UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





x                                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended September 30, 2009





o                                TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





Commission file number: 0-19049





FORTUNE INDUSTRIES, INC.


(Exact name of Registrant as specified in its charter)





INDIANA

                        20-2803889(State or other jurisdiction of

                        (IRS Employerincorporation or organization)

                        Identification Number)





6402 Corporate Drive

                    46278Indianapolis, IN

                    (Zip Code)(Address of principal executive offices)





(317) 532-1374


(Registrant’s telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.





Yes x No o





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





Large accelerated
                filer ̈                                     Accelerated filer   
                                             ̈


Non-accelerated filer         ̈                                     Smaller reporting
            company              x


(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes o No x





As of November 13, 2009, 12,192,823 shares of the Company’s $0.10 per share par value common stock were outstanding.













FORTUNE INDUSTRIES, INC.


FORM 10-Q


For The Quarterly Period Ended September 30, 2009





INDEX





PagePART  I.    Financial InformationITEM 1.  Financial StatementsConsolidated Balance Sheets as of September 30, 2009 (unaudited) and June 30, 2009

                                3Consolidated Statements of Operations for the three month periods ended September 30, 2009 (unaudited) and November 30, 2008 (unaudited)

                                5Consolidated Statement of Changes in Shareholders’ Equity for the three month period ended September 30, 2009 (unaudited)

                                6Consolidated Statements of Cash Flows for the three month periods ended September 30, 2009 and November 30, 2008 (unaudited)

                                7Notes to the Unaudited Interim Consolidated Financial Statements

                                9ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

                                15ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

                                21ITEM 4.  Controls and Procedures

                                21PART II.    Other InformationITEM 1.    Legal Proceedings

                                21ITEM 1A. Risk Factors

                                21ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds

                                21ITEM 3.    Defaults Upon Senior Securities

                                21ITEM 4.    Submission of Matters to a Vote of Security Holders

                                22ITEM 5.    Other Information

                                22ITEM 6.    Exhibits

                                22Signatures

                                22




2





PART 1 - FINANCIAL INFORMATION


Item 1. Financial Statements.





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(DOLLARS IN THOUSANDS)





September 30,

                            

                            

                            June 30,2009

                            

                            

                            2009(Unaudited)

                            

                            

                            (Audited)ASSETSCURRENT ASSETSCash and equivalents

                            

                            $

                            698

                            

                            

                            $

                            1,686Restricted cash (Note 1)

                            

                            

                            3,508

                            

                            

                            

                            3,142Accounts receivable, net of allowance for doubtful accounts of $21 and $137

                            

                            

                            2,417

                            

                            

                            

                            2,622Deferred tax asset

                            

                            

                            1,750

                            

                            

                            

                            1,750Prepaid expenses and other current assets

                            

                            

                            1,730

                            

                            

                            

                            1,483Inventory

                            

                            

                            10

                            

                            

                            

                            13Assets of discontinued operations, net

                            

                            

                            61

                            

                            

                            

                            112Total Current Assets

                            

                            

                            10,174

                            

                            

                            

                            10,808OTHER ASSETSProperty, plant & equipment, net of accumulated depreciation of $2,293 and $2,193

                            

                            

                            674

                            

                            

                            

                            764Term note receivable related party (Note 2)

                            

                            

                            2,533

                            

                            

                            

                            2,546Deferred tax asset

                            

                            

                            1,000

                            

                            

                            

                            750Goodwill

                            

                            

                            12,339

                            

                            

                            

                            12,339Other intangible assets, net

                            

                            

                            3,161

                            

                            

                            

                            3,263Other long-term assets

                            

                            

                            43

                            

                            

                            

                            43Total Other Assets

                            

                            

                            19,750

                            

                            

                            

                            19,705TOTAL ASSETS

                            

                            $

                            29,924

                            

                            

                            $

                            30,513





See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements


3





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS (CONTINUED)


(DOLLARS IN THOUSANDS)





September 30,

                                                        

                                                        

                                                        June 30,2009

                                                        

                                                        

                                                        2009(Unaudited)

                                                        

                                                        

                                                        (Audited)LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIESShort-term debt and current maturities of long-term debt (Note 3)

                                                        

                                                        $

                                                        276

                                                        

                                                        

                                                        $

                                                        275Accounts payable

                                                        

                                                        

                                                        1,358

                                                        

                                                        

                                                        

                                                        1,037Health and workers' compensation reserves

                                                        

                                                        

                                                        3,046

                                                        

                                                        

                                                        

                                                        4,125Accrued expenses

                                                        

                                                        

                                                        5,013

                                                        

                                                        

                                                        

                                                        5,376Other current liabilities

                                                        

                                                        

                                                        803

                                                        

                                                        

                                                        

                                                        1,003Liabilities of discontinued operations, net

                                                        

                                                        

                                                        -

                                                        

                                                        

                                                        

                                                        1Total Current Liabilities

                                                        

                                                        

                                                        10,496

                                                        

                                                        

                                                        

                                                        11,817LONG-TERM LIABILITIESLong-term debt, less current maturities (Note 3)

                                                        

                                                        

                                                        4

                                                        

                                                        

                                                        

                                                        11Total Long-Term Liabilities

                                                        

                                                        

                                                        4

                                                        

                                                        

                                                        

                                                        11Total Liabilities

                                                        

                                                        

                                                        10,500

                                                        

                                                        

                                                        

                                                        11,828SHAREHOLDERS' EQUITY (NOTE 5)Common stock, $0.10 par value; 150,000,000 authorized;12,192,673 and 12,082,173 issued and outstanding at September 30, 2009and June 30, 2009, respectively

                                                        

                                                        

                                                        1,198

                                                        

                                                        

                                                        

                                                        1,187Series C Preferred stock, $0.10 par value; 1,000,000 authorized;296,180 issued and outstanding at September 30, 2009and June 30, 2009, respectively

                                                        

                                                        

                                                        29,618

                                                        

                                                        

                                                        

                                                        29,618Additional paid-in capital and warrants outstanding

                                                        

                                                        

                                                        19,321

                                                        

                                                        

                                                        

                                                        19,253Accumulated deficit

                                                        

                                                        

                                                        (30,713

                                                        )

                                                        

                                                        

                                                        (31,373

                                                        )Total Shareholders' Equity

                                                        

                                                        

                                                        19,424

                                                        

                                                        

                                                        

                                                        18,685TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

                                                        

                                                        $

                                                        29,924

                                                        

                                                        

                                                        $

                                                        30,513





See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements


4


FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


(UNAUDITED)





Three Month Period EndedSeptember 30,

                            

                            

                            November 30,2009

                            

                            

                            2008REVENUESService revenues

                            

                            $

                            14,829

                            

                            

                            $

                            18,236Product revenues

                            

                            

                            -

                            

                            

                            

                            17,929TOTAL REVENUES

                            

                            

                            14,829

                            

                            

                            

                            36,165COST OF REVENUESService cost of revenues

                            

                            

                            11,428

                            

                            

                            

                            14,109Product cost of revenues

                            

                            

                            -

                            

                            

                            

                            14,944TOTAL COST OF REVENUES

                            

                            

                            11,428

                            

                            

                            

                            29,053GROSS PROFIT

                            

                            

                            3,401

                            

                            

                            

                            7,112OPERATING EXPENSESSelling, general and administrative expenses

                            

                            

                            2,676

                            

                            

                            

                            6,369Depreciation and amortization

                            

                            

                            201

                            

                            

                            

                            376Total Operating Expenses

                            

                            

                            2,877

                            

                            

                            

                            6,745OPERATING INCOME

                            

                            

                            524

                            

                            

                            

                            367OTHER INCOME (EXPENSE)Interest income

                            

