**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 May 31, 2008**

 

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

**SECURITIES EXCHANGE ACT OF 1934**

 

**Commission file number: 0-19049**

 

**FORTUNE INDUSTRIES, INC.**

(Exact name of Registrant as specified in its charter)

 

| **INDIANA**                     | **20-2803889**         |
|---------------------------------|------------------------|
| (State or other jurisdiction of | (IRS Employer          |
| incorporation or organization)  | Identification Number) |

 

| **6402 Corporate Drive**                 | **46278**  |
|------------------------------------------|------------|
| **Indianapolis, IN**                     | (Zip Code) |
| (Address of principal executive offices) |       |

 

**(317) 532-1374**

(Registrant’s telephone number, including area code)

 

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

 

YesxNoo

 

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).  

YesoNox

 

As of July 14, 2008, 11,391,823 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 May 31, 2008**

 

**INDEX**

 

 

|                                                            | Page                                                                                                     |
|-----------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| PART  I.    Financial Information |                                                                                                     |
|                                                            | ITEM 1.  Financial Statements                                                                  |   |
|                                                            |                                                                                                     | Consolidated Balance Sheets as of May 31, 2008 (unaudited) and August 31, 2007 (audited, restated) | 3 |
|                                                            |                                                                                                     | Consolidated Statements of Operations for the three and nine month periods ended May 31, 2008 and 2007 (unaudited) | 5 |
|                                                            |                                                                                                     | Consolidated Statement of Changes in Shareholders’ Equity for the nine month period ended May 31, 2008 (unaudited) | 6 |
|                                                            |                                                                                                     | Consolidated Statements of Cash Flows for the nine month periods ended May 31, 2008 and 2007 (unaudited, restated) | 7 |
|                                                            |                                                                                                     | Notes to the Unaudited Interim Consolidated Financial Statements (restated) | 9 |
|                                                            | ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations | 33 |
|                                                            | ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk                            | 44 |
|                                                            | ITEM 4.  Controls and Procedures                                                               | 44 |
| PART II.    Other Information               |                                                                                                     |
|                                                            | ITEM 1.    Legal Proceedings                                                         | 45 |
|                                                            | ITEM 1A. Risk Factors                                                                                    | 45 |
|                                                            | ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds               | 45 |
|                                                            | ITEM 3.    Defaults Upon Senior Securities                                           | 45 |
|                                                            | ITEM 4.    Submission of Matters to a Vote of Security Holders                       | 45 |
|                                                            | ITEM 5.    Other Information                                                         | 45 |
|                                                            | ITEM 6.    Exhibits                                                                  | 45 |
| Signatures                                                      | 45                                                                                                       |

 

 

 

2

----

**PART 1 - FINANCIAL INFORMATION**

**Item 1. Financial Statements.**

 

**FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(DOLLARS IN THOUSANDS)**

 

 

|                                                                            |                                               |                 |   |                                                                                                    | **May 31,**                                                                            |                                                                                                                                        | **August 31,**                                                                                                       |
|---------------------------------------------------------------------------------|----------------------------------------------------|----------------------|--------|---------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|
|                                                                            |                                               |                 |   |                                                                                                    | **2008**                                                                               |                                                                                                                                        | **2007**                                                                                                             |
|                                                                            |                                               |                 |   |                                                                                                    | **(Unaudited)**                                                                        |                                                                                                                                        | **(Audited, Restated)**                                                                                              |
|                                                                            |                                               |                 |   |                                                                                                    |                                                                                   |                                                                                                                                        |                                                                                                                 |
| **ASSETS**                                                                      |
| **CURRENT ASSETS**                                                              |                                               |                 |   |                                                                                                    |                                                                                   |
|                                                                            | Cash and equivalents                               |                 |   | $                 3,097 |                                                                                   | $                       9,830 |
|                                                                            | Restricted cash (Note 1)                           |                 |   | 5,383                                                                                                   |                                                                                   | 5,091                                                                                                                                       |
|                                                                            | Accounts receivable, net (Note 4)                  |                 | 19,605 |                                                                                                    | 21,157                                                                                 |
|                                                                            | Costs and estimated earnings in excess of billings |                 |   |
|                                                                            | on uncompleted contracts (Note 5)                  |                 | 3,540  |                                                                                                    | 1,279                                                                                  |
|                                                                            | Inventory, net (Note 6)                            |                 |   | 4,480                                                                                                   |                                                                                   | 6,656                                                                                                                                       |
|                                                                            | Deferred tax asset (Note 11)                       |                 |   | 1,535                                                                                                   |                                                                                   | 1,535                                                                                                                                       |
|                                                                            | Prepaid expenses and other current assets          |                 | 1,212  |                                                                                                    | 2,840                                                                                  |
|                                                                            |                                               | Total Current Assets |   |                                                                                                    | 38,852                                                                                 |                                                                                                                                        | 48,388                                                                                                               |
|                                                                            |                                               |                 |   |                                                                                                    |                                                                                   |                                                                                                                                        |                                                                                                                 |
| **OTHER ASSETS**                                                                |                                               |                 |   |                                                                                                    |                                                                                   |
|                                                                            | Property, plant & equipment, net (Note 7)      |                 | 11,569 |                                                                                                    | 12,238                                                                                 |
|                                                                            | Long-term accounts receivable (Note 4)             |                 | 829    |                                                                                                    | 770                                                                                    |
|                                                                            | Goodwill (Note 8)                                  |                 |   | 18,461                                                                                                  |                                                                                   | 18,461                                                                                                                                      |
|                                                                            | Other intangible assets, net (Note 8)              |                 | 6,526  |                                                                                                    | 7,450                                                                                  |
|                                                                            | Other long-term assets                             |                 |   | 511                                                                                                     |                                                                                   | 1,048                                                                                                                                       |
|                                                                            |                                               | Total Other Assets   |   |                                                                                                    | 37,896                                                                                 |                                                                                                                                        | 39,967                                                                                                               |
|                                                                            |                                               |                 |   |                                                                                                    |                                                                                   |                                                                                                                                        |                                                                                                                 |
|                                                                            |                                               | **TOTAL ASSETS**     |   |                                                                                                    | $              76,748 |                                                                                                                                        | $                   88,355 |
|                                                                            |                                               |                 |   |                                                                                                    |                                                                                   |                                                                                                                                        |                                                                                                                 |
| *See Accompanying Notes to Unaudited Interim Consolidated Financial Statements* |

 

 

 

3

----

**FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS (CONTINUED)**

**(DOLLARS IN THOUSANDS)**

 

|                                                                            |                                                                      |                                           |                                   |   | **May 31,**                                 |   | **August 31,**          |
|---------------------------------------------------------------------------------|---------------------------------------------------------------------------|------------------------------------------------|----------------------------------------|--------|---------------------------------------------|--------|-------------------------|
|                                                                            |                                                                      |                                           |                                   |   | **2008**                                    |   | **2007**                |
|                                                                            |                                                                      |                                           |                                   |   | **(Unaudited)**                             |   | **(Audited, Restated)** |
|                                                                            |                                                                      |                                           |                                   |   |                                        |   |                    |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                        |
| **CURRENT LIABILITIES**                                                         |                                                                      |                                           |                                   |   |
|                                                                            | Line of credit (Note 9)                                                   |                                           | $      15,000 |   | $      15,000 |
|                                                                            | Short- term debt and current maturities of long-term debt (Note 9)        | 16,758                                         |                                   | 18,416 |
|                                                                            | Current maturities of convertible term note (Note 9)                      | 4,086                                          |                                   | 2,727  |
|                                                                            | Variable interest entity line of credit (Note 9)                          | 2,200                                          |                                   | 2,200  |
|                                                                            | Variable interest entity current maturities of long-term debt (Note 9)    | 2,694                                          |                                   | 503    |
|                                                                            | Accounts payable                                                          |                                           | 7,850                                  |   | 9,168                                       |
|                                                                            | Health and workers' compensation reserves                                 | 4,368                                          |                                   | 5,128  |
|                                                                            | Accrued expenses                                                          |                                           | 9,732                                  |   | 9,239                                       |
|                                                                            | Billings in excess of costs and estimated earnings on                     |                                           |                                   |   |
|                                                                            |                                                                      | uncompleted contracts (Note 5)                 | 1,177                                  |   | 1,178                                       |
|                                                                            | Other current liabilities                                                 |                                           | 339                                    |   | 725                                         |
|                                                                            |                                                                      | Total Current Liabilities                      | 64,204                                 |   | 64,284                                      |
|                                                                            |                                                                      |                                           |                                   |   |                                        |   |                    |
| **LONG-TERM LIABILITIES**                                                       |                                                                      |                                           |                                   |   |
|                                                                            | Long-term debt, less current maturities (Note 9)                          | 218                                            |                                   | 208    |
|                                                                            | Convertible term note (Note 9)                                            | -                                              |                                   | 2,950  |
|                                                                            | Variable interest entity long-term debt, less current maturities (Note 9) | 1,664                                          |                                   | 4,559  |
|                                                                            | Line of credit term note - majority shareholder (Note 9)                  | 1,300                                          |                                   | 1,000  |
|                                                                            | Other long-term liabilities                                               |                                           | 831                                    |   | 1,029                                       |
|                                                                            |                                                                      | Total Long-Term Liabilities                    | 4,013                                  |   | 9,746                                       |
|                                                                            |                                                                      |                                           |                                   |   |                                        |   |                    |
|                                                                            |                                                                      | Total Liabilities                              |                                   | 68,217 |                                        | 74,030 |
|                                                                            |                                                                      |                                           |                                   |   |                                        |   |                    |
| **MINORITY INTEREST IN VARIABLE INTEREST ENTITY (NOTE 2)**                      | (609)                                                                     |                                           | 236                                    |
|                                                                            |                                                                      |                                           |                                   |   |                                        |   |                    |
| **SHAREHOLDERS' EQUITY (NOTE 13)**                                              |                                                                      |                                           |                                   |
|                                                                            | Common stock, $0.10 par value; 150,000,000 authorized;                    |                                           |                                   |   |
|                                                                            | 11,391,823 issued and outstanding at May 31, 2008                         |                                           |                                   |   |
|                                                                            | and August 31, 2007, respectively                                         | 1,117                                          |                                   | 1,117  |
|                                                                            | Preferred stock, $0.10 par value; 1,000,000 authorized;                   |                                           |                                   |   |
|                                                                            | 66,180 issued and outstanding at February 29, 2008                        |                                           |                                   |   |
|                                                                            | and August 31, 2007, respectively                                         | 6,618                                          |                                   | 6,618  |
|                                                                            | Additional paid-in capital and warrants outstanding                       | 19,317                                         |                                   | 19,317 |
|                                                                            | Accumulated deficit                                                       |                                           | (18,209)                               |   | (12,300)                                    |
|                                                                            | Accumulated other comprehensive income (Note 14)                          | 297                                            |                                   | 260    |
|                                                                            |                                                                      |                                           |                                   |   | 9,140                                       |   | 15,012                  |
|                                                                            | Less: Treasury stock, 0 and 384,500 shares of common stock                |                                           |                                   |   |
|                                                                            | outstanding at May 31, 2008 and August 31, 2007, respectively             | -                                              |                                   | (923)  |
|                                                                            |                                                                      | Total Shareholders' Equity                     | 9,140                                  |   | 14,089                                      |
|                                                                            |                                                                      |                                           |                                   |   |                                        |   |                    |
|                                                                            |                                                                      | **TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY** | $      76,748 |   | $      88,355      |
|                                                                            |                                                                      |                                           |                                   |   |                                        |   |                    |
| *See Accompanying Notes to Unaudited Interim Consolidated Financial Statements* |                                                                      |                                           |

 

 

 

4

----

**FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)**

**(UNAUDITED)**

 

 

|                                                   |                                                                                                            |                         |                                                                                                                             |   | **Three Month Period Ended**                                                                                          |    | **Nine Month Period Ended**                                                                                                            |
|--------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------|------------------------------|----------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------|---------|----------------------------------------------------------------------------------------------------------------------------------------|
|                                                   |                                                                                                            |                         |                                                                                                                             |   | **May 31,**                                                                                                           |    | **May 31,**                                                                                                                            |   | **May 31,** |   | **May 31,** |
|                                                   |                                                                                                            |                         |                                                                                                                             |   | **2008**                                                                                                              |    | **2007**                                                                                                                               |   | **2008** |   | **2007** |
| **REVENUES**                                           |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |   |
| Service revenues                                       |                                                                                                            |                         | $                     21,978 |   | $                24,727                    |    | $                    68,278                  |   | $                  55,372 |
| Product revenues                                       |                                                                                                            |                         | 18,222                                                                                                                           |   | 17,559                                                                                                                |    | 57,605                                                                                                                                 |   | 59,837 |
|                                                   |                                                                                                            | **TOTAL REVENUES**           |                                                                                                                             | 40,200 |                                                                                                                  | 42,286  |                                                                                                                                   | 125,883 |   | 115,209 |
|                                                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |   |   |   |
| **COST OF REVENUES**                                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |
| Service cost of revenues                               |                                                                                                            | 17,467                       |                                                                                                                             | 20,341 |                                                                                                                  | 54,451  |                                                                                                                                   | 44,629 |
| Product cost of revenues                               |                                                                                                            | 15,785                       |                                                                                                                             | 13,916 |                                                                                                                  | 49,047  |                                                                                                                                   | 49,248 |
|                                                   |                                                                                                            | **TOTAL COST OF REVENUES**   | 33,252                                                                                                                           |   | 34,257                                                                                                                |    | 103,498                                                                                                                                |   | 93,877 |
|                                                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |   |   |   |
| **GROSS PROFIT**                                       |                                                                                                            |                         | 6,948                                                                                                                            |   | 8,029                                                                                                                 |    | 22,385                                                                                                                                 |   | 21,332 |
|                                                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |   |   |   |
| **OPERATING EXPENSES**                                 |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |
|                                                   | Selling, general and administrative expenses                                                                    | 8,149                        |                                                                                                                             | 7,702  |                                                                                                                  | 22,529  |                                                                                                                                   | 21,815 |
|                                                   | Depreciation and amortization                                                                                   | 844                          |                                                                                                                             | 613    |                                                                                                                  | 2,262   |                                                                                                                                   | 2,415 |
|                                                   | Impairment (Note 1)                                                                                             |                         | -                                                                                                                                |   | -                                                                                                                     |    | -                                                                                                                                      |   | 2,027 |
|                                                   |                                                                                                            | Total Operating Expenses     | 8,993                                                                                                                            |   | 8,315                                                                                                                 |    | 24,791                                                                                                                                 |   | 26,257 |
|                                                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |   |   |   |
| **OPERATING LOSS**                                     |                                                                                                            | (2,045)                      |                                                                                                                             | (286)  |                                                                                                                  | (2,406) |                                                                                                                                   | (4,925) |
|                                                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |   |   |   |
| **OTHER INCOME (EXPENSE)**                             |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |
|                                                   | Interest income                                                                                                 |                         | 40                                                                                                                               |   | 115                                                                                                                   |    | 197                                                                                                                                    |   | 302 |
|                                                   | Interest expense                                                                                                |                         | (629)                                                                                                                            |   | (843)                                                                                                                 |    | (2,357)                                                                                                                                |   | (2,498) |
|                                                   | Gain (loss) on disposal of assets                                                                               | 14                           |                                                                                                                             | 40     |                                                                                                                  | (33)    |                                                                                                                                   | (371) |
|                                                   | Gain on investments in marketable securities, net (Note 1)                                                      | -                            |                                                                                                                             | (25)   |                                                                                                                  | -       |                                                                                                                                   | (8) |
|                                                   | Exchange rate gain (loss)                                                                                       |                         | 3                                                                                                                                |   | 20                                                                                                                    |    | 42                                                                                                                                     |   | 11 |
|                                                   | Other income (expense)                                                                                          |                         | 15                                                                                                                               |   | 82                                                                                                                    |    | 28                                                                                                                                     |   | 94 |
|                                                   |                                                                                                            | Total Other Income (Expense) | (557)                                                                                                                            |   | (611)                                                                                                                 |    | (2,123)                                                                                                                                |   | (2,470) |
|                                                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |   |   |   |
| **LOSS BEFORE MINORITY INTEREST IN**                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |
| **VARIABLE INTEREST ENTITY**                           | (2,602)                                                                                                         |                         | (897)                                                                                                                            |   | (4,529)                                                                                                               |    | (7,395)                                                                                                                                |
|                                                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |   |   |   |
| Minority Interest in Variable Interest Entity (Note 2) | 306                                                                                                             |                         | 309                                                                                                                              |   | 774                                                                                                                   |    | 473                                                                                                                                    |
|                                                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |   |   |   |
| **LOSS BEFORE PROVISION FOR INCOME TAXES**             | (2,908)                                                                                                         |                         | (1,206)                                                                                                                          |   | (5,303)                                                                                                               |    | (7,868)                                                                                                                                |
|                                                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |   |   |   |
| Provision for income taxes (Note 11)                   | 48                                                                                                              |                         | 25                                                                                                                               |   | 234                                                                                                                   |    | 144                                                                                                                                    |
|                                                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |   |   |   |
| **NET LOSS**                                           |                                                                                                            |                         | (2,956)                                                                                                                          |   | (1,231)                                                                                                               |    | (5,537)                                                                                                                                |   | (8,012) |
|                                                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |   |   |   |
| Preferred stock dividends                              |                                                                                                            | 124                          |                                                                                                                             | 124    |                                                                                                                  | 372     |                                                                                                                                   | 372 |
|                                                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |   |   |   |
| **NET LOSS AVAILABLE TO COMMON SHAREHOLDERS**          | $                  (3,080) |                         | $               (1,355)                                    |   | $                   (5,909) |    | $                     (8,384) |
|                                                   |                                                                                                            |                         |                                                                                                                             |   |                                                                                                                  |    |                                                                                                                                   |   |   |   |   |

| **BASIC LOSS PER COMMON SHARE**                                                 | $                   (0.27)            |   | $                 (0.12)      |   | $                     (0.52) |   | $                       (0.78) |
|---------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                            |                                                                                                                            |   |                                                                                                     |   |                                                                                                                             |   |                                                                                                                                         |   |   |   |   |
| **Basic weighted average shares outstanding**                                   | 11,391,823                                                                                                                      |   | 11,417,748                                                                                               |   | 11,391,823                                                                                                                       |   | 10,810,765                                                                                                                                   |
|                                                                            |                                                                                                                            |   |                                                                                                     |   |                                                                                                                             |   |                                                                                                                                         |   |   |   |   |
| **DILUTED LOSS PER COMMON SHARE**                                               | $                    (0.24) |   | $                 (0.10) |   | $                     (0.46) |   | $                      (0.67)       |
|                                                                            |                                                                                                                            |   |                                                                                                     |   |                                                                                                                             |   |                                                                                                                                         |   |   |   |   |
| **Diluted weighted average shares outstanding**                                 | 12,771,670                                                                                                                      |   | 13,221,883                                                                                               |   | 12,890,962                                                                                                                       |   | 12,463,326                                                                                                                                   |
|                                                                            |                                                                                                                            |   |                                                                                                     |   |                                                                                                                             |   |                                                                                                                                         |   |   |   |   |
| *See Accompanying Notes to Unaudited Interim Consolidated Financial Statements* |                                                                                                                            |   |                                                                                                     |   |                                                                                                                             |   |

 

 

 

5

----

**FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY**

**(DOLLARS IN THOUSANDS)**

**(UNAUDITED)**

 

 

|                                      |                                                                            |                                                 |                               |                                                                         |                                              |                                                                                                                             |                                                                                      | **Additional**                                                                                                                   |                                                                                      | **Accumulated**                                                                                  |                   |              |   |  |
|-------------------------------------------|---------------------------------------------------------------------------------|------------------------------------------------------|------------------------------------|------------------------------------------------------------------------------|---------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------|-------------------|-------------------|--------|--|
|                                      |                                                                            |                                                 |                               |                                                                         |                                              |                                                                                                                             |                                                                                      | **Paid-in Capital**                                                                                                              |                                                                                      | **Other**                                                                                        | **Total**         |                   |   |
|                                      |                                                                            |                                                 |                               |                                                                         | **Common**                                        | **Treasury**                                                                                                                     | **Preferred**                                                                             | **and Warrants**                                                                                                                 | **Accumulated**                                                                           | **Comprehensive**                                                                                | **Shareholders'** | **Comprehensive** |        |  |
|                                      |                                                                            |                                                 |                               |                                                                         | **Stock**                                         | **Stock**                                                                                                                        | **Stock**                                                                                 | **Outstanding**                                                                                                                  | **Deficit**                                                                               | **Income**                                                                                       | **Equity**        | **Loss**          |        |  |
|                                      |                                                                            |                                                 |                               |                                                                         |                                              |                                                                                                                             |                                                                                      |                                                                                                                             |                                                                                      |                                                                                             |              |              |        |
| **BALANCE AT AUGUST 31, 2007 (Restated)** | **$    1,117**                                                   | **$       (923)** | **$    6,618** | **$           19,317**     | **$      (12,300)** | **$                    260** | **$             14,089** |                                                                                                                             |                                                                                           |
| Net Loss                                  |                                                                            |                                                 |                               | -                                                                            | -                                                 | -                                                                                                                                | -                                                                                         | (5,537)                                                                                                                          | -                                                                                         | (5,537)                                                                                          | (5,537)           |                   |        |
| Preferred Stock Dividends                 |                                                                            |                                                 | -                                  | -                                                                            | -                                                 | -                                                                                                                                | (372)                                                                                     | -                                                                                                                                | (372)                                                                                     | -                                                                                                |                   |                   |
| Foreign currency translation              |                                                                            |                                                 |                               |                                                                         |                                              |                                                                                                                             |                                                                                      |                                                                                                                             |                                                                                      |                                                                                             |                   |
|                                      | adjustments, net of tax                                                         |                                                 |                               | -                                                                            | -                                                 | -                                                                                                                                | -                                                                                         | -                                                                                                                                | 37                                                                                        | 37                                                                                               | 37                |                   |        |
| Distribution of 384,500 shares from       |                                                                            |                                                 |                               |                                                                         |                                              |                                                                                                                             |                                                                                      |                                                                                                                             | -                                                                                         |                                                                                                  |                   |
|                                      | variable interest entity                                                        |                                                 |                               |                                                                         | 923                                               | -                                                                                                                                | -                                                                                         | -                                                                                                                                | -                                                                                         | 923                                                                                              | -                 |                   |        |
|                                      |                                                                            |                                                 |                               |                                                                         |                                              |                                                                                                                             |                                                                                      |                                                                                                                             |                                                                                      |                                                                                             |              |              |        |
| Total comprehensive loss                  |                                                                            |                                                 | -                                  | -                                                                            | -                                                 | -                                                                                                                                | -                                                                                         | -                                                                                                                                | -                                                                                         | **$              (5,500)** |                   |                   |
|                                      |                                                                            |                                                 |                               |                                                                         |                                              |                                                                                                                             |                                                                                      |                                                                                                                             |                                                                                      |                                                                                             |              |              |        |
| **BALANCE AT MAY 31, 2008**               |                                                                            |                                                 | **$    1,117**      | **$               -** | **$    6,618**                | **$           19,317**                                                    | **$      (18,209)**                                         | **$                    297** | **$              9,140** |                                                                                             |                   |
|                                      |                                                                            |                                                 |                               |                                                                         |                                              |                                                                                                                             |                                                                                      |                                                                                                                             |                                                                                      |                                                                                             |              |              |        |
|                                      | *See Accompanying Notes to Unaudited Interim Consolidated Financial Statements* |                                                 |                               |                                                                         |                                              |                                                                                                                                  |

