at June 30, 2012 and 2011, respectively. The decrease in debt was due to the pay off of the $1.0 million term note put in place in 2010. In addition, the Company entered into a $2.0 million revolving line of credit agreement on April 15, 2011, which is used to cover a letter of credit to one of our major vendors. There were no draws on the line of credit at June 30, 2012.

 

Cash Flows

 

Net cash provided by operating activities was $1.2 million, $5.0 million and $0.8 million for the years ended June 30, 2012, 2011 and 2010 respectively.

 

Net cash used in investing activities was $0.0 million, $0.0 million and $0.1 million for the years ended June 30, 2012, 2011 and 2010 respectively.

 

Net cash used in financing activities was $1.9 million, $1.3 million and $0.1 million for the years ended June 30, 2012, 2011 and 2010 respectively.

 

Contractual Obligations and Commercial Commitments

 

The following table summarizes our contractual obligations as of June 30, 2012:

 

  Payments Due By 
   Total    Less Than    1-2 Years    3-5 Years    More
Than
 
       1 Year            5 Years 
    (Dollars in thousands) 
                    
Operating Lease (1)  $1,200   $512   $447   $241   $0 

 

(1) Operating leases represent the total future minimum lease payments.

 

Off Balance Sheet Arrangements

 

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

 

16
 

 

Guaranties

 

A significant portion of our debt and letters of credit are personally guaranteed by the estate of the Company’s Chairman.  Future changes to these guarantees would affect financing capacity of the Company.  As of June 30, 2012 and 2011, the Chairman of the Board had personally guaranteed Company debt and obligations under irrevocable letter of credit arrangements in the amount of $2.15 million.   The Company did not pay any guarantee fees during the years ended June 30, 2010, 2011 and 2012.

 

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 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 June 30, 2012, we had approximately $2.4 million in restricted cash primarily to secure obligations under our PEO contracts.

 

Majority Shareholder

 

As of June 30, 2012, our Chairman of the Board, Mr. Carter M. Fortune effectively owned and controlled 7,344,687 shares (or 60%) of our outstanding common stock. Mr. Fortune also is the sole owner of 100% of the 296,180 shares of Series C Preferred Stock outstanding at June 30, 2012. The common stock and preferred stock owned and held by Mr. Fortune serves as collateral for certain personal debt obligations of Mr. Fortune that do not represent liabilities of the Company. Mr. Fortune passed away on August 25, 2012 at which point his ownership interests in the Company transitioned to his estate.

 

Critical Accounting Policies

 

The Company has identified the following policies as critical to its business and the understanding of its results of operations. The impact of these policies is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where these policies affect reported and anticipated financial results. For a detailed discussion on the application of these and other accounting policies see the Notes to the Consolidated Financial Statements. Preparation of this report requires the Company’s use of estimates and assumptions that affect the reported amounts of assets, liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported revenue and expense amounts for the periods being reported. On an ongoing basis, the Company evaluates these estimates, including those related to the valuation of accounts receivable reserves, the potential impairment of long-lived assets and income taxes, and valuation of certain liability reserves. The Company bases the estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Senior management has discussed the development, selection, and disclosure of these estimates with the Company’s audit committee.

 

Management believes the following critical accounting policies affect its more significant judgments and estimates used in preparation of its consolidated financial statements.

 

Revenue and Cost Recognition

 

PSM, CSM, and ESG and related entities bill clients under their Professional Services Agreement as licensed Professional Employer Organizations (collectively the “PEOs”), which includes each worksite employee’s gross wages, plus additional charges for employment related taxes, benefits, workers’ compensation insurance, administrative and record keeping, as well as safety, human resources, and regulatory compliance consultation. Most wages, taxes and insurance coverage are provided under the PEOs’ federal, state, and local or vendor identification numbers. No identification or recognition is given to the client when these monies are remitted or calculations are reported. Most calculations or amounts the PEOs owe the government and its employment insurance vendors are based on the experience levels and activity of the PEOs. The PEOs bill the client their worksite employees’ gross wages plus an overall service fee that includes components of employment related taxes, employment benefits insurance, and administration of those items. The component of the service fee related to administration varies, in part, according to the size of the client, the amount and frequency of payroll payments and the method of delivery of such payments. The component of the service fee related to health, workers’ compensation and unemployment insurance is based, in part, on the client’s historical claims experience. Charges by the PEOs are invoiced along with each periodic payroll delivered to the client.

 

The PEOs report revenues in accordance FASB ASC 605-45, “Revenue Recognition - Principal Agent Considerations.” The PEOs report revenues on a gross basis, the total amount billed to clients for service fees which includes health and welfare benefit plan fees, workers’ compensation insurance, unemployment insurance fees, and employment-related taxes. The PEOs report revenues on a gross basis for such fees because the PEOs are the primary obligor and deemed to be the principal in these transactions under ASC 605-45. The PEOs report revenues on a net basis for the amount billed to clients for worksite employee salaries and wages. This accounting policy of reporting revenue net as an agent versus gross as a principal has no effect on gross profit, operating income, or net income.

 

17
 

 

The PEOs account for their revenues using the accrual method of accounting. Under the accrual method of accounting, revenues are recognized in the period in which the worksite employee performs work. The PEOs accrue revenues for service fees and payroll taxes relating to work performed by worksite employees but unpaid at the end of each period. The PEOs accrue unbilled receivables for payroll taxes and service fees relating to work performed by worksite employees but unpaid at the end of each period. In addition, the related costs of services are accrued as a liability for the same period. Subsequent to the end of each period, such costs are paid and the related service fees are billed.

 

Consistent with their revenue recognition policy, the PEOs direct costs do not include the payroll cost of its worksite employees. The Company’s direct costs associated with its revenue generating activities are comprised of all other costs related to its worksite employees, such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance costs.

 

Valuation of Accounts Receivable Reserves

 

Collectability of accounts receivable is evaluated for each subsidiary based on the current economic conditions. Other factors include analysis of historical bad debts, projected losses, and current past due accounts. The Company’s accounts receivable reserves increased by $0.01 million at June 30, 2012 compared to June 30, 2011 and decreased $0.02 million at June 30, 2011 compared to June 30, 2010.

 

Goodwill and Other Intangible Assets

 

Material goodwill was assessed for impairment. 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 goodwill 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. Per review of these qualitative factors, the Company determined that goodwill and other intangible assets were not impaired at June 30, 2012 and June 30, 2011.

 

Impairment of Long-Lived Assets

 

The Company evaluates the recoverability of its long-lived assets in accordance with FASB ASC 360, “Property, Plant, and Equipment,” which generally requires the Company to assess these assets for recoverability whenever events or changes in circumstance indicate that the carrying amounts of such assets may not be recoverable. The Company considers historical performances and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated non-discounted future cash flows expected to result from the use of the asset. If such assets are considered to be impaired, the impairment recognized is measured by comparing projected individual reporting unit discounted cash flows to the asset reporting unit carrying values. The estimation of fair value is measured by discounting expected future cash flows at the discount rate the Company utilizes to evaluate potential investments. Actual results may differ from these estimates and as a result the estimation of fair values may be adjusted in the future.

 

Income Taxes

 

Deferred tax assets are recognized for taxable temporary differences, tax credit and net operating loss carry forwards. These assets are reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. For this purpose, management considered evidence, both positive and negative, regarding various uncertainties identified as risk factors to the Company. Recent events, including significant turmoil within the domestic and foreign financial markets, healthcare legislation and increasing unemployment tax rates and taxable wage thresholds, more than likely are expected to contribute to atypical customer attrition and decreased gross profits. Additionally, since the divesture of certain segments in fiscal 2009 unrelated to the Company’s current focus of full service human resources, the Company has had positive results for the last four fiscal periods for financial reporting purposes, including the current period. However, the Company has not evidenced a similar trend for income tax reporting purposes, experiencing net operating losses in four of prior six fiscal periods, with the current and 2011 fiscal years as the exception. These taxable losses are primarily the result of permanent timing differences related to the amortization of certain intangible assets for income tax purposes through 2022. The Company’s deferred tax assets and liabilities are susceptible to erratic changes due to the inherent unpredictable nature of the Company’s insurance claim liabilities and sensitivity to unemployment and wage volatility. Changes in the economy and federal and state legislature, both favorable and unfavorable, will impact management’s assumptions and estimates in future periods.

 

18
 

 

As of June 30, 2012, management has determined that a 87% valuation allowance against the Company’s $4.3 million component of deferred tax assets generated by the net operating loss carry forward of $10.8 million is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. This represents a decrease from the prior fiscal year’s 90% allowance as the Company experienced positive taxable earnings in the current year for the second time in six years. As a result, management elected to limit the valuation allowance release to 13% as the Company has not established a significant historical trend of taxable earnings. As of June 30, 2012, management has also determined that a $1.3 million valuation allowance against the Company’s $3.5 million of deferred tax assets generated by book versus tax differences of certain assets and liabilities is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. This 38% valuation allowance represents a decrease from the prior fiscal year’s 40% due to the aforementioned earnings trend. The Company released $0.9 million of the valuation allowance in fiscal 2012 due to the positive earnings in the Company’s operations and projected earnings for 2013 and 2014.

 

As of June 30, 2011, management had determined that a 90% valuation allowance against the Company’s $5.1 million component of deferred tax assets generated by the net operating loss carry forward of $12.3 million was necessary to reduce the deferred tax assets to the amount that would more likely than not be realized. This represented a decrease from the prior fiscal year’s 100% allowance as the Company experienced positive taxable earnings in the 2011 fiscal year for the first time in five years. As a result, management elected to limit the valuation allowance release to 10% as the Company had not established a significant historical trend of taxable earnings. As of June 30, 2011, management had also determined that a $1.6 million valuation allowance against the Company’s $3.9 million of deferred tax assets generated by book versus tax differences of certain assets and liabilities was necessary to reduce the deferred tax assets to the amount that would more likely than not be realized. This 40% valuation allowance represented a decrease from the prior fiscal year’s 45% due to the aforementioned earnings trend. The Company released $0.8 million of the valuation allowance in fiscal 2011 due to the positive earnings in the Company’s operations and projected earnings in fiscal 2012 and 2013.

 

Workmen’s Compensation Reserves

 

The Company recognizes significant reserves in relation to its fully insured high deductible workers’ compensation programs based on (a) the amount of past claims incurred and (b) the estimated time lag to report and pay such claims. Our deductible under our workers’ compensation insurance at PSM and CSM is $0.25 million with an aggregate liability limit of approximately $2.0 million. Our deductible under the ESG LUA policy is $0.35 million with no aggregate liability. The reserve recognized for unpaid workers’ compensation benefits on the Company’s consolidated balance sheet is $1.3 million (for which approximately $2.1 million of cash is restricted on the Company’s Consolidated Balance Sheet) for the year ended June 30, 2012.