                            

                            28

                            

                            

                            

                            30Interest expense

                            

                            

                            (4

                            )

                            

                            

                            (144

                            )Gain on disposal of assets

                            

                            

                            -

                            

                            

                            

                            3Exchange rate gain

                            

                            

                            -

                            

                            

                            

                            1Other income

                            

                            

                            -

                            

                            

                            

                            73Total Other Income (Expense)

                            

                            

                            24

                            

                            

                            

                            (37

                            )INCOME BEFORE PROVISION FOR INCOME TAXES

                            

                            

                            548

                            

                            

                            

                            330Provision for income taxes

                            

                            

                            (271

                            )

                            

                            

                            28NET INCOME FROM CONTINUING OPERATIONS

                            

                            

                            819

                            

                            

                            

                            302DISCONTINUED OPERATIONSLoss from discontinued operations

                            

                            

                            (11

                            )

                            

                            

                            (60

                            )NET INCOME

                            

                            

                            808

                            

                            

                            

                            242Preferred stock dividends

                            

                            

                            148

                            

                            

                            

                            198NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

                            

                            $

                            660

                            

                            

                            $

                            44Basic Income Per Common Share-Continuing Operations

                            

                            $

                            0.05

                            

                            

                            $

                            0.01Basic Loss Per Common Share-Discontinued Operations

                            

                            $

                            -

                            

                            

                            $

                            (0.01)BASIC INCOME PER COMMON SHARE

                            

                            $

                            0.05

                            

                            

                            $

                            -Basic Weighted Average Shares Outstanding

                            

                            

                            12,089,380

                            

                            

                            

                            11,388,222Diluted Income Per Common Share-Continuing Operations

                            

                            $

                            0.05

                            

                            

                            $

                            0.01Diluted Loss Per Common Share-Discontinued Operations

                            

                            $

                            -

                            

                            

                            $

                            (0.01)DILUTED INCOME PER COMMON SHARE

                            

                            $

                            0.05

                            

                            

                            $

                            -Diluted Weighted Average Shares Outstanding

                            

                            

                            14,599,543

                            

                            

                            

                            11,766,980





See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements


5


FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY


(DOLLARS IN THOUSANDS)


(UNAUDITED)





AdditionalPaid-in Capital

                                    

                                    

                                    

                                    

                                    

                                    TotalCommon

                                    

                                    

                                    Preferred

                                    

                                    

                                    and Warrants

                                    

                                    

                                    Accumulated

                                    

                                    

                                    Shareholders'Stock

                                    

                                    

                                    Stock

                                    

                                    

                                    Outstanding

                                    

                                    

                                    Deficit

                                    

                                    

                                    EquityBALANCE AT JUNE 30, 2009

                                    

                                    $

                                    1,187

                                    

                                    

                                    $

                                    29,618

                                    

                                    

                                    $

                                    19,253

                                    

                                    

                                    $

                                    (31,373

                                    )

                                    

                                    $

                                    18,685Issuance of 110,500 shares of common stock for compensation

                                    

                                    

                                    11

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    68

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    79Net income

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    808

                                    

                                    

                                    

                                    808Preferred stock dividends

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    -

                                    

                                    

                                    

                                    (148

                                    )

                                    

                                    

                                    (148

                                    )BALANCE AT SEPTEMBER 30, 2009

                                    

                                    $

                                    1,198

                                    

                                    

                                    $

                                    29,618

                                    

                                    

                                    $

                                    19,321

                                    

                                    

                                    $

                                    (30,713

                                    )

                                    

                                    $

                                    19,424





See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements


6


FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(DOLLARS IN THOUSANDS)


(UNAUDITED)





Three Months EndedSeptember 30,

                                

                                

                                November 30,2009

                                

                                

                                2008CASH FLOWS FROM OPERATING ACTIVITIESNet Income

                                

                                $

                                808

                                

                                

                                $

                                242Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization

                                

                                

                                201

                                

                                

                                

                                376Provision for losses on accounts receivable

                                

                                

                                (116

                                )

                                

                                

                                (4

                                )Loss on disposal of assets

                                

                                

                                -

                                

                                

                                

                                (3

                                )Stock based compensation

                                

                                

                                79

                                

                                

                                

                                180Deferred income taxes

                                

                                

                                (250

                                )

                                

                                

                                -Changes in certain operating assets and liabilities:Restricted cash

                                

                                

                                (366

                                )

                                

                                

                                (208

                                )Accounts receivable

                                

                                

                                321

                                

                                

                                

                                560Inventory, net

                                

                                

                                3

                                

                                

                                

                                245Prepaid assets and other current assets

                                

                                

                                (248

                                )

                                

                                

                                326Assets of discontinued operations

                                

                                

                                (82

                                )

                                

                                

                                134Other long-term assets

                                

                                

                                -

                                

                                

                                

                                81Accounts payable

                                

                                

                                321

                                

                                

                                

                                1,019Health and workers' compensation reserves

                                

                                

                                (1,079

                                )

                                

                                

                                197Accrued expenses and other current liabilities

                                

                                

                                (563

                                )

                                

                                

                                (1,385

                                )Liabilities of discontinued operations

                                

                                

                                (1)

                                

                                

                                

                                64Net Cash Provided by (Used in) Operating Activities

                                

                                

                                (972

                                )

                                

                                

                                1,824CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures

                                

                                

                                (10

                                )

                                

                                

                                (107

                                )Net Cash Used in Investing Activities

                                

                                

                                (10

                                )

                                

                                

                                (107

                                )CASH FLOWS FROM FINANCING ACTIVITIESPayments on long-term debt majority shareholder

                                

                                

                                -

                                

                                

                                

                                (300

                                )Payments on long-term debt

                                

                                

                                (6

                                )

                                

                                

                                (21

                                )Payments on convertible debentures

                                

                                

                                -

                                

                                

                                

                                (3,405

                                )Dividends on preferred stock

                                

                                

                                -

                                

                                

                                

                                (198

                                )Net Cash Used in Financing Activities

                                

                                

                                (6

                                )

                                

                                

                                (3,924

                                )NET DECREASE IN CASH AND EQUIVALENTS

                                

                                

                                (988

                                )

                                

                                

                                (2,207

                                )CASH AND EQUIVALENTSBeginning of Period

                                

                                

                                1,686

                                

                                

                                

                                4,740End of Period

                                

                                $

                                698

                                

                                

                                $

                                2,533





See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements


7


FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


(DOLLARS IN THOUSANDS)


(UNAUDITED)





Three Months EndedSeptember 30,

                                

                                

                                November 30,2009

                                

                                

                                2008SUPPLEMENTAL DISCLOSURESInterest paid

                                

                                $

                                4

                                

                                

                                $

                                263Income taxes paid

                                

                                $

                                (21

                                )

                                

                                $

                                11Non-cash investing and financing activities:Retirement of series B preferred stock in exchange for series C

                                

                                

                                -

                                

                                

                                

                                (7,918

                                )Issuance of series C preferred stock in exchange for series B

                                

                                

                                -

                                

                                

                                

                                7,918Issuance of series C preferred stock for debt extinguishment

                                

                                

                                -

                                

                                

                                

                                21,700Term note receivable for disposition of assets

                                

                                

                                -

                                

                                

                                

                                (3,240

                                )Reduction in term loan in exchange for disposition of assets

                                

                                

                                -

                                

                                

                                

                                (10,000

                                )$

                                -

                                

                                

                                $

                                8,460





See Accompanying Notes to the Unaudited Interim Consolidated Financial Statements


8





FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED,


EXCEPT PER SHARE DATA)


(UNAUDITED)





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





General





Basis of Presentation: The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in the 2009 Annual Report on Form 10-K filed by Fortune Industries, Inc. (which, together with its subsidiaries unless the context requires otherwise, shall be referred to
            herein as the “Company”).  The consolidated balance sheet at June 30, 2009 has been derived from the audited financial statements at that date, but does not include all of the information or footnotes required by accounting principles generally accepted in the United States for complete financial statements. The Company’s consolidated balance sheet at September 30, 2009, and the consolidated statements of operations, cash flows and
            shareholders’ equity for the periods ended September 30, 2009 and November 30, 2008, have been prepared by the Company without audit.  These unaudited financial statements contain, in the opinion of management, all adjustments (consisting of normal accruals and other recurring adjustments) necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles
            generally accepted in the United States. The Company has evaluated subsequent events through the time these financial statements in the Form 10-Q report were filed with the Securities and Exchange Commission on November 13, 2009.  The operating results for the three-month period ended September 30, 2009 are not necessarily indicative of the operating results to be expected for the full fiscal year.