 

 

6

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**FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(DOLLARS IN THOUSANDS)**

**(UNAUDITED)**

 

|                                                |                                                                  |                                                 |                                                  |                                                | **Nine Month Period Ended**                                                                                          |
|-----------------------------------------------------|-----------------------------------------------------------------------|------------------------------------------------------|-------------------------------------------------------|-----------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|
|                                                |                                                                  |                                                 |                                                  |                                                | **May 31,**                                                                                                          |   | **May 31,** |
|                                                |                                                                  |                                                 |                                                  |                                                | **2008**                                                                                                             |   | **2007 (Restated)** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**            |                                                                  |                                                 |                                                  |
|                                                | Net Loss                                                              |                                                 | $      (5,537)          |                                                | $                  (8,012) |
|                                                | Adjustments to reconcile net income to net cash                       |                                                 |                                                  |                                                |
|                                                | provided by (used in) operating activities:                           |                                                 |                                                  |                                                |
|                                                |                                                                  | Depreciation and amortization                        | 2,925                                                 |                                                | 2,415                                                                                                                |
|                                                |                                                                  | Provision for (gains) losses on accounts receivable  | 22                                                    |                                                | 342                                                                                                                  |
|                                                |                                                                  | Gain on sale of investments                          | -                                                     |                                                | 8                                                                                                                    |
|                                                |                                                                  | Loss on disposal of assets                           | 33                                                    |                                                | 506                                                                                                                  |
|                                                |                                                                  | Stock based compensation                             | -                                                     |                                                | 49                                                                                                                   |
|                                                |                                                                  | Minority interest in variable interest entity income | 774                                                   |                                                | 473                                                                                                                  |
|                                                |                                                                  | Impairment on intangible assets                      | -                                                     |                                                | 2,027                                                                                                                |
|                                                |                                                                  | Changes in certain operating assets and liabilities: |                                                  |                                                |                                                                                                                 |
|                                                |                                                                  |                                                 | Restricted cash                                       | (292)                                               |                                                                                                                 | (1,150) |
|                                                |                                                                  |                                                 | Accounts receivable                                   | 1,530                                               |                                                                                                                 | 7,472 |
|                                                |                                                                  |                                                 | Costs and estimated earnings in excess of billings on |                                                |                                                                                                                 |   |
|                                                |                                                                  |                                                 |                                                  | uncompleted contracts                               | (2,261)                                                                                                              |   | 2,165 |
|                                                |                                                                  |                                                 | Inventory, net                                        | 2,176                                               |                                                                                                                 | (94) |
|                                                |                                                                  |                                                 | Prepaid assets and other current assets               | 1,628                                               |                                                                                                                 | 2,779 |
|                                                |                                                                  |                                                 | Other long-term assets                                | (32)                                                |                                                                                                                 | 435 |
|                                                |                                                                  |                                                 | Accounts payable                                      | (1,318)                                             |                                                                                                                 | (3,784) |
|                                                |                                                                  |                                                 | Health and workers' compensation reserves             | (760)                                               |                                                                                                                 | 1,242 |
|                                                |                                                                  |                                                 | Accrued expenses and other current liabilities        | 107                                                 |                                                                                                                 | 1,117 |
|                                                |                                                                  |                                                 | Billings in excess of costs and estimated earnings on |                                                |                                                                                                                 |   |
|                                                |                                                                  |                                                 |                                                  | uncompleted contracts                               | (1)                                                                                                                  |   | (215) |
|                                                |                                                                  |                                                 |                                                  | Net Cash Provided by (Used in) Operating Activities | (1,006)                                                                                                              |   | 7,775 |
|                                                |                                                                  |                                                 |                                                  |                                                |                                                                                                                 |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**            |                                                                  |                                                 |                                                  |
|                                                | Capital expenditures                                                  | (1,307)                                              |                                                  | (905)                                               |
|                                                | Variable interest entity proceeds from sale of assets                 | 390                                                  |                                                  | -                                                   |
|                                                | Proceeds from sale of assets                                          | 24                                                   |                                                  | -                                                   |
|                                                | Proceeds from sales of marketable securities                          | -                                                    |                                                  | 1,225                                               |
|                                                | Acquisition of productive assets and businesses, net of cash received | -                                                    |                                                  | (8,397)                                             |
|                                                |                                                                  |                                                 |                                                  | Net Cash Used in Investing Activities               | (893)                                                                                                                |   | (8,077) |
|                                                |                                                                  |                                                 |                                                  |                                                |                                                                                                                 |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**            |                                                                  |                                                 |                                                  |
|                                                | Net borrowings under line of credit                                   | -                                                    |                                                  | 9,601                                               |
|                                                | Borrowings on long-term debt - majority shareholder                   | 300                                                  |                                                  | -                                                   |
|                                                | Payments on short and long-term debt                                  | (1,648)                                              |                                                  | (1,479)                                             |
|                                                | Variable interest entity payments on long-term debt                   | (704)                                                |                                                  | (297)                                               |
|                                                | Debt issuance costs                                                   | (150)                                                |                                                  | -                                                   |
|                                                | Payments from convertible debentures                                  | (1,591)                                              |                                                  | (1,596)                                             |
|                                                | Dividends on preferred stock                                          | (372)                                                |                                                  | (372)                                               |
|                                                | Proceeds from variable interest entity member contributions           | 70                                                   |                                                  | 88                                                  |
|                                                | Distributions to variable interest entity members                     | (776)                                                |                                                  | (239)                                               |
|                                                |                                                                  |                                                 |                                                  | Net Cash Provided by (Used in) Financing Activities | (4,871)                                                                                                              |   | 5,706 |
|                                                |                                                                  |                                                 |                                                  |                                                |                                                                                                                 |   |   |
|                                                |                                                                  |                                                 |                                                  | Effect of exchange rate changes on cash             | 37                                                                                                                   |   | 49 |
|                                                |                                                                  |                                                 |                                                  |                                                |                                                                                                                 |   |   |
| **NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS** | (6,733)                                                               |                                                 | 5,453                                                 |

|                     |                                                                             |                                                         |   |                                                                                                                                 |   |   |   |
|--------------------------|----------------------------------------------------------------------------------|--------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| **CASH AND EQUIVALENTS** |                                                                             |                                                         |   |
|                     | Beginning of Period                                                              | 9,830                                                        |   | 3,632                                                                                                                                |
|                     |                                                                             |                                                         |   |                                                                                                                                 |   |   |   |
|                     | End of Period                                                                    | $         3,097 |   | $                     9,085 |
|                     |                                                                             |                                                         |   |                                                                                                                                 |   |   |   |
|                     | *See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.* |                                                         |

 

 

 

7

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**FORTUNE INDUSTRIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)**

**(DOLLARS IN THOUSANDS)**

**(UNAUDITED)**

 

 

|                         |                                                                             |                                                                              |                                       |                                                                                                                                          | **Nine Month Period Ended**                                                                            |
|------------------------------|----------------------------------------------------------------------------------|-----------------------------------------------------------------------------------|--------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
|                         |                                                                             |                                                                              |                                       |                                                                                                                                          | **May 31,**                                                                                            |   | **May 31,** |
|                         |                                                                             |                                                                              |                                       |                                                                                                                                          | **2008**                                                                                               |   | **2007 (Restated)** |
| **SUPPLEMENTAL DISCLOSURES** |                                                                             |                                                                              |                                       |
|                         | Interest paid                                                                    |                                                                              | $      2,343 |                                                                                                                                          | $                1,921 |
|                         |                                                                             |                                                                              |                                       |                                                                                                                                          |                                                                                                   |   |   |
|                         | Income taxes paid                                                                | $         229                        |                                       | $                   134                             |
|                         |                                                                             |                                                                              |                                       |                                                                                                                                          |                                                                                                   |   |   |
|                         | Unrealized net gain on marketable equity securities                              | $              - |                                       | $                     23                  |
|                         |                                                                             |                                                                              |                                       |                                                                                                                                          |                                                                                                   |   |   |
|                         | Stock distribution to variable interest entity members                           | $      1,846                                             |                                       | $                        - |
|                         |                                                                             |                                                                              |                                       |                                                                                                                                          |                                                                                                   |   |   |
|                         | Acquisition of Employer Solutions Group, Inc.                                    |                                                                              |                                       |                                                                                                                                          |
|                         |                                                                             |                                                                              | Fair value of assets acquired              | $              -                                                        |                                                                                                   | $              11,524 |
|                         |                                                                             |                                                                              | Common stock consideration                 | -                                                                                                                                             |                                                                                                   | 2,424 |
|                         |                                                                             |                                                                              | Cash paid                                  | $              -                                                             |                                                                                                   | $                9,100 |
|                         |                                                                             |                                                                              |                                       |                                                                                                                                          |                                                                                                   |   |   |
|                         | Acquisition of Precision Employee Management, LLC                                |                                                                              |                                       |                                                                                                                                          |
|                         |                                                                             |                                                                              | Fair value of assets acquired              | $              -                                                             |                                                                                                   | $                2,376 |
|                         |                                                                             |                                                                              | Common stock consideration                 | -                                                                                                                                             |                                                                                                   | 1,276 |
|                         |                                                                             |                                                                              | Cash paid                                  | $              -                                                        |                                                                                                   |  $               1,100 |
|                         |                                                                             |                                                                              |                                       |                                                                                                                                          |                                                                                                   |   |   |
|                         | *See Accompanying Notes to Unaudited Interim Consolidated Financial Statements.* |

 

 

 

 

8

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**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 2007 Annual Report on Form 10-K/A filed by Fortune Industries, Inc. (which, together with its subsidiaries unless the context requires otherwise, shall be referred to herein as the            “Company”).  The purpose of Amendment No. 1 to the Company’s Annual Report for the year ended August 31, 2007 is to reclassify long term debt from our credit facility loan to current debt as a result of covenant violations, reclassify our temporary equity component related to the ESG acquisition to liabilities, and disclose put options related to our ESG acquisition. The accompanying unaudited consolidated financial statements 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 operating results for the nine month period ended May 31, 2008 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 a variety of services and products for selected market segments, which are classified under five operating segments, Business Solutions, Wireless Infrastructure, Transportation Infrastructure, Ultraviolet Technologies and Electronics            Integration. As a holding company of various products and services, 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. Additionally, management            continually seeks and evaluates strategic acquisitions that expand core offerings and drive incremental revenue and earnings growth.

 

*Principles of Consolidation*:  The accompanying consolidated financial statements include the accounts of Fortune Industries, Inc. and its wholly-owned subsidiaries, and a variable interest entity (“VIE”) as described in Note 2. Nor-Cote International, Inc. (“Nor-Cote”), a wholly-owned subsidiary, contains foreign subsidiaries from the United            Kingdom, China, Singapore, and Mexico, which have been eliminated in consolidation at the Nor-Cote subsidiary level. All significant inter-company accounts and transactions of the Company have been eliminated.

 

*Foreign Currency Translation*:  Assets and liabilities of the foreign subsidiaries of Nor-Cote are translated into U.S. dollars at the exchange rate in effect at the end of the period. Revenue and expense accounts are translated at a weighted-average of exchange rates in effect during the year. Translation adjustments that arise from translating the            subsidiaries’ financial statements from local currency to U.S. dollars are accumulated and presented, net of tax, as a separate component of shareholders’ equity.

 

*Comprehensive Income (Loss*):  Comprehensive income (loss) refers to the change in an entity’s equity during a period resulting from all transactions and events other than capital contributed by and distributions to the entity’s owners. For the Company, comprehensive income (loss) is equal to net income plus the change in unrealized gains or losses on            investments and the change in foreign currency translation adjustments. The Company reports comprehensive income (loss) in the consolidated statement of shareholders’ equity.

 

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

 

Significant estimates used in preparing these consolidated financial statements include those assumed in computing profit percentages under the percentage-of-completion revenue recognition method. It is reasonably possible that the significant estimates used will change within the next year.

 

*Revenue and Cost Recognition:*In the Business Solutions segment PSM, CSM, and ESG, and consolidated affiliates bill clients under Professional Services Agreement as licensed Professional Employer Organizations (collectively the “PEOs”), which includes each worksite employee’s gross wages, plus additional charges for employment related taxes, benefits,            workers’ compensation insurance, administrative and record keeping, as well as safety, human resources, and regulatory compliance

 

 

9

----

consultation. Most wages, taxes and insurance coverage are provided under the PEOs’ federal, state, and local or vendor identification numbers. No identification or recognition is given to the client when these monies are remitted or calculations are reported. Most calculations or amounts the PEOs owe the government and its employment insurance vendors are based on the experience levels and            activity of the PEOs with no consideration to client detail. The PEOs bill the client their worksite employees’ gross wages plus an overall service fee that includes components of employment related taxes, employment benefits insurance, and administration of those items. The component of the service fee related to administration varies, in part, according to the size of the client, the amount and frequency of payroll payments and the method of delivery of such payments. The            component of the service fee related to health, workers’ compensation and unemployment insurance is based, in part, on the client’s historical claims experience. Charges by the PEOs are invoiced along with each periodic payroll delivered to the client.

 

The PEOs report revenue in accordance with Emerging Issues Task Force ("EITF") No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. The PEOs report revenue on a gross basis for the total amount billed to clients for service fees, which includes health and welfare benefit plan fees, workers’ compensation insurance, unemployment insurance fees, and employment-related taxes. The            PEOs report revenue on a gross basis for such fees because the Company is the primary obligor and deemed to be the principal in these transactions under EITF No. 99-19.  The PEOs report revenue on a net basis for the amount billed to clients for worksite employee salaries and wages. This accounting policy of reporting revenue net as an agent versus gross as a principal has no effect on gross profit, operating income, or net income.

 

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

 

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

 

In the Wireless Infrastructure segment, Fortune Wireless enters into contracts principally on the basis of competitive bids, the final terms and prices of which are frequently negotiated with the customer. Although the terms of its contracts vary considerably, most are made on a unit price basis in which Fortune Wireless agrees to do the work for units of work performed. Fortune Wireless also performs            services on a cost-plus or time and material basis. Fortune Wireless completes most projects within twelve months. Fortune Wireless generally recognizes revenue utilizing output measures, such as when services are performed, units are delivered or when contract milestones are reached or under the percentage of completion method as appropriate.  Cornerstone Construction recognizes revenue solely using the percentage of completion method on contracts in process. Under this            method, the portion of the contract price recognized as revenue is based on the ratio of costs incurred to the total estimated cost of the contract. The estimated total cost of a contract is based upon management’s best estimate of the remaining costs that will be required to complete a project. The actual costs required to complete a project and, therefore, the profit eventually realized, could differ materially in the near term. Costs and estimated earnings in excess of            billings on uncompleted contracts are shown as a current asset. Billings in excess of costs and estimated earnings on uncompleted contracts are shown as a current liability. Anticipated losses on contracts, if any, are recognized when they become evident.

 

In the Transportation Infrastructure segment, JH Drew recognizes revenue using the percentage of completion method on contracts in process. Under this method, the portion of the contract price recognized as revenue is based on the ratio of costs incurred to the total estimated cost of the contract. The estimated total cost of a contract is based upon management’s best estimate of the remaining            costs that will be required to complete a project. The actual costs required to complete a project and, therefore, the profit eventually realized, could differ materially in the near term. Costs and estimated earnings in excess of billings on uncompleted contracts are shown as a current asset. Billings in excess of costs and estimated earnings on uncompleted contracts are shown as a current liability. Anticipated losses on contracts, if any, are recognized when they become            evident.

 

In the Ultraviolet Technologies segment, revenue from the sale of products at Nor-Cote is recognized according to the terms of the sales arrangement, which is generally upon shipment. Revenues are recognized, net of estimated costs of returns, allowances and sales incentives, when title and principal ownership transfers to the customer, which is generally when products are shipped to customers. Products            are generally sold on open account under credit terms customary to the geographic region of distribution. Ongoing credit evaluations are performed on customers and Nor-Cote does not generally require collateral to secure accounts receivable.

 

In the Electronics Integration segment, revenue from the sale of products at Kingston and Commercial Solutions is recognized according to the terms of the sales arrangement. Revenue is recognized when title and principal ownership transfers to the customer, which is generally when products are shipped to customers. Products are generally sold on open account under credit

 

 

10

----

terms customary to the geographic region of distribution. Ongoing credit evaluations are performed on customers and Kingston and Commercial Solutions do not generally require collateral to secure accounts receivable.

 

Revenue is reduced by appropriate allowances, estimated returns, price concessions, and similar adjustments, as applicable.

 

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

 

*Restricted Cash:*Restricted cash includes certificates of deposits and letters of credit issued as collateral 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 May 31, 2008, the Company had $5,383 in total restricted cash.  Of this,            $1,760 is restricted for employer contributions to various health and accident benefit programs established under third party actuarial analysis, $2,021 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.

 

*Marketable Securities:*Marketable securities include common stocks classified as available for sale investments in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The securities are carried at fair value based on current market quotations. Unrealized            holding gains and losses, net of tax, are not included in "net income," but are accounted for as "other comprehensive income" and reflected as a separate component of the change in shareholders’ equity. The cost of securities used to compute realized gains and losses is based on specifically identified securities. The fair value of investment securities is determined by currently available market prices. Dividends on marketable equity securities are recognized in income when            declared.  The net tax effect of the unrealized gain (loss) after consideration of the valuation allowance is insignificant and is not included in deferred tax asset or accumulated other comprehensive income.  There were $0 and ($25) of realized gains and losses for the three month period ended May 31, 2008 and 2007, respectively. For the nine month period ended May 31, 2008 and 2007 there were $0 and ($8), respectively, of realized gains from the sale of            marketable securities.

 

*Accounts Receivable:*  Accounts receivable is stated at the amount billable to customers. Accounts receivable are ordinarily due 30-60 days after the issuance of the invoice. The Company provides allowances for estimated doubtful accounts and for returns and sales allowances, based on the Company’s assessment of known delinquent accounts, historical experience,            and other currently available evidence of the collectability and the aging of the accounts receivable. Delinquent receivables that are deemed uncollectible are written off based on individual credit evaluation and specific circumstances of the customer. The Company’s policy is not to accrue interest on past due trade receivables.

 

*Inventories:*Inventories are recorded at the lower of cost or market value. Costs are determined primarily under the first-in, first-out method (“FIFO”) method of accounting.

 

*Shipping and Handling:*Costs incurred for shipping and handling are included in the Company's consolidated financial statements as a component of costs of revenue.

 

*Property, Plant, Equipment, and Depreciation:*Property, plant and equipment is recorded at cost and include expenditures for new additions and those which substantially increase the useful lives of existing assets. Depreciation is computed principally on the straight-line method over the estimated useful life.   Depreciable lives range from 3 to 30            years.

 

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

 

*Goodwill and Other Indefinite-Lived Intangible Assets:*  The Company accounts for goodwill and other indefinite-lived intangible assets under 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 fourth quarter. The results of this annual impairment test indicated that the fair value of each of the reporting units as of August 31, 2007, 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.

 

 

11

----

 

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

 

*Fair Value of Financial Instruments:*The fair value of financial instruments is estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, prepayments, and other factors. Changes in assumptions or market conditions could significantly affect these estimates. The            amounts reported in the consolidated balance sheets for cash and equivalents, receivables, and payables approximate fair value.

 

*Stock-based Compensation:*The Company accounts for stock-based compensation under the provisions of SFAS No. 123R, “Share-Based Payment” using the modified prospective method.  The Company recognizes compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards.

 

*Income per Common Share:*Income per common share has been computed in accordance with SFAS No. 128, "Earnings per Share." Under SFAS 128, basic income per common share is computed based on net income applicable to common stock divided by the weighted average number of common shares outstanding for the period. Diluted income per common share is computed based on net income            applicable to common stock divided by the weighted average number of shares of common stock outstanding during the period after giving effect to securities considered to be dilutive common stock equivalents.