 

New Accounting Pronouncements

 

See Note 1 of the Notes to the Consolidated Financial Statements of this report for a discussion of new accounting pronouncements.

 

Forward-Looking Statements

 

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

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

Cash and cash equivalents as of June 30, 2012 was $5.3 million and is primarily invested in money market interest bearing accounts. A hypothetical 10% adverse change in the average interest rate on the Company’s investments would not have had a material effect on net income for the year ended June 30, 2012. We do not currently utilize any derivative financial instruments to hedge interest rate risks.

 

19
 

 

Item 8. Financial Statements and Supplementary Data

 

FORTUNE INDUSTRIES, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Report of Independent Registered Public Accounting Firm   21
     
Consolidated Balance Sheets as of June 30, 2012 and 2011   22
     
Consolidated Statements of Operations for the fiscal years ended June 30, 2012, 2011 and 2010   24
     
Consolidated Statements of Shareholders’ Equity for the fiscal years ended June 30, 2012, 2011 and 2010   25
     
Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2012, 2011 and 2010   26
     
Notes to Consolidated Financial Statements   28

 

20
 

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Shareholders

Fortune Industries, Inc. and Subsidiaries

Indianapolis, Indiana

 

We have audited the accompanying consolidated balance sheets of Fortune Industries, Inc. and Subsidiaries (the “Company”) as of June 30, 2012 and 2011, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three fiscal years ended June 30, 2012, 2011 and 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fortune Industries, Inc. and Subsidiaries at June 30, 2012 and 2011, and the results of its operations and its cash flows for each of the three fiscal years ended June 30, 2012, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.

 

 

/s/ SOMERSET CPAs, P.C.

 

 

Indianapolis, Indiana

September 28, 2012

 

21
 

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS)

 

   June 30,   June 30, 
   2012   2011 
         
ASSETS          
           
CURRENT ASSETS          
Cash and equivalents (Note 1)  $5,312   $6,036 
Restricted cash (Note 1)   2,397    2,394 
Accounts receivable, net (Note 1)   3,092    2,639 
Deferred tax asset (Note 6)   1,500    1,500 
Prepaid expenses and other current assets   483    866 
           
Total Current Assets   12,784    13,435 
           
OTHER ASSETS          
Property, plant and equipment, net (Note 2)   139    245 
Deferred tax asset (Note 6)   1,250    1,250 
Goodwill (Note 3)   12,379    12,339 
Other intangible assets, net (Note 3)   2,044    2,450 
Other long-term assets   66    78 
           
Total Other Assets   15,878    16,362 
           
TOTAL ASSETS  $28,662   $29,797 

 

See Accompanying Notes to the Consolidated Financial Statements

 

22
 

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(DOLLARS IN THOUSANDS)

 

 

   June 30,   June 30, 
   2012   2011 
         
LIABILITIES AND SHAREHOLDERS' EQUITY          
           
CURRENT LIABILITIES          
Current maturities of long-term debt (Note 4)  $0   $417 
Accounts payable   881    497 
Workers' compensation reserves   632    945 
Customer deposits   92    2,511 
Accrued expenses   7,085    6,394 
Other current liabilities   0    40 
           
Total Current Liabilities   8,690    10,804 
           
LONG-TERM LIABILITIES          
Workers' compensation reserves   624    580 
           
Total Liabilities   9,314    11,384 
           
SHAREHOLDERS' EQUITY (NOTE 8)          
Common stock, $0.10 par value; 150,000,000 authorized;          
12,287,290 and 12,270,790 issued and outstanding at June 30, 2012 and June 30, 2011, respectively   1,226    1,224 
Series C preferred stock, $0.10 par value; 1,000,000 authorized;          
296,180 issued and outstanding at June 30, 2012 and June 30, 2011   27,133    27,133 
Treasury stock, at cost, 214,444 shares at June 30, 2012 and June 30, 2011   (809)   (809)
Additional paid-in capital and warrants outstanding   20,383    20,376 
Accumulated deficit   (28,585)   (29,511)
           
Total Shareholders' Equity   19,348    18,413 
           
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  $28,662   $29,797 

 

See Accompanying Notes to the Consolidated Financial Statements

 

23
 

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

 

   Year Ended   Year
Ended
   Year
Ended
 
   June 30,   June 30,   June 30, 
   2012   2011   2010 
             
REVENUES  $60,891   $64,335   $60,694 
                
COST OF REVENUES   47,793    51,527    48,068 
                
GROSS PROFIT   13,098    12,808    12,626 
                
OPERATING EXPENSES               
Selling, general and administrative expenses   10,229    10,346    11,046 
Depreciation and amortization   531    613    770 
                
Total Operating Expenses   10,760    10,959    11,816 
                
OPERATING INCOME   2,338    1,849    810 
                
OTHER INCOME (EXPENSE)               
Interest income   22    113    123 
Interest expense   (10)   (41)   (17)
Other income   0    3    12 
                
Total Other Income (Expense)   12    75    118 
                
INCOME BEFORE PROVISION FOR INCOME TAXES   2,350    1,924    928 
                
Provision for income taxes (Note 6)   67    65    (262)
                
NET INCOME FROM CONTINUING OPERATIONS   2,283    1,859    1,190 
                
DISCONTINUED OPERATIONS               
Loss from discontinued operations   0    (8)   (19)
                
NET INCOME   2,283    1,851    1,171 
                
Preferred stock dividends   1,357    568    592 
                
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS  $926   $1,283   $579 
                
Basic Income Per Common Share-Continuing Operations  $0.08   $0.10   $0.05 
Basic Loss Per Common Share-Discontinued Operations   0    0    0 
BASIC INCOME PER COMMON SHARE  $0.08   $0.10   $0.05 
                
Basic Weighted Average Shares Outstanding   12,278,710    12,251,329    12,177,741 
                
Diluted Income Per Common Share-Continuing Operations  $0.06   $0.09   $0.04 
Diluted Loss Per Common Share-Discontinued Operations   0    0    0 
DILUTED INCOME PER COMMON SHARE  $0.06   $0.09   $0.04 
                
Diluted Weighted Average Shares Outstanding   14,599,710    14,558,965    14,687,904 

 

See Accompanying Notes to the Consolidated Financial Statements

 

24
 

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(DOLLARS IN THOUSANDS)

 

               Additional         
               Paid-in Capital       Total 
   Common   Preferred   Treasury   and Warrants   Accumulated   Shareholders’ 
   Stock   Stock   Stock   Outstanding   Deficit   Equity 
                         
BALANCE AT JUNE 30, 2009  $1,187   $29,618   $-   $19,253   $(31,373)  $18,685 
                               
Issuance of 142,117 shares of common stock for compensation   14    -    -    81    -    95 
                               
Purchase of 48,263 shares of common stock for treasury at cost   5    -    (186)   181    -    - 
Capital contribution by majority shareholder   -    -    -    250    -    250 
Net income   -    -    -    -    1,171    1,171 
Preferred stock dividends   -    -    -    -    (592)   (592)
                               
BALANCE AT JUNE 30, 2010  $1,206   $29,618   $(186)  $19,765   $(30,794)  $19,609 
                               
Issuance of 46,500 shares of common stock for compensation   1    -    -    5    -    6 
                               
Purchase of 166,181 shares of common stock for treasury at cost   17    -    (623)   606    -    - 
                               
Offset of term note receivable against outstanding preferred stock   -    (2,485)   -    -    -    (2,485)
Net income   -    -    -    -    1,851    1,851 
Preferred stock dividends   -    -    -    -    (568)   (568)
                               
BALANCE AT JUNE 30, 2011  $1,224   $27,133   $(809)  $20,376   $(29,511)  $18,413 
                               
Issuance of 16,500 shares of common stock for compensation   2    -    -    7    -    9 
Net income   -    -    -    -    2,283    2,283 
Preferred stock dividends   -    -    -    -    (1,357)   (1,357)
                               
BALANCE AT JUNE 30, 2012  $1,226   $27,133   $(809)  $20,383   $(28,585)  $19,348 

 

See Accompanying Notes to the Consolidated Financial Statements

 

25
 

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

 

   For the Year Ended 
   June 30,   June 30,   June 30, 
   2012   2011   2010 
CASH FLOWS FROM OPERATING ACTIVITIES               
Net Income  $2,283   $1,851   $1,171 
Adjustments to reconcile net income to net cash provided by operating activities:               
Depreciation and amortization   531    622    770 
Provision for losses on accounts receivable   15    (29)   (111)
Stock based compensation   9    6    95 
Deferred income taxes   -    -    (250)
Changes in certain operating assets and liabilities:               
Restricted cash   (3)   426    322 
Accounts receivable   (468)   (365)   486 
Prepaid assets and other current assets   383    77    553 
Assets of discontinued operations   -    8    106 
Other long-term assets   (28)   35    (9)
Accounts payable   384    (412)   (128)
Health and workers' compensation reserves   (269)   (606)   (1,993)
Customer deposits   (2,419)   2,152    - 
Accrued expenses and other current liabilities   818    1,279    (256)
Net Cash Provided by Operating Activities   1,236    5,044    756 
                
CASH FLOWS FROM INVESTING ACTIVITIES               
Capital expenditures   (19)   (60)   (55)
Proceeds from sale of assets   -    55    - 
Net Cash Used in Investing Activities   (19)   (5)   (55)
                
CASH FLOWS FROM FINANCING ACTIVITIES               
Payments on term debt   (417)   (511)   (108)
Proceeds from term debt   -    -    1,000 
Repurchase of common stock for treasury   -    (248)   (557)
Dividends paid on preferred stock   (1,524)   (568)   (398)
Net Cash Used in Financing Activities   (1,941)   (1,327)   (63)
                
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS   (724)   3,712    638 
                
CASH AND EQUIVALENTS               
Beginning of Year   6,036    2,324    1,686 
                
End of Year  $5,312   $6,036   $2,324 

 

See Accompanying Notes to the Consolidated Financial Statements

 

26
 

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

 

 

   For the Year Ended 
   June 30,   June 30,   June 30, 
   2012   2011   2010 
SUPPLEMENTAL DISCLOSURES               
Interest paid  $10   $41   $17 
                
Income taxes paid  $67   $65   $49 
                
See Accompanying Notes to the Consolidated Financial Statements                

  

27
 

 

FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED,

EXCEPT PER SHARE DATA)

 

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

 

General

 

Fortune Industries, Inc. (formerly known as Fortune Diversified Industries, Inc.) is an Indiana corporation, originally incorporated in Delaware in 1988. The term “Company” as used herein refers to Fortune Industries, Inc. and its subsidiaries unless the context otherwise requires. The Company provides full service human resources outsourcing services through co-employment relationships with its clients.  As a holding company, the Company has historically invested in businesses that are undervalued, underperforming, or in operations that are poised for significant growth.  Management’s strategic focus is to support the revenue and earnings growth of its operations by creating synergies that can be leveraged to enhance the performance of the Company’s entities and by investing capital to fund expansion.  