Nature of Business: Fortune Industries, Inc. is an Indiana corporation, originally incorporated in Delaware in 1988.  The Company provides full service human resources outsourcing services through co-employment relationships with their clients.  As a holding company, the Company has historically invested in businesses that are
            undervalued, underperforming, or in operations that are poised for significant growth.  Management’s strategic focus is to support the revenue and earnings growth of its operations by creating synergies that can be leveraged to enhance the performance of the Company’s entities and by investing capital to fund expansion.  Effective November 30, 2008, the Company sold its subsidiaries in its Wireless Infrastructure, Transportation Infrastructure,
            Ultraviolet Technologies, and Electronics Integration business segments to a related party.  Refer to Note 2 for further details.  As of this date, management will focus all its financial and human capital resources on its subsidiaries in the Business Solutions segment.  The effect of this sale will impact the comparability of the Company’s financial information in future filings.





Restricted Cash: Restricted cash includes certificates of deposits and letters of credit issued to collateralize its obligations under its health and accident benefit program, its workers’ compensation program, and certain general insurance coverage related to the Company’s Business Solutions segment.  At September 30, 2009, the
            Company had $3,508 in total restricted cash.  Of this, $3,048 is restricted for various workers’ compensation programs in accordance with terms of insurance carrier agreements, and the remainder is restricted for certain standby letters of credits in accordance with various state regulations.





Goodwill and Other Indefinite-Lived Intangible Assets: The Company accounts for goodwill and other indefinite-lived intangible assets under SFAS No. 142, "Goodwill and Other Intangible Assets."  Under SFAS No. 142, goodwill and other intangible assets with indeterminate lives are assessed for impairment at least annually and more often as
            triggering events occur.  In making this assessment, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and market place data.  There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of both goodwill and other intangible assets impairment.  Since management’s judgment is
            involved in performing goodwill and other intangible assets valuation analyses, there is risk that the carrying value of the goodwill and other intangible assets may be overstated or understated.





The Company has elected to perform the annual impairment test of recorded goodwill and other indefinite-lived intangible assets as required by SFAS 142 as of the end of fiscal first quarter.  As of November 13, 2009, the annual impairment test is in process.  The results of the last completed annual impairment test indicated that the fair value of the Business Solutions segment, as of
            August 31, 2008, exceeded the carrying, or book value, including goodwill, and therefore recorded goodwill and other indefinite-lived intangible assets were not subject to impairment.  The required annual impairment test may result in future periodic write-downs.





Self Insurance:The Company’s PSM subsidiary maintains a loss-sensitive worksite employees’ health and accident benefit program.  Under
            the insurance policy, PSM’s self-funded liability is limited to $200 per employee, with an aggregate liability limit of approximately $9,400.  The aggregate liability limits are adjusted monthly based on the number of participants.


9


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





NOTE 2 – DISPOSITION OF ASSETS AND PRO FORMA RESULTS





On December 11, 2008, the Company completed a transaction with an effective date as of November 30, 2008 to sell all of the outstanding shares of common stock of the following wholly-owned subsidiaries: James H Drew Corporation; Nor-Cote International, Inc.; Fortune Wireless, Inc.; and Commercial Solutions, Inc.  The subsidiaries were sold to related party entities owned by the Company’s two
            majority shareholders, the Chairman of the Board of Directors (“Chairman”) and the Chief Executive Officer (“CEO”).  The shares were sold in exchange for a $10,000 reduction in the outstanding balance of the Term Loan Note due to the Chairman, and a three year Promissory Note receivable in the amount of $3,240 with a maturity date of November 30, 2011.  The Promissory Note bears interest at the prime rate plus 1% and is interest-only
            for the first twelve months, with $50,000 and $100,000 monthly principal payments due beginning December 30, 2009 and December 30, 2010, respectively.  The unpaid balance at maturity is due in a lump sum payment.





As part of the terms of the sales transaction, the Chairman received 217,000 shares of Series C Preferred Stock as consideration for cancellation of the Term Note Balance of $21,700.  In addition, the Company converted 79,180 shares of Series B Preferred Stock previously issued to and held by the Chairman to 79,180 shares of Series C Preferred Stock.  The Series C Preferred Stock with a
            par value of $0.10 per share is non-redeemable, non-voting cumulative preferred and bears annual dividends of $5 per share in years one and two subsequent to the transaction date, $6 per share in year three subsequent to the transaction date and $7 per share thereafter.  The dividends will be paid on a pro-rata basis monthly.  Additionally, as part of the terms of the sales transaction, the Company issued the Chairman 2,200,000 warrants with a ten-year term and
            an exercise price of $ .40 per share.





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





At the request of the independent Directors, the Company received a fairness opinion from an independent financial advisor concluding that the consideration received by the Company in connection with the transaction is fair to the Company’s shareholders as a group from a financial point of view.





The transaction was approved by the Company’s Board of Directors on December 10, 2008.





The following is a condensed balance sheet disclosing the amount assigned to each major asset and liability caption of the sold subsidiaries at the disposition date:


10





AssetsCash and equivalents

                                

                                $

                                556Accounts receivable, net

                                

                                

                                12,927Costs and estimated earnings in excess of billings on uncompleted contracts

                                

                                

                                3,292Inventory, net

                                

                                

                                4,073Deferred tax asset

                                

                                

                                46Prepaid expenses and other current assets

                                

                                

                                790Property, plant & equipment, net

                                

                                

                                3,527Goodwill

                                

                                

                                152Other long term assets

                                

                                

                                13Total Assets

                                

                                

                                25,376LiabilitiesAccounts payable

                                

                                

                                4,248Accrued expenses

                                

                                

                                1,510Billings in excess of costs and estimated earnings on uncompleted contracts

                                

                                

                                402Line of credit

                                

                                

                                5,500Other liabilities

                                

                                

                                476Total Liabilities

                                

                                

                                12,136Net Assets

                                

                                $

                                13,240Cash considertation - related party term note offset

                                

                                $

                                10,000Term note receivable - three year

                                

                                

                                3,240Total consideration

                                

                                $

                                13,240





Pro Forma Financial Statements





The accompanying unaudited pro forma consolidated statements of operations for the three months ended November 30, 2008 is presented as if the sale had been completed as of the beginning of the periods presented.  The unaudited pro forma consolidated statements of operations is presented for illustrative purposes only and is not necessarily indicative of the results of operations for the three
            months ended November 30, 2008 that would have actually been reported had the sales transaction occurred at the dates indicated, nor is it indicative of future financial position or results of operations.  The unaudited pro forma condensed consolidated statements of operations are based upon the respective historical financial statements of the Company and the subsidiaries.  The pro forma data give effect to actual operating results as if the previous
            acquisitions occurred as of the beginning of the period presented.  The pro forma data give effect to actual operating results prior to the dispositions and adjustments for the following:





·

                    To eliminate the results of operations of the subsidiaries sold.