 

*Income Taxes:*  The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." Accordingly, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates. Changes in deferred income tax assets and            liabilities that are associated with components of other comprehensive income, primarily unrealized investment gains, are charged or credited directly to other comprehensive income. Otherwise, changes in deferred income tax assets and liabilities are included as a component of income tax expense. The Company files separate United States, United Kingdom, Mexico, and Singapore income tax returns.

 

*Research and Development Costs:*Research and development costs are expensed as incurred and totaled $199 and $179 for the three month periods ended May 31, 2008 and 2007, respectively.  Research and development costs are expensed as incurred and totaled $442 and $468 for the nine month periods ended May 31, 2008 and 2007, respectively.  Research and            development expense is recorded in the Company’s Ultraviolet Technologies segment.

 

*Advertising Costs:*  Advertising costs including marketing, advertising, publicity, promotion and other distribution costs are expensed as incurred and totaled $114 and $288 for the three months ended May 31, 2008 and 2007, respectively. Advertising costs including marketing, advertising, publicity, promotion and other distribution costs are expensed as incurred and            totaled $396 and $411 for the nine months ended May 31, 2008 and 2007, respectively.

 

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

 

Debt and equity issuances may have features, which allow the holder to convert at beneficial conversion terms, which are then measured using similar valuation techniques and amortized to interest expense in the case of debt or recorded as dividends in the case of preferred stock instruments.  No issuances have beneficial conversion terms during the three and nine months ended May 31, 2008 and            2007.

 

*Self Insurance:*The Company’s holding company and various subsidiaries have elected to act as a self-insurer for certain costs related to employee health programs. Costs resulting from non-insured losses are estimated and charged to income when incurred. The Company has purchased insurance which limits its annual exposure for individual claims to $70 and which limits            its aggregate annual exposure to approximately $1,500.

 

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 $13,600. The aggregate liability limits are adjusted annually, based on the number of participants.

 

 

12

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*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 $1,300.  Under the insurance            policy established at ESG, the deductible liability is limited to $350 per incident, with no aggregate liability limit.

 

**New Accounting Pronouncements**

 

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement.  SAB 108 was effective during our three month period ending May 31,            2008.  The adoption of this statement did not have a material impact on our financial position or results of operations during the three month period ending May 31, 2008.

 

In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, “Fair Value Measurements,” which provides guidance for using fair value to measure assets and liabilities.  SFAS 157 only applies when other standards require or permit the fair value measurement of assets and liabilities and does not expand the use of fair value to new circumstances. SFAS            No. 159 is effective for fiscal years beginning after November 15, 2007.  The Company does not expect this statement to have a material impact on its financial position, results of operations or cash flows.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which allows companies to choose to measure certain financial instruments and other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  We are in the process of determining the effect, if any, that            the potential adoption of SFAS 159 will have on our consolidated financial statements.

 

FASB statement No. 160 “Noncontrolling Interest in Consolidated Financial Statements-an amendment of ARB No. 51” was issued December of 2007.  This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  The guidance will become effective as of the beginning of a company’s            fiscal year beginning after December 15, 2008. The Company has not determined the effect that the adoption of SFAS 160 will have on its consolidated financial statements.

 

**NOTE 2 – VARIABLE INTEREST ENTITY**

 

In December 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN 46R"). FIN 46R requires a variable interest entity to be consolidated by a company, if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's            residual returns, or both. FIN 46R also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest.

 

The Company leases a total of five facilities from a consolidated variable interest entity, a related-party referenced earlier whose primary purpose is to own and lease these properties to the Company. As of May 31, 2008, the VIE is wholly owned by the Company’s Chairman of the Board and its Chief Executive Officer.  The VIE does not have any other significant            assets.  Although the Company does not have direct ownership interests in the VIE, it is considered the primary beneficiary as interpreted by FIN 46R due to implicit interests generated from personal guarantees from the Company’s majority shareholders on certain debt instruments and leasing arrangements of the VIE.

 

The real estate owned by the VIE consists of land, buildings and building improvements, which were subject to mortgages under which the lender has no recourse to the Company.  The non-cash consolidation of the assets and liabilities of the variable interest entity at May 31, 2008 and August 31, 2007 consisted of the following:

 

 

13

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|                                         |   | **May 31,****2008****(Unaudited)** |   |   | **August** **31,****2007****(Audited)** |                            |
|----------------------------------------------|--------|------------------------------------|--------|--------|----------------------------------------------|---------------------------------|
|                                         |   |                               |   |   |                                         |                            |
| **Assets**                                   |   |                               |   |   |                                         |                            |
| Cash                                         |   | $                                  | 40     |   |                                         | $                               | 79 |   |
| Prepaid expenses and other current assets    |   |                               | -      |   |                                         |                            | 10 |   |
| Property, plant and equipment                |   |                               | 6,050  |   |                                         |                            | 6,626 |   |
| Other assets                                 |   |                               | 1      |   |                                         |                            | 3 |   |
|                                         |   | $                                  | 6,091  |   |                                         | $                               | 6,718 |   |
|                                         |   |                               |   |   |                                         |                            |   |   |
| **Liabilities and Members Equity (Deficit)** |   |                               |   |   |                                         |                            |   |   |
| Accounts payable                             |   | $                                  | 11     |   |                                         | $                               | - |   |
| Line of credit                               |   |                               | 2,200  |   |                                         |                            | 2,200 |   |
| Current maturities of long-term debt         |   |                               | 2,694  |   |                                         |                            | 503 |   |
| Accrued expenses                             |   |                               | 131    |   |                                         |                            | 143 |   |
| Long-term debt, net of current maturities    |   |                               | 1,664  |   |                                         |                            | 4,559 |   |
|                                         |   |                               | 6,700  |   |                                         |                            | 7,405 |   |
|                                         |   |                               |   |   |                                         |                            |   |   |
| Members equity (deficit)                     |   |                               | (609   | )      |                                         |                            | 236 |   |
| Less: Treasury Stock                         |   |                               | -      |   |                                         |        |  (923 | ) |
|                                         |   | $                                  | 6,091  |   |                                         | $                               | 6,718 |   |

 

For the three month period ended May 31, 2008, the consolidation of the VIE included income of $306 comprised of $429 in rental income, offset by a $67 charge to interest expense, a $48 charge to depreciation expense and $8 in administrative and other miscellaneous expenses.  For the three month period ended May 31, 2007, the consolidation of the VIE included income of $309 comprised of $470 in            rental income, offset by a $103 charge to interest expense, a $50 charge to depreciation expense, and $8 in administrative and other miscellaneous expenses. For the nine month period ended May 31, 2008, the consolidation of the VIE included income of $774 comprised of $1,283 in rental income, offset by a $293 charge to interest expense, a $144 charge to depreciation expense, a $47 loss on disposal of property, plant, and equipment, and $25 in administrative and other miscellaneous            expenses.  For the nine month period ended May 31, 2007, the consolidation of the VIE included income of $473 comprised of $1,054 in rental income, offset by a $382 charge to interest expense, a $148 charge to depreciation expense, and $51 in administrative and other miscellaneous expenses.

 

**NOTE 3 - ACQUISITIONS AND PRO FORMA RESULTS**

 

**Acquisitions**

 

During the nine month period ended May 31, 2008, the Company had no acquisitions.

 

The Company acquired Employer Solutions Group in March 2007 details of which are included in previous filings. Of the 577,143 total shares issued; 217,143 shares were issued to the sellers at closing and 360,000 contingent shares are held in escrow and may be earned based on the EBITDA schedule below.  During the three month period ended May 31, 2008, the sellers earned 120,000 shares based on            their annual EBITDA. The Company entered into an agreement in which the sellers may put (put option) the 217,143 shares issued at closing to the Company during the thirty (30) day period that begins on March 1, 2010.  The Company recorded $814 related to the put option on the 217,143 shares as other long term liabilities, since the Company is not able to control whether such options can be put to the Company during the required time period.  The contingent shares            are earned based on the table below:

 

|                                                                             |   | (3)EBITDA Target |   |   |    |   |   |
|----------------------------------------------------------------------------------|--------|------------------|--------|--------|---------|--------|--------|
|                                                                             |   | Minimum          |   |   | Maximum |   |   |   | Total Shares |   |
|                                                                             |   |             |   |   |    |   |   |   |   |   |
| Year 1 - 3/1/2008*                                                               |   | $                | 1,600  |   |    | $      | 1,800  |   |   |   |   | 120,000 |   |
| Year 2 - 3/1/2009*                                                               |   | $                | 1,600  |   |    | $      | 2,000  |   |   |   |   | 120,000 |   |
| Year 3 - 3/1/2010*                                                               |   | $                | 1,600  |   |    | $      | 2,400  |   |   |   |   | 120,000 |   |
|                                                                             |   |             |   |   |    |   |   |   |   |   |   | 360,000 |   |
|                                                                             |   |             |   |   |    |   |   |   | closing share price* |   |   | 4.20 |   |
|                                                                             |   |             |   |   |    |   |   |   |   |   | $ | 1,512,000 |   |
| (3) Earn-out of 360,000 shares vests ratably over 3 years based on annual EBITDA |   |

 

 

 

14

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The earn out of $1,512,000 (360,000 shares at $4.20/share) is included as a component of the purchase allocation based on Company EBITDA projections over this period combined with expected synergies gained  from working with the Company’s existing PEO subsidiaries included in the Business Solutions segment.  As a result management deemed the likelihood for sellers to earn all            the contingent stock to be more than likely at the date of the transaction.

 

**Pro Forma Results**

 

The following unaudited pro forma data summarize the results of operations for the periods indicated as if the ESG acquisition that was described in the Company’s prior periodic filings had been completed as of the beginning of the periods presented.  The pro forma data give effect to actual operating results prior to the acquisitions and adjustments to interest expense and income            taxes.  No effect has been given to cost reductions or operating synergies in this presentation.  These pro forma amounts do not purport to be indicative of the results that would have actually been achieved if the acquisition had occurred as of the beginning of the periods presented or that may be achieved in the future.

 

|                                      | Three Month Period Ended                                             |   | Nine Month Period Ended                                                   |
|-------------------------------------------|----------------------------------------------------------------------|--------|---------------------------------------------------------------------------|
|                                      | May 31,                                                              |   | May 31,                                                                   |   | May 31, |   | May 31, |
|                                      | 2008                                                                 |   | 2007                                                                      |   | 2008 |   | 2007 |
|                                      | (Unaudited)                                                          |   | (Unaudited)                                                               |   | (Unaudited) |   | (Unaudited) |
|                                      |                                                                 |   |                                                                      |   |   |   |   |
| Net revenue                               | $          40,200       |   | $          42,286            |   | $            125,883 |   | $      135,117 |
|                                      |                                                                 |   |                                                                      |   |   |   |   |
| Operating loss                            | $         (1,905)            |   | $            (286) |   | $             (2,266) |   | $        (5,743) |
|                                      |                                                                 |   |                                                                      |   |   |   |   |
| Net loss available to common shareholders | $         (2,940)            |   | $          1,355)            |   | $             (5,769) |   | $        (9,075) |
|                                      |                                                                 |   |                                                                      |   |   |   |   |
| Basic loss per common share               | $           (0.27) |   | $           (0.12)      |   | $               (0.52) |   | $          (0.84) |
|                                      |                                                                 |   |                                                                      |   |   |   |   |
| Diluted loss per common share             | $           (0.24) |   | $           (0.10)      |   | $               (0.46) |   | $          (0.73) |

 

**NOTE 4 - ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE**

 

Accounts receivable and contracts receivable are summarized as follows:

 

|                                                   |   | May 31,2008(Unaudited) |   |   | August 31,2007(Audited) |   |
|--------------------------------------------------------|--------|------------------------|--------|--------|------------------------------|--------|
|                                                   |   |                   |   |   |                         |   |
| Accounts receivable                                    |   | $                      | 14,374 |   |                         | $      | 17,572 |   |
| Contracts receivable                                   |   |                   |   |   |                         |   |   |   |
| Progress billing                                       |   |                   | 5,643  |   |                         |   | 4,576 |   |
| Retainages                                             |   |                   | 981    |   |                         |   | 239 |   |
|                                                   |   |                   | 20,998 |   |                         |   | 22,387 |   |
| Less allowance for doubtful accounts and sales returns |   |                   | (1,393 | )      |                         |   | (1,230 | ) |
|                                                   |   |                   |   |   |                         |   |   |   |
|                                                   |   | $                      | 19,605 |   |                         | $      | 21,157 |   |
|                                                   |   |                   |   |   |                         |   |   |   |
| Long-term accounts receivable                          |   | $                      | 829    |   |                         | $      | 770 |   |

 

 

 

15

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**NOTE 5 – CONTRACTS IN PROGRESS**

 

Information related to contracts in progress is summarized as follows:

 

|                                                           |   | May 31, 2008

 (Unaudited) |    |   | August 31, 2007

(Audited) |   |
|----------------------------------------------------------------|--------|---------------------------------|---------|--------|--------------------------------------|--------|
|                                                           |   |                            |    |   |                                 |   |
| Costs incurred on uncompleted contracts                        |   | $                               | 19,603  |   |                                 | $      | 10,999 |   |
| Estimated earnings recognized to date on uncompleted contracts |   |                            | 3,800   |   |                                 |   | 2,511 |   |
|                                                           |   |                            | 23,403  |   |                                 |   | 13,510 |   |
| Less billings on uncompleted contracts                         |   |                            | (21,040 | )      |                                 |   | (13,409 | ) |
|                                                           |   | $                               | 2,363   |   |                                 | $      | 101 |   |

 

The net amount is included in the accompanying consolidated balance sheets under the following captions:

 

|                                                                        |   | May 31,2008(Unaudited) |   |   | August 31,2007(Audited) |   |
|-----------------------------------------------------------------------------|--------|------------------------|--------|--------|------------------------------|--------|
|                                                                             |
|                                                                        |   |                   |   |   |                         |   |
| Costs and estimated earnings in excess of billings on uncompleted contracts |   | $                      | 3,540  |   |                         | $      | 1,279 |   |
| Billings in excess of costs and estimated earnings on uncompleted contracts |   |                   | 1,177  |   |                         |   | 1,178 |   |
|                                                                        |   | $                      | 2,363  |   |                         | $      | 101 |   |

 

**NOTE 6 – INVENTORY**

 

Inventories are summarized as follows:

 

|                   |   | May 31,2008(Unaudited) |   |   | August 31,2007(Audited) |   |
|------------------------|--------|------------------------|--------|--------|------------------------------|--------|
|                   |   |                   |   |   |                         |   |
| Raw materials          |   | $                      | 755    |   |                         | $      | 691 |   |
| Work-in-process        |   |                   | 58     |   |                         |   | 29 |   |
| Finished goods         |   |                   | 4,439  |   |                         |   | 6,317 |   |
|                   |   |                   | 5,252  |   |                         |   | 7,037 |   |
|                   |   |                   |   |   |                         |   |   |   |
| Less inventory reserve |   |                   | (772   | )      |                         |   | (381 | ) |
|                   |   | $                      | 4,480  |   |                         | $      | 6,656 |   |

 

**NOTE 7 - PROPERTY, PLANT AND EQUIPMENT**

 

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

 

|                          |   | May 31,2008(Unaudited) |    |   | August 31,2007(Audited) |   |
|-------------------------------|--------|------------------------|---------|--------|------------------------------|--------|
|                          |   |                   |    |   |                         |   |
| Land and building             |   | $                      | 8,960   |   |                         | $      | 9,440 |   |
| Machinery and equipment       |   |                   | 7,176   |   |                         |   | 6,926 |   |
| Research equipment            |   |                   | 371     |   |                         |   | 270 |   |
| Office equipment              |   |                   | 6,311   |   |                         |   | 5,616 |   |
| Vehicles                      |   |                   | 3,249   |   |                         |   | 3,299 |   |
| Leasehold improvements        |   |                   | 480     |   |                         |   | 342 |   |
|                          |   |                   | 26,547  |   |                         |   | 25,893 |   |
| Less accumulated depreciation |   |                   | (14,978 | )      |                         |   | (13,655 | ) |
|                          |   | $                      | 11,569  |   |                         | $      | 12,238 |   |

 

 

 

16

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The provision for depreciation amounted to $537, of which $235 is included in cost of revenues, and $516, of which $290 is included in cost of revenues, for the three month periods ended May 31, 2008 and 2007, respectively.  The provision for depreciation amounted to $1,536, of which $662 is included in cost of revenues, and $1,643, of which $290 is included in cost of revenues, for the nine            month periods ended May 31, 2008 and 2007, respectively.  Gains on disposal of assets totaling $14 and $40 were recorded for the three month periods ended May 31, 2008 and 2007, respectively, related to various building, office equipment, and vehicle disposals.  Losses on disposal of assets totaling ($33) and ($371) were recorded for the nine month periods ended May 31, 2008 and 2007, respectively, related to various building, office equipment, and vehicle            disposals. A total of $6,050 net of $776 of accumulated depreciation and $6,675 net of $595 of accumulated depreciation is included in the property, plant and equipment at May 31, 2008 and 2007, respectively, related to a consolidated variable interest entity.

 

**NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS**

 

There were no changes in the carrying amount of goodwill, as recorded under SFAS 142 for the three and nine month periods ended May 31, 2008.

 

The total amount of goodwill that is deductible for tax purposes is $9,476 and $1,276 at May 31, 2008 and 2007, respectively.

 

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

 

 

|                                    |   | May 31, 2008

(Unaudited) |   |
|-----------------------------------------|--------|---------------------------|--------|
|                                    |   | GrossCarryingAmount       |   |   | AccumulatedAmortization |   |   | Net Book  Value |   |   | Weighted AverageAmortizationPeriod (in years) |   |
|                                    |   |                      |   |   |   |   |   |   |   |   |   |   |
| Customer relationships                  |   | $                         | 6,294  |   |   | $ | 1,716 |   |   | $ | 4,578 |   |   |   | 10 |   |
| Non-compete                             |   |                      | 200    |   |   |   | 73 |   |   |   | 127 |   |   |   | 5 |   |
| Non-compete                             |   |                      | 930    |   |   |   | 233 |   |   |   | 697 |   |   |   | 5 |   |
| Non-compete                             |   |                      | 1,485  |   |   |   | 951 |   |   |   | 534 |   |   |   | 5 |   |
| Total                                   |   |                      | 8,909  |   |   |   | 2,973 |   |   |   | 5,936 |   |   |   |   |   |
| Tradename (not subject to amortization) |   |                      | 590    |   |   |   | - |   |   |   | 590 |   |   |   |   |   |
| Total                                   |   | $                         | 9,499  |   |   | $ | 2,973 |   |   | $ | 6,526 |   |   |   |   |   |

 

 

|                                    |   | August 31, 2007

(Audited) |   |
|-----------------------------------------|--------|--------------------------------------|--------|
|                                    |   | GrossCarryingAmount                  |   |   | AccumulatedAmortization |   |   | Net BookValue |   |   | Weighted AverageAmortizationPeriod (in years) |   |
|                                    |   |                                 |   |   |   |   |   |   |   |   |   |   |
| Customer relationships                  |   | $                                    | 6,294  |   |   | $ | 1,169 |   |   | $ | 5,124 |   |   |   | 10 |   |
| Non-compete                             |   |                                 | 200    |   |   |   | 58 |   |   |   | 142 |   |   |   | 5 |   |
| Non-compete                             |   |                                 | 930    |   |   |   | 93 |   |   |   | 837 |   |   |   | 5 |   |
| Non-compete                             |   |                                 | 1,485  |   |   |   | 729 |   |   |   | 757 |   |   |   | 5 |   |
| Total                                   |   |                                 | 8,909  |   |   |   | 2,049 |   |   |   | 6,860 |   |   |   |   |   |
| Tradename (not subject to amortization) |   |                                 | 590    |   |   |   | - |   |   |   | 590 |   |   |   |   |   |
| Total                                   |   | $                                    | 9,499  |   |   | $ | 2,049 |   |   | $ | 7,450 |   |   |   |   |   |

 

Intangible asset amortization expense is $542 and $387 for the three month periods ended May 31, 2008 and May 31, 2007, respectively, which includes $233 and $83 of amortization related to loan origination fees, respectively. Intangible asset amortization expense is $1,388 and $1,062 for the nine month periods ended May 31, 2008 and 2007, respectively, which includes $462 and $422 of amortization related            to loan origination fees, respectively.