 

Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Fortune Industries, Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions of the Company have been eliminated.

 

Estimates: Management uses estimates and assumptions in preparing consolidated financial statements in accordance with accounting principles generally accepted in the United States. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses. Actual results could vary from the estimates that were used.

 

Revenue and Cost Recognition: Professional Staff Management, Inc. and related entities (“PSM”); CSM, Inc. and subsidiaries (“CSM”); and Employer Solutions Group, Inc. and subsidiaries (“ESG”) bill clients under their Professional Services Agreement as licensed Professional Employer Organizations (collectively the “PEOs”), which includes each worksite employee’s gross wages, plus additional charges for employment related taxes, benefits, workers’ compensation insurance, administrative and record keeping, as well as safety, human resources, and regulatory compliance consultation.  Most wages, taxes and insurance coverage are provided under the PEOs’ federal, state, and local or vendor identification numbers.  No identification or recognition is given to the client when these monies are remitted or calculations are reported.  Most calculations or amounts the PEOs owe the government and its employment insurance vendors are based on the experience levels and activity of the PEOs with no consideration to client detail.  The PEOs bill the client their worksite employees’ gross wages plus an overall service fee that includes components of employment related taxes, employment benefits insurance, and administration of those items.  The component of the service fee related to administration varies, in part, according to the size of the client, the amount and frequency of payroll payments and the method of delivery of such payments.  The component of the service fee related to health, workers’ compensation and unemployment insurance is based, in part, on the client’s historical claims experience.  Charges by the PEOs are invoiced along with each periodic payroll delivered to the client.

 

The PEOs report revenue in accordance with Financial Accounting Standards Board (“FASB”) ASC 605-45, “Revenue Recognition - Principal Agent Considerations.” The PEOs report revenue on a gross basis for the total amount billed to clients for service fees, which includes health and welfare benefit plan fees, workers’ compensation insurance, unemployment insurance fees, and employment-related taxes.  The PEOs report revenue on a gross basis for such fees because the PEOs are the primary obligor and deemed to be the principal in these transactions under ASC 605-45.  The PEOs report revenue on a net basis for the amount billed to clients for worksite employee salaries and wages and outside benefit plans.  This accounting policy of reporting revenue net as an agent versus gross as a principal has no effect on gross profit, operating income, or net income. The gross to net revenue reconciliation is as follows:

 

   June 30,   June 30,   June 30, 
   2012   2011   2010 
             
Gross billings  $501,597   $522,880   $515,497 
Less worksite employee costs   440,706    458,545    454,803 
Net revenue  $60,891   $64,335   $60,694 

 

The PEOs account for their revenue using the accrual method of accounting.  Under the accrual method of accounting, revenues are recognized in the period in which the worksite employee performs work. The PEOs accrue unbilled receivables for service fees, health and welfare benefits plan fees, workers’ compensation and unemployment insurance fees relating to work performed by worksite employees but unpaid at the end of each period.  In addition, the related costs of services are accrued as a liability for the same period.  Subsequent to the end of each period, such costs are paid and the related service fees are billed.

 

28
 

 

Consistent with their revenue recognition policy, the PEOs’ direct costs do not include the payroll cost of its worksite employees.  The Company’s direct costs associated with its revenue generating activities are comprised of all other costs related to its worksite employees, such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers’ compensation insurance costs.

 

Cash and Equivalents: Cash and equivalents may include money market fund shares, bank time deposits, certificates of deposits, and other instruments with original maturities of three months or less.

 

Restricted Cash: Restricted cash includes certificates of deposits for letters of credit issued to collateralize the Company’s obligations under its workers’ compensation program and certain general insurance coverage. At June 30, 2012, the Company had $2.4 million in total restricted cash. Of this, $2.1 million is restricted for the Company’s workers’ compensation program in accordance with terms of its insurance carrier agreement, and the remainder is restricted for certain standby letters of credits in accordance with various state regulations.

 

Accounts Receivable: Accounts receivable is stated at the amount billable to customers. The Company provides allowances for estimated doubtful accounts based on the Company’s assessment of known delinquent accounts, historical experience, and other currently available evidence of the collectability and the aging of the accounts receivable. Management had established an allowance for doubtful accounts of $0.01 million as of June 30, 2012. Delinquent receivables that are deemed uncollectible are written off based on individual credit evaluation and specific circumstances of the customer. The Company’s policy is not to accrue interest on past due trade receivables.

 

Property, Plant, Equipment, and Depreciation: Property, plant and equipment are carried at cost and include expenditures for new additions and those which substantially increase the useful lives of existing assets. Depreciation is computed principally on the straight-line method over the estimated useful life. Depreciable lives range from 3 to 10 years.

 

Expenditures for normal repairs and maintenance are charged to operations as incurred. The cost of property or equipment retired or otherwise disposed of and the related accumulated depreciation are removed from the accounts in the period of disposal with the resulting gain or loss reflected in earnings or in the cost of the replacement asset.

 

Goodwill and Other Indefinite-Lived Intangible Assets: The Company accounts for goodwill and other indefinite-lived intangible assets under FASB ASC 350, “Intangibles - Goodwill and Other.” Under ASC 350, 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 not recognized impairment charges in the past 4 fiscal years. Triggering events would include a) a substantial change in the customer mix and number of worksite employees, b) losses incurred within certain operating units, c) significant downsizing of personnel and operations, or d) restructuring of management. Per review of these qualitative factors, the Company determined that goodwill and other indefinite-lived assets are not impaired at June 30, 2012.

 

Long-lived Assets: The Company evaluates the carrying value of long-lived assets, primarily property, plant and equipment and other definite-lived intangible assets, whenever significant events or changes in circumstances indicate the carrying value of these assets may be impaired. If such indicators of impairment are present, the Company determines whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their carrying value. If less, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. The fair value of the asset then becomes the asset’s new carrying value, which the Company depreciates over the remaining estimated useful life of the asset. Fair value is determined by discounted future cash flows, appraisals or other methods.

 

Stock-based Compensation: The Company accounts for stock-based compensation under the provisions of FASB ASC 718, “Stock Compensation” using the modified prospective method.  The Company recognizes compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards.

 

Earnings per Common Share: Income per common share has been computed in accordance with FASB ASC 260, “Earnings per Share”. Basic income per common share is computed based on net income applicable to common stock divided by the weighted average number of common shares outstanding for the period. Diluted income per common share is computed based on net income applicable to common stock divided by the weighted average number of shares of common stock outstanding during the period after giving effect to securities considered to be dilutive common stock equivalents.

 

Income Taxes: The Company accounts for income taxes under the provisions of FASB ASC 740, “Income Taxes.” Accordingly, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates. Changes in deferred income tax assets and liabilities are included as a component of income tax expense.

 

29
 

 

 

Advertising Costs: Advertising costs including marketing, advertising, publicity, promotion and other distribution costs, are expensed as incurred and totaled $100, $114 and $99, for the fiscal periods ended June 30, 2012, 2011 and 2010, respectively.

 

Warrants: The Company has issued and anticipates issuing warrants along with debt and equity instruments to third parties. These issuances are recorded based on the fair value of these instruments. Warrants and equity instruments require valuation using the Black-Scholes model and other techniques, as applicable, and consideration of various assumptions including but not limited to the volatility of the Company’s stock, risk free rates and the expected lives of these equity instruments.

 

The Company issued 2,200,000 warrants to the Chairman of the Board effective November 30, 2008. The warrants have a ten-year term and an exercise price of $0.40 per share. Upon utilization of the valuation models described above, it was determined that the warrants had no value at the time of issuance.

 

Debt and equity issuances may have features which allow the holder to convert at beneficial conversion terms, which are then measured using similar valuation techniques and amortized to interest expense in the case of debt or recorded as dividends in the case of preferred stock instruments. No issuances have beneficial conversion terms for any of the fiscal periods ended June 30, 2012, 2011 and 2010.

 

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

 

New Accounting Pronouncements:

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

 

In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment”. The objective of this ASU is to simplify how an entity tests indefinite-lived intangibles for impairment. The new guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative indefinite-lived intangible assets impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.

 

Other new pronouncements issued but not effective until after June 30, 2012, are not expected to have a significant effect on the Company’s consolidated financial statements.

 

NOTE 2 - PROPERTY AND EQUIPMENT

 

Property, plant and equipment, including capital leases, are comprised of the following:

 

   June 30,   June 30, 
   2012   2011 
         
Office equipment  $1,921   $1,927 
Vehicles   3    20 
Leasehold improvements   14    14 
    1,938    1,961 
           
Less accumulated depreciation   (1,799)   (1,716)
   $139   $245 

 

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The provision for depreciation expense was $125, $216 and $364 for the years ended June 30, 2012, 2011 and 2010, respectively. The Company did not recognize any gain or loss on the disposal of assets during the years ended June 30, 2012, 2011 or 2010.

 

NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS

 

There have been no significant changes in the carrying amount of goodwill during the fiscal periods ended June 30, 2012, 2011 and 2010. The total amount of goodwill that is deductible for tax purposes is $5,538, $6,149 and $6,918 at June 30, 2012, 2011 and 2010, respectively.

 

The following table sets forth the gross carrying amount and accumulated amortization of the Company's other intangible assets:

 

   June 30, 2012 
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Book
Value
   Amortization
Period (in
years)
 
                 
Customer relationships  $4,063   $2,609   $1,454    10 
Tradename (not subject to amortization)   590    -    590      
Total  $4,653   $2,609   $2,044      

 

   June 30, 2011 
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Book
Value
   Amortization
Period (in
years)
 
                 
Customer relationships  $4,063   $2,203   $1,860    10 
Tradename (not subject to amortization)   590    -    590      
Total  $4,653   $2,203   $2,450      

 

Intangible asset amortization expense is $406 for each of the fiscal periods ended June 30, 2012, 2011 and 2010.

 

Amortization expense on intangible assets at June 30, 2012 for each of the next five fiscal years is as follows:

 

2013  $406 
2014   380 
2015   329 
2016   203 
2017 and thereafter   726 
Total  $2,044 

 

NOTE 4 - DEBT ARRANGEMENTS

 

The Company’s debt obligations consisted of the following:

 

   June 30,   June 30, 
   2012   2011 
Notes payable          
           
Term note due in monthly principal installments of $42, plus interest at 4.5% through April 2012. The loan was secured by all of the assets of the Company and was personally guaranteed by the Company’s chairman and majority shareholder.  $-   $417 
           
Total debt obligations   -    417 
           
Less current maturities   -    (417)
           
Long-term portion of outstanding debt  $-   $- 

 

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Term Notes

 

Effective 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 Statements of Changes in Shareholders’ Equity as additional paid-in capital.