·

                    To adjust the dividends to the terms of the Series C Preferred shares that were issued in conjunction with the sales transaction.


11





For the Three

                                    Months EndedNovember 30,2008Revenues

                                

                                $

                                16,741Cost of Revenues

                                

                                

                                13,340Gross Profit

                                

                                

                                3,401Operating ExpensesSelling, general and administrative expenses

                                

                                

                                3,148Depreciation and amortization

                                

                                

                                169Total Operating Expenses

                                

                                

                                3,317Operating Income

                                

                                

                                84Other Income (Expense)

                                

                                

                                31Income Before Provision for Income Taxes

                                

                                

                                115Provision for income taxes

                                

                                

                                24Net Income

                                

                                

                                91Preferred stock dividends

                                

                                

                                370Net Loss available to common shareholder

                                

                                $

                                (279

                                )Basic loss per common share

                                

                                $

                                (0.02

                                )Diluted loss per common share

                                

                                $

                                (0.02

                                )





NOTE 3 - DEBT ARRANGEMENTS





Term Note





Effective May 29, 2009, the Company entered into a $250 term loan note with a bank. The term loan note matures on October 28, 2009 and bears interest at the Prime Rate plus 2.0%. Effective October 27, 2009 the note was extended until November 30, 2009.  The note is collateralized by certain assets of the Company’s majority shareholders. The loan requires the Company to maintain a minimum
            debt service coverage ratio of 1.25 to 1.0 among other covenants. The Company is in compliance with all covenants as of September 30, 2009.





NOTE 4– EQUITY INCENTIVE PLANS AND OTHER STOCK COMPENSATION





Restricted Share Units





Effective April 13, 2006, the Company’s shareholders approved the 2006 Equity Incentive Plan. Under terms of the 2006 Equity Incentive Plan, the Company may grant options, restricted share units and other stock-based awards to its management personnel as well as other individuals for up to 1.0 million shares of common stock.  During the period ended September 30, 2009, 110,500 restricted
            share units were issued under this plan.





NOTE 5- SHAREHOLDERS’ EQUITY





Common Stock





There were a total of 110,500 shares issued for the period ended September 30, 2009.  There was no share retirements during the period ended September 30, 2009.


12


Preferred Stock





Effective November 30, 2008, the Company exchanged the 79,180 shares non-voting Series B Preferred Stock with $0.10 par value and a dividend of $10.00 per share for non-voting Series C Preferred Stock with $0.10 par value and annual dividends 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. The dividends will be paid
            on a pro-rata basis monthly.





Effective November 30, 2008, the Company issued 217,000 shares of $0.10 par value non-voting Series C Preferred Stock to the Company’s majority shareholder as consideration for cancellation of certain debt obligations owed by the Company under a line of credit promissory note dated June 5, 2008.  The shares are not convertible to common stock and have various restrictions pertaining to their
            transferability as they are not registered under the Securities Act of 1933.





The shares issued are single class and pay on a monthly basis an annual cash dividend of $5 per share in years ending November 30, 2009 and 2010, $6 per share in the year ending November 30, 2011 and $7 per share thereafter. On September 25, 2009, the Company reached an agreement with the Chairman to amend the dividend rates on the Series C Preferred Stock with an effective date of July 1,
            2009.  From the effective date forward the Series C Preferred Stock will bear annual dividend of $2 per share in the years ending June 30, 2010 and 2011, $5 per share in the year ending June 30, 2012, $6 per share in the year ending June 30, 2013 and $7 per share thereafter.  All other items of the Series C Preferred Shares remained unchanged.  Dividends of $148 and $198 were accrued for the three months ended September 30, 2009 and November
            30, 2008, respectively.





NOTE 6 - RELATED PARTY TRANSACTIONS





On September 25, 2009, the Board of Directors approved the Chairman’s request to utilize approximately $8.15 million of the Company’s net operating loss carryforward for individual tax purposes related to the Chairman’s personal loss on indebtedness associated with the sales transaction as described in Note 2.





NOTE 7 - SEGMENT INFORMATION





Effective November 30, 2008, the Company sold or discontinued operations in its Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies, and Electronics Integration segments.  As a result, the Company currently has one reportable business segment, Business Solutions.  Prior to December 1, 2008, the Company was organized into five reportable business
            segments;  Business Solutions, Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies, and Electronics Integration.  The Company’s reportable business segments are organized in a manner that reflects how management reviews and evaluates those business activities.  Certain businesses have been grouped together for segment reporting based upon similar products or product lines, marketing, selling and distribution
            characteristics.  The segments are organized as follows:





Segment & Entity

                                    

                                    Business ActivityBusiness SolutionsProfessional Staff Management, Inc. and subsidiaries; CSM, Inc. and subsidiaries and related entities; Employer Solutions Group, Inc. and related entities; Precision Employee Management, LLC

                                    

                                    Provider of outsourced human resource servicesWireless InfrastructureFortune Wireless, Inc.; Magtech Services, Inc.; Cornerstone Wireless Construction Services, Inc.; James Westbrook & Associates, LLC

                                    

                                    Provider turnkey development services for the deployment of wireless networks





Transportation InfrastructureJames H. Drew Corp. and subsidiaries

                                

                                Installer of fiber optic, smart highway systems, traffic signals, street signs, high mast and ornamental lighting, guardrail, wireless communications, and fabrications of structural steelUltraviolet TechnologiesNor-Cote International, Inc. and subsidiaries

                                

                                Manufacturer of UV curable screen printing ink productsElectronics IntegrationKingston Sales Corporation; Commercial Solutions, Inc.; Telecom Technology, Corp.

                                

                                Distributor and installer of home and commercial electronics


13





The following tables report data by segment and exclude revenues from transactions with other operating segments:





Business

                                

                                

                                Holding

                                

                                

                                SegmentSolutions (1)

                                

                                

                                Company

                                

                                

                                TotalsThree months ended September 30, 2009Revenue

                                

                                $

                                14,829

                                

                                

                                $

                                -

                                

                                

                                $

                                14,829Cost of revenue

                                

                                

                                11,428

                                

                                

                                

                                -

                                

                                

                                

                                11,428Gross profit

                                

                                

                                3,401

                                

                                

                                

                                -

                                

                                

                                

                                3,401Operating expensesSelling, general and administrative

                                

                                

                                2,521

                                

                                

                                

                                155

                                

                                

                                

                                2,676Depreciation and amortization

                                

                                

                                159

                                

                                

                                

                                42

                                

                                

                                

                                201Total operating expenses

                                

                                

                                2,680

                                

                                

                                

                                197

                                

                                

                                

                                2,877Segment operating income (loss)

                                

                                $

                                721

                                

                                

                                $

                                (197

                                )

                                

                                $

                                524





(1)

                    Gross billings of $130,153 less worksite employee payroll costs of $115,324.