 

 

17

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Amortization expense on intangible assets currently owned by the Company at May 31, 2008 for each of the next five fiscal years is as follows:

 

| 2008                |   | $      | 308   |   |
|---------------------|--------|--------|-------|--------|
| 2009                |   |   | 1,158 |   |
| 2010                |   |   | 1,083 |   |
| 2011                |   |   | 986   |   |
| 2012                |   |   | 818   |   |
| 2013 and thereafter |   |   | 2,173 |   |
| Total               |   | $      | 6,526 |   |

 

**NOTE 9 - DEBT ARRANGEMENTS**

 

The Company’s debt liabilities consisted of the following:

 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | May 31,2008(Unaudited) |   |   | August 31,2007(Audited, Restated) |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|--------|-----------------------------------|--------|
| Notes payable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                   |   |   |                              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                   |   |   |                              |   |
| Revolving line of credit promissory note due August 31, 2008. Interest at LIBOR plus 2.0% or 1.75% upon achievement of certain financial performance criteria.  The loan is secured by the business assets of the Company and personal guarantees of the Company’s two majority shareholders (the Chairman of the Board and the CEO of the Company).  The loan is                            further secured by certain marketable securities of the Company’s majority shareholder and Chairman of the Board. |   | $                      | 15,000 |   |                              | $      | 15,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                   |   |   |                              |   |   |   |
| Term loan due in monthly installments of $167 plus interest at LIBOR plus 2.0% or 1.75% upon achievement of certain financial performance criteria through maturity date, August 31, 2011.  The loan is secured by the business assets of the Company and personal guarantees of the Company’s two majority shareholders. The loan is further secured by certain marketable                            securities of the Company’s majority shareholder.                                                                 |   |                   | 16,587 |   |                              |   | 18,167 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                   |   |   |                              |   |   |   |
| Various term notes due in monthly installments of $14, including interest ranging from 4.9% to 9.03% through November 2012. The loans are secured by vehicles and equipment.                                                                                                                                                                                                                                                                                                                                                                   |   |                   | 297    |   |                              |   | 314 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                   |   |   |                              |   |   |   |
| Convertible Term Note:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                   |   |   |                              |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                   |   |   |                              |   |   |   |
| Convertible term note due in monthly installments of $227 plus interest at the Prime Rate plus 3.0% (subject to adjustments as described below) through maturity date, November 30, 2008.  The loan is guaranteed by the Company’s two majority shareholders.                                                                                                                                                                                                                                                                  |   |                   | 4,086  |   |                              |   | 5,678 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                   |   |   |                              |   |   |   |
| Debt with majority shareholder:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                   |   |   |                              |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                   |   |   |                              |   |   |   |
| Unsecured line of credit promissory note due December 1, 2010.  Interest at the one-month LIBOR plus 3.0% with $8,000 available borrowings.                                                                                                                                                                                                                                                                                                                                                                                          |   |                   | 1,300  |   |                              |   | 1,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                   |   |   |                              |   |   |   |
| Term note due in monthly installments of $3 including interest at 4.0% through September 2008.  The loan is secured by vehicles and equipment.                                                                                                                                                                                                                                                                                                                                                                                       |   |                   | 9      |   |                              |   | 30 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                   |   |   |                              |   |   |   |
| Variable Interest Entity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                   |   |   |                              |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                   |   |   |                              |   |   |   |
| Revolving line of credit promissory note due August 29, 2008. Interest at LIBOR plus 2.5%.  The loan is secured by real estate and personal guarantees of the Company’s two majority shareholders.                                                                                                                                                                                                                                                                                                                             |   |                   | 2,200  |   |                              |   | 2,200 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                   |   |   |                              |   |   |   |
| Various term loans due in monthly installments totaling $44 plus interest at ranges from LIBOR plus 1.5% to LIBOR plus 1.6%.  The loans mature at dates ranging from February 2009 through April 2011. The notes are secured by real estate and personal guarantees of the Company’s two majority shareholders.                                                                                                                                                                                                                |   |                   | 4,358  |   |                              |   | 5,062 |   |

 

 

 

18

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| Capital leases:                                                                                                                                                          |   |   |    |   |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
|                                                                                                                                                                     |   |   |    |   |   |   |
| Various notes due in monthly installments of $6 including interest at ranges from 2.3% to 11.6% through November 2010. The loans are secured by computers and equipment. |   |   | 83      |   |   |   | 112 |   |
| Total debt obligation                                                                                                                                                    |   |   | 43,920  |   |   |   | 47,563 |   |
| Less current maturities                                                                                                                                                  |   |   | (40,738 | )      |   |   | (38,846 | ) |
| Long-term portion of outstanding debt                                                                                                                                    |   | $      | 3,182   |   |   | $      | 8,717 |   |

 

Fiscal year principal payments due on long-term debt outstanding (including convertible term note) at May 31, 2008 are approximately as follows:

 

| 2008                |   | $      | 34,658 |   |
|---------------------|--------|--------|--------|--------|
| 2009                |   |   | 7,303  |   |
| 2010                |   |   | 583    |   |
| 2011                |   |   | 1,337  |   |
| 2012 and thereafter |   |   | 39     |   |
|                |   | $      | 43,920 |   |

 

*Credit Facility Loan and Security Agreement*

 

Effective August 31, 2006 and as amended by the “First Amendment to the Loan and Security Agreement” (the “Agreement”) on October 18, 2007, the Company entered into a $35,000 credit facility with Fifth Third Bank.  The credit facility replaced the parties' $25,000 credit facility, which expired on August 31, 2006. The facility includes a $20,000 term loan evidenced by a            term loan note, which matures on August 31, 2011 and a $15,000 revolving loan evidenced by a revolving line of credit promissory note, which matures on August 31, 2008. Availability under the revolving loan is the lesser of $15,000 or the borrowing base amount, which is calculated monthly as a percentage of the Company's eligible assets. Interest is charged on the loans at LIBOR plus 2.0%, which may be reduced to LIBOR plus 1.75% if the Company meets certain performance criteria.            The line of credit and the term loan are secured by assets of the Company and by personal guarantees of the Company’s two majority shareholders (the Chairman of the Board of Directors and CEO).  The loan is further secured by certain marketable securities of the Chairman of the Board. Outstanding borrowings on this line of credit amounted to $15,000 at May 31, 2008.  The Company had no availability under the line of credit at May 31, 2008.

 

Covenant terms of the Company’s Agreement require the maintenance of certain ratios including debt (excluding subordinated debt) to EBITDA and fixed charge coverage.  Additionally, the Company must maintain tangible net worth requirements and one of the personal guarantors of the Agreement must meet certain liquidity tests.  The Company violated certain loan covenants during the            second and third quarters of fiscal 2007.  However, the bank provided waivers for noncompliance in conjunction with the Agreement with respect to those dates.  The bank also amended certain covenants as of August 31, 2007 and through the respective maturity dates as stated in the Agreement.  The Company’s majority shareholder is also required to maintain $20,000 of personal marketable securities in the bank’s custody until certain future            EBITDA targets are met by the Company.

 

As of May 31, 2008 and August 31, 2007, the Company was not in compliance with certain covenants. Under terms of the Agreement, the bank may call the loan if the Company is in violation of any restrictive covenants. The Company is in breach of (a) the Minimum Shareholders’ Equity covenant requirement of $15,000, (b) the Maximum Funded Debt/Total Capitalization Ratio and (c) Fixed Charge Coverage            Ratio covenant requirements.  In the absence of waivers from the bank and in accordance with SFAS 78, the Company reclassified the related notes payable as current debt. This reclassification totaled $14,753 as of May 31, 2008 and $16,167 as of August 31, 2008.On June 2, 2008, the Company’s majority shareholder and Chairman of the Board of Directors funded a $32,000 term loan note to the Companywhich replaced the            Company’s Term Loan Note and the Revolving Line of Credit Promissory Note with a $32,000 term loan note with its majority shareholder. Refer to Note 22 for further details.

 

*Convertible Term Note*

 

On November 21, 2005, the Company issued a convertible term note (the “Note”) payable to an unrelated party, Laurus Master Fund, Ltd. (“Laurus”), in the principal amount of $7,500.  The Note has a term of three years and is convertible into the

 

 

19

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Company’s common stock at an exercise price of $5.50 per share subject to certain adjustments contained in the Note.  Principal payments are payable monthly at $227 beginning March 1, 2006.  Interest is payable monthly in arrears beginning January 1, 2006 at prime plus 3.0% subject to a floor of 9.5%. This interest rate is subject to adjustments as later described and as fully            set forth in the Note.  Additionally, the Company issued a warrant to Laurus (the “Laurus Warrant”) to purchase up to an aggregate of 272,727 shares of the Company's common stock.  The Company also issued a warrant (the “CB Capital Warrant”) exercisable for shares of the Company’s common stock to CB Capital Partners, Inc. (“CB Capital”), a financial advisor to purchase up to an aggregate of 13,636 shares of the            Company’s common stock.  The Laurus and CB Capital warrants (collectively, “the Warrants”) have a term of five years and an exercise price of $6.60 per share. The Company used the proceeds from the offering of the Note and the Warrants for general working capital purposes.  The Note is unsecured by the Company, but guaranteed by the Company’s two majority shareholders.  The Company has registered the shares of common stock            underlying the Note and Warrants.

 

Subject to the terms of the Note, the monthly principal and interest payments are payable in shares of the Company’s common stock if certain criteria are met, as follows:

 

| • | the average closing price of the Company’s common stock as reported by Bloomberg, L.P. for the five trading days immediately preceding the repayment date is greater than or equal to 109% of the conversion price of the Note, set in the Note at $5.50 per share (based upon the conversion price of $5.50, the average closing price required would be $6.00); |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| • | the total value of the shares converted cannot exceed 25% of the aggregate dollar trading volume of the Company’s common stock for the previous twenty-two trading days; |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| • | there must be an effective registration statement covering the shares of the Company’s common stock into which the principal and interest under the Note are convertible or an exemption from registration for resale must be available pursuant to Rule 144 of the Securities Act; and |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| • | there must be no event of default existing under the Note that has not been cured or is otherwise waived in writing by Laurus at Laurus’ option. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

 

If the above criteria are not met, the Company must pay that portion or all of the monthly principal payment in cash at a rate of 102% of the respective monthly amortization amounts.  The Company had the option to postpone payment of any 12 principal payments due.  As of May 31, 2008, the Company has postponed all 12 months of principal payments.  These deferred principal            amounts shall be due and payable, at the Company’s option, on any subsequent payment date or on the maturity date of the Note.

 

The Company may prepay the Note at any time by paying 130% of the principal amount then outstanding, together with accrued but unpaid interest thereon. Upon an event of default under the Note, Laurus may demand repayment in full at a rate of 105% of the outstanding principal amount of the Note. If the Note remains outstanding after an event of default that is not cured, the interest rate increases an            additional 1.0% per month. Events of default include:

 

|   | • | a failure to make payments under the Note when due; |
|--------|--------|-----------------------------------------------------|

 

|   | • | a material breach of the transaction documents by the Company; |
|--------|--------|----------------------------------------------------------------|

 

|   | • | bankruptcy-related events; |
|--------|--------|----------------------------|

 

|   | • | a change of control transaction without prior approval; and |
|--------|--------|-------------------------------------------------------------|

 

|   | • | events of default under certain other agreements to which the Company is a party. |
|--------|--------|-----------------------------------------------------------------------------------|

 

On a month-by-month basis, the interest rate on the Note is subject to reduction by 2% for every 25% increase in the market price of the Company’s common stock above the fixed conversion price of the Note, but in no event shall the interest rate be less than 0%.

 

Laurus also has the option to convert all or a portion of the Note into shares of the Company’s common stock at any time, at an initial fixed conversion price of $5.50 per share, subject to limitations and adjustment as described below. The Note is currently convertible into 866,942 shares of the Company’s common stock, excluding the conversion of any accrued interest. The conversion price is            adjustable on a weighted average basis upon certain future issuances of securities by the Company at a price less than the conversion price then in effect. There are a number of limitations on Laurus’ ability to convert the Note and exercise the Laurus Warrant. These limitations include:

 

| • | Laurus may not convert the Note or exercise the Laurus Warrant for a number of shares that would cause all shares then held by Laurus to exceed 4.99% of the Company’s outstanding shares of common stock unless there has been an event of default or Laurus provides the Company with seventy-five days prior notice. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

20

----

 

| • | Laurus agreed that it would not acquire in aggregate more than 2,108,764 shares of common stock through the conversion of the Note or the Laurus Warrant or through any agreement related thereto unless the Company’s shareholders approved such issuance. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Subject to prior satisfaction of the conversion of amounts due and subject to certain other restrictions set forth in the Note, if (i) the average closing price of common stock as reported by Bloomberg, L.P. for five consecutive trading days in any calendar month shall be greater than or equal to 200% of the conversion price, then Laurus shall convert on each such occurrence (limited to once per calendar            month), such principal amount of the Note as does not exceed 25% of the aggregate dollar trading volume of the common stock for the period of twenty-two trading days immediately preceding such date less any amounts previously converted.

 

The Warrants were recorded at fair value and classified as a liability.  Any discount accretion is considered immaterial based on the Black-Scholes model.  The Company recorded $856 for debt issue costs, including $308 paid to affiliates of Laurus, $475 to CB Capital, and $73 for legal and professional fees. The debt issue costs are included in other assets in the accompanying            consolidated balance sheet as of May 31, 2008.

 

**NOTE 10 - RETIREMENT PLAN**

 

The Company maintains a profit-sharing plan that covers all employees who meet the eligibility requirements set forth in the plan. Company contributions are made at management’s discretion and are allocated based upon each participant’s eligible compensation. The plan includes a 401(k) savings plan whereby employees can contribute and defer taxes on compensation contributed to the plan. The            Company matches 25% up to 4% of an employee’s compensation.  The Company is not required to contribute to the plan but may make a discretionary contribution.

 

**NOTE 11 - INCOME TAXES**

 

The reconciliation for 2008 and 2007 of income tax expense (benefit) computed at the U.S. Federal statutory tax rate to the Company's effective income rate is as follows:

 

|                                          |   | May 31,2008(Unaudited) |   |   | August 31, 2007(Audited) |   |
|-----------------------------------------------|--------|------------------------|--------|--------|------------------------------------|--------|
|                                          |   |                   |   |   |                               |   |
| Tax at U.S. Federal statutory rate            |   |                   | 34.0   | %      |                               |   | 34.0 | % |
| State and local taxes, net of federal benefit |   |                   | 5.6    |   |                               |   | 5.6 |   |
| Other                                         |   |                   | -      |   |                               |   | - |   |
| Change in valuation allowance                 |   |                   | (39.6  | )      |                               |   | (39.6 | ) |
|                                          |   |                   | 0.0    | %      |                               |   | (0.0 | )% |

 

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

 

|                          |   | May 31,2008(Unaudited) |   |    | August 31, 2007(Audited) |   |
|-------------------------------|--------|------------------------|--------|---------|------------------------------------|--------|
| Current:                      |   |                   |   |    |                               |   |
| Federal                       |   | $                      | (1,659 | )       |                               | $      | (1,652 | ) |
| State                         |   |                   | (274   | )  |                               |   | (273 | ) |
|                          |   |                   | (1,933 | )  |                               |   | (1,925 | ) |
| Deferred:                     |   |                   |   |    |                               |   |   |   |
| Federal                       |   |                   | (305   | )       |                               |   | (96 | ) |
| State                         |   |                   | (47    | )       |                               |   | (15 | ) |
|                          |   |                   | (353   | )       |                               |   | (111 | ) |
|                          |   |                   |   |    |                               |   |   |   |
| Change in valuation allowance |   |                   | 2,520  |    |                               |   | 2,193 |   |
|                          |   |                   |   |    |                               |   |   |   |
| Net income tax (benefit)      |   | $                      | 234    |    |                               | $      | 157 |   |

 

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

 

 

21

----

|                                           |   | May 31,2008(Unaudited) |   |   | August 31, 2007(Audited) |   |
|------------------------------------------------|--------|------------------------|--------|--------|------------------------------------|--------|
| Deferred Tax Assets:                           |   |                   |   |   |                               |   |
| Current:                                       |   |                   |   |   |                               |   |
| Allowances for doubtful accounts and inventory |   | $                      | 855    |   |                               | $      | 637 |   |
| Accrued liabilities and other                  |   |                   | 1,384  |   |                               |   | 1,494 |   |
| Noncurrent:                                    |   |                   |   |   |                               |   |   |   |
| Amortization of covenants                      |   |                   | 126    |   |                               |   | 270 |   |
| Depreciation                                   |   |                   | (566   | )      |                               |   | (246 | ) |
| Net operating losses and other carryforwards   |   |                   | 6,560  |   |                               |   | 3,684 |   |
|                                           |   |                   | 8,359  |   |                               |   | 5,839 |   |
|                                           |   |                   |   |   |                               |   |   |   |
| Valuation allowance                            |   |                   | (6,824 | )      |                               |   | (4,304 | ) |
|                                           |   |                   |   |   |                               |   |   |   |
|                                           |   | $                      | 1,535  |   |                               | $      | 1,535 |   |

 

SFAS 109 requires a valuation allowance to reduce the deferred tax assets reported if, at May 31, 2008, the Company had federal tax operating loss 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.  After consideration of all the evidence, both positive and negative, management has determined that a $6,824            valuation allowance at May 31, 2008 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 $2,520.  At May 31, 2008, the Company has federal net operating loss carryforwards of approximately $15,000, which expire between 2020 and 2023. The state tax operating loss carryforwards are approximately $18,000.  The difference between federal and state net            operating loss carryforwards represents a change in business venue in a prior period.  The Company's capital loss carryforward is approximately $47, which expires during the fiscal year ending August 31, 2010 and 2012.  The Company also incurred net operating losses related to European operations that can be carried forward indefinitely.

 

**NOTE 12 – 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 one million shares of common stock.  During the period ended May 31, 2008, no restricted share units            were issued under this plan.

 

*Warrants*

 

At May 31, 2008, the Company had 5,000 warrants issued and outstanding that are each convertible into one share of common stock with an exercise price of $10.00 per share. The remaining contractual term on these warrants is through June 30, 2008.

 

**NOTE 13 - SHAREHOLDERS’ EQUITY**

 

*Common Stock*

 

The following are the details of the Company's common stock as of May 31, 2008 and August 31, 2007:

 

|                          |   | Number of Shares |   |       |
|-------------------------------|--------|----------------------------|--------|------------|
|                          |   | Authorized                 |   | Issued     |   | Outstanding |   |   | Amount |   |
|                          |   |                       |   |       |   |   |   |   |   |   |
| Common stock, $0.10 par value |   | 150,000,000                |   | 11,391,823 |   | 11,391,823 |   | $ | 1,117 |   |

 

There were no share issuances or retirements for the period ended May 31, 2008.

 

*Preferred Stock*

 

The following are the details of the Company's non-voting preferred stock as of May 31, 2008 and August 31, 2007:

 

 

 

22

----

 

|                             |   | Number of Shares |      |   |   |   |
|----------------------------------|--------|----------------------------|-----------|--------|--------|--------|
|                             |   | Authorized                 |      |   | Issued |   |   | Outstanding |   |   | Amount |   |
|                             |   |                       |      |   |   |   |   |   |   |   |   |   |
| Preferred stock, $0.10 par value |   |                       | 1,000,000 |   |   |   | 66,180 |   |   |   | 66,180 |   |   | $ | 6,618 |   |
|                                  |        |                            |           |        |        |        |  |  |  |  |  |  |  |  |  |  |

 

On November 30, 2005, the Company issued 66,180 shares of $0.10 par value non-voting 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 May 25, 2005. 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 $7.50 per share. Dividends of $124 were paid for the three months ended May 31, 2008 and 2007, respectively. Dividends of $372 were paid for the nine months ended May 31, 2008 and 2007, respectively.

 

*Treasury Stock*

 

The Company’s related party consolidated variable interest entity described in Note 2 held 384,500 shares of the Company’s common stock at August 31, 2007.  The shares were distributed to the members during the period ending February 29, 2008.

 

**NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)**

 

Significant components of accumulated other comprehensive income (loss) is as follows:

 

|                       |   | ForeignCurrencyAdjustments |   |   | UnrealizedGains (Losses)on Securities |   |   | Reclassification ofRealized Gains(Losses) includedin Net Income |   |   | AccumulatedOtherComprehensiveIncome |   |
|----------------------------|--------|----------------------------|--------|--------|-------------------------------------------------|--------|--------|------------------------------------------------------------------------------------------|--------|--------|-------------------------------------|--------|
|                       |   |                       |   |   |                                            |   |   |                                                                                     |   |   |                                |   |
| Balance at August 31, 2007 |   | $                          | 259    |   |                                            | $      | (41    | )                                                                                        |   | $      | 42                                  |   |   | $ | 260 |   |
|                       |   |                       |   |   |                                            |   |   |                                                                                     |   |   |                                |   |   |   |   |   |
| Period change              |   |                       | 37     |   |                                            |   | -      |                                                                                     |   |   | -                                   |   |   |   | 37 |   |
|                       |   |                       |   |   |                                            |   |   |                                                                                     |   |   |                                |   |   |   |   |   |
| Balance at May 31, 2008    |   | $                          | 296    |   |                                            | $      | (41    | )                                                                                        |   | $      | 42                                  |   |   | $ | 297 |   |

 

The net tax effect of the unrealized gain (loss) after consideration of the valuation allowance is insignificant and is not included in deferred tax assets or accumulated other comprehensive income (loss).

 

**NOTE 15 - PER SHARE DATA**

 

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

 

|                                                         |                                                     | Three Month Period Ended |                                                     | Nine Month Period Ended |
|--------------------------------------------------------------|----------------------------------------------------------|--------------------------|----------------------------------------------------------|-------------------------|
|                                                         |                                                     | May 31,                  |                                                     | May 31,                 |   | May 31, |   | May 31, |
|                                                         |                                                     | 2008                     |                                                     | 2007                    |   | 2008 |   | 2007 |
|                                                         |                                                     | (Unaudited)              |                                                     | (Unaudited)             |   | (Unaudited) |   | (Unaudited) |
|                                                         |                                                     |                     |                                                     |                    |   |   |   |   |
| Net Loss Available to Common Shareholders                    | $       (3,080)       |                     | $       (1,355)       |                    | $       (5,909) |   | $       (8,384) |
|                                                         |                                                     |                     |                                                     |                    |   |   |   |   |
| Basic Loss Per Common Share                                  | $         (0.27) |                     | $         (0.12) |                    | $         (0.52) |   | $         (0.78) |
|                                                         |                                                     |                     |                                                     |                    |   |   |   |   |
| Basic weighted average number of

common shares outstanding  | 11,391,823                                               |                     | 11,417,748                                               |                    | 11,391,823 |   | 10,810,765 |
|                                                         |                                                     |                     |                                                     |                    |   |   |   |   |
| Diluted Loss Per Common Share:                               | $         (0.24) |                     | $         (0.10) |                    | $         (0.46) |   | $         (0.67) |
|                                                         |                                                     |                     |                                                     |                    |   |   |   |   |
| Diluted weighted average number of common shares outstanding | 12,771,670                                               |                     | 13,221,883                                               |                    | 12,890,962 |   | 12,463,326 |

 

 

 

23

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At May 31, 2008, diluted shares represent 742,976 shares obtainable through the Laurus convertible term note and 272,727 shares obtainable through the Laurus Warrant, 13,636 shares obtainable through the CB Capital Warrant, and 5,000 shares obtainable through warrants issued as stock compensation. The remainder of diluted shares is obtainable through acquisition agreements and employee stock compensation            plans.