 

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

 

Line of Credit

 

Effective April 15, 2011, the Company entered into a $2.0 million revolving line of credit agreement with a bank. The line of credit matures February 28, 2013 and bears interest at the Prime Rate plus 0.75%. The note is collateralized by substantially all the assets of the Company. The loan requires the Company to maintain a maximum total senior liabilities to adjusted tangible capital ratio of 1.5 to 1.0 and a minimum operating cash flow to fixed charge ratio of 1.25 to 1.0. There were no draws on the line of credit at June 30, 2012.

 

NOTE 5 - RETIREMENT PLAN

 

The Company maintains a 401(k) savings plan whereby employees can contribute and defer taxes on compensation contributed to the plan. The Company is not required to contribute to the plan but may make a discretionary contribution.

 

NOTE 6 - INCOME TAXES

 

The reconciliation for the 2012, 2011 and 2010 income tax expense (benefit) computed at the U.S. Federal statutory tax rate to the Company's effective income rate is as follows (in percentages):

 

   June 30,   June 30,   June 30, 
   2012   2011   2010 
             
Tax at U.S. Federal statutory rate   34.0    34.0    0.0 
State and local taxes, net of federal benefit   5.6    5.6    5.6 
Change in valuation allowance   (36.7)   (36.2)   (27.6)
    2.9    3.4    (22.0)

 

Significant components of the provision for income tax expense (benefit) from continuing operations are as follows:

 

   Year Ended   Year Ended   Year Ended 
   June 30, 2012   June 30, 2011   June 30, 2010 
Current:               
Federal  $564   $429   $- 
State   93    71    68 
    657    500    68 
Deferred:               
Federal   298    288    270 
State   49    48    (23)
    347    336    247 
                
Decrease in valuation allowance   (937)   (771)   (577)
                
Net income tax (benefit)  $65   $65   $(262)

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. The significant components of the Company's deferred tax asset are as follows:

 

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   June 30,   June 30, 
   2012   2011 
         
Current:          
           
Amortization of intangible assets  $314   $314 
Accrued liabilities and other   869    686 
Net operating losses and other carryforwards   317    500 
Noncurrent:          
Amortization of intangible assets   2,627    2,946 
Depreciation   (27)   (62)
Net operating losses and other carryforwards   3,961    4,614 
    8,061    8,998 
Valuation allowance   (5,311)   (6,248)
Total deferred tax assets  $2,750   $2,750 

 

ASC 740 requires a valuation allowance to reduce the deferred tax assets reported, if at June 30, 2012, the Company had federal tax operating losses 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.

 

This evidence includes consideration of various uncertainties that management has identified as risk factors to the Company. Recent events, including significant turmoil within the domestic and foreign financial markets, healthcare legislation and increasing unemployment tax rates and taxable wage thresholds, more than likely are expected to contribute to atypical custom attrition and decreased gross profits. Additionally, since the divesture of certain segments in fiscal 2009 unrelated to the Company’s current focus of full service human resources, the Company has had positive results for the last four fiscal periods for financial reporting purposes. However, the Company has not evidenced a similar trend for income tax reporting purposes, experiencing net operating losses in four of prior six fiscal periods, with the current and 2011 fiscal years as the exception. These taxable losses are primarily the result of permanent timing differences related to the amortization of certain intangible assets for income tax purposes through 2022. The Company’s deferred tax assets and liabilities are susceptible to erratic changes due to the inherent unpredictable nature of the Company’s insurance claim liabilities and sensitivity to unemployment and wage volatility. Changes in the economy and federal and state legislature, both favorable and unfavorable, will impact management’s assumptions and estimates in future periods.

 

After consideration of the evidence, both positive and negative, management has determined that a $5,311 and $6,248 valuation allowance at June 30, 2012 and 2011, respectively, is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance is $937 and $771 for the fiscal years ended June 30, 2012 and 2011, respectively. The Company has federal net operating loss carryforwards of approximately $10.8 and $12.3 million at June 30, 2012 and 2011, respectively, which expire between 2021 and 2030. The Company has state net operating loss carryforwards of approximately $11.0 and $12.6 million at June 30, 2012 and 2011, respectively.

 

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2012, 2011 and 2010, the Company made no provisions for interest or penalties related to uncertain tax positions. The tax years beginning July 1, 2008 through July 1, 2011 remain open to examination by the Internal Revenue Service of the United States.

 

NOTE 7 – 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 fiscal periods ended June 30, 2012, 2011 and 2010, 16,500, 46,500 and 142,117 restricted share units, respectively, were issued under this plan.

 

33
 

 

NOTE 8 - SHAREHOLDERS’ EQUITY

 

Common Stock

 

The following are the details of the Company's common stock as of June 30, 2012 and 2011:

 

   Number of Shares 
   Authorized   Issued   Outstanding   Amount 
                 
June 30, 2012                    
Common stock, $0.10 par value   150,000,000    12,363,486    12,287,290   $1,226 
                     
June 30, 2011                    
Common stock, $0.10 par value   150,000,000    12,346,986    12,270,790   $1,224 

 

There were 16,500 shares issued during the year ended June 30, 2012. These shares were issued upon board approval as compensation during the current fiscal year.

 

There were 46,500 shares issued during the year ended June 30, 2011. These shares were issued upon board approval as compensation during the 2011 fiscal year.

 

At June 30, 2012, the Company had 2,200,000 warrants outstanding to the Chairman of the Company.

 

Preferred Stock

 

The following are the details of the Company's non-voting preferred stock as of June 30, 2012 and 2011:

 

   Number of Shares 
   Authorized   Issued   Outstanding   Amount 
June 30, 2012                    
Preferred stock, Series A $0.10 par value   1,000,000    66,180    -   $- 
Preferred stock, Series B $0.10 par value   1,000,000    79,180    -    - 
Preferred stock, Series C $0.10 par value   1,000,000    296,180    296,180   $27,133 
                     
June 30, 2011                    
Preferred stock, Series A $0.10 par value   1,000,000    66,180    -   $- 
Preferred stock, Series B $0.10 par value   1,000,000    79,180    -    - 
Preferred stock, Series C $0.10 par value   1,000,000    296,180    296,180   $27,133 

 

The shares issued are single class and pay on a monthly basis an annual cash dividend of $5 per share in years ending November 30, 2009 and 2010, $6 per share in the year ending November 30, 2011 and $7 per share thereafter.

 

On September 25, 2009, the Company reached agreement with the Chairman to amend the dividend rates on the Series C Preferred Stock with an effective date of July 1, 2009. From the effective date forward the Series C Preferred Stock will bear annual dividends of $2 per share in years one and two subsequent to the effective date, $5 per share in year three subsequent to the effective date, $6 per share in year four subsequent to the effective date and $7 per share thereafter. All other terms of the Series C Preferred Shares remained unchanged.

 

Effective December 31, 2010, the Company revised its estimate regarding the collectability of its $2.5 million term note receivable with a related party. Based on this change in estimate, the Company reclassified the note receivable as a reduction to its outstanding preferred stock as prescribed by a security agreement between the Company and the related party. Under terms of this security agreement and in the event of default of the term note receivable, the Company obtains the right to equal value of the preferred stock as defined including but not limited to title, interest and dividends. The Company has no intention to convert the note receivable in the foreseeable future.

 

Dividends of $1,357, $568 and $398 were declared for the fiscal periods ended June 30, 2012, 2011 and 2010, respectively.

 

Treasury Stock

 

During the fiscal year ended June 30, 2011, the Company purchased 166,181 shares of its common stock at a cost of $3.75 per share as contractually obligated pursuant to put options outstanding from the purchase of ESG in March 2007.

 

During the fiscal year ended June 30, 2010, the Company purchased 48,263 shares of its common stock at a cost of $3.75 per share as contractually obligated pursuant to put options outstanding from the purchase of ESG in March 2007. There were a total of 217,143 shares eligible to be put to the Company per the terms of the purchase agreement. Substantially, all of the shares were put to the Company on March 1, 2010. The Company negotiated with two of the put holders which held an aggregate of 168,880 of the puts for extended payment terms on the contractual obligation. The remaining contractual obligation of $248 was included in current liabilities at June 30, 2010. This contractual obligation was paid out in monthly payments through December 31, 2010. These shares were held as collateral by the put holders until the final payment was made on December 31, 2010, and therefore have not been included in treasury stock at June 30, 2010.

 

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NOTE 9 - PER SHARE DATA

 

The following presents the computation of basic income per share and diluted income per share:

 

   Year Ended   Year Ended   Year Ended 
   June 30,   June 30,   June 30, 
   2012   2011   2010 
             
Net Income Available to Common Shareholders  $926   $1,283   $579 
                
Basic Income from Continuing Operations  $0.08   $0.10   $0.05 
                
Basic Loss from Discontinued Operations   -    -    - 
                
Basic Income per Common Share  $0.08   $0.10   $0.05 
                
Basic Weighted Average Shares Outstanding   12,278,710    12,251,329    12,177,741 
                
Diluted Income from Continuing Operations  $0.06   $0.09   $0.04 
                
Diluted Loss from Discontinued Operations   -    -    - 
                
Diluted Income per Common Share  $0.06   $0.09   $0.04 
                
Diluted Weighted Average Shares Outstanding   14,599,710    14,558,965    14,687,904 

 

NOTE 10 - OPERATING LEASE COMMITMENTS

 

Property Lease Commitments

 

Segment   Location(s)   Description
Business Solutions   Richmond, IN (1); Brentwood, TN (2); Provo, UT (3); Tucson, AZ (4); Loveland, CO (5); Phoenix, AZ (6); Indianapolis, IN (8)   Offices
Corporate   Indianapolis, IN (7)   Offices

 

(1)The lease on this property was with the former Chief Operating Officer of the Company. The operating lease agreement provides for monthly base rent of $1.6 through August 31, 2011, and $1.3 through August 31, 2012. This lease was not renewed and operations were moved to Brentwood, TN.

 

(2)The Company maintains an operating lease agreement that provides for monthly base rent of $12 through January 31, 2014. In addition to an escalating base monthly rent, the agreement requires the Company to pay any increase in operating costs, real estate taxes, or utilities over the base year.

 

(3)The lease on this property is with the former President of ESG. The operating lease agreement provides for monthly base rent of $30 through May 30, 2011, $29 through January 31, 2012, and $18 through January 31, 2013, then increased 4% annually through January 31, 2015. The lessee pays most expenses related to repairs, maintenance, property taxes, and insurance. The lessor is required to carry minimal amounts of insurance.

 

(4)The Company maintains an operating lease agreement that provides for monthly base rent of $4 through February 2015 and is increased 4% annually. The lessee has the right to terminate the lease at its election after a three year period with minimum penalty. The lessor pays most expenses related to repairs, maintenance, property taxes, and insurance. The lessor is required to carry minimal amounts of insurance.

 

35
 

 

(5)The Company maintains an operating lease agreement that provides for monthly base rent of $2 through January 31, 2014. In addition to an escalating base monthly rent, the agreement requires the Company to pay most expenses related to repairs, maintenance, property taxes, and insurance. The lessor is required to carry minimal amounts of insurance.