Business

                            

                            

                            Wireless

                            

                            

                            Transportation

                            

                            

                            Ultraviolet

                            

                            

                            Electronics

                            

                            

                            Holding

                            

                            

                            SegmentSolutions (1)

                            

                            

                            Infrastructure

                            

                            

                            Infrastructure

                            

                            

                            Technologies

                            

                            

                            Integration

                            

                            

                            Company

                            

                            

                            TotalsThree Months Ended November 30, 2008Revenue

                            

                            $

                            16,741

                            

                            

                            $

                            3,312

                            

                            

                            $

                            12,090

                            

                            

                            $

                            2,771

                            

                            

                            $

                            1,251

                            

                            

                            $

                            -

                            

                            

                            $

                            36,165Cost of revenue

                            

                            

                            13,340

                            

                            

                            

                            2,458

                            

                            

                            

                            10,747

                            

                            

                            

                            1,596

                            

                            

                            

                            912

                            

                            

                            

                            -

                            

                            

                            

                            29,053Gross profit

                            

                            

                            3,401

                            

                            

                            

                            854

                            

                            

                            

                            1,343

                            

                            

                            

                            1,175

                            

                            

                            

                            339

                            

                            

                            

                            -

                            

                            

                            

                            7,112Operating expensesSelling, general and administrative

                            

                            

                            3,160

                            

                            

                            

                            650

                            

                            

                            

                            781

                            

                            

                            

                            1,320

                            

                            

                            

                            238

                            

                            

                            

                            220

                            

                            

                            

                            6,369Depreciation and amortization

                            

                            

                            169

                            

                            

                            

                            11

                            

                            

                            

                            5

                            

                            

                            

                            59

                            

                            

                            

                            1

                            

                            

                            

                            131

                            

                            

                            

                            376Total operating expenses

                            

                            

                            3,329

                            

                            

                            

                            661

                            

                            

                            

                            786

                            

                            

                            

                            1,379

                            

                            

                            

                            239

                            

                            

                            

                            351

                            

                            

                            

                            6,745Segment operating income (loss)

                            

                            $

                            72

                            

                            

                            $

                            193

                            

                            

                            $

                            557

                            

                            

                            $

                            (204

                            )

                            

                            $

                            100

                            

                            

                            $

                            (351

                            )

                            

                            $

                            367





(1) Gross billings of $149,548 less worksite employee payroll costs of $132,807.





Business

                                

                                

                                Electronics

                                

                                

                                HoldingSolutions

                                

                                

                                Integration

                                

                                

                                Company

                                

                                

                                TotalsAs of September 30, 2009 (Unaudited)Current AssetsCash and equivalents

                                

                                $

                                631

                                

                                

                                $

                                -

                                

                                

                                $

                                67

                                

                                

                                $

                                698Restricted cash

                                

                                

                                3,508

                                

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                3,508Accounts receivable, net

                                

                                

                                2,354

                                

                                

                                

                                -

                                

                                

                                

                                63

                                

                                

                                

                                2,417Deferred tax asset

                                

                                

                                1,750

                                

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                1,750Prepaid expenses and other current assets

                                

                                

                                1,751

                                

                                

                                

                                -

                                

                                

                                

                                (21

                                )

                                

                                

                                1,730Inventory, net

                                

                                

                                10

                                

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                10Assets of discontinued operations, net

                                

                                

                                -

                                

                                

                                

                                61

                                

                                

                                

                                -

                                

                                

                                

                                61Total Current Assets

                                

                                

                                10,004

                                

                                

                                

                                61

                                

                                

                                

                                109

                                

                                

                                

                                10,174Other AssetsProperty, plant & equipment, net

                                

                                

                                441

                                

                                

                                

                                -

                                

                                

                                

                                233

                                

                                

                                

                                674Term note receivable-related party

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                2,533

                                

                                

                                

                                2,533Deferred tax asset

                                

                                

                                1,000

                                

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                1,000Goodwill

                                

                                

                                12,339

                                

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                12,339Other intangible assets, net

                                

                                

                                3,161

                                

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                3,161Other long term assets

                                

                                

                                22

                                

                                

                                

                                -

                                

                                

                                

                                21

                                

                                

                                

                                43Total Other Assets

                                

                                

                                16,963

                                

                                

                                

                                -

                                

                                

                                

                                2,787

                                

                                

                                

                                19,750Total Assets

                                

                                $

                                26,967

                                

                                

                                $

                                61

                                

                                

                                $

                                2,896

                                

                                

                                $

                                29,924


14





Business

                                

                                

                                Electronics

                                

                                

                                HoldingSolutions

                                

                                

                                Integration

                                

                                

                                Company

                                

                                

                                TotalsAs of June 30, 2009 (Audited)Current AssetsCash and equivalents

                                

                                $

                                1,622

                                

                                

                                $

                                -

                                

                                

                                $

                                64

                                

                                

                                $

                                1,686Restricted cash

                                

                                

                                3,142

                                

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                3,142Accounts receivable, net

                                

                                

                                2,619

                                

                                

                                

                                -

                                

                                

                                

                                3

                                

                                

                                

                                2,622Inventory, net

                                

                                

                                13

                                

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                13Deferred tax asset

                                

                                

                                1,750

                                

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                1,750Prepaid expenses and other current assets

                                

                                

                                1,493

                                

                                

                                

                                -

                                

                                

                                

                                (10

                                )

                                

                                

                                1,483Assets of discontinued operations, net

                                

                                

                                -

                                

                                

                                

                                112

                                

                                

                                

                                -

                                

                                

                                

                                112Total Current Assets

                                

                                

                                10,639

                                

                                

                                

                                112

                                

                                

                                

                                57

                                

                                

                                

                                10,808Other AssetsProperty, plant & equipment, net

                                

                                

                                489

                                

                                

                                

                                -

                                

                                

                                

                                275

                                

                                

                                

                                764Deferred tax asset

                                

                                

                                750

                                

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                750Goodwill

                                

                                

                                12,339

                                

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                12,339Other intangible assets, net

                                

                                

                                3,263

                                

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                3,263Term note receivable-related party

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                2,546

                                

                                

                                

                                2,546Other long term assets

                                

                                

                                22

                                

                                

                                

                                -

                                

                                

                                

                                21

                                

                                

                                

                                43Total Other Assets

                                

                                

                                16,863

                                

                                

                                

                                -

                                

                                

                                

                                2,842

                                

                                

                                

                                19,705Total Assets

                                

                                $

                                27,502

                                

                                

                                $

                                112

                                

                                

                                $

                                2,899

                                

                                

                                $

                                30,513





NOTE 8 – GOING CONCERN





The accompanying consolidated financials statements have been prepared assuming that the Company will continue as a going concern.  As described in Note 2, by selling the subsidiaries in four segments that overall have been underperforming and require a higher level of working capital investment, management believes they will be able to start generating positive cash flows
            immediately.  The conversion of the outstanding debt to preferred stock by the Company’s majority shareholder will also result in a significant decrease in the debt service requirements in 2010.  With the Company’s human capital and financial resources all focusing on the profitability of a segment that historically has generated operating income and strong cash flows from operations, management believes the Company will have adequate cash to fund
            anticipated needs through June 30, 2010.  The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.





Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.





Statements contained in this document, as well as some statements by the Company in periodic press releases and oral statements of Company officials during presentations about the Company constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”).  Forward-looking statements include
            statements that are predictive in nature, depend on or refer to future events or conditions, which include words such as “expect,” “estimate,” “anticipate,” “predict,” “believe” and similar expressions.  These statements are based on the current intent, belief or expectation of the Company with respect to, among other things, trends affecting the Company’s financial condition or results of
            operations.  These statements are not guaranties of future performance and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.





Actual events and results involve risks and uncertainties and may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors.  Factors that might cause or contribute to such differences, include, but are not limited to, the risks and uncertainties that are discussed under the heading “Risk Factors” disclosed within
            Form 10-K for the ten months  ended June 30, 2009.  Readers should carefully review the risk factors referred to above and the other documents filed by the Company with the Securities and Exchange Commission.





OVERVIEW





As a holding company of various product and service entities, we have historically invested in businesses that we believe are undervalued or underperforming, and /or in operations that are poised for significant growth.  Management’s strategic focus is to support the growth of its operations by increasing revenues and revenue streams, managing costs and creating earnings growth.