 

**NOTE 16 - OPERATING LEASE COMMITMENTS**

 

**Property Lease Commitments**

 

| Segment                                                                                  |   | Location(s)                                                                                                   |   | Description                                                            |
|------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------|
| Corporate and various Wireless Infrastructure & Electronics Integration subsidiaries |   | Indianapolis, IN (1)                                                                                          |   | Corporate offices, various subsidiary offices and warehouse facilities |
|                                                                                     |   |                                                                                                          |   |                                                                   |
| Wireless Infrastructure                                                                  |   | Cleveland, OH, Kansas City, MO, Alpharetta, GA, Fort Mitchell, KY (2); Ft. Wayne, IN (3)                      |   | Offices, warehouse facilities                                          |
|                                                                                     |   |                                                                                                          |   |                                                                   |
| Business Solutions                                                                       |   | Richmond, IN (4); Indianapolis, IN (5); Brentwood, TN (6); Provo, UT (10); Tucson, AZ (12); Loveland, CO (11) |   | Offices                                                                |
|                                                                                     |   |                                                                                                          |   |                                                                   |
| Transportation Infrastructure                                                            |   | Indianapolis, IN, Sedalia, MO, Knoxville, TN (7)                                                              |   | Offices, equipment yard, warehouse, storage                            |
|                                                                                     |   |                                                                                                          |   |                                                                   |
| Ultraviolet Technologies                                                                 |   | Crawfordsville, IN (8); United Kingdom, Singapore, Shenzhen, China and Guangdong, China (9)                   |   | Offices, warehouse and manufacturing facilities                        |

 

| (1) | The leases on these properties are with a limited liability company consolidated by the Company as a variable interest entity and owned by the Company’s two majority shareholders.   The operating lease agreement provides for monthly base rent of $111 per month for office and warehouse facilities through February 2017, adjusted annually to fair market value. The agreement also includes a one-year renewal option. The lease is an                            “Absolute Triple Net Lease” which provides for the lessee to pay most expenses related to the building including repairs and maintenance, insurance, and property taxes. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| (2) | The Company maintains various operating lease agreements that provide for monthly base rents between $1 and $8 that expire between March 2009 and November 2013 and may be adjusted annually to fair market value or to increases defined in the agreements. The agreements include various multi-year renewal options and the lessee pays most expenses related to the building including repairs and maintenance, insurance, and property taxes. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| (3) | The Company maintains a sublease obligation that provides for monthly base rent of $3 through December 31, 2010 and may be adjusted annually to fair market value or to increases defined in the agreement. The agreement includes a one year renewal option and the lessee pays most expenses related to the building including repairs and maintenance, insurance, and property taxes. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| (4) | The lease on this property is with the former Chief Operating Officer of the Company.  The operating lease agreement provides for monthly base rent of $4 through August 31, 2010 with nominal annual increases. The agreement also includes a one-year renewal option. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| (5) | The Company maintains a sublease obligation that provides for monthly base rent of $5 through December 31, 2008 and may be adjusted annually to fair market value or to increases defined in the agreement. The lessee pays most expenses related to the building including repairs and maintenance, insurance, and property taxes. There is no renewal option. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| (6) | The Company maintains an operating lease agreement that provides for monthly base rent of $10 through January 31, 2009. In addition to an escalating base monthly rent, the agreement requires the Company to pay any increase in operating costs, real estate taxes, or utilities over the base year. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| (7) | The leases on these properties are with a limited liability company consolidated by the Company as a variable interest entity and owned by the Company’s two majority shareholders.  The operating lease agreement provides for monthly base rent of $25 through April 30, 2014, adjusted annually to fair market value. The agreement also |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

24

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includes a one-year renewal option. The lease is an “Absolute Triple Net Lease” which provides for the lessee to pay most expenses related to the buildings including repairs and maintenance, insurance, and property taxes.

 

| (8) | The leases on these properties are with a limited liability company consolidated by the Company as a variable interest entity and owned by the Company’s two majority shareholders.  The operating lease agreement provides for monthly base rent of $7 through August 31, 2009, adjusted annually to fair market value. The agreement also includes one renewal option. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| (9) | The Company maintains various operating leases in the United Kingdom, Singapore and China providing for monthly base rent of approximately $10 with various expirations through 2015, which may be adjusted annually to fair market value or to increases defined in the agreement. The agreement includes a one-year renewal option and the lessee pays most expenses related to the building including repairs and maintenance, insurance, and property                            taxes. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| (10) | The Company maintains an operating lease agreement that provides for monthly base rent of $25 through January 31, 2012 and is increased 5% annually.  The lessee pays most expenses related to repairs, maintenance, property taxes, and insurance.  The lessor is required to carry minimal amounts of insurance.  The lease is with a limited liability company in which an employee is a member. |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| (11) | The Company maintains an operating lease agreement that provides for monthly base rent of $3 through January 31, 2009.  The lessee pays most expenses related to repairs, maintenance, property taxes, and insurance.  The lessor is required to carry minimal amounts of insurance. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| (12) | The Company maintains an operating lease agreement that provides for monthly base rent of $5 through January 31, 2010.  The lessee pays most expenses related to repairs, maintenance, property taxes, and insurance.  The lessor is required to carry minimal amounts of insurance.  The lease includes two three-year lease renewal options for a total of six years. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Rent expense under these agreements amounted to $642 and $1,966 for the three and nine months ending May 31, 2008, respectively.

 

**Equipment**

 

The Company leases a fleet of trucks and trailers, support vehicles, specialty construction equipment, and office equipment.  As of May 31, 2008, the Company had approximately 300 units of rolling-stock fleet. Lease expense under these agreements amounted to approximately $277 for the nine months ending May 31, 2008 and leases expire in various years through 2012. Most operating leases            provide for a one-year term per vehicle with an option to purchase or continue leasing on a month-to-month basis.

 

Future fiscal minimum commitments under these agreements at May 31, 2008 are approximately as follows:

 

|                |   | Facilities |   |   | Vehicles and

Equipment |   |
|---------------------|--------|------------|--------|--------|------------------------------|--------|
| 2008                |   | $          | 663    |   |                         | $      | 80 |   |
| 2009                |   |       | 2,514  |   |                         |   | 65 |   |
| 2010                |   |       | 2,255  |   |                         |   | 39 |   |
| 2011                |   |       | 2,177  |   |                         |   | 32 |   |
| 2012                |   |       | 1,879  |   |                         |   | 12 |   |
| 2013 and thereafter |   |       | 6,662  |   |                         |   | - |   |
|                |   |       |   |   |                         |   |   |   |
|                |   | $          | 16,150 |   |                         | $      | 228 |   |

 

**NOTE 17 - RELATED PARTY TRANSACTIONS**

 

The following is a summary of related party amounts included in the consolidated financial statements at May 31, 2008 and 2007, respectively:

 

 

25

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|                                            |   | May 31,2008(Unaudited) |   |   | August 31,2007(Audited) |   |
|-------------------------------------------------|--------|------------------------|--------|--------|------------------------------|--------|
| Assets:                                         |   |                   |   |   |                         |   |
| Note receivable from former subsidiary employee |   | $                      | 300    |   |                         | $      | 300 |   |
|                                            |   |                   |   |   |                         |   |   |   |
| Liabilities:                                    |   |                   |   |   |                         |   |   |   |
| Long-term line of credit                        |   |                   | (1,300 | )      |                         |   | (1,000 | ) |
| Installment notes payable                       |   |                   | (9     | )      |                         |   | (30 | ) |
|                                            |   |                   |   |   |                         |   |   |   |
| Net assets (liabilities)                        |   | $                      | (1,009 | )      |                         | $      | (730 | ) |

 

The note receivable represents a loan with a former subsidiary employee in connection with the acquisition of the subsidiary.  The loan is secured by restricted stock and expires June 30, 2008.

 

The long-term line of credit represents a loan from the Company’s majority shareholder and matures on December 1, 2010.  See Note 9 for further details.

 

The installment notes payable represents loans for equipment and vehicle purchases by the Company’s majority shareholder.  The loans are secured by the respective assets acquired and expire no later than September 30, 2008.  Interest expense is immaterial.  See Note 9 for further details.

 

The following is a summary of related party amounts included in the consolidated statements of operations for the nine months ending May 31, 2008 and 2007, respectively:

 

|                                |   | May 31,2008(Unaudited) |   |   | May 31,2007(Unaudited) |   |
|-------------------------------------|--------|------------------------|--------|--------|------------------------|--------|
| Revenues:                           |   |                   |   |   |                   |   |
| Electronics Integration (1)         |   | $                      | 13     |   |                   | $      | 3 |   |
| Total                               |   |                   | 13     |   |                   |   | 3 |   |
|                                |   |                   |   |   |                   |   |   |   |
| Expenses:                           |   |                   |   |   |                   |   |   |   |
| Wireless Infrastructure (2) (3) (4) |   |                   | 166    |   |                   |   | 293 |   |
| Business Solutions (5) (6) (7)      |   |                   | 305    |   |                   |   | 156 |   |
| Transportation Infrastructure (8)   |   |                   | 225    |   |                   |   | 225 |   |
| Ultraviolet Technologies (9)        |   |                   | 63     |   |                   |   | 63 |   |
| Electronics Integration (2)         |   |                   | 107    |   |                   |   | 180 |   |
| Holding Company (10) (11)           |   |                   | 787    |   |                   |   | 255 |   |
| Total                               |   |                   | 1,653  |   |                   |   | 1,172 |   |

 

| (1) | During the nine months ending May 31, 2008 and 2007, the Company’s TTC subsidiary performed $13 and $3, respectively, worth of services for businesses owned by the Company’s two majority shareholders. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | The Company maintains an operating lease agreement for the rental of a building with a limited liability company consolidated by the Company as a variable interest entity and owned by the Company’s two majority shareholders.  A majority of the Company’s subsidiaries maintain offices and or warehouse space in the facility. The lease agreement includes a ten-year term with one option to extend the lease term for a one-year                            period. The agreement provides for a monthly base rent of $30 per month. The base rent shall be adjusted annually to fair market value. In addition, the Company shall pay certain expenses including taxes, assessments, maintenance and repairs.  Rent and related expenses of $260 and $432 were recognized for the nine months ended May 31, 2008 and 2007, respectively. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | The Company maintains a debt obligation to its majority shareholder for the purchase of vehicles and equipment. The loans are secured by the assets and pay interest at 6%.  Interest expense of $1 and $5 was recognized for the nine months ending May 31, 2008 and 2007, respectively. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | The Company’s Fortune Wireless subsidiary maintained an operating lease agreement for rental of a building with a limited liability company consolidated by the Company as a variable interest entity and owned by the Company’s two majority shareholders. The operating lease agreement provided for monthly base rent of $4 through April 30, 2011, adjusted annually to fair market value. The building was sold during November 2007. Rent and                            related expenses of $12 and $36 were recognized for the nine months ending May 31, 2008 and 2007, respectively. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | The Company’s PSM subsidiary holds a lease for an office building in Richmond, IN from a former Chief Operating Officer of the Company. The lease is for a period of 27 months and expires in August 2010. The agreement provides |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

26

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for base rent of $3 per month with nominal annual increases.  Rent and related expense of $27 was recognized for the nine months ending May 31, 2008 and 2007, respectively.  

| (6) | The Company’s ESG subsidiary entered into a lease agreement for an office building in Provo, Utah which is leased from a limited liability company in which an employee is a member of the limited liability company.  The lease is due to expire January 31, 2011.  Rent and related expense of $224 and $75 was recognized for the nine months ending May 31, 2008 and 2007, respectively. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | The Company’s ESG subsidiary entered into a lease agreement for an office building in Tucson, Arizona which is leased from a Company owned by a former employee. The lease is due to expire January 31, 2010. Rent and related expense of $45 was recognized for the nine months ending May 31, 2008 and 2007, respectively. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8) | The Company’s JH Drew subsidiary maintains an operating lease agreement for rental of three buildings located in Indiana, Tennessee and Missouri with a limited liability company consolidated by the Company as a variable interest entity and owned by the Company’s two majority shareholders. The lease agreement includes a five-year term with one option to extend the lease term for a one-year period and provides for base rent of $25 per                            month. The base rent shall be adjusted annually to fair market value. In addition, the Company shall pay certain expenses including taxes, assessments, maintenance and repairs.  Rent and related expenses of $225 were recognized for the nine months ending May 31, 2008 and 2007, respectively. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (9) | The Company’s Nor-Cote subsidiary maintains an operating lease agreement for rental of a building with a limited liability company consolidated by the Company as a variable interest entity and owned by the Company’s two majority shareholders.  The agreement provides for monthly base rent of $7 and expires in August 2009. The base rent shall be adjusted annually to fair market value. The agreement also includes one renewal                            option, which allows the Company to extend the lease term for an additional year.  Rent and related expenses of $63 were recognized for the nine months ending May 31, 2008 and, 2007, respectively. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (10) | The Company maintains an operating lease agreement for the rental of a building with a limited liability company consolidated by the Company as a variable interest entity and owned by the Company’s two majority shareholders.  The lease agreement includes a ten-year term with one option to extend the lease term for a one-year period. The agreement provides for a monthly base rent of $86 per month. The base rent shall be adjusted                            annually to fair market value. In addition, the Company shall pay certain expenses including taxes, assessments, maintenance and repairs.  Rent and related expenses of $727 and $255 were recognized for the nine months ending May 31, 2008 and 2007, respectively. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (11) | As described in Note 9, the Company entered into various unsecured line of credit agreements with its majority shareholder. Interest expense booked on these agreements amounted to $60 and $0 for the nine months ending May 31, 2008 and 2007, respectively. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Other Related Party Transactions**

 

The Company’s majority shareholders have entered into various put/call option agreements (“option agreements”) with the Company’s common stock over the last five years.  Option agreements with these shareholders are included in the acquisitions of CSM.  The put/ call options range in price from $1 to $10.33 per common share.  During the nine months            ending May 31, 2008, the majority shareholders did not acquire any shares of the Company’s common stock related to option agreements with shareholders.

 

**Guaranties**

 

A significant portion of the Company’s debt and surety bonds are personally guaranteed by the Company’s Chairman of the Board and Chief Executive Officer.  Future changes to these guaranties would affect financing capacity of the Company.

 

**NOTE 18 - SIGNIFICANT ESTIMATES**

 

Significant estimates have been made by management with respect to the realizability of the Company’s deferred tax assets. Actual results could differ from these estimates making it reasonably possible that a change in these estimates could occur in the near term. The net increase in the valuation allowance for deferred income tax assets was $2,520 and $2,219 at May 31, 2008 and 2007, respectively.            The valuation allowance relates primarily to net operating loss carryforwards, tax credit carryforwards, and net deductible temporary differences. The Company evaluates a variety of factors in determining the amount of the deferred income tax assets to be recognized pursuant to SFAS No. 109, including the number of years the Company’s operating loss and tax credits can be carried forward, the existence of taxable temporary differences, the Company’s earnings history and            the Company’s near-term earnings expectations. At May 31, 2008, management believes it is more likely than not that the majority of net deferred income tax assets will not be realized.

 

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

 

 

27

----

 

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

 

Certain portions of the Company’s business (including, Wireless Infrastructure and Transportation Infrastructure Segments) recognize revenues using the percentage-of-completion method of accounting.  This accounting method results in the Company recognizing contract revenues and earnings ratably over the contract term in proportion to its incurrence of contract costs.  The            earnings or losses recognized on individual contracts are based on estimates of contract revenues, costs and profitability that require considerable judgment. If in any period the Company significantly increases its estimate of the total costs to complete a given project, the Company may recognize very little or no additional revenues with respect to that project.  If the total contract cost estimates indicate that there is a loss, such loss is recognized in the period            such determination is made.  To the extent that the Company’s cost estimates fluctuate over time or differ from actual costs, its operating results may be materially affected.  As a result, the Company’s gross profit in future periods may be significantly reduced or eliminated.

 

**NOTE 19 - CONCENTRATION OF CREDIT RISK**

 

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

 

**NOTE 20 - COMMITMENTS AND CONTINGENCIES**

 

**Litigation**

 

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

 

**Restricted Cash**

 

Certain states and vendors require us to post letters of credit to ensure payment of taxes or payments to the Company’s vendors under health insurance and workers compensation contracts and to guarantee performance under the Company’s contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit commits the issuer to pay specified            amounts to the holder of the letter of credit if the holder demonstrates that the Company has failed to perform specified actions. If this were to occur, the Company would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, the Company may also have to record a charge to earnings for the reimbursement. The Company does not believe that it is likely that any claims will be made under a letter of credit in the            foreseeable future.  As of May 31, 2008, the Company had approximately $5.4 million in restricted cash primarily to secure obligations under its PEO contracts in the Business Solutions segment.

 

**Payment and Performance Bonds**

 

Within the Company’s Wireless Infrastructure and Transportation Infrastructure segments, certain customers, particularly in connection with new construction, require the Company to post payment or performance bonds issued by a financial institution known as a surety. These bonds provide a guarantee to the customer that the Company will perform under the terms of a contract and that the Company will            pay subcontractors and vendors. If the Company fails to perform under a contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. The Company must reimburse the surety for any expenses or outlays it incurs. Under the Company’s continuing indemnity and security agreement with the surety, the Company has posted letters of credit in the amount of $5 million in favor of the surety and, with the            consent of the Company’s lenders under its credit facility, the Company has granted security interests in certain of its assets to collateralize its obligations to the surety. The Company expects these letters of credit in favor of the surety to be reduced in the future. To date, the Company has not been required to make any reimbursements to the surety for bond-related costs. The

 

 

28

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Company believes that it is unlikely that it will have to fund claims under its surety arrangements in the foreseeable future.

 

**NOTE 21 - SEGMENT INFORMATION**

 

The Company’s reportable business segments are organized in a manner that reflects how management reviews and evaluates those business activities.  Certain businesses have been grouped together for segment reporting based upon similar products or product lines, marketing, selling and distribution characteristics.

 

The segments are organized as follows:

 

| **Segment & Entity**                                                                                                                                   |   | **Business Activity**                                                                                                                                                                  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                       |   |                                                                                                                                                                                        |
| **Business Solutions**                                                                                                                                     |   |                                                                                                                                                                                        |
| Professional Staff Management, Inc. and subsidiaries; CSM, Inc. and subsidiaries and related entities; Employer Solutions Group, Inc. and related entities |   | Provider of outsourced human resource services                                                                                                                                              |
|                                                                                                                                                       |   |                                                                                                                                                                                        |
| **Wireless Infrastructure**                                                                                                                                |   |                                                                                                                                                                                        |
| Fortune Wireless, Inc.; Magtech Services, Inc.; Cornerstone Wireless Construction Services, Inc.; James Westbrook & Associates, LLC                    |   | Provider turnkey development services for the deployment of wireless networks                                                                                                               |
|                                                                                                                                                       |   |                                                                                                                                                                                        |
| **Transportation Infrastructure**                                                                                                                          |   |                                                                                                                                                                                        |
| James H. Drew Corp. and subsidiaries                                                                                                                       |   | Installer of fiber optic, smart highway systems, traffic signals, street signs, high mast and ornamental lighting, guardrail, wireless communications, and fabrications of structural steel |
|                                                                                                                                                       |   |                                                                                                                                                                                        |
| **Ultraviolet Technologies**                                                                                                                               |   |                                                                                                                                                                                        |
| Nor-Cote International, Inc. and subsidiaries                                                                                                              |   | Manufacturer of UV curable screen printing ink products                                                                                                                                     |
|                                                                                                                                                       |   |                                                                                                                                                                                        |
| **Electronics Integration**                                                                                                                                |   |                                                                                                                                                                                        |
| Kingston Sales Corporation; Commercial Solutions, Inc.; Telecom Technology, Corp.                                                                          |   | Distributor and installer of home and commercial electronics                                                                                                                                |
|                                                                                                                                                       |   |                                                                                                                                                                                        |
| **Variable Interest Entity**                                                                                                                               |   |                                                                                                                                                                                        |
| Fortune Fisbeck Development, LLC                                                                                                                           |   | Land, buildings and building improvements that are utilized solely by the Company                                                                                                           |

 

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

 

 

|                                |   | Business                                                                  |   | Wireless                                                                             |   | Transportation                                                                                              |   | Ultraviolet                                                                          |   | Electronics                                       |   | Operating                             |
|-------------------------------------|--------|---------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|--------|---------------------------------------------------|--------|---------------------------------------|
|                                |   | Solutions (1)                                                             |   | Infrastructure                                                                       |   | Infrastructure                                                                                              |   | Technologies                                                                         |   | Integration                                       |   | Total                                 |
| 3-Months Ended May 31, 2008         |   |                                                                      |   |                                                                                 |   |                                                                                                        |   |                                                                                 |   |                                              |   |                                  |
| Revenue                             |   | $         20,286             |   | $             2,913 |   | $             10,581                            |   | $            2,826            |   | $       3,592       |   | $     40,198 |
| Cost of revenue                     |   | 16,572                                                                    |   | 2,417                                                                                |   | 9,282                                                                                                       |   | 1,594                                                                                |   | 3,387                                             |   | 33,252                                |
| Gross profit                        |   | 3,714                                                                     |   | 496                                                                                  |   | 1,299                                                                                                       |   | 1,232                                                                                |   | 205                                               |   | 6,946                                 |
| Operating expenses                  |   |                                                                      |   |                                                                                 |   |                                                                                                        |   |                                                                                 |   |                                              |   |                                  |
| Selling, general and administrative |   | 3,827                                                                     |   | 1,103                                                                                |   | 873                                                                                                         |   | 1,185                                                                                |   | 652                                               |   | 7,640                                 |
| Depreciation and amortization       |   | 359                                                                       |   | 38                                                                                   |   | 8                                                                                                           |   | 86                                                                                   |   | 11                                                |   | 502                                   |
| Total operating expenses            |   | 4,186                                                                     |   | 1,141                                                                                |   | 881                                                                                                         |   | 1,271                                                                                |   | 663                                               |   | 8,142                                 |
|                                |   |                                                                      |   |                                                                                 |   |                                                                                                        |   |                                                                                 |   |                                              |   |                                  |
| Segment operating income (loss)     |   | $            (472) |   | $             (645)      |   | $                  418 |   | $              (39) |   | $        (458) |   | $    (1,196)           |

 

 

 

29

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|                                |   | Holding                                                                                 |   | Consolidated                                                                                         |   | VIE                                                                                           |   | Segment                          |
|-------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|--------|----------------------------------|
|                                |   | Company                                                                                 |   | VIE                                                                                                  |   | Elimination                                                                                   |   | Totals                           |
| 3-Months Ended May 31, 2008         |   |                                                                                    |   |                                                                                                 |   |                                                                                          |   |                             |
| Revenue                             |   | $               - |   | $                429      |   | $         (427)                                       |   | $     40,200 |
| Cost of revenue                     |   | -                                                                                       |   | -                                                                                                    |   | -                                                                                             |   | 33,252                           |
| Gross profit                        |   | -                                                                                       |   | 429                                                                                                  |   | (427)                                                                                         |   | 6,948                            |
| Operating expenses                  |   |                                                                                    |   |                                                                                                 |   |                                                                                          |   |                             |
| Selling, general and administrative |   | 928                                                                                     |   | 8                                                                                                    |   | (427)                                                                                         |   | 8,149                            |
| Depreciation and amortization       |   | 294                                                                                     |   | 48                                                                                                   |   | -                                                                                             |   | 844                              |
| Total operating expenses            |   | 1,222                                                                                   |   | 56                                                                                                   |   | (427)                                                                                         |   | 8,993                            |
|                                |   |                                                                                    |   |                                                                                                 |   |                                                                                          |   |                             |
| Segment operating income (loss)     |   | $    (1,222)                                                        |   | $                373 |   | $                - |   | $    (2,045)      |

 

 

(1) Gross billings of $148,232 less worksite employee payroll costs of $127,946.