 

(6)The Company maintains an operating lease agreement that provides for monthly base rent of $3 through September 30, 2015. In addition to an escalating base monthly rent, the agreement requires the Company to pay most expenses related to repairs, maintenance, property taxes, and insurance.

 

(7)The Company maintains an operating lease agreement with a limited liability company that is owned by the majority shareholder. The operating lease agreement provides for monthly base rent of $5 through August 2013, adjusted annually to fair market value. The lease was terminated April 1, 2012.

 

(8)The Company maintains an operating lease agreement that provides for monthly base rent of $1.5 through February, 2015. In addition to an adjustable base monthly rent, the agreement requires the Company to pay most expenses related to repairs, maintenance, property taxes and insurance. The lessor is required to carry minimal amounts of insurance.

 

Rent expense under these agreements amounted to $612, $671 and $740 for the fiscal periods ending June 30, 2012, 2011 and 2010.

 

Future minimum commitments under these agreements at June 30, 2012 are approximately as follows:

 

   Facilities 
2013   512 
2014   447 
2015   232 
2016   9 
   $1,200 

 

NOTE 11 - RELATED PARTY TRANSACTIONS

 

We have a long term note receivable which represents a loan with a business owned by the Company’s majority shareholder in connection with the disposition of certain assets effective November 30, 2008.  The loan expired on November 30, 2011 and bore interest at the Prime Rate plus 1%.  Effective June 30, 2009, the Company entered into an agreement with the Chairman/majority shareholder to amend the terms of the promissory note receivable. In exchange for offsetting $740 of accrued dividends due and owing to the Chairman against the outstanding principal balance of the promissory note receivable the Company extended the maturity date of the note to June 30, 2012 and reset the payment schedule to interest only for the first twelve months beginning July 1, 2009, with $50 and $100 monthly principal payments due beginning July 1, 2010 and July 1 2011, respectively. As of the date of this filing, the promissory note was still outstanding and the Board is considering an additional extension.

 

Effective December 31, 2010, the Company revised its estimate regarding the collectability of the term note receivable.  Based on this change in estimate, the Company reclassified the note receivable as a reduction to its outstanding preferred stock as prescribed by a Security Agreement between the Company and the related party.  Under terms of this Security Agreement and in the event of default of the term note receivable, the Company obtains the right to equal value of the preferred stock as defined including but not limited to title, interest and dividends.  As of June 30, 2012 and the date of this filing, the Company has no intention to convert the note receivable in the foreseeable future.

 

The following is a summary of related party amounts included in the Consolidated Statements of Operations for the fiscal periods ending June 30, 2012, 2011 and 2010, respectively:

 

   June 30,   June  30,   June  30, 
   2012   2011   2010 
Revenues:               
Continuing Operations (1)  $391   $573   $720 
Discontinued Operations (3)   -    -    30 
Total  $391   $573   $750 
                
Expenses:               
Continuing Operations (2) (4)  $45   $90   $514 

 

36
 

 

(1)During the fiscal years ended June 30, 2012, 2011 and 2010, the Company’s CSM and PSM subsidiaries performed $391, $573 and $720 worth of services for businesses owned by the Company’s majority shareholder.
(2)The Company’s PSM and ESG subsidiaries held leases for office buildings in Richmond, Indiana, Provo, Utah and Tucson, Arizona from companies owned by former officers of the Company. Rent expense of $394 was recognized for the fiscal period ending June 30, 2010.
(3)The Company’s discontinued electronics integration operations sold inventory as part of its liquidation of the discontinued operations to a company owned by the majority shareholder.
(4)The Company maintained an operating lease agreement for the rental of a building with a limited liability company owned by the Company’s majority shareholder.  The lease was terminated April 1, 2012. The agreement provided for a monthly base rent of $5 per month.  Rent and related expenses of $45, $90 and $120 were recognized for the fiscal periods ending June 30, 2012, 2011 and 2010, respectively.

 

NOTE 12 - SIGNIFICANT ESTIMATES

 

Significant estimates have been made by management with respect to the realizability of the Company’s deferred tax assets. Actual results could differ from these estimates making it reasonably possible that a change in these estimates could occur in the near term. The net decrease in the valuation allowance for deferred income tax assets was $937, $771, and $577 for the fiscal years ended June 30, 2012, 2011 and 2010, respectively. The valuation allowance relates primarily to net operating loss carryforwards, tax credit carryforwards, and net deductible temporary differences. The Company evaluates a variety of factors in determining the amount of the deferred income tax assets to be recognized pursuant to ASC 740, including the number of years the Company’s operating loss and tax credits can be carried forward, the existence of taxable temporary differences, the Company’s earnings history and the Company’s near-term earnings expectations. At June 30, 2012, management believes it is more likely than not that a significant portion of net deferred income tax assets will not be realized in the next few years.

 

Company subsidiaries establish reserves for workers’ compensation claims by estimating unpaid losses and loss expenses with respect to claims occurring on or before the balance sheet date. Such estimates include provisions for reported claims and provisions for incurred-but-not-reported claims. The estimates of unpaid losses are established and continually reviewed by the Company using a variety of statistical and analytical techniques. Reserve estimates reflect past claims experience, currently known factors and trends and estimates of future claim trends.

 

Irrespective of the techniques used, estimation error is inherent in the process of establishing unpaid loss reserves as of any given date. Uncertainties in projecting ultimate claim amounts are enhanced by the time lag between when a claim actually occurs and when it becomes reported and settled. These policies contain aggregate limits of indemnification, so the risks of additional claims under the contracts are limited. For the reasons previously discussed, the amounts of the reserves established as of a given balance sheet date and the subsequent actual losses and loss expenses paid will likely differ, perhaps by a material amount. There is no guaranty that the recorded reserves will prove to be adequate. Changes in unpaid loss estimates arising from the review process are charged or credited, as applicable, to earnings in the period of the change.

 

NOTE 13 - CONCENTRATION OF CREDIT RISK

 

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivables. The Company places its cash and cash equivalents with several regional and national banking institutions. At times, such amounts may be in excess of the FDIC insured limit. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its accounts receivable credit risk exposure is limited.

 

NOTE 14 - COMMITMENTS AND CONTINGENCIES

 

Litigation

 

The Company is involved in various legal proceedings. The Company believes it has adequate legal defenses with respect to each of the suits and intends to vigorously defend against these actions. However, it is reasonably possible that these cases could result in outcomes unfavorable to the Company. While the Company currently believes that the amounts of the ultimate potential loss would not be material to the Company’s financial position, the outcome of litigation is inherently difficult to predict. In the event of an adverse outcome, the ultimate potential loss could have a material effect on the financial position or reported results of operations in a particular quarter.

 

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Regulatory Matters

 

The Company’s employer and health care operations are subject to numerous federal, state and local laws related to employment, taxes and benefit plan matters. Generally, these rules affect all companies in the United States. However, the rules that govern professional employer organizations (“PEO”) constitute an evolving area due to uncertainties resulting from the non-traditional employment relationship among the PEO, the client and the client employees. Many federal and state laws relating to tax and employment matters were enacted before the widespread existence of PEO’s and do not specifically address the obligations and responsibilities of these PEO relationships. If the Internal Revenue Service concludes that PEO’s are not “employers” of certain client employees for purposes of the Internal Revenue Code of 1986, as amended, its cafeteria plan may lose its favorable tax status, the Company may no longer be able to assume the client’s federal employment tax withholding obligations, and certain defined employee benefit plans maintained by the Company may be denied the ability to deliver benefits on a tax-favored basis as intended.

 

Restricted Cash

 

Certain states and vendors require the Company to post letters of credit to ensure payment of taxes or payments to the Company’s vendors under workers’ compensation contracts and to guarantee performance under the Company’s 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 the Company has failed to perform specified actions. If this were to occur, the Company would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, the Company may also have to record a charge to earnings for the reimbursement. The Company does not believe that it is likely that any claims will be made under a letter of credit in the foreseeable future. As of June 30, 2012 and 2011, the Company had approximately $2.4 million in restricted cash primarily to secure obligations under its workers’ compensation contracts.

 

NOTE 15 – QUARTERLY FINANCIAL DATA (UNAUDITED)

 

The following table presents the unaudited consolidated operating results by quarter for the fiscal periods ended June 30, 2012 and 2011:

 

   For the Three Months Ended 
   September 30,   December 31,   March 31,   June 30, 
2012:                    
Revenues  $15,795   $14,836   $16,038   $14,222 
Gross Profit   3,252    3,110    3,278    3,458 
Net income available to common shareholders   392    78    197    259 
Basic earnings per share – continuing operations   0.03    0.01    0.02    0.02 
Basic earnings per share   0.03    0.01    0.02    0.02 
Diluted earnings per share – continuing operations   0.03    0.01    0.01    0.02 
Diluted earnings per share   0.03    0.01    0.01    0.02 

 

   For the Three Months Ended 
   September 30,   December 31,   March 31,   June 30, 
2011:                    
Revenues  $15,571   $15,860   $16,816   $16,088 
Gross Profit   3,198    3,144    3,103    3,362 
Net income available to common shareholders   302    226    265    490 
Basic earnings per share – continuing operations   0.02    0.02    0.02    0.04 
Basic earnings per share   0.02    0.02    0.02    0.04 
Diluted earnings per share – continuing operations   0.02    0.02    0.02    0.03 
Diluted earnings per share   0.02    0.02    0.02    0.03 

 

NOTE 16 – SUBSEQUENT EVENTS

 

Management has evaluated subsequent events through the date on which the financial statements were issued.

 

On September 20, 2012, the Company announced that it has reached an agreement in principal to restructure its current merger agreement by planning to enter into an amended merger agreement with Ide Management Group, LLC (“Ide”), a skilled nursing facility management group headquartered in Greenfield, Indiana (the “Amended Agreement”). The Amended Agreement is subject to final documentation, completion of due diligence, regulatory compliance and other normal contingencies. Once completed, a revised Proxy Statement and the Amended Agreement will be filed with the SEC for review. Further, the Amended Agreement will result in the Company remaining registered with the Securities and Exchange Commission, and it is anticipated that it will continue to be publicly traded. Current shareholders of the Company will continue to own their Company shares.

 

In connection with the Amended Agreement, the Company will exchange all of its professional employer organization (“PEO”) subsidiaries for all of the common and preferred shares owned by the late Carter M. Fortune and by CEP, Inc., a Tennessee corporation which had previously entered into a merger agreement with the Company to acquire all the Company’s PEO operations. As a result of the revised transaction structure, the Company will cease being in the PEO business and through its newly acquired Ide subsidiaries, will operate a chain of over 20 skilled nursing facilities located in Indiana, Illinois, Iowa and Wisconsin.