Our operations are largely decentralized from the corporate office.  Autonomy is given to subsidiary entities, and there are few integrated business functions (i.e. sales, marketing, purchasing and human resources).  Day-to-day operating decisions are made by subsidiary management teams.  Our Corporate management team assists in operational decisions when deemed necessary,
            selects subsidiary management teams and handles capital allocation among our operations.


15


We were incorporated in the state of Delaware in 1988, restructured in 2000 and redomesticated to the state of Indiana in May 2005.  Prior to 2001, we conducted business mainly in the entertainment industry.





Until November 30, 2008, we classified our businesses under five operating segments:  Business Solutions; Wireless Infrastructure; Transportation Infrastructure; Ultraviolet Technologies; and Electronics Integration.   Effective November 30, 2008, we approved the sale of all of our remaining operating subsidiaries within four of our five segments (Wireless Infrastructure, Transportation
            Infrastructure, Ultraviolet Infrastructure, and Electronics Integration).  Consequently, as of the effective date of the transaction, our Business Solutions segment is the Company’s remaining operating segment.  The sales transaction, combined with other significant events disclosed in Note 2 of our financial statements in Item 1, will change the focus of our Company in fiscal 2009 and thereafter.  This operational change in our Company will
            impact the comparability of our financial information compared to historical data presented in past filings.





Recent Developments





On April 13, 2009, our Board of Directors approved a change in the Company’s fiscal year end from August 31 stto June 30 thcommencing with our fiscal year 2009.  This will result in our fiscal year 2009 being shortened from 12 months to 10
            months and ending on June 30, 2009.





Effective November 30, 2008, the Company completed a transaction to sell all of the outstanding shares of common stock of the following wholly-owned subsidiaries: James H Drew Corporation, Nor-Cote International, Inc., Fortune Wireless, Inc. and Commercial Solutions, Inc.  The subsidiaries were sold to related parties entities owned by the Company’s majority shareholders in exchange for a
            $10,000,000 reduction in the outstanding balance of the term loan note due to the majority shareholder and a three-year term note in the amount of $3,240,000.  The transaction also included the conversion of the remaining term loan note balance to Preferred Stock and the issuance of additional warrants.  For further discussion of this transaction, see Note 2 – Disposition of Assets in the Notes to the Consolidated Financial Statements.





Effective November 30, 2008, the Company will no longer be operating in the Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies and Electronics Integration Segments.





Effective December 1, 2008, the Company will devote substantially all its resources on the growth and profitability of the Business Solutions segment.





Business Solutions Segment





The Business Solutions segment is comprised of Professional Employer Organizations (PEOs) which provide full-service human resources outsourcing services through co-employment relationships with their clients.  Companies operating in the Business Solutions Segment include PSM, CSM, PEM, and ESG.  Our PEOs provide services typically managed by a company’s internal human resources
            and accounting departments, including payroll and tax processing and management, worker’s compensation and risk management, benefits administration, unemployment administration, human resource compliance services, 401k and retirement plan administration and employee assessments.  Clients represent a wide variety of industries from healthcare, professional services, software development, manufacturing logistics, telemarketing and construction. Combined, these
            organizations provide co-employment services to approximately 14,000 employees in 48 states.





Wireless Infrastructure Segment





Through November 30, 2008, we invested in wireless infrastructure businesses, having completed six acquisitions primarily related to infrastructure products and service offerings related to the development, marketing, management, maintenance and upgrading of wireless telecommunications sites.   Subsidiaries operating in the Company’s Wireless Infrastructure segment included Fortune
            Wireless, Magtech Services, Inc., Cornerstone Wireless Construction Services, Inc. and James Westbrook & Associates, LLC.





Effective November 30, 2008, the Company sold its subsidiaries operating in the Wireless Infrastructure segment.





Transportation Infrastructure Segment





Through November 30, 2008, the Company owned subsidiaries in its Transportation Infrastructure segment that assist customers with the development, maintenance and upgrading of transportation infrastructure and commercial construction projects.  Transportation infrastructure products and services are performed by JH Drew.  JH Drew was acquired in April 2004 and has been operating for over
            fifty years servicing contractors and state departments of transportation throughout the Midwestern United States.  JH Drew is a leading specialty contractor in the field of transportation infrastructure, including guardrail, electrical components, and the fabrication and installation of structural steel for commercial buildings.


16





Effective November 30, 2008, the Company sold its subsidiaries operating in the Transportation Infrastructure segment.





Ultraviolet Technologies Segment





Through November 30, 2008, the Company owned subsidiaries in its Ultraviolet (UV) Technologies segment that manufactured UV curable screen printing inks.  UV Technologies products are manufactured by Nor-Cote, which we acquired in July 2003. These ink products are printed on many types of plastic, metals and other substrates that are compatible with the UV curing process.  Typical
            applications are plastic sheets, point-of-purchase (POP) signage, banners, decals, cell phones, bottles and containers, CD and DVD, rotary-screen printed labels, and membrane switch overlays for conductive ink.  Nor-Cote has operating facilities in the United States, United Kingdom, China, Singapore and Mexico, with worldwide distributors located in South Africa, Australia, Canada, China, Colombia, Hong Kong, India, Indonesia, Italy, Japan, Korea, Mexico, New Zealand,
            Poland, Spain, Taiwan, Thailand and the United States.





Effective November 30, 2008, the Company sold its subsidiaries operating in the Ultraviolet Technologies segment.





Electronics Integration Segment





Through November 30, 2008, the Company owned subsidiaries in its Electronics Integration segment that sell and install a variety of electronic products and equipment, including video, sound and security products.  Subsidiaries included Kingston, Commercial Solutions and Telecom Technology Corp. (TTC) d/b/a Audio-Video Revolution, Inc. (AVR).





Effective November 30, 2008, the Company sold its subsidiary Commercial Solutions and discontinued operations of its subsidiaries Kingston and TTC d/b/a AVR in its Electronics Integration segment.





CRITICAL ACCOUNTING POLICIES





The Company’s accounting policies, which are in compliance with accounting principles generally accepted in the United States, require application of methodologies, estimates and judgments that have a significant impact on the results reported in the Company’s financial statements.  Those policies that, in the belief of management, are critical and require the use of complex judgment
            in their application, are disclosed on the Company’s Form 10-K for the year ended June 30, 2009.  Since June 30, 2009, there have been no material changes to the Company’s critical accounting policies.





New Accounting Pronouncements





In September 2006, the Financial Accounting Standards Board (“FASB”) ASC 820-10 (formerly SFAS 157), “Fair Value Measurements” was issued.  ASC 820-10 establishes a framework for measuring fair value by providing a standard definition of fair value as it applies to assets and liabilities.  ASC 820-10, which does not require any new fair value measurements,
            clarifies the application of other accounting pronouncements that require or permit fair value measurements.  The standard was effective for fiscal years beginning after November 15, 2007.  However, the FASB delayed the effective date of ASC 820-10 for all non-financial assets and non-financials liabilities until fiscal years beginning after November 15, 2008.  Accordingly, we adopted ASC 820-10 for our financial assets and liabilities on September 1,
            2008 and adopted ASC 820-10 for our non-financial assets and liabilities on July 1, 2009.  The adoption did not have a material impact on our consolidated financial statements.





In December 2007, the FASB issued ASC No. 805-10 (formerly SFAS No. 141R) “Business Combinations”.  ASC No.805-10 establishes principles and requirements for how the acquirer of as business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree.  The statements also
            provides guidance for recognizing and measuring the goodwill acquired in the business combination and specifies what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC No. 805-10 is effective for financial statements issued for fiscal years beginning after December 15, 2008.  We expect ASC No. 805-10 will have an impact on our consolidated financial statements when
            effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the effective date.