 

 

|                                |   | BusinessSolutions (1) |                         |   |  Wireless Infrastructure |   |   | TransportationInfrastructure |   |   | UltravioletTechnologies |   |   | ElectronicsIntegration |   |   | OperatingTotal |   |
|-------------------------------------|--------|----------------------------|------------------------------|--------|-------------------------------|--------|--------|------------------------------|--------|--------|-------------------------|--------|--------|------------------------|--------|--------|----------------|--------|
| 3-Months Ended May 31, 2007         |   |                       |                         |   |                          |   |   |                         |   |   |                    |   |   |                   |   |   |           |   |
| Revenue                             |   | $                          | 22,012                       |   |                          | $      | 5,100  |                         |   | $      | 8,882                   |   |   | $                      | 3,378  |   |           | $      | 2,912 |   |   | $ | 42,284 |   |
| Cost of  revenue               |   |                       | 18,590                       |   |                          |   | 3,621  |                         |   |   | 7,664                   |   |   |                   | 1,950  |   |           |   | 2,432 |   |   |   | 34,257 |   |
| Gross profit                        |   |                       | 3,422                        |   |                          |   | 1,479  |                         |   |   | 1,218                   |   |   |                   | 1,428  |   |           |   | 480 |   |   |   | 8,027 |   |
| Operating expenses                  |   |                       |                         |   |                          |   |   |                         |   |   |                    |   |   |                   |   |   |           |   |   |   |   |   |   |   |
| Selling, general and administrative |   |                       | 3,010                        |   |                          |   | 1,455  |                         |   |   | 787                     |   |   |                   | 1,226  |   |           |   | 557 |   |   |   | 7,035 |   |
| Depreciation and amortization       |   |                       |      347 |   |                          |   | 48     |                         |   |   | 4                       |   |   |                   | 6      |   |           |   | 18 |   |   |   | 423 |   |
| Total operating expenses            |   |                       | 3,357                        |   |                          |   | 1,503  |                         |   |   | 791                     |   |   |                   | 1,232  |   |           |   | 575 |   |   |   | 7,458 |   |
|                                |   |                       |                         |   |                          |   |   |                         |   |   |                    |   |   |                   |   |   |           |   |   |   |   |   |   |   |
| Segment operating income (loss)     |   | $                          | 65                           |   |                          | $      | (24    | )                       |   | $      | 427                     |   |   | $                      | 196    |   |           | $      | (95 | )  |   | $ | (569 | )  |

 

 

|                                | Holding

Company |   |   | Consolidated

VIE |   |   | VIE

Elimination |   |   | Segment

Totals |   |
|-------------------------------------|------------------|--------|--------|-------------------|--------|--------|------------------|--------|--------|-----------------|--------|
| 3-Months Ended May 31, 2007         |             |   |   |              |   |   |             |   |   |            |   |
| Revenue                             | $                | -      |   |              | $      | 470    |             |   | $      | (468            | )      |   | $ | 42,286 |   |
| Cost of revenue                     |             | -      |   |              |   | -      |             |   |   | -               |   |   |   | 34,257 |   |
| Gross profit                        |             | -      |   |              |   | 470    |             |   |   | (468            | )      |   |   | 8,029 |   |
| Operating expenses                  |             |   |   |              |   |   |             |   |   |            |   |   |   |   |   |
| Selling, general and administrative |             | 1,127  |   |              |   | 8      |             |   |   | (468            | )      |   |   | 7,702 |   |
| Depreciation and amortization       |             | 140    |   |              |   | 50     |             |   |   | -               |   |   |   | 613 |   |
| Total operating expenses            |             | 1,267  |   |              |   | 58     |             |   |   | (468            | )      |   |   | 8,315 |   |
|                                |             |   |   |              |   |   |             |   |   |            |   |   |   |   |   |
| Segment operating income (loss)     | $                | (1,267 | )      |              | $      | 412    |             |   | $      | -               |   |   | $ | (286 | )  |

 

(1) Gross billings of $156,933 less worksite employee payroll costs of $134,921.

 

(2) Beginning in fiscal year 2008, the Company began allocating selling, general, and administrative expenses to the segments. The effect of this change in period ending May 31, 2007 would be $678 of unallocated selling, general and administrative expenses.

 
|                                |   | Business      |   | Wireless       |   | Transportation |   | Ultraviolet  |   | Electronics |   | Operating |
|-------------------------------------|--------|---------------|--------|----------------|--------|----------------|--------|--------------|--------|-------------|--------|-----------|
|                                |   | Solutions (1) |   | Infrastructure |   | Infrastructure |   | Technologies |   | Integration |   | Total     |
| 9-months ended May 31, 2008         |   |          |   |           |   |           |   |         |   |        |   |      |
| Revenue                             |   | $ 62,913      |   | $ 12,693       |   | $ 32,208       |   | $ 8,903      |   | $ 9,161     |   | $ 125,878 |
| Cost of revenue                     |   | 51,415        |   | 9,816          |   | 28,768         |   | 5,097        |   | 8,402       |   | 103,498   |
| Gross profit                        |   | 11,498        |   | 2,877          |   | 3,440          |   | 3,806        |   | 759         |   | 22,380    |
| Operating expenses                  |   |          |   |           |   |           |   |         |   |        |   | -         |
| Selling, general and administrative |   | 10,486        |   | 3,295          |   | 2,712          |   | 3,671        |   | 1,553       |   | 21,717    |
| Depreciation and amortization       |   | 1,066         |   | 120            |   | 17             |   | 239          |   | 36          |   | 1,478     |
| Total operating expenses            |   | 11,552        |   | 3,415          |   | 2,729          |   | 3,910        |   | 1,589       |   | 23,195    |
|                                |   |          |   |           |   |           |   |         |   |        |   |      |
| Segment operating income (loss)     |   | $ (54)        |   | $ (538)        |   | $ 711          |   | $ (104)      |   | $ (830)     |   | $ (815)   |

 

|                                |   | Holding   |   | Consolidated |   | VIE         |   | Segment   |
|-------------------------------------|--------|-----------|--------|--------------|--------|-------------|--------|-----------|
|                                |   | Company   |   | VIE          |   | Elimination |   | Totals    |
| 9-months ended May 31, 2008         |   |      |   |         |   |        |   |      |
| Revenue                             |   | $ -       |   | $ 1,283      |   | $ (1,278)   |   | $ 125,883 |
| Cost of revenue                     |   | -         |   | -            |   | -           |   | 103,498   |
| Gross profit                        |   | -         |   | 1,283        |   | (1,278)     |   | 22,385    |
| Operating expenses                  |   |      |   |         |   |        |   |      |
| Selling, general and administrative |   | 2,065     |   | 25           |   | (1,278)     |   | 22,529    |
| Depreciation and amortization       |   | 639       |   | 145          |   | -           |   | 2,262     |
| Total operating expenses            |   | 2,704     |   | 170          |   | (1,278)     |   | 24,791    |
|                                |   |      |   |         |   |        |   |      |
| Segment operating income (loss)     |   | $ (2,704) |   | $ 1,113      |   | $ -         |   | $ (2,406) |

 

 

(1) Gross billings of $464,761 less worksite employee payroll costs of $401,848.

 

|                                |   | Business

Solutions (1) |   |   | Wireless

Infrastructure |   |   | Transportation

Infrastructure |   |   | Ultraviolet

Technologies |   |   | Electronics

Integration |   |   | Operating

Total |        |   |         |
|-------------------------------------|--------|------------------------------|--------|--------|--------------------------|--------|--------|--------------------------------|--------|--------|---------------------------|--------|--------|--------------------------|--------|--------|------------------|--------|--------|---------|
| 9-Months Ended May 31, 2007         |   |                         |   |   |                     |   |   |                           |   |   |                      |   |   |                     |   |   |             |        |   |         |
| Revenue                             |   | $                            | 47,103 |   |                     | $      | 18,790 |                           |   | $      | 29,514                    |   |   | $                        | 9,340  |   |             | $      | 10,454 |    |   | $ | 115,201 |  |   |  |
| Cost of revenue                     |   |                         | 38,968 |   |                     |   | 14,870 |                           |   |   | 25,596                    |   |   |                     | 5,511  |   |             |   | 8,932  |    |   |   | 93,877 |  |   |  |
| Gross profit                        |   |                         | 8,135  |   |                     |   | 3,920  |                           |   |   | 3,918                     |   |   |                     | 3,829  |   |             |   | 1,522  |    |   |   | 21,324 |  |   |  |
| Operating expenses                  |   |                         |   |   |                     |   |   |                           |   |   |                      |   |   |                     |   |   |             |   |   |    |   |   |   |  |   |  |
| Selling, general and administrative |   |                         | 6,387  |   |                     |   | 5,580  |                           |   |   | 2,293                     |   |   |                     | 3,426  |   |             |   | 1,954  |    |   |   | 19,640 |  |   |  |
| Depreciation and amortization       |   |                         | 664    |   |                     |   | 346    |                           |   |   | 287                       |   |   |                     | 223    |   |             |   | 98     |    |   |   | 1,618 |  |   |  |
| Impairment                          |   |                         | -      |   |                     |   | 1,815  |                           |   |   | -                         |   |   |                     | -      |   |             |   | 212    |    |   |   | 2,027 |  |   |  |
| Total operating expenses            |   |                         | 7,051  |   |                     |   | 7,741  |                           |   |   | 2,580                     |   |   |                     | 3,649  |   |             |   | 2,264  |    |   |   | 23,285 |  |   |  |
|                                |   |                         |   |   |                     |   |   |                           |   |   |                      |   |   |                     |   |   |             |   |   |    |   |   |   |  |   |  |
| Segment operating income (loss)     |   | $                            | 1,084  |   |                     | $      | (3,821 | )                         |   | $      | 1,338                     |   |   | $                        | 180    |   |             | $      | (742   | )  |   | $ | (1,961 |  | )  |  |

 

|                                |   | Holding

Company |   |   | Consolidated

VIE |   |   | VIE

Elimination |   |   | Segment

Totals |   |
|-------------------------------------|--------|------------------|--------|--------|-------------------|--------|--------|------------------|--------|--------|-----------------|--------|
| 9-Months Ended May 31, 2007         |   |             |   |   |              |   |   |             |   |   |            |   |
| Revenue                             |   | $                | -      |   |              | $      | 1,054  |             |   | $      | (1,046          | )      |   | $ | 115,209 |   |
| Cost of revenue                     |   |             | -      |   |              |   | -      |             |   |   | -               |   |   |   | 93,877 |   |
| Gross profit                        |   |             | -      |   |              |   | 1,054  |             |   |   | (1,046          | )      |   |   | 21,332 |   |
| Operating expenses                  |   |             |   |   |              |   |   |             |   |   |            |   |   |   |   |   |
| Selling, general and administrative |   |             | 3,170  |   |              |   | 51     |             |   |   | (1,046          | )      |   |   | 21,815 |   |
| Depreciation and amortization       |   |             | 649    |   |              |   | 148    |             |   |   | -               |   |   |   | 2,415 |   |
| Impairment                          |   |             | -      |   |              |   | -      |             |   |   | -               |   |   |   | 2,027 |   |
| Total operating expenses            |   |             | 3,819  |   |              |   | 199    |             |   |   | (1,046          | )      |   |   | 26,257 |   |
|                                |   |             |   |   |              |   |   |             |   |   |            |   |   |   |   |   |
| Segment operating income (loss)     |   | $                | (3,819 | )      |              | $      | 855    |             |   | $      | -               |   |   | $ | (4,925 | )  |

 

(1) Gross billings of $346,343 less worksite employee payroll costs of $299,240.

 

 

30

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(2) Beginning in fiscal year 2008, the Company began allocating selling, general, and administrative expenses to the segments. The effect of this change in period ending May 31, 2007 would be $1,936 of unallocated selling, general and administrative expenses.

 

 

|                                   | Business                                               |   | Wireless                                                            |   | Transportation                                                                           |   | Ultraviolet                                                 |   | Electronics                                      |   | Operating                                        |
|----------------------------------------|--------------------------------------------------------|--------|---------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------|--------|--------------------------------------------------|--------|--------------------------------------------------|
|                                   | Solutions                                              |   | Infrastructure                                                      |   | Infrastructure                                                                           |   | Technologies                                                |   | Integration                                      |   | Total                                            |
| As of May 31, 2008 (unaudited)         |                                                   |   |                                                                |   |                                                                                     |   |                                                        |   |                                             |   |                                             |
| Current Assets                         |                                                   |   |                                                                |   |                                                                                     |   |                                                        |   |                                             |   |                                             |
| Cash and equivalents                   | $        3,081 |   | $           (618) |   | $               51 |   | $          641 |   | $        (75) |   | $       3,080 |
| Restricted cash                        | 5,383                                                  |   | -                                                                   |   | -                                                                                        |   | -                                                           |   | -                                                |   | 5,383                                            |
| Accounts receivable, net               | 3,899                                                  |   | 3,274                                                               |   | 9,075                                                                                    |   | 1,804                                                       |   | 1,762                                            |   | 19,814                                           |
| Costs and estimated earnings in excess |                                                   |   |                                                                |   |                                                                                     |   |                                                        |   |                                             |   | -                                                |
| of billings on uncompleted contracts   | -                                                      |   | 213                                                                 |   | 3,327                                                                                    |   | -                                                           |   | -                                                |   | 3,540                                            |
| Inventory, net                         | 14                                                     |   | 109                                                                 |   | 2,032                                                                                    |   | 1,767                                                       |   | 558                                              |   | 4,480                                            |
| Deferred tax asset                     | 922                                                    |   | -                                                                   |   | 613                                                                                      |   | -                                                           |   | -                                                |   | 1,535                                            |
| Prepaid expenses and                   |                                                   |   |                                                                |   |                                                                                     |   |                                                        |   |                                             |   | -                                                |
| other current assets                   | 311                                                    |   | 401                                                                 |   | 373                                                                                      |   | 177                                                         |   | 47                                               |   | 1,309                                            |
| Total Current Assets                   | 13,610                                                 |   | 3,379                                                               |   | 15,471                                                                                   |   | 4,389                                                       |   | 2,292                                            |   | 39,141                                           |
|                                   |                                                   |   |                                                                |   |                                                                                     |   |                                                        |   |                                             |   |                                             |
| Other Assets                           |                                                   |   |                                                                |   |                                                                                     |   |                                                        |   |                                             |   |                                             |
| Property, plant & equipment, net   | 821                                                    |   | 618                                                                 |   | 1,492                                                                                    |   | 1,990                                                       |   | 118                                              |   | 5,039                                            |
| Accounts receivable - long term        | -                                                      |   | 21                                                                  |   | 808                                                                                      |   | -                                                           |   | -                                                |   | 829                                              |
| Goodwill                               | 12,338                                                 |   | -                                                                   |   | 152                                                                                      |   | 4,695                                                       |   | 1,276                                            |   | 18,461                                           |
| Other intangible assets, net           | 6,031                                                  |   | -                                                                   |   | -                                                                                        |   | 495                                                         |   | -                                                |   | 6,526                                            |
| Other long term assets                 | 12                                                     |   | -                                                                   |   | -                                                                                        |   | 14                                                          |   | 6                                                |   | 32                                               |
| Total Other Assets                     | 19,202                                                 |   | 639                                                                 |   | 2,452                                                                                    |   | 7,194                                                       |   | 1,400                                            |   | 30,887                                           |
|                                   |                                                   |   |                                                                |   |                                                                                     |   |                                                        |   |                                             |   |                                             |
| Total Assets                           | $    32,812                             |   | $      4,018                               |   | $      17,923                                                   |   | $     11,583                            |   | $     3,692                  |   | $    70,028                       |

 

 

 

 

|                                      | Holding                                                                              |   | Consolidated                                                                        | Segment |
|-------------------------------------------|--------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|---------|
|                                      | Company                                                                              |   | VIE                                                                                 |    | Totals |
| As of May 31, 2008 (unaudited, continued) |                                                                                 |   |                                                                                |    |   |
| Current Assets                            |                                                                                 |   |                                                                                |    |   |
| Cash and equivalents                      | $              (23) |   | $               40 |    | $       3,097 |
| Restricted cash                           | -                                                                                    |   | -                                                                                   |    | 5,383 |
| Accounts receivable, net                  | (209)                                                                                |   | -                                                                                   |    | 19,605 |
| Costs and estimated earnings in excess    |                                                                                 |   |                                                                                |    |   |
| of billings on uncompleted contracts      | -                                                                                    |   | -                                                                                   |    | 3,540 |
| Inventory, net                            | -                                                                                    |   | -                                                                                   |    | 4,480 |
| Deferred tax asset                        | -                                                                                    |   | -                                                                                   |    | 1,535 |
| Prepaid expenses and                      |                                                                                 |   |                                                                                |    |   |
| other current assets                      | 18                                                                                   |   | (115)                                                                               |    | 1,212 |
| Total Current Assets                      | (214)                                                                                |   | (75)                                                                                |    | 38,852 |
|                                      |                                                                                 |   |                                                                                |    |   |
| Other Assets                              |                                                                                 |   |                                                                                |    |   |
| Property, plant & equipment, net      | 480                                                                                  |   | 6,050                                                                               |    | 11,569 |
| Accounts receivable - long term           | -                                                                                    |   | -                                                                                   |    | 829 |
| Goodwill                                  | -                                                                                    |   | -                                                                                   |    | 18,461 |
| Other intangible assets, net              | -                                                                                    |   | -                                                                                   |    | 6,526 |
| Other long term assets                    | 478                                                                                  |   | 1                                                                                   |    | 511 |
| Total Other Assets                        | 958                                                                                  |   | 6,051                                                                               |    | 37,896 |
|                                      |                                                                                 |   |                                                                                |    |   |
| Total Assets                              | $             744   |   | $             5,976     |    | $      76,748 |

 

 

 