 

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The Amended Agreement provides that Ide will merge with a to-be formed subsidiary of the Company, and become a wholly-owned subsidiary of the Company. Mark Ide, the sole member of Ide, will receive sufficient shares of the Company in exchange for full ownership of Ide. As a result, Mr. Ide will own a substantial majority of the Company shares. In addition, Ide will pay the Company three hundred thousand dollars ($300,000) as part of the transaction, which has been deposited into an escrow account with an independent third-party bank. The terms and conditions of the escrow agreement and the revised merger transaction are more fully described in the Company’s Form 8-K filed on September 20, 2012.

 

Mr. Fortune has pledged his ownership holdings in the Company as collateral on certain personal debt obligations. Mr. Fortune passed away on August 25, 2012. If Mr. Fortune’s shares in the Company are not sold through the aforementioned transaction, or by some other similar transaction, and if his estate were to default on these debt obligations and the collateral is called upon by the lending institution, it could result in a potential change in control of the Company if the default may not be cured by the majority shareholder through some other means.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None

 

Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our President/Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, our President/Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2012.

 

Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including the President/Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting as of June 30, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework.

 

Based upon this assessment, we determined that our internal control over financial reporting as of June 30, 2012 was effective.

 

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

 

Changes in Internal Controls

 

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

 

Inherent Limitations on Effectiveness of Controls

 

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

 

39
 

 

Item 9B. Other Information

 

None

 

PART III

 

Item 10. Directors and Executive Officers of the Company and Corporate Governance

 

Directors of the Company

 

The following table sets forth the name and age of each Director, indicating all positions and offices with us currently held by each Director.

 

Name   Principle Position and Role (Age)   Director Since
         
Carter M. Fortune   Chairman of the Board (Deceased August 25, 2012)   2002
David A. Berry   Independent Director, Audit Committee Member (59)   2002
Richard F. Suja   Independent Director, Audit Committee Member (57)   2011
Paul J. Hayes   Director (Resigned August 30, 2012)   2011

 

Set forth below are descriptions of the backgrounds and principal occupations of each of our Directors, and the period during which each has served as a Director. Each Director serves for a term of one year or until such time as that director is replaced pursuant to the Company’s By-Laws.

 

Carter M. Fortune was appointed Chief Executive Officer and Chairman of the Board of the Company as of January 2002. Mr. Fortune resigned as Chief Executive Officer on May 27, 2005 and was appointed Treasurer and remained Chairman of the Board. Mr. Fortune has a Bachelor of Business Administration degree in marketing from the University of Cincinnati. He began his professional career at a leading national food brands company where after five years he had ascended to the position of Regional Marketing Manager. Mr. Fortune was then hired as Director of Marketing for a leading insurance and actuarial services provider where he served for three years. Mr. Fortune then began a period of about fifteen years where he was the owner and operator of a chain of retail stores. Concurrently Mr. Fortune began investing in, owning and operating numerous commercial and residential real estate developments; he continues to pursue such ventures. Mr. Fortune was the sole owner of Fisbeck-Fortune Development, LLC, 14 West, LLC and Fortune Group, Inc., none of which is a parent, subsidiary or other affiliate of the Company. In addition, Mr. Fortune was the majority shareholder of the Company. Mr. Fortune passed away on August 25, 2012.

 

David A. Berry was elected to the Fortune Industries’ Board of Directors on November 1, 2002. Mr. Berry serves as the chairman of the Company’s Audit Committee. Mr. Berry began his professional career by starting his own underground and aerial utility construction company in 1978, which he had grown into a national company with operations from Maine to California. He sold the company in 1984. Mr. Berry then started OSP Engineering (OSP), an outside and inside plant telecommunications engineering company, designing telephone, cable TV and electrical systems for AT&T, Indiana Bell Telephone and Indiana Bell Communications. Mr. Berry again grew the OSP into a regional company, with customers thought the Midwest, which he sold in 1990. Mr. Berry was one of the founding members of Citimark Communications, a shared tenant services telephone company; he sold his interest to his partners and formed Shared Telcom Services (STS) in 1995. Mr. Berry grew STS (via acquisition) into the third largest regional Competitive Local Exchange Carrier (CLEC) behind Ameritech and AT&T. He then sold the company in 2000 to a large national Utility. In addition to his vast experience in growing and managing businesses, Mr. Berry has personally been involved in the sale of multiple companies. His financial acumen developed over years of starting, growing and selling businesses is a valuable asset to the board and the audit committee. Mr. Berry has been retired since 2001 and is currently an independent consultant pursuing multiple business ventures.

 

Richard F. Suja was elected to the Fortune Industries’ Board of Directors on February 21, 2011. Mr. Suja serves on the Company’s Audit Committee. Mr. Suja is a Senior Advisor at Colliers International, where he specializes in industrial building, land and investment acquisitions and dispositions, build-to-suit, lease negotiations and corporate property portfolio representations. He has over 22 years of commercial real estate experience, specializing in industrial building, land and investment acquisitions and dispositions, build-to-suits, lease negotiations, and corporate property portfolio management, and he has a strong understanding of financial statements and various investment strategies. Mr. Suja has sold or leased over 13.2 million square feet of industrial, research and site development space, totaling more than $600 million in transaction volume. His clientele is located throughout the United States and in Canada, and is concentrated in central Indiana. Prior to joining Colliers International, Mr. Suja worked for Summit Realty, Cushman & Wakefield’s Global Supply Chain Solutions Group and CB Richard Ellis’ Global Logistics Group.

 

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Paul J. Hayes was elected to the Fortune Industries’ Board of Directors on February 21, 2011. Mr. Hayes has over 25 years experience in corporate accounting and finance, primarily in the commercial real estate, residential construction and land development industries. Prior to his current position, he spent the last 13 years with The Estridge Companies, serving as Vice President of Finance from 2006 to 2010 and Controller from 1997 to 2006. Mr. Hayes secured over $25 million in land and development financing and served on the company’s executive committee. Prior to joining Estridge, Mr. Hayes held several positions, including Financial Reporting Controller, with Simon Property Group, where he worked on the company’s initial public offering in 1993 and the company’s merger with its largest competitor in 1996. Mr. Hayes began his career with the big-8 public accounting firm Ernst & Whinney providing assurance services to a wide range of clients in many diverse industries. Effective August 30, 2012, Mr. Paul Hayes resigned from the Company’s Board of Directors. Mr. Hayes’ resignation was not due to a disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

 

Executive Officers of the Company

 

The executive officers of the Company are as follows:

 

Name   Age   Position
         
Tena Mayberry   49   Chief Executive Officer and President
Randy Butler   52   Chief Financial Officer

 

Each executive officer serves, in accordance with the by-laws of the Company, until the annual meeting of the Board of Directors.

 

Tena Mayberry was elected President of the Company on April 13, 2009, and Chief Executive Officer of the Company on January 15, 2010, replacing John F. Fisbeck who resigned and the Company’s Chief Executive Officer on January 15, 2010. Ms. Mayberry was named president of Century II, a subsidiary of the Company, in 2007, after serving four years as Chief Operating Officer, two years as a senior vice president, and four years as vice president. Prior to joining Century II, Ms. Mayberry served in management positions with Contract Sales Managers, Kroger Co. and Norrell Temporary Services. Ms. Mayberry graduated from Tennessee Technological University with a Bachelor of Science degree in marketing and business management.

 

Randy Butler became Chief Financial Officer on April 2, 2009, replacing Garth Allred who resigned as the Company’s Chief Financial Officer on April 2, 2009. Prior to his election as the Company’s Chief Financial Officer, Mr. Butler joined Century II, a subsidiary of the Company on May 1, 2006 as the Controller, and assumed responsibility for all the financial functions of PSM, Inc. another subsidiary of the Company in May 2008. Prior to Century II, Mr. Butler was the Controller for PFIC Corporation, a broker-dealer for Union Planters Bank, where he was responsible for all the accounting and financial operations for the Financial Services Division of Union Planters Bank. Mr. Butler graduated with honors from the University of Tennessee with a Bachelor of Science degree in accounting.

 

SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE

 

Section 16(a) of the Exchange Act requires the Company’s officers and Directors, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file an initial report of ownership of such securities on Form 3 and changes in ownership of such securities on Form 4 or 5 with the SEC. Such officers, Directors and ten percent shareholders are required to furnish the Company with copies of all Section 16(a) forms they file with the SEC.

 

Based solely on its review of the copies of such forms received by it, or written representations from certain such reporting persons that no Form 5’s were required for such persons, the Company believes that, for the fiscal period ended June 30, 2012, its officers, Directors and ten percent shareholders complied with all applicable Section 16(a) filing requirements.

 

CODE OF ETHICS

 

The Company has adopted a code of ethics (the “Code of Ethics”) that applies to the Company’s principal executive officer, principal financial officer, and employees. A copy of the Company’s Code of Ethics can be viewed on the Company’s website at www.ffi.net or obtained free of charge by sending a written request to the attention of the Company’s Chief Financial Officer, Randy Butler, at 6402 Corporate Drive, Indianapolis, Indiana 46278.

 

SHAREHOLDER PROPOSALS

 

Any of our shareholders wishing to have a proposal considered for inclusion in our 2013 proxy solicitation materials must set forth such proposal in writing to be received at our corporate office no later than November 1, 2012. In addition, any shareholder wishing to nominate a candidate for Director or propose other business at the Annual Meeting must generally give us written notice on or before November 1, 2012, and the notice must provide certain specific information as pursuant to Rule 14a-8 of the rules promulgated under the Exchange Act must comply with the advance notice provisions and other requirements of our bylaws, which are on file with the SEC and may be obtained from our corporate office upon request. Our Board will review any shareholder proposals that are filed as required and will determine whether such proposals meet applicable criteria for inclusion in our 2013 proxy solicitation materials or consideration at the 2013 Annual Meeting. In addition, we retain discretion to vote proxies on matters of which we are not properly notified at our principal executive offices on or before the close of business on January 2, 2013, and also retain that authority under certain other circumstances. These procedures remain unchanged from those last reported in the Company’s Schedule 14A, except for the notice dates set forth above.

 

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THE AUDIT COMMITTEE

 

The Company maintains an Audit Committee that is currently composed of two members, David A. Berry and Richard F. Suja, neither of whom is an officer or employee of the Company or any parent or subsidiary of the Company. Further, neither Mr. Berry nor Mr. Suja has any other material relationship with the Company that would interfere with their exercise of independent judgment. The Board has determined that Mr. Berry and Mr. Suja are "independent" and "financially sophisticated" as such terms are defined by the NYSE Amex.

 

The Company’s Board has determined that David Berry qualifies as an "audit committee financial expert" as defined by Item 401(h) of Regulation S-K adopted pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Mr. Berry has years of experience in reading, interpreting and analyzing financial statements in his roles as more fully described in the above biographical information. Mr. Berry also qualifies as "independent" as that term is used in Item 7(d) (3) (IV) of Schedule 14A of the Exchange Act.