In June 2008, the FASB issued ASC 260-10 (formerly FASB Staff Position No. EITF 03-6-1), “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. ASC 260-10 concludes that unvested restricted share awards that pay nonforfeitable cash dividends are participating securities and are
            subject to the two-class method of computing earnings per share. Our effective date for ASC 260-10 was July 1, 2009. The adoption of ASC 260-10 did not have a material impact on our consolidated financial statements.





In April 2009, the FASB issued ASC No. 825-10-65-1 (formerly FAS 107-1 and APB 28-1), “Interim Disclosures about Fair Value of Financial Instruments”.This ASC essentially expands the disclosure about fair value of financial instruments that were previously required only
            annually to also be required for interim period reporting. In addition, the ASC requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. These additional disclosures will be required beginning with the quarter ending September 30, 2009. The adoption of ASC No. 825-10-65-1 did not have a material impact on our consolidated financial statements.


17


In May 2009, FASB ASC 855-10 (formerly SFAS No. 165), “Subsequent Events”was issued. ASC 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date (“subsequent events”), but before the financial statements are issued or available to be issued and requires
            disclosure of the date through which the entity has evaluated subsequent events and the basis for that date. ASC 855-10 is effective for interim and annual periods ending after June 15, 2009; the Company adopted ASC 855-10 for the quarter ended June 30, 2009. The Company evaluated subsequent events through the time we filed our Form 10-Q with the Securities and Exchange Commission on November 12, 2009. The adoption did not have a material impact on our consolidated
            financial statements.





In June 2009, FASB ASC 105-10 (formerly SFAS 168), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”was issued. ASC 105-10 is the single official source of authoritative U.S. GAAP, superseding all other accounting literature except that issued by the Securities and Exchange
            Commission. As of July 2009, only one level of authoritative U.S. GAAP exists. All other literature will be considered non-authoritative. The Codification does not change U.S. GAAP; instead, it introduces a new referencing system that is designed to be an easily accessible, user-friendly online research system. ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted ASC 105-10 for the
            quarter ended September 30, 2009. The adoption did not have a material impact on our consolidated financial statements.





Other new pronouncements issued but not effective until after September 30, 2009, are not expected to have a significant effect on the company’s consolidated financial statements.





RESULTS OF OPERATIONS:  COMPARISON OF THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND NOVEMBER 30, 2008





Executive Overview of Financial Results





Results of operations for the three month periods ended September 30, 2009 and November 30, 2008 are as follows:





Revenue for the

                                

                                

                                Operating income (loss) for theThree Months Ended

                                

                                

                                Three Months EndedSeptember 30,

                                

                                

                                November 30,

                                

                                

                                September 30,

                                

                                

                                November 30,2009

                                

                                

                                2008

                                

                                

                                2009

                                

                                

                                2008(Dollars in thousands)Business Solutions

                                

                                $

                                14,829

                                

                                

                                $

                                16,741

                                

                                

                                $

                                721

                                

                                

                                $

                                72Wireless Infrastructure

                                

                                

                                -

                                

                                

                                

                                3,312

                                

                                

                                

                                -

                                

                                

                                

                                193Transportation Infrastructure

                                

                                

                                -

                                

                                

                                

                                12,090

                                

                                

                                

                                -

                                

                                

                                

                                557Ultraviolet Technologies

                                

                                

                                -

                                

                                

                                

                                2,771

                                

                                

                                

                                -

                                

                                

                                

                                (204

                                )Electronics Integration

                                

                                

                                -

                                

                                

                                

                                1,251

                                

                                

                                

                                -

                                

                                

                                

                                100Holding Company

                                

                                

                                -

                                

                                

                                

                                -

                                

                                

                                

                                (197

                                )

                                

                                

                                (351

                                )Segment Totals

                                

                                $

                                14,829

                                

                                

                                $

                                36,165

                                

                                

                                $

                                524

                                

                                

                                $

                                367Net Income Available to Common Shareholders

                                

                                

                                

                                

                                

                                

                                $

                                660

                                

                                

                                $

                                44





Net income available to common stock shareholders was $0.7 million or $0.05 per diluted share on revenue of $14.8 million for the three month period ended September 30, 2009 compared with net income available to common stock shareholders of $0.04 million or $0.0 per diluted share on revenue of $36.2 million for the three month period ended November 30, 2008.  This represents a 59% decrease in
            revenue and a 1400% percent increase in net income.





The following factors primarily contributed to the decrease in revenue for the three-month period ended September 30, 2009:





·

                    The Business Solutions decreases are due to a decrease in the total number of worksite employees as a result of clients reducing their payrolls, bonus programs and overall staffing levels due to the overall downturn in economic conditions.


·

                    The Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies, and the Electronics Integration decreases are due to the sale and or discontinuation of operations for the subsidiaries in these divisions.





The following factors primarily contributed to the increase in segment operating income for the three-month period ended September 30, 2009:





·

                    Increases in the Business Solutions are due to an overall reduction of internal staffing and continued efficiency improvements and expense reductions in all aspects of the companies operations.


·

                    The Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies, and the Electronics Integration increases are due to the sale and or discontinuation of operations for the subsidiaries in these divisions.


18


Results by segment are described in further detail as follows:





Business Solutions





Business Solutions segment operating results for three month period ended September 30, 2009 and November 30, 2008 are as follows:





Three Month Period EndedSeptember 30, 2009

                                                                

                                                                

                                                                November 30, 2008(Dollars in thousands)Revenues

                                                                

                                                                $

                                                                14,829

                                                                

                                                                

                                                                

                                                                100

                                                                %

                                                                

                                                                $

                                                                16,741

                                                                

                                                                

                                                                

                                                                100

                                                                %Cost of revenues

                                                                

                                                                

                                                                11,428

                                                                

                                                                

                                                                

                                                                77.1

                                                                %

                                                                

                                                                

                                                                13,340

                                                                

                                                                

                                                                

                                                                79.7

                                                                %Gross profit

                                                                

                                                                

                                                                3,401

                                                                

                                                                

                                                                

                                                                22.9

                                                                %

                                                                

                                                                

                                                                3,401

                                                                

                                                                

                                                                

                                                                20.3

                                                                %Operating expensesSelling, general and administrative

                                                                

                                                                

                                                                2,521

                                                                

                                                                

                                                                

                                                                17.0

                                                                %

                                                                

                                                                

                                                                3,160

                                                                

                                                                

                                                                

                                                                18.9

                                                                %Depreciation and amortization

                                                                

                                                                

                                                                159

                                                                

                                                                

                                                                

                                                                1.1

                                                                %

                                                                

                                                                

                                                                169

                                                                

                                                                

                                                                

                                                                1.0

                                                                %Total operating expenses

                                                                

                                                                

                                                                2,680

                                                                

                                                                

                                                                

                                                                18.1

                                                                %

                                                                

                                                                

                                                                3,329

                                                                

                                                                

                                                                

                                                                19.9

                                                                %Segment operating income

                                                                

                                                                $

                                                                721

                                                                

                                                                

                                                                

                                                                4.9

                                                                %

                                                                

                                                                $

                                                                72

                                                                

                                                                

                                                                

                                                                0.4

                                                                %





Revenue





Revenue for the three-month period ended September 30, 2009 was $14.8 million, compared to $16.7 million for the three-month period ended November 30, 2008, a decrease of $1.9 million or 11%.   Revenue decreased primarily due to attrition of customers and the impact of the economic slowdown on our customers.





Gross Profit





Gross profit for the three-month period ended September 30, 2009 was $3.4 million, representing 23% of revenue, compared to $3.4 million, representing 20% of revenue for the three month period ended November 30, 2008.  Gross profit as a dollar amount remained unchanged.  Gross profit as a percentage of revenue increased due to implementing a more efficient tracking system for the benefit
            plans.