31

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|                                                                        |   | BusinessSolutions |   |   | WirelessInfrastructure |   |   | TransportationInfrastructure |   |   | UltravioletTechnologies |   |   | ElectronicsIntegration |   |   | OperatingTotal |   |
|-----------------------------------------------------------------------------|--------|-------------------|--------|--------|------------------------|--------|--------|------------------------------|--------|--------|-------------------------|--------|--------|------------------------|--------|--------|----------------|--------|
| As of August 31, 2007 (audited)                                             |   |              |   |   |                   |   |   |                         |   |   |                    |   |   |                   |   |   |           |   |
| Current Assets                                                              |   |              |   |   |                   |   |   |                         |   |   |                    |   |   |                   |   |   |           |   |
| Cash and equivalents                                                        |   | $                 | 9,104  |   |                   | $      | (134   | )                            |   | $      | 498                     |   |   | $                      | 519    |   |           | $      | (77 | ) |   | $ | 9,910 |   |
| Restricted cash                                                             |   |              | 5,091  |   |                   |   | -      |                         |   |   | -                       |   |   |                   | -      |   |           |   | - |   |   |   | 5,091 |   |
| Accounts receivable, net                                                    |   |              | 3,330  |   |                   |   | 5,193  |                         |   |   | 9,913                   |   |   |                   | 1,856  |   |           |   | 1,614 |   |   |   | 21,906 |   |
| Costs and estimated earnings in excess of billings on uncompleted contracts |   |              | -      |   |                   |   | 560    |                         |   |   | 719                     |   |   |                   | -      |   |           |   | - |   |   |   | 1,279 |   |
| Inventory, net                                                              |   |              | 9      |   |                   |   | 78     |                         |   |   | 3,339                   |   |   |                   | 1,759  |   |           |   | 1,471 |   |   |   | 6,656 |   |
| Deferred tax asset                                                          |   |              | 922    |   |                   |   | -      |                         |   |   | 613                     |   |   |                   | -      |   |           |   | - |   |   |   | 1,535 |   |
| Prepaid expenses and other current assets                                   |   |              | 731    |   |                   |   | 713    |                         |   |   | 399                     |   |   |                   | 232    |   |           |   | 238 |   |   |   | 2,313 |   |
| Total Current Assets                                                        |   |              | 19,187 |   |                   |   | 6,410  |                         |   |   | 15,481                  |   |   |                   | 4,366  |   |           |   | 3,246 |   |   |   | 48,690 |   |
|                                                                        |   |              |   |   |                   |   |   |                         |   |   |                    |   |   |                   |   |   |           |   |   |   |   |   |   |   |
| Other Assets                                                                |   |              |   |   |                   |   |   |                         |   |   |                    |   |   |                   |   |   |           |   |   |   |   |   |   |   |
| Property, plant & equipment, net                                        |   |              | 636    |   |                   |   | 790    |                         |   |   | 1,614                   |   |   |                   | 1,869  |   |           |   | 139 |   |   |   | 5,048 |   |
| Accounts receivable - long term                                             |   |              | -      |   |                   |   | -      |                         |   |   | 770                     |   |   |                   | -      |   |           |   | - |   |   |   | 770 |   |
| Goodwill                                                                    |   |              | 12,338 |   |                   |   | -      |                         |   |   | 152                     |   |   |                   | 4,695  |   |           |   | 1,276 |   |   |   | 18,461 |   |
| Other intangible assets, net                                                |   |              | 6,888  |   |                   |   | -      |                         |   |   | -                       |   |   |                   | 562    |   |           |   | - |   |   |   | 7,450 |   |
| Other long term assets                                                      |   |              | 38     |   |                   |   | -      |                         |   |   | -                       |   |   |                   | 15     |   |           |   | 4 |   |   |   | 57 |   |
| Total Other Assets                                                          |   |              | 19,900 |   |                   |   | 790    |                         |   |   | 2,536                   |   |   |                   | 7,141  |   |           |   | 1,419 |   |   |   | 31,786 |   |
|                                                                        |   |              |   |   |                   |   |   |                         |   |   |                    |   |   |                   |   |   |           |   |   |   |   |   |   |   |
| Total Assets                                                                |   | $                 | 39,087 |   |                   | $      | 7,200  |                         |   | $      | 18,017                  |   |   | $                      | 11,507 |   |           | $      | 4,665 |   |   | $ | 80,476 |   |

 

|                                                                        |   | HoldingCompany |   |   | ConsolidatedVIE |   |   | Segment Totals |   |
|-----------------------------------------------------------------------------|--------|----------------|--------|--------|-----------------|--------|--------|---------------------|--------|
| As of August 31, 2007 (continued, audited)                                  |   |           |   |   |            |   |   |                |   |
| Current Assets                                                              |   |           |   |   |            |   |   |                |   |
| Cash and equivalents                                                        |   | $              | (159   | )      |            | $      | 79     |                |   | $ | 9,830 |   |
| Restricted cash                                                             |   |           | -      |   |            |   | -      |                |   |   | 5,091 |   |
| Accounts receivable, net                                                    |   |           | (749   | )      |            |   | -      |                |   |   | 21,157 |   |
| Costs and estimated earnings in excess of billings on uncompleted contracts |   |           | -      |   |            |   | -      |                |   |   | 1,279 |   |
| Inventory, net                                                              |   |           | -      |   |            |   | -      |                |   |   | 6,656 |   |
| Deferred tax asset                                                          |   |           | -      |   |            |   | -      |                |   |   | 1,535 |   |
| Prepaid expenses and other current assets                                   |   |           | 517    |   |            |   | 10     |                |   |   | 2,840 |   |
| Total Current Assets                                                        |   |           | (391   | )      |            |   | 89     |                |   |   | 48,388 |   |
|                                                                        |   |           |   |   |            |   |   |                |   |   |   |   |
| Other Assets                                                                |   |           |   |   |            |   |   |                |   |   |   |   |
| Property, plant & equipment, net                                        |   |           | 564    |   |            |   | 6,626  |                |   |   | 12,238 |   |
| Accounts receivable - long term                                             |   |           | -      |   |            |   | -      |                |   |   | 770 |   |
| Goodwill                                                                    |   |           | -      |   |            |   | -      |                |   |   | 18,461 |   |
| Other intangible assets, net                                                |   |           | -      |   |            |   | -      |                |   |   | 7,450 |   |
| Other long term assets                                                      |   |           | 988    |   |            |   | 3      |                |   |   | 1,048 |   |
| Total Other Assets                                                          |   |           | 1,552  |   |            |   | 6,629  |                |   |   | 39,967 |   |
|                                                                        |   |           |   |   |            |   |   |                |   |   |   |   |
| Total Assets                                                                |   | $              | 1,161  |   |            | $      | 6,718  |                |   | $ | 88,355 |   |

 

**NOTE 22 - SUBSEQUENT EVENTS**

 

On June 2, 2008, the Company’s majority shareholder and Chairman of the Board of Directors funded a $32,000 term loan note to the Company. The new term loan note replaced the Company’s Term Loan Note in the amount of $16,648 in principal and interest and the Revolving Line of Credit Promissory Note in the amount of $15,056 in principal and interest. The term loan note matures on May 5, 2011            and bears interest at the one year LIBOR plus 1.75% adjusted on June 1 of each year until maturity. In addition, the term loan note requires a guarantee fee of 1.88% beginning June 5, 2008. The term loan note is secured by substantially all assets of the Company and a 50% personal guarantee by the Chief Executive Officer of the Company.

 

On June 10, 2008, the Company’s wholly-owned subsidiary, James H. Drew Corporation, entered into a $6 million revolving line of credit with KeyBank. Availability under the credit facility is the lesser of $6 million or the borrowing base amount, which is

 

 

32

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calculated monthly as a percentage of the Company’s eligible assets. The revolving line of credit incurs interest at the Prime Rate minus 0.5% and matures on May 31, 2010. The revolving line of credit is secured by certain assets of the Company and limited personal guaranties of Fortune’s two majority shareholders. The revolving line of credit is subject to certain covenants including a            minimum tangible net worth and current ratio requirements.

 

On June 30, 2008, the Company exchanged 66,180 shares of non-voting preferred stock with $0.10 par value and a dividend of $7.50 per share for 66,180 shares of non-voting preferred stock with $0.10 par value and a dividend of $10.00 per share.

 

Effective June 30, 2008, the Company issued 13,000 shares of non-voting preferred stock with a par value of $0.10 per share and a dividend of $10.00 per share in consideration for the termination of the Company’s term loan note in the amount of $1,300 with its majority shareholder. The unsecured Term Loan Note was due on November 1, 2010 and paid interest at LIBOR plus 3.0%.

 

**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/A for the year ended August 31, 2007.*  *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 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 revenue and revenue streams, managing costs and creating earnings growth. Additionally, we            continually seek and evaluate strategic acquisitions that expand core offerings and drive incremental revenue and 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 presidents and handles capital allocation among our operations.

 

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

 

We classify our businesses under five operating segments: Business Solutions; Wireless Infrastructure; Transportation Infrastructure; Ultraviolet Technologies; and Electronics Integration.

 

*Business Solutions Segment*

 

The Business Solutions segment provides full-service human resource services through PEO relationships.  Business Solutions services are performed by Professional Staff Management, Inc. and its affiliated entities (“PSM”), CSM, Inc. and its affiliated entities (“CSM”), Employer Solutions Group, Inc. and its affiliated entities (“ESG”). PSM was acquired in            October 2003, CSM was acquired in April 2005, and ESG was acquired effective as of March 1, 2007.  As of January 1, 2008, PEM is included in the operation of 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,            401(k) and retirement plan administration and employee assessments.  Clients represent a wide variety of industries including healthcare, professional services, manufacturing logistics, telemarketing and blue-collar services. Combined, these organizations provide co-employment services to approximately 17,200 employees in 44 states.

 

 

33

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*Wireless Infrastructure Segment*

 

We have invested in wireless infrastructure businesses since July 2001, and have completed six acquisitions primarily related to infrastructure products and service offerings related to the development, marketing, management, maintenance and upgrading of wireless telecommunications sites, as well as development of commercial and residential land development projects.  The telecommunications industry            includes cellular, personal communication services (PCS), specialized mobile radio (SMR), enhanced specialized mobile radio (ESMR), microwave systems, fixed wireless, broadband and fiber optics technologies for carriers, tower consolidators and utilities.  While the wireless services are still offered under certain subsidiaries, in November 2005 we began marketing the consolidated services of these subsidiaries under the Fortune Wireless name brand to promote our            ‘turn-key’ service offerings whereby we assist with multiple areas of wireless infrastructure under integrated contracting arrangements.  Turn-key services include site acquisition, engineering, architecture and design, and construction/technical services.

 

*Site Acquisition*

 

Site acquisition services are performed for the wireless telecommunications industry and include program management, site leasing, land use planning, co-location facilitation, lease renegotiation, site marketing and asset management.

 

*Engineering, Architecture and Design*

 

Engineering, architecture and design services are performed for the wireless, telecommunications, real estate development, municipal, and petroleum industries. Services also include structural analysis and design of improvements to telecommunications towers, the structural design and analysis of buildings, and commercial and residential land development projects, including re-zoning of            properties.

 

*Construction/Technical Services*

 

Construction services are performed for the telecommunications industry, primarily consisting of developing and upgrading wireless networks for wireless carriers. Services include: program and construction management; electrical, foundation, and tower installations; and antennae and line installations.  Technical services are performed for wireless equipment manufacturers and service            providers including switch and radio base station engineering.  Services include site, survey, delivery, installation and integration for the implementation of end user equipment offered by a wide range of wireless equipment manufacturers.

 

We reduced the size and scope of our Wireless Infrastructure segment during the fiscal year ended August 31, 2007.  Some of the effects of these reductions will not become apparent until the conclusion of the year ending August 31, 2008.  Most of these reductions occurred in our wireless construction and wireless technical services businesses.  We deliberately reduced the            size and scope of these businesses due to the large losses incurred by these businesses.  The losses were incurred primarily due to our inability to efficiently match our number of employees with the construction and technical services workload.  We did not receive the anticipated number of jobs and the jobs that we did receive were often delayed or cancelled.  After downsizing our wireless construction business, we transferred control of the remaining            business to the Transportation Infrastructure segment effective July 1, 2007.  Similarly, after downsizing our wireless technical services business, we transferred control of the remaining business to the Transportation Infrastructure segment effective November 1, 2007.  We made these transfers because the management of our Transportation Infrastructure segment has substantial expertise in managing construction projects.  We believe this expertise will            allow them to exercise better control of the wireless construction and wireless technical services businesses.  Remaining under the control of the Wireless Infrastructure segment are the engineering, architecture and design business and the site acquisition business.  These businesses have performed successfully and we believe they will continue to grow in the future.

 

Subsidiaries operating in the Wireless Infrastructure segment include Fortune Wireless, Inc. (“Fortune Wireless”), Magtech Services, Inc. (“Magtech”), Cornerstone Wireless Construction Services, Inc. (“Cornerstone Construction”) and James Westbrook & Associates, LLC (“JWA”).

 

*Transportation Infrastructure Segment*

 

The Transportation Infrastructure segment assists customers with the development, maintenance and upgrading of transportation infrastructure and commercial construction projects.  Transportation infrastructure products and services are performed by the James H. Drew Corp. and its subsidiaries (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 Midwest portion of the 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.

 

 

34

----

*Ultraviolet Technologies Segment*

 

The Ultraviolet (UV) Technologies segment manufactures UV curable screen printing inks.  UV Technologies products are manufactured by Nor-Cote International, Inc. and its subsidiaries (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.

 

*Electronics Integration Segment*

 

The Electronics Integration segment sells and installs a variety of electronic products and equipment, including video, sound and security products.  Subsidiaries include Kingston Sales Corporation (Kingston), Commercial Solutions, Inc. (Commercial Solutions) and Telecom Technology Corp. (TTC) d/b/a Audio-Video Revolution, Inc. (AVR).

 

Kingston and Commercial Solutions are distributors for prominent national companies in the electronic, sound, security, and video markets. Customers include businesses in the hospitality, healthcare, education, transportation and retail industries.  Product offerings include the latest technology in HDTV displays, including LCDs and plasma televisions, sound systems, electronic locking devices,            wire, cable and fiber optics, and intercom systems.  The Electronics Integration segment also includes mobile audio products for the RV and marine industry as well as telecommunications products for commercial and residential applications.   Kingston was acquired in July 2002.  Commercial Solutions began operations in December 2003.

 

TTC  provides a wide range of design, engineering and installation of residential, commercial, and retail audio and video systems including video-conferencing, digital signage, touch panel control systems, board-room, home-theater, surround sound audio and security and CCTV systems, as well as design, engineering and installation of structured cabling systems, digital satellite television and            wireless and network high speed (broadband) internet.

 

**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 in the Company’s Form 10-K/A for the year ended August 31, 2007.  The purpose of Amendment No. 1 to the Company’s Annual Report for the year ended August 31, 2007 is to reclassify long term debt from our credit facility loan to current debt as a result of covenant violations, reclassify our temporary equity component related o the ESG acquisition to liabilities, and disclose put            options related to our ESG acquisition.  Other than the Amendment discussed, there have been no material changes to the Company’s critical accounting policies since August 31, 2007.

 

**RESULTS OF OPERATIONS:**  **COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED MAY 31, 2008 AND 2007**

 

**Executive Overview of Financial Results**

 

Results of operations for the three month period ended May 31, 2008 and 2007 are as follows:

 

 

|                                               | Revenue for the                             |                                                            | Operating income (loss) for the             |
|----------------------------------------------------|---------------------------------------------|-----------------------------------------------------------------|---------------------------------------------|
|                                               | 3-months ended May 31,                      |                                                            | 3-months ended May 31,                      |
|                                               | 2008                                        |                                                            | 2007                                        |   | 2008 |   | 2007 |
|                                               | (Dollars in thousands)                      |
| Business Solutions                                 | $      20,286 |                                                            | $      22,012 |   | $            (472) |   | $                      65 |
| Wireless Infrastructure                            | 2,913                                       |                                                            | 5,100                                       |   | (645) |   | (24) |
| Transportation Infrastructure                      | 10,581                                      |                                                            | 8,882                                       |   | 418 |   | 427 |
| Ultraviolet Technologies                           | 2,826                                       |                                                            | 3,378                                       |   | (39) |   | 196 |
| Electronics Integration                            | 3,592                                       |                                                            | 2,912                                       |   | (458) |   | (95) |
| Holding Company                                    | -                                           |                                                            | -                                           |   | (1,222) |   | (1,267) |
| Variable Interest Entity                           | 429                                         |                                                            | 470                                         |   | 373 |   | 412 |
| Variable Interest Entity Elimination               | (427)                                       |                                                            | (468)                                       |   | - |   | - |
| Segment Totals                                     | $      40,200 |                                                            | $      42,286 |   | $         (2,045) |   | $                 (286) |
|                                               |                                        |                                                            |                                        |   |   |   |   |
| Net Income (Loss) Available to Common Shareholders |                                        |  $         (3,080) |                                        | $              (1,355) |

 

 

 

35

----

 

Results of operations for the nine month period ended May 31, 2008 and 2007 are as follows:

 

 

|                                      | Revenue for the                              |   | Operating income (loss) for the              |
|-------------------------------------------|----------------------------------------------|--------|----------------------------------------------|
|                                      | 9-months ended May 31,                       |   | 9-months ended May 31,                       |
|                                      | 2008                                         |   | 2007                                         |   | 2008 |   | 2007 |
|                                      | (Dollars in thousands)                       |
| Business Solutions                        | $       62,913 |   | $       47,103 |   |   $         (54) |   | $                  1,084 |
| Wireless Infrastructure                   | 12,693                                       |   | 18,790                                       |   | (538) |   | (3,821) |
| Transportation Infrastructure             | 32,208                                       |   | 29,514                                       |   | 711 |   | 1,338 |
| Ultraviolet Technologies                  | 8,903                                        |   | 9,340                                        |   | (104) |   | 180 |
| Electronics Integration                   | 9,161                                        |   | 10,454                                       |   | (830) |   | (742) |
| Holding Company                           | -                                            |   | -                                            |   | (2,704) |   | (3,819) |
| Variable Interest Entity                  | 1,283                                        |   | 1,054                                        |   | 1,113 |   | 855 |
| Variable Interest Entity Elimination      | (1,278)                                      |   | (1,046)                                      |   | - |   | - |
| Segment Totals                            | $     125,883       |   | $     115,209       |   | $     (2,406) |   | $               (4,925) |
|                                      |                                         |   |                                         |   |   |   |   |
| Net Loss Available to Common Shareholders |                                         |   |                                         | $     (5,909) |   | $              (8,384) |

 

 

Net loss available to common stock shareholders was ($3.080) million or ($0.24) per diluted share on revenue of $40.200 million for the three month period ended May 31, 2008 compared with net loss available to common stock shareholders of ($1.355) million or ($0.10) per diluted share on revenue of $42.286 million for the three month period ended May 31, 2007.  This represents a 5% decrease in            revenue and a 127% percent decrease in net loss available to common stock shareholders.

 

Net loss available to common stock shareholders was ($5.909) million or ($0.46) per diluted share on revenue of $125.883 million for the nine month period ended May 31, 2008 compared with net loss available to common stock shareholders of ($8.384) million or ($0.67) per diluted share on revenue of $115.209 million for the nine month period ended May 31, 2007.  This represents a 9% increase in            revenue and a 30% percent increase in net income available to common stock shareholders.

 

The following factors primarily contributed to the decrease in revenue for the three month period ended May 31, 2008 compared to the three month period ended May 31, 2007:

 

|   | **•** | A decrease in revenue at PSM in the Business Solutions segment due to a loss in worksite employees; reduced volumes of work in the construction division of the Wireless Infrastructure segment due to operational changes that took place in the three month period ended February 28, 2007; and a decrease in ink sales in Ultraviolet Technologies; offset by |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | An increase in revenue in Transportation Infrastructure and an increase in Electronics Integration revenue due to increased availability of television products and an increased demand from existing customers. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The following factors primarily contributed to the increase in revenue for the nine month period ended May 31, 2008 compared to the nine month period ended May 31, 2007:

 

|   | **•** | Organic growth and the acquisition of ESG on March 1, 2007 within the Business Solutions segment and an increase in revenue in Transportation Infrastructure; offset by |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Reduced volumes of work associated with the Wireless Infrastructure operational changes that took place during the three month period ended February 28, 2007; a decrease in ink sales in Ultraviolet Technologies; and a decrease in Electronics Integration revenue due primarily to a lower volume of sales of television products. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The following factors primarily contributed to the increase in net loss available to common stock shareholders for the three month period ended May 31, 2008 compared to the three month period ended May 31, 2007:

 

|   | **•** | An increase in doubtful accounts allowances and contingent liability reserves in the Business Solutions segment; decreased revenues in the Wireless Infrastructure and Ultraviolet Technologies segments; and defective merchandise in the Electronics Integration segment. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The following factors primarily contributed to the decrease in net loss available to common stock shareholders for the nine month period ended May 31, 2008 compared to the nine month period ended May 31, 2007:

 

 

36

----

|   | **•** | Operational changes and a non-recurring impairment charge in the Wireless Infrastructure segment during the three month period ended February 28, 2007, and a decrease in interest expense in the Holding Company; offset by |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | An increase in doubtful accounts allowances and contingent liability reserves in the Business Solutions segment; reduced ink sales in Ultraviolet Technologies; and defective merchandise and lack of available product in the Electronics Integration segment. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Results by segment are described in further detail as follows:

 

**Business Solutions**

 

Business Solutions segment operating results for three and nine month period ended May 31, 2008 and 2007 are as follows:

 

 

|                            |                                         |                     |   | Three Month Period Ended |                                                                   | Nine Month Period Ended |
|---------------------------------|----------------------------------------------|--------------------------|--------|--------------------------|------------------------------------------------------------------------|-------------------------|
|                            |                                         |                     |   | May 31, 2008             |                                                                   | May 31, 2007            |   | May 31, 2008 |   | May 31, 2007 |
|                            |                                         |                     |   | (Dollars in thousands)   |                                                                   | (Dollars in thousands)  |
| Revenues                        | $      20,286       |                     | 100%   |                     | $      22,012                            |                    | 100% |   | $      62,913 |   | 100% |   | $      47,103 |   | 100% |
| Cost of revenues                | 16,572                                       |                     | 81.7%  |                     | 18,590                                                                 |                    | 84.5% |   | 51,415 |   | 81.7% |   | 38,968 |   | 82.7% |
| Gross profit                    | 3,714                                        |                     | 18.3%  |                     | 3,422                                                                  |                    | 15.5% |   | 11,498 |   | 18.3% |   | 8,135 |   | 17.3% |
|                            |                                         |                     |   |                     |                                                                   |                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses              |                                         |                     |   |                     |                                                                   |                    |   |   |   |   |   |   |   |   |   |
|                            | Selling, general and administrative          | 3,827                    |   | 18.9%                    |                                                                   | 3,010                   |   | 13.7% |   | 10,486 |   | 16.7% |   | 6,387 |   | 13.6% |
|                            | Depreciation and amortization                | 359                      |   | 1.8%                     |                                                                   | 347                     |   | 1.6% |   | 1,066 |   | 1.7% |   | 664 |   | 1.4% |
|                            |                                         | Total operating expenses | 4,186  |                     | 20.6%                                                                  |                    | 3,357 |   | 15.3% |   | 11,552 |   | 18.4% |   | 7,051 |   | 15.0% |
|                            |                                         |                     |   |                     |                                                                   |                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment operating income (loss) | $        (472) |                     | -2.3%  |                     | $            65 |                    | 0.3% |   | $          (54) |   | -0.1% |   | $        1,084 |   | 2.3% |

 

 

*Revenue*

 

Revenue for the three month period ended May 31, 2008 was $20.286 million, compared to $22.012 million for the three month period ended May 31, 2007, a decrease of $1.726 million or 8%.  Revenue for the nine month period ended May 31, 2008 was $62.913 million, compared to $47.103 million for the nine month period ended May 31, 2007, an increase of $15.810 million or 34%.  Revenue            decreased for the three month period ended May 31, 2008 due to a loss in worksite employees in PSM and the slow-down in the home construction industry affecting the customer base of ESG. Revenue increased for the nine month period ended May 31, 2008 primarily due to organic growth and the acquisitions of ESG and Precision.  As such, administrative fees, workers compensation premiums, employee benefit premiums and income taxes collected have increased.