 

Item 11. Executive Compensation

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Overview

 

The Company’s Board of Directors believes that the success of the Company is largely based on the performance and skills of its executive officers. Therefore, when determining executive compensation, the Company’s Board of Directors focuses on the concepts of rewarding executive performance and retaining and attracting top executive talent. The Company’s principal objectives with respect to executive compensation are to encourage strong executive leadership and on providing value to the Company’s stockholders.

 

The Company, due to its status as a “Controlled Company’ under the regulations of the NYSE Amex, is not required to have separate nominating or compensation committees and does not have such committees. The Company’s full Board of Directors regularly meets to analyze whether the compensation for the Company’s executive officers is aligned with the Company’s objectives for executive compensation. In the event an executive officer also services as a director, that individual is excluded from discussions regarding compensation. Currently, the Company’s only executive officers are its Chief Executive Officer and Chief Financial Officer.

 

Determination of Compensation

 

The Company’s Board of Directors relies on its independent judgment in determining the compensation to be paid to the Company’s executive officers. In reaching its decisions with respect to executive compensation, the Board of Directors evaluates the executive’s past performance, the executive’s inherent value to the Company and takes into account the compensation paid to executive officers by comparable companies. The Board of Directors’ goal is to align executive officer compensation with the value that those executive officers provide to the Company.

 

Elements of Compensation

 

The Company’s compensation program consists of base salary, cash bonuses, discretionary stock awards and other benefits.

 

The base salary for the Company’s Chief Executive Officer, Chief Financial Officer and Chief Operating Officer is determined based upon the responsibilities of the executive officer, the executive officer’s general contributions to the Company, and the skills, expertise and leadership qualities that the executive officer brings to the Company. As noted above, the base salaries for the Company’s Chief Executive Officer, Chief Financial Officer and Chief Operating Officer are reviewed on a regular basis.

 

The Company’s Board of Directors maintains the discretion to pay cash bonuses to the Company’s named executive officers based on their evaluation of the executive officer. However, the Company prefers to pay executive compensation through an annual salary rather than through bonuses.

 

The Company’s Board of Directors also maintains the discretion to award stock to executive officers based upon the Company’s compensation strategy. Although the Company has made stock awards to executive officers in the past and may do so in the future, because the Company prefers to pay executive officers through salary, such stock awards are not common.

 

42
 

 

Chief Executive Officer Compensation

 

The Company’s Board of Directors considered a variety of factors when determining the compensation to be paid to the Company’s Chief Executive Officer. Ms. Mayberry was paid $200,000 in salary during the fiscal year ended June 30, 2012 pursuant to her employment contract. The Board of Directors based Ms. Mayberry’s compensation on her record of performance for other companies and for the skills and expertise that she offered the Company. The Board of Directors also considered salaries paid to comparable executives by peer companies.

 

Chief Financial Officer Compensation

 

Randy Butler was paid $130,000 in salary during the fiscal period ended June 30, 2012 pursuant to his employment agreement. The Board of Directors based Mr. Butler’s compensation on his record of performance for other companies and for the skills and expertise that he offered the Company. The Board of Directors also considered salaries paid to comparable executives by peer companies.

 

Compensation for Named Executives

 

The following table sets forth certain information concerning the compensation paid or accrued by the Company for services rendered during the Company’s past three fiscal periods ended June 30, 2012, 2011 and 2010 by our Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer. The Company had no other executive officers during fiscal 2012.

 

EXECUTIVE COMPENSATION TABLE

 

   Fiscal Period               
   Ended                    
   June 30, 2012  Annual Salary   Annual Bonus   Stock   Other     
Name and Principal Position  2011 and 2010  Compensation   Compensation   Awards   Compensation   Total 
John F. Fisbeck, CEO, 1  2010  $180,000                  $180,000 
P. Andy Rayl, COO, 2  2011  $99,000                  $99,000 
   2010  $105,000                 $105,000 
Tena Mayberry, CEO, 3  2012  $200,000   $30,000   $5,1007       $235,107 
   2011  $200,000   $25,000   $13,4005       $238,405 
   2010  $180,000   $20,000            $200,000 
Randy Butler, CFO, 4  2012  $130,000   $30,000   $2,5508       $162,558 
   2011  $130,000   $10,000   $10,0506       $150,056 
   2010  $130,000               $130,000 

 

(1)John Fisbeck’s term as the Company’s CEO ended on January 15, 2010, when he resigned from the Company.

 

(2)P. Andy Rayl was employed as the Company’s COO from May 8, 2008 to April 1, 2011.

 

(3)Tena Mayberry began her term as the Company’s President on April 13, 2009 and as the Company’s CEO on January 1, 2010.

 

(4)Randy Butler began his term as the Company’s Chief Financial Officer on April 2, 2009.

 

(5)Represents the aggregate fair value of 20,000 shares of unrestricted common stock granted on April 6, 2011 at a price of $0.67 per share, which represents the closing price of the Company’s shares on the grant date.

 

(6)Represents the aggregate fair value of 15,000 shares of unrestricted common stock granted on April 6, 2011 at a price of $0.67 per share, which represents the closing price of the Company’s shares on the grant date.

 

(7)Represents the aggregate fair value of 10,000 shares of unrestricted common stock granted on February 20, 2012 at a price of $0.51 per share, which represents the closing price of the Company’s shares on the grant date.

 

(8)Represents the aggregate fair value of 5,000 shares of unrestricted common stock granted on February 20, 2012 at a price of $0.51 per share, which represents the closing price of the Company’s shares on the grant date.

 

Grant of Plan Based Awards

 

On April 6, 2011, Tena Mayberry was awarded 20,000 shares of common stock in accordance with her employment agreement.

 

On April 6, 2011, Randy Butler was awarded 15,000 shares of common stock in accordance with his employment agreement.

 

On February 20, 2012, Tena Mayberry was awarded 10,000 shares of common stock in accordance with her employment agreement.

 

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On February 20, 2012, Randy Butler was awarded 5,000 shares of common stock in accordance with her employment agreement.

 

No other plan-based awards were made to the named executive officers during the fiscal period ended June 30, 2012, 2011 and 2010.

 

Outstanding Equity Awards

 

There were no outstanding equity awards for the named executive officers as of the end of the fiscal period ended June 30, 2012.

 

Option Exercises and Vested Stock

 

There were no option/SAR exercises during the fiscal period ended June 30, 2012 by any of the named executive officers and there are currently no outstanding unexercised options or SARs held by any of the named executive officers.

 

Pension Benefits

 

None of the named executive officers held any pension benefits as of the end of the fiscal period ended June 30, 2012.

 

Non-Qualified Deferred Compensation Plans

 

None of the named executive officers was the beneficiary of any non-qualified deferred compensation plan during the fiscal period ended June 30, 2012.

 

Compensation of Directors

 

The following table sets forth the compensation paid to all Directors of the Company during the fiscal period ended June 30, 2012:

 

DIRECTOR COMPENSATION TABLE

 

   Fees Earned or   All Other    
Name  paid in Cash   Compensation    Total 
             
David A. Berry  $12,000       $12,000 
Richard F. Suja  $12,000       $12,000 
Paul J. Hayes  $12,000       $12,000 

 

Pursuant to the Company’s policies, Directors who are also employees of the Company receive no compensation for their service as directors. The Company determines the compensation paid to its directors based upon its goals of maintaining active and well-qualified directors and based upon its evaluation of the reasonable compensation for the services rendered by its non-employee directors.

 

Compensation Committee Interlocks and Insider Participation

 

There were no compensation committee interlocks or insider participation during the fiscal period ended June 30, 2012.

 

Compensation Committee Report

 

The Board of Directors has reviewed and discussed the Compensation Discussion and Analysis set forth above and based upon this review and discussions the Board of Directors has recommended inclusion of that Compensation Discussion and Analysis in this Annual Report on Form 10-K.

 

David A. Berry

Richard F. Suja

 

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

 

Shares Authorized for Issuance under Equity Compensation Plans

 

The following information presents a summary of the Company’s equity compensation plans as of June 30, 2012:

 

Plan Category  Number of
securities to
be issued upon
exercise
of outstanding
options,
warrants and
rights
   Weighted-
average
exercise priceof
outstanding
 options,
warrants and
rights
   Number of
securities
remaining
available for
future
issuance
 
                
Equity Compensation Plan Approved by Shareholders (1)   890,783   $0.00    109,217 
Total   890,783   $0.00    109,217 

 

(1)Includes the 2006 Equity Incentive Plan

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

 

Security Ownership of Certain Beneficial Owners

 

The following table sets forth information as of June 30, 2012 with respect to the only persons or groups known to the Company who may be deemed to beneficially own more than five percent of the Company’s voting securities (i.e. Common Stock).

 

Title of Class  Name and Address of Beneficial Owner   Amount and Nature of Beneficial
Ownership (1)
   Percent of
Class
 
             
Common Stock   

Carter M. Fortune

6402 Corporate Drive

Indianapolis, IN 46278

    7,344,687(2)   60%

 

(1)As used in this table, "beneficial ownership" of securities means the sole or shared power to vote, or to direct the voting of, such securities, or the sole or shared investment power with respect to such securities, including the power to dispose of, or to direct the disposition of, such securities. In addition, for purposes of this table, a person is deemed to have "beneficial ownership" of any security that such person had the right to acquire within 60 days after June 30, 2012. "Beneficial ownership" also includes that ownership of shares that may be imputed to any control group of the Company.
(2)As the sole member of 14 West, LLC, Carter M. Fortune has sole voting and dispositive power over 1,259,834 (10%) shares of the Company’s Common Stock held by that entity, therefore 1,259,834 shares are included within the beneficial holdings of Mr. Fortune in the above table.

 

Security Ownership of Management

 

The following table sets forth information as of June 30, 2012 with respect to (i) each current Director, (ii) all individuals currently serving as the Company’s executive officers (as defined in Item 402(a)(3) of Regulation S-K) as of the above date, and (iii) all current Directors and all such executive officers as a group. Unless otherwise noted, each holder has sole voting and investment power with respect to the shares of the listed securities. An asterisk (*) indicates beneficial ownership of less than one percent.

 

Title of Class  Name and Address of Beneficial Owner  Amount and Nature of Beneficial
Ownership (1)
   Percent of
Class
 
Common Stock  Carter M. Fortune
6402 Corporate Drive
Indianapolis, IN 46278
  7,344,687(2)   60
Common Stock  David A. Berry
6402 Corporate Drive
Indianapolis, IN 46278
   10,000    

*

 
Common Stock  Tena Mayberry
6402 Corporate Drive
Indianapolis, IN 46278
   50,000    

 *

 
Common Stock  Randy Butler
6402 Corporate Drive
Indianapolis, IN 46278
   30,000    

 *

 
Common Stock  All current executive officers and Directors as a group   7,434,687    61%

 

(1)As used in this table, "beneficial ownership" of securities means the sole or shared power to vote, or to direct the voting of, such securities, or the sole or shared investment power with respect to such securities, including the power to dispose of, or to direct the disposition of, such securities. In addition, for purposes of this table, a person is deemed to have "beneficial ownership" of any security that such person had the right to acquire within 60 days after June 30, 2012.
(2)As the sole member of 14 West, LLC, Carter M. Fortune has sole voting and dispositive power over 1,259,834 (10%) shares of the Company’s Common Stock held by that entity, therefore 1,259,834 shares are included within the beneficial holdings of Mr. Fortune in the above table.