Operating Income





Operating income for the three-month period, ended September 30, 2009 was $0.7 million, compared to $0.07 million for the three-month period ended November 30, 2008, an increase of $0.6 million or 901%.  Operating income increased due to a reduction in amortization of prior year impairment charges, reductions in internal staffing levels and overall efficiency improvements and expense reductions in
            all areas of the companies operations.





Holding Company





Operating Expense





The Holding Company does not have any income producing operating assets.  As such, the operating loss was equal to operating expenses.  Operating expenses consist primarily of legal, accounting and consulting fees.  Operating expenses for the three-month period ended September 30, 2009 were $0.2 million, compared to $0.4 million for the three-month period ended November 30,
            2008, a decrease of $0.2 million or 50%.  Operating expense decreased as a result of selling our subsidiaries within our Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies and Electronics Integration divisions.





Interest Expense





Interest expense was $0.04 million for the three-month period ended September 30, 2009, compared to $0.1 million for the three-month period ended November 30, 2008, a decrease of $0.1 million or 97%.  The decrease was primarily due to eliminating the consolidation of the VIE as a result of terminating the lease agreement with the VIE as of November 30, 2008 and due to the sale of our subsidiaries
            for satisfaction of our related party debt.


19





Income Taxes





There was ($0.27) and $0.03 million of income tax expense (benefit) for the three months ended September 30, 2009 and November 30, 2008, 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 $7.0 million valuation allowance at September 30, 2009 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized.  The change in the valuation allowance for the current period is approximately ($0.6) million.





LIQUIDITY AND CAPITAL RESOURCES





Our principal sources of liquidity include cash and equivalents and proceeds from debt borrowings.  We had cash and equivalents of $0.7 million at September 30, 2009 and $1.7 million at June 30, 2009.





We had working capital of ($0.3) million at September 30, 2009 compared with ($1.0) million at June 30, 2009.  The increase in working capital was primarily due to the disposition of four of our five operating segments at November 30, 2008.  Current assets are primarily comprised of cash and equivalents, net accounts receivable, and prepaid expenses. Current liabilities are primarily
            comprised of accounts payable and accrued expenses.





The Company is required to collateralize its obligations under its workers’ compensation and health benefit plans and certain general insurance coverage. The Company uses its cash and cash equivalents to collateralize these obligations. Restricted cash was approximately $3.5 and $3.1 at September 30, 2009 and June 30, 2009, respectively.





Total debt at September 30, 2009 and June 30, 2009 was $0.3 million.





Cash Flows





Cash flows provided by (used in) operations for the three month period ended September 30, 2009 and November 30, 2008 were ($1.0) million and $1.8 million, respectively.  This decrease in operating cash flows was due primarily to the increase in health and workers compensation reserves and other accrued expenses.





Net cash flow used in investing activities was $0.01 million for the three month period ended September 30, 2009 compared to $0.1 million for the three month period ended November 30, 2008.  The decrease was primarily due to the fact that no major fixed assets were acquired during the three month period ending September 30, 2009.





Net cash flow used in financing activities was $0.006 million for the three month period ended September 30, 2009 compared to $3.9 million for the three month period ended November 30, 2008.  The increase was primarily the result of making our final balloon payment for the Laurus convertible debt in November 2008.





CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS





There have been no material changes to the Company’s contractual obligations from those disclosed in the Form 10-K under “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations.”





OFF BALANCE SHEET ARRANGEMENTS





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





Transactions with Related Parties





We have entered into various acquisition agreements over the past three years which contain option agreements or rights between the sellers of the acquired entities and our two majority shareholders, the Chairman and the CEO, related to the Company’s stock provided as consideration under the acquisitions.  As more fully described in Note 6 the option agreements provide for put/call options
            on the Company’s common stock held by the sellers of the acquired companies.





Guarantees





A significant portion of our letters of credit are personally guaranteed by the Company’s Chairman and CEO.  Future changes to these guarantees would affect financing capacity of the Company.


20


Restricted Cash





Certain states and vendors require us to post letters of credit to ensure payment of taxes or payments to our vendors under health insurance and workers’ compensation contracts and to guarantee performance under our contracts.  Such letters of credit are generally issued by a bank or similar financial institution.  The letter of credit commits the issuer to pay specified amounts to
            the holder of the letter of credit if the holder demonstrates that we have failed to perform specified actions.  If this situation were to occur, we would be required to reimburse the issuer of the letter of credit.  Depending on the circumstances of such a reimbursement, we may also have to record a charge to earnings for the reimbursement.  We do not believe that it is likely that any claims will be made under a letter of credit in the foreseeable
            future.  As of September 30, 2009, we had approximately $3.5 million in restricted cash primarily to secure obligations under our PEO contracts in the Business Solutions segment.





Item 3.  Quantitative and Qualitative Disclosures about Market Risk





There have been no material changes from the information previously reported under “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the Form 10-K.





Item 4.  Controls and Procedures





The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports the Company file pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s
            management, including its CEO, CFO, and Chief Operating Officer (“COO”) as appropriate, to allow timely decisions regarding required disclosure.  The Company’s management, including the CEO, CFO, and COO, recognizes that, because the design of any system of controls is based in part upon certain assumptions about the likelihood of future events and also is subject to other inherent limitations, disclosure controls and procedures, no matter how well
            designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired objectives.





Under the supervision and with the participation of the Company’s management, including the Company’s CEO, CFO and COO the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2009.  Based on this evaluation, the CEO, CFO, and COO have concluded that, for the reasons more fully set forth below, the Company’s
            disclosure controls and procedures were not effective on September 30, 2009 in providing reasonable assurance that information required to be disclosed in the reports the Company file pursuant to the Securities Exchange Act of 1934 was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.





More specifically, the Company’s management has concluded that: (i) additional accounting personnel were needed at certain subsidiaries at September 30, 2009 to ensure that certain disclosure controls and procedures were operating effectively; (ii) greater segregation of duties was needed in the accounting functions; and (iii) certain procedures should be documented to ensure that personnel turnover
            does not result in a failure of those procedures.  The Company will continue to evaluate the need for additional staff at the parent and subsidiary levels, but given the size and location of the Company’s subsidiaries the Company believes it will continue to face challenges in attracting and retaining qualified personnel.  Additionally, the Company is also in the process of evaluating ways in which the impact of personnel turnover on the implementation of
            disclosure controls and procedures can be reduced.  Management continues to evaluate the effectiveness of this segregation and the need for additional enhancements, including, but not limited to, the addition of accounting personnel.





PART II—OTHER INFORMATION.





Item 1. Legal Proceedings.





The Company is not involved in any legal proceedings or claims that management believes will have a material adverse effect on the Company's business or financial condition.





Item 1A. Risk Factors





There have been no material changes with regard to the risk factors previously disclosed in our most recent Annual Report on Form 10-K.





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





None





Item 3. Defaults upon Senior Securities.





None


21





Item 4. Submission of Matters to a Vote of Security Holders.





None





Item 5. Other Information.





None





Item 6. Exhibits





The following exhibits are included herein:





31.1

                    Rule 15d-14(a) Certification of CEO


31.2

                    Rule 15d-14(a) Certification of CFO


32.1

                    Section 1350 Certification of CEO


32.2

                    Section 1350 Certification of CFO





SIGNATURES





In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Fortune Industries, Inc.(Registrant)Date:  November 13, 2009

                            By: /s/ John F. FisbeckJohn F. Fisbeck,Chief Executive OfficerDate:  November 13, 2009

                            By: /s/ Randy E. ButlerRandy E. Butler,Chief Financial Officer


22