 

45
 

 

CHANGES IN CONTROL

 

On March 26, 2012, CEP, Inc., a Tennessee corporation (“Parent”), CEP Merger Sub, Inc., a Tennessee corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), and Fortune Industries, Inc., an Indiana corporation (the “Company”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) whereby Merger Sub will merge with and into the Company (the “Merger”) with the Company surviving as a subsidiary of CEP (the “Surviving Corporation”). The Surviving Corporation will continue to be named “Fortune Industries, Inc.” when the merger is effective.

 

Further details of this transaction can be found in the Form 8-K filed on March 26, 2012 and the Agreement and Plan of Merger which was attached as Exhibit 10.1 of the Form 8-K. Additional information has been provided in a Fortune Proxy Statement Form 14-A filed on May 22, 2012 and Fortune Schedule 13E-3 filed on May 29, 2012.

 

On September 20, 2012, the Company announced that it has reached an agreement in principal to restructure its current merger agreement by planning to enter into an amended merger agreement with Ide Management Group, LLC (“Ide”), a skilled nursing facility management group headquartered in Greenfield, Indiana (the “Amended Agreement”). The Amended Agreement is subject to final documentation, completion of due diligence, regulatory compliance and other normal contingencies. Once completed, a revised Proxy Statement and the Amended Agreement will be filed with the SEC for review. Further, the Amended Agreement will result in the Company remaining registered with the Securities and Exchange Commission, and it is anticipated that it will continue to be publicly traded. Current shareholders of the Company will continue to own their Company shares.

 

In connection with the Amended Agreement, the Company will exchange all of its professional employer organization (“PEO”) subsidiaries for all of the common and preferred shares owned by the late Carter M. Fortune and by CEP, Inc., a Tennessee corporation which had previously entered into a merger agreement with the Company to acquire all the Company’s PEO operations. As a result of the revised transaction structure, the Company will cease being in the PEO business and through its newly acquired Ide subsidiaries, will operate a chain of over 20 skilled nursing facilities located in Indiana, Illinois, Iowa and Wisconsin.

 

The Amended Agreement provides that Ide will merge with a to-be formed subsidiary of the Company, and become a wholly-owned subsidiary of the Company. Mark Ide, the sole member of Ide, will receive sufficient shares of the Company in exchange for full ownership of Ide. As a result, Mr. Ide will own a substantial majority of the Company shares. In addition, Ide will pay the Company three hundred thousand dollars ($300,000) as part of the transaction, which has been deposited into an escrow account with an independent third-party bank. The terms and conditions of the escrow agreement and the revised merger transaction are more fully described in the Company’s Form 8-K filed on September 20, 2012.

 

Mr. Fortune has pledged his ownership holdings in the Company as collateral on certain personal debt obligations. Mr. Fortune passed away on August 25, 2012. If Mr. Fortune’s shares in the Company are not sold through the aforementioned transactions, or by some other similar transaction, and if his estate were to default on these debt obligations and the collateral is called upon by the lending institution, it could result in a potential change in control of the Company if the default may not be cured by the majority shareholder through some other means.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

The Company holds various operating leases for the rental of properties with Fisbeck-Fortune Development, LLC, a Company owned by its majority shareholder, the Chairman of the Board. The Company pays certain expenses including taxes, assessments, maintenance and repairs under terms of the leases. Rent expense of $45 was recognized in fiscal period 2012 under these agreements. This lease was terminated on April 1, 2012.

 

46
 

 

Effective November 30, 2008, the Company approved a transaction to sell all of the outstanding shares of common stock of its wholly owned subsidiaries, James H Drew Corporation, Nor-Cote International, Inc., Fortune Wireless, Inc. and Commercial Solutions, Inc. The subsidiaries were sold to related party entities owned by the Company’s majority shareholders in exchange for a $10,000 reduction in the outstanding balance of the term loan note due to the majority shareholder and a three year term promissory note receivable in the amount of $3,500 whose maturity date was extended to June 30, 2012.  The promissory note receivable bears interest at prime plus 1% and is interest only for the first twelve months, with $50 and $100 monthly principal payments due in years two and three, respectively. The unpaid balance at maturity is due in lump sum payment. As of the date of this filing, the promissory note receivable was still outstanding and the Board is considering an additional extension.

 

Effective December 31, 2010, the Company revised its estimate regarding the collectability of the term note receivable.  Based on this change in estimate, the Company reclassified the note receivable as a reduction to its outstanding preferred stock as prescribed by a Security Agreement between the Company and the related party.  Under terms of this Security Agreement and in the event of default of the term note receivable, the Company obtains the right to equal value of the preferred stock as defined including but not limited to title, interest and dividends.  As of June 30, 2012 and the date of this filing, the Company has no intention to convert the note receivable in the foreseeable future.

 

As part of the terms of the sales transaction, the majority shareholder received 217,000 shares of Series C Preferred Stock in consideration for cancellation of the outstanding principal balance of the term note payable of $21.7 million. In addition, the Company converted 79,180 shares of Series B Preferred Stock previously issued to and held by the majority shareholder to 79,180 shares of Series C Preferred Stock. The Series C Preferred Stock is non-redeemable, non-voting cumulative preferred and bears annual dividends of $5 per share in years one and two subsequent to the transaction date, $6 per share in year three subsequent to the transaction date and $7 per share thereafter. Effective July 1, 2009, the Series C Preferred Stock annual dividend was modified to $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.

 

As part of the terms of the sales transaction, the Company issued the majority shareholder 2.2 million warrants with a ten year term and an exercise price of $ .40 per share.

 

Item 14. Principal Accountant Fees and Services.

 

Our financial statements for the fiscal period ended June 30, 2012 were certified by Somerset CPA’s, P.C. (“Somerset”). The following table sets forth the aggregate fees billed to the Company by Somerset:

 

   Fiscal 2012   Fiscal 2011 
         
Audit Fees  $245,000   $295,000 
Audit Related Fees   90,000    100,000 
Tax Fees   255,000    225,000 
All Other Fees   -    - 
   $590,000   $620,000 

 

Audit Fees: The aggregate fees billed in each of the fiscal periods ended June 30, 2012 and 2011 for professional services rendered by the principal accountant for the audit of the Company’s annual financial statements and review of the financial statements included in the Company’s Forms 10-K and 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal periods. These fees also include five statutory audits for certain wholly owned subsidiaries of the Company.

 

Audit Related Fees: The aggregate fees billed in each of the fiscal periods ended June 30, 2012 and 2011 for professional services rendered by the principal accountant for audit related fees including, primarily, consultations on various accounting and reporting matters.

 

Tax Fees: The aggregate fees billed in each of the fiscal periods ended June 30, 2012 and 2011 for professional services rendered by the principal accountant for tax compliance Federal and State advice.

 

All Other Fees: For the fiscal periods ended June 30, 2012 and 2011, the Company was not billed any additional fees for services by Somerset other than the services covered under the captions "Audit Fees", "Audit Related Fees" and "Tax Fees" above.

 

All services listed were pre-approved by the Audit Committee and all auditing services were performed by Somerset employees. The Audit Committee has considered whether the services described above are compatible with maintaining the independent accountant's independence and has determined that such services have not adversely affected Somerset’s independence.

 

47
 

 

POLICIES RELATED TO PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The Audit Committee has pre-approval policies and procedures, pursuant to which the Audit Committee approves the audit and permissible non-audit services provided by Somerset. The Audit Committee’s pre-approval policy is as follows: consistent with the Audit Committee’s responsibility for engaging our independent auditors, all audit and permitted non-audit services require pre-approval by the Audit Committee, some such services require specific approvals, whereas other services are granted general pre-approval. All requests or applications for services to be provided by the independent registered public accounting firm that do not require specific approval by the Audit Committee will be submitted to the Chief Financial Officer and must include a detailed description of the services to be rendered. The Chief Financial Officer will determine whether such services are included within the list of services that have received the general pre-approval of the Audit Committee. The Audit Committee will be informed on a timely basis of any such services rendered by the independent auditor. Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the independent auditor and the Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the Securities and Exchange Commission‘s (“SEC’s”) rules on auditor independence. The Chief Financial Officer will immediately report any breach of this policy that comes to the attention of the Chief Financial Officer or any member of management to the chairman of the Audit Committee. Pursuant to these procedures, the Audit Committee approved the foregoing audit and permissible non-audit services provided by Somerset in fiscal 2012.

 

PART IV

 

Item 15. Exhibits and Financial Statement Schedules.

 

The following financial statements, schedules and exhibits are filed as part of this Report:

 

(1)Financial Statements. Reference is made to the Index to Consolidated Financial Statements on page 20 of this Report.

 

(2)All schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes to the financial statements.

 

(3)List of Exhibits.

 

Exhibit

No.

  Description
2.1   Agreement and Plan of Share Exchange entered into April 13, 2007 (1)
     
3.1   Second Amended and Restated Articles of Incorporation (2)
     
3.2   Second Amended and Restated Code of Bylaws (3)
     
10.1   Term Loan Note (4)
     
21.1   List of subsidiaries (5)
     
23.1   Consent of Independent Registered Public Accounting Firm (5)
     
31.1   Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Tena Mayberry. (5)
     
31.2   Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Randy Butler. (5)
     
32.1   Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Tena Mayberry. (5)
     
32.2   Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Randy Butler. (5)

 

Notes to Exhibits:

 

1.This exhibit is incorporated by reference from the Company’s Current Report on Form 8-K, dated April 19, 2007.

 

2.This exhibit is incorporated by reference from the Company’s Annual Report on Form 10-K, dated September 28, 2009.

 

3.This exhibit is incorporated by reference from the Company’s Current Report on Form 8-K, dated December 27, 2006.

 

4.This exhibit is incorporated by reference from the Company’s Current Report on Form 8-K, dated June 5, 2008.

 

5.Attached hereto.

  

48
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  FORTUNE INDUSTRIES, INC.
     
Date: September 28, 2012 By: /s/ Tena Mayberry
    Tena Mayberry,
    Chief Executive Officer
     
Date: September 28, 2012 By: /s/ Randy Butler
    Randy Butler
    Chief Financial Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Date: September 28, 2012   /s/ David A. Berry
    David A. Berry, Director
     
Date: September 28, 2012   /s/ Richard F. Suja
    Richard F. Suja, Director

 

49

 

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