 

*Gross Profit*

 

Gross profit for the three month period ended May 31, 2008 was $3.714 million, representing 18% of revenue, compared to $3.422 million, representing 16% of revenue for the three month period ended May 31, 2007, an increase of $0.292 million or 9%.  Gross profit for the nine month period ended May 31, 2008 was $11.498 million, representing 18% of revenue, compared to $8.135 million, representing            17% of revenue for the nine month period ended May 31, 2007, an increase of $3.363 million or 41%.  Gross profit increased for the three month period ended May 31, 2008 due to a reduction in workers compensation claims, and increased for the nine month period ended May 31, 2008 due to the acquisitions of ESG and Precision.

 

*Operating Income*

 

Operating loss for the three month period, ended May 31, 2008 was ($0.472) million, compared to an operating income of $0.065 million for the three month period ended May 31, 2007, a decrease of $0.537 million or 826%.  Operating loss for the nine month period, ended May 31, 2008 was ($0.054) million, compared to operating income of $1.084 million for the nine month period ended May 31, 2007, a            decrease of $1.138 million or 105%.  Operating income decreased as a result of the Company increasing the reserve for doubtful accounts allowances and contingent liability reserves in respons to current market conditions.

 

**Wireless Infrastructure**

 

Wireless Infrastructure segment operating results for the three and nine month periods ended May 31, 2008 and 2007 are as follows:

 

 

37

----

 

 

|                   |                                                    |                     |   | Three Month Period Ended |                                                               | Nine Month Period Ended |
|------------------------|---------------------------------------------------------|--------------------------|--------|--------------------------|--------------------------------------------------------------------|-------------------------|
|                   |                                                    |                     |   | May 31, 2008             |                                                               | May 31, 2007            |   | May 31, 2008 |   | May 31, 2007 |
|                   |                                                    |                     |   | (Dollars in thousands)   |                                                               | (Dollars in thousands)  |
| Revenues               | $        2,913       |                     | 100%   |                     | $         5,100            |                    | 100% |   | $      12,693 |   | 100% |   | $      18,790 |   | 100% |
| Cost of revenues       | 2,417                                                   |                     | 83.0%  |                     | 3,621                                                              |                    | 71.0% |   | 9,816 |   | 77.3% |   | 14,870 |   | 79.1% |
| Gross profit (loss)    | 496                                                     |                     | 17.0%  |                     | 1,479                                                              |                    | 29.0% |   | 2,877 |   | 22.7% |   | 3,920 |   | 20.9% |
|                   |                                                    |                     |   |                     |                                                               |                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses     |                                                    |                     |   |                     |                                                               |                    |   |   |   |   |   |   |   |   |   |
|                   | Selling, general and administrative                     | 1,103                    |   | 37.9%                    |                                                               | 1,455                   |   | 28.5% |   | 3,295 |   | 26.0% |   | 5,580 |   | 29.7% |
|                   | Depreciation and amortization                           | 38                       |   | 1.3%                     |                                                               | 48                      |   | 0.9% |   | 120 |   | 0.9% |   | 346 |   | 1.8% |
|                   | Impairment                                              | -                        |   | 0.0%                     |                                                               | -                       |   | 0.0% |   | - |   | 0.0% |   | 1,815 |   | 9.7% |
|                   |                                                    | Total operating expenses | 1,141  |                     | 39.2%                                                              |                    | 1,503 |   | 29.5% |   | 3,415 |   | 26.9% |   | 7,741 |   | 41.2% |
|                   |                                                    |                     |   |                     |                                                               |                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment operating loss | $         (645) |                     | -22.1% |                     | $           (24) |                    | -0.5% |   | $        (538) |   | -4.2% |   | $     (3,821) |   | -20.3% |

 

 

*Revenue*

 

Revenue for the three month period ended May 31, 2008 was $2.913 million compared to $5.100 million for the three month period ended May 31, 2007, a decrease of $2.187 million or 43%.  The decrease in revenues is primarily due to the decline and/or suspension of capital budgets by clients, the consolidation in the industry and the decision to downsize operations in the construction            division.

 

Revenue for the nine month period ended May 31, 2008 was $12.693 million compared to $18.790 million for the nine month period ended May 31, 2007, a decrease of $6.097 million or 32%.  The decrease in revenues is primarily due to the decline and/or suspension of capital budgets by clients, the consolidation in the industry and our decision to downsize operations in the construction            division.

 

*Gross Profit*

 

Gross profit for the three month period ended May 31, 2008 was $0.496 million, representing 17% of revenue, compared to $1.479 million representing 29% of revenue for the three month period ended May 31, 2007, a decrease of $0.983 million or 67%.  Gross profit for the nine month period ended May 31, 2008 was $2.877 million, representing 23% of revenue, compared to $3.920 million representing            21% of revenue for the nine month period ended May 31, 2007, a decrease in gross profit of $1.043 million or 27%.  Gross profit decreased for the three month period ended May 31, 2008 due to operating inefficiencies and estimate corrections on two major projects in the construction division. These projects were closed during the three month period ended May 31, 2008. Gross profit as a dollar amount decreased for the nine month period ended May 31, 2008 due to the decrease            in revenue discussed above. Gross profit as a percentage of revenue increased for the nine month period ended May 31, 2008 due to improved pricing models and performance in the site acquisition and engineering divisions. Additionally, the increase for the nine month period ended May 31, 2008 is partially due to the non-recurring impairment charge during the three month period ended February 28, 2007.

 

*Operating Income*

 

The operating loss for the three month period, ended May 31, 2008 was ($0.645) million, compared to operating loss of ($0.024) million for the three month period ended May 31, 2007, an increase in operating loss of $0.621 million or 26%. Operating loss for the nine month period, ended May 31, 2008 was ($0.538) million, compared to operating loss of ($3.821) million for the nine month period ended May 31,            2007, an increase in operating income of $3.283 million or 86%. Operating income decreased for the three month period ended May 31, 2008 due to the decrease in gross profit discussed above. Operating income increased for the nine month period ended May 31, 2008 as a result of initiated management team changes, better aligning asset and labor base with market conditions, and evaluating and adjusting ongoing customer contract negotiations and purchasing procedures. Additionally, the            increase is partially due to a non-recurring impairment charge during the three month period ended February 28, 2007.

 

**Transportation Infrastructure**

 

Transportation Infrastructure segment operating results for the three and nine month periods ended May 31, 2008 and 2007 are as follows:

 

 

38

----

 

 

|                     |                                                              |                     |   | Three Month Period Ended |                                                              | Nine Month Period Ended |
|--------------------------|-------------------------------------------------------------------|--------------------------|--------|--------------------------|-------------------------------------------------------------------|-------------------------|
|                     |                                                              |                     |   | May 31, 2008             |                                                              | May 31, 2007            |   | May 31, 2008 |   | May 31, 2007 |
|                     |                                                              |                     |   | (Dollars in thousands)   |                                                              | (Dollars in thousands)  |
| Revenues                 | $      10,581                            |                     | 100%   |                     | $        8,882                 |                    | 100% |   | $      32,208 |   | 100% |   | $      29,514 |   | 100% |
| Cost of revenues         | 9,282                                                             |                     | 87.7%  |                     | 7,664                                                             |                    | 86.3% |   | 28,768 |   | 89.3% |   | 25,596 |   | 86.7% |
| Gross profit             | 1,299                                                             |                     | 12.3%  |                     | 1,218                                                             |                    | 13.7% |   | 3,440 |   | 10.7% |   | 3,918 |   | 13.3% |
|                     |                                                              |                     |   |                     |                                                              |                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses       |                                                              |                     |   |                     |                                                              |                    |   |   |   |   |   |   |   |   |   |
|                     | Selling, general and administrative                               | 873                      |   | 8.3%                     |                                                              | 787                     |   | 8.9% |   | 2,712 |   | 8.4% |   | 2,293 |   | 7.8% |
|                     | Depreciation and amortization                                     | 8                        |   | 0.1%                     |                                                              | 4                       |   | 0.0% |   | 17 |   | 0.1% |   | 287 |   | 1.0% |
|                     |                                                              | Total operating expenses | 881    |                     | 8.3%                                                              |                    | 791 |   | 8.9% |   | 2,729 |   | 8.5% |   | 2,580 |   | 8.7% |
|                     |                                                              |                     |   |                     |                                                              |                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment operating income | $           418 |                     | 4.0%   |                     | $           427 |                    | 4.8% |   | $           711 |   | 2.2% |   | $        1,338 |   | 4.5% |

 

*Revenue*

 

Revenue for the three month period ended May 31, 2008 was $10.581 million compared to $8.882 million for the three month period ended May 31, 2007, an increase of $1.699 million or 19%. Revenue for the nine month period ended May 31, 2008 was $32.208 million compared to $29.514 million for the nine month period ended May 31, 2007, an increase of $2.694 million or 9%. Revenue increased primarily due to            the Company beginning work on new specialty projects during the three month period ended May 31, 2008.

 

*Gross Profit*

 

Gross profit for the three month period ended May 31, 2008 was $1.299 million, representing 12% of revenue, compared to $1.218 million representing 14% of revenue for the three month period ended May 31, 2007, an increase of $0.0081 million or 7%. Gross profit for the nine month period ended May 31, 2008 was $3.440 million, representing 11% of revenue, compared to $3.918 million representing 13% of            revenue for the nine month period ended May 31, 2007, a decrease of $0.478 million or 12%. Gross profit decreased primarily due to an increase in raw material and diesel fuel costs**.**

 

*Operating Income*

 

Operating income for the three month period ended May 31, 2008 was $0.418 million, compared to $0.427 million for the three month period ended May 31, 2007, a decrease in operating income of $0.009 million or 2%. Operating income for the nine month period ended May 31, 2008 was $0.711 million, compared to $1.338 million for the nine month period ended May 31, 2007, a decrease of $0.627 million or 47%.            Operating income decreased due to the decrease in gross profit discussed above.

 

**Ultraviolet Technologies**

 

Ultraviolet Technologies segment operating results for the three and nine month periods ended May 31, 2008 and 2007 are as follows:

 

|                            |                                                         |                     |   | Three Month Period Ended |                                                              | Nine Month Period Ended |
|---------------------------------|--------------------------------------------------------------|--------------------------|--------|--------------------------|-------------------------------------------------------------------|-------------------------|
|                            |                                                         |                     |   | May 31, 2008             |                                                              | May 31, 2007            |   | May 31, 2008 |   | May 31, 2007 |
|                            |                                                         |                     |   | (Dollars in thousands)   |                                                              | (Dollars in thousands)  |
| Revenues                        | $        2,826            |                     | 100%   |                     | $        3,378                 |                    | 100% |   | $        8,903 |   | 100% |   | $        9,340 |   | 100% |
| Cost of revenues                | 1,594                                                        |                     | 56.4%  |                     | 1,950                                                             |                    | 57.7% |   | 5,097 |   | 57.3% |   | 5,511 |   | 59.0% |
| Gross profit (loss)             | 1,232                                                        |                     | 43.6%  |                     | 1,428                                                             |                    | 42.3% |   | 3,806 |   | 42.7% |   | 3,829 |   | 41.0% |
|                            |                                                         |                     |   |                     |                                                              |                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses              |                                                         |                     |   |                     |                                                              |                    |   |   |   |   |   |   |   |   |   |
|                            | Selling, general and administrative                          | 1,185                    |   | 41.9%                    |                                                              | 1,226                   |   | 36.3% |   | 3,671 |   | 41.2% |   | 3,426 |   | 36.7% |
|                            | Depreciation and amortization                                | 86                       |   | 3.0%                     |                                                              | 6                       |   | 0.2% |   | 239 |   | 2.7% |   | 223 |   | 2.4% |
|                            |                                                         | Total operating expenses | 1,271  |                     | 45.0%                                                             |                    | 1,232 |   | 36.5% |   | 3,910 |   | 43.9% |   | 3,649 |   | 39.1% |
|                            |                                                         |                     |   |                     |                                                              |                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment operating income (loss) | $          (39) |                     | -1.4%  |                     | $           196 |                    | 5.8% |   | $        (104) |   | -1.2% |   | $           180 |   | 1.9% |

 

 

 

39

----

 

*Revenue*

 

Revenue for the three month period ended May 31, 2008 was $2.826 million compared to $3.378 million for the three month period ended May 31, 2007, a decrease of $0.552 million or 16%. Revenue for the nine month period ended May 31, 2008 was $8.903 million compared to $9.340 million for the nine month period ended May 31, 2007, a decrease of $0.437 million or 5%. Revenue decreased for the three month            period ended May 31, 2008 as a result of a decline in sales of specialty inks in the US, a decline in sales of conductive inks in the UK, a decline in sales of CD inks in South Africa, and a decrease in nameplate ink sales in Asia.

 

*Gross Profit*

 

Gross profit for the three month period ended May 31, 2008 was $1.232 million representing 44% of revenue, compared to $1.428 million representing 42% of revenue for the three month period ended May 31, 2007, a decrease of $0.196 or 14%.  Gross profit for the nine month period ended May 31, 2008 was $3.806 million representing 43% of revenue, compared to $3.829 million representing 41% of            revenue for the nine month period ended May 31, 2007, a decrease of $0.023 or 1%.  Gross profit as a dollar amount decreased for the three month period ended May 31, 2008 due to the decrease in revenue discussed above. Gross profit as a percentage of revenue increased due to new sales of an additive at a high margin. Gross profit did not change significantly for the nine month period ended May 31, 2008.

 

*Operating Income*

 

Operating loss for the three month period ended May 31, 2008 was ($0.039) million, compared to operating income of $0.196 million for the three month period ended May 31, 2007, a decrease in operating income of $0.235 million or 120%. Operating loss for the nine month period ended May 31, 2008 was ($0.104) million, compared to operating income of $0.180 million for the nine month period ended May 31,            2007, a decrease in operating income of $0.284 million or 158%. Operating income decreased for the three month period ended May 31, 2008 primarily due to lower revenue.

 

**Electronics Integration**

 

Electronics Integration segment operating results for the three and nine month periods ended May 31, 2008 and 2007 are as follows:

 

 

|                   |                                                         |                     |   | Three Month Period Ended |                                                               | Nine Month Period Ended |
|------------------------|--------------------------------------------------------------|--------------------------|--------|--------------------------|--------------------------------------------------------------------|-------------------------|
|                   |                                                         |                     |   | May 31, 2008             |                                                               | May 31, 2007            |   | May 31, 2008 |   | May 31, 2007 |
|                   |                                                         |                     |   | (Dollars in thousands)   |                                                               | (Dollars in thousands)  |
| Revenues               | $        3,592            |                     | 100%   |                     | $        2,912             |                    | 100% |   | $        9,161 |   | 100% |   | $      10,454 |   | 100% |
| Cost of revenues       | 3,387                                                        |                     | 94.3%  |                     |  2,432                                                        |                    | 83.5% |   | 8,402 |   | 91.7% |   | 8,932 |   | 85.4% |
| Gross profit           | 205                                                          |                     | 5.7%   |                     | 480                                                                |                    | 16.5% |   | 759 |   | 8.3% |   | 1,522 |   | 14.6% |
|                   |                                                         |                     |   |                     |                                                               |                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses     |                                                         |                     |   |                     |                                                               |                    |   |   |   |   |   |   |   |   |   |
|                   | Selling, general and administrative                          | 652                      |   | 18.2%                    |                                                               | 557                     |   | 19.1% |   | 1,553 |   | 17.0% |   | 1,954 |   | 18.7% |
|                   | Depreciation and amortization                                | 11                       |   | 0.3%                     |                                                               | 18                      |   | 0.6% |   | 36 |   | 0.4% |   | 98 |   | 0.9% |
|                   | Impairment                                                   | -                        |   | 0.0%                     |                                                               | -                       |   | 0.0% |   | - |   | 0.0% |   | 212 |   | 2.0% |
|                   |                                                         | Total operating expenses | 663    |                     | 18.5%                                                              |                    | 575 |   | 19.7% |   | 1,589 |   | 17.3% |   | 2,264 |   | 21.7% |
|                   |                                                         |                     |   |                     |                                                               |                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment operating loss | $         (458) |                     | -12.8% |                     | $           (95) |                    | -3.3% |   | $         (830) |   | -9.1% |   | $         (742) |   | -7.1% |

 

 

*Revenue*

 

Revenue for the three month period ended May 31, 2008 was $3.592 million compared to $2.912 million for the three month period ended May 31, 2007, an increase of $0.680 million or 23%. Revenue for the nine month period ended May 31, 2008 was $9.161 million compared to $10.454 million for the nine month period ended May 31, 2007, a decrease of $1.293 million or 12%.

 

 

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Revenue increased for the three month period ended May 31, 2008 primarily due to the availability of healthcare products and an increase in sales volume with two existing customers. Revenue decreased for the nine month period ended May 31, 2008 due to the completion of a large contract, as well as a shortage of healthcare sets due to manufacturing issues within the period.

 

*Gross Profit*

 

Gross profit for the three month period ended May 31, 2008 was $0.205 million representing 6% of revenue, compared to $0.480 million representing 17% of revenue for the three month period ended May 31, 2007, a decrease of $0.275 million or 57%.  Gross profit for the nine month period ended May 31, 2008 was $0.759 million representing 8% of revenue, compared to $1.522 million representing 15% of            revenue for the nine month period ended May 31, 2007, a decrease of $0.763 million or 50%.  Gross profit decreased for the three and nine month periods ended May 31, 2008 due to an increase in the inventory allowance related to defective inventory, and operating at a lower margin as a result of competition from a manufacturer.

 

*Operating Income*

 

Operating loss for the three month period ended May 31, 2008 was ($0.458) million, compared to ($0.95) million for the three month period ended May 31, 2007, an increase in operating loss of $0.363 million or 382%. Operating loss for the nine month period ended May 31, 2008 was ($0.830) million, compared to an operating loss of ($0.742) million for the nine month period ended May 31, 2007, an increase in            operating loss of $0.088 million or 12%. The increase in operating loss was due to the decrease in revenue and gross profit discussed above.

 

**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 employee compensation and benefits, legal, accounting and consulting fees. Operating expenses for the three month period ended May 31, 2008 were $1.222 million, compared to $1.267 million for the three month period ended May 31,            2007, a decrease in operating expense of $0.045 million or 4%. Operating expenses for the nine month period ended May 31, 2008 were $2.704 million, compared to $3.819 million for the nine month period ended May 31, 2007, a decrease of $1.115 million or 29%.  Beginning September 1, 2007, the Company becan allocating selling general and administrative expenses to the segments, resulting in a decrease of $0.367 million and $1.256 million for the three and nine month periods            ended May 31, 2008 from the Holding company.

 

*Interest Expense*

 

Interest expense was $0.553 million for the three month period ended May 31, 2008, compared to $0.843 million for the three month period ended May 31, 2007, a decrease of $0.290 million or 34%. Interest expense was $2.029 million for the nine month period ended May 31, 2008, compared to $2.498 million for the nine month period ended May 31, 2007, a decrease of $0.469 million or 19%. The decrease was            primarily due to decreasing interest rates on the variable interest rate notes.

 

*Income Taxes*

 

The Company recorded a 100% valuation allowance on additions to deferred tax assets due to uncertainty regarding future profitability of the Company based on the last year’s loss. In addition, management is required to estimate taxable income for future years by taxing jurisdictions and to consider this when making its judgment to determine whether or not to record a valuation allowance for            part or all of a deferred tax asset. A one percent change in the Company's overall statutory tax rate for 2008 would not have a material effect in the carrying value of the net deferred tax assets or liabilities.

 

**Variable Interest Entity**

 

The Company leases a total of five facilities from a consolidated variable interest entity, whose primary purpose is to own and lease these properties to the Company. The VIE had ownership of 384,500 shares of the Company’s stock and is wholly owned by the Company’s Chairman of the Board of Directors and the Chief Executive Officer.  During the period ending February 29, 2008, the            VIE transferred the 384,500 shares to the members. The VIE does not have any other significant assets. For the three month period ended May 31, 2008, the consolidation of the VIE comprised of $0.429 million in rental income, offset by a $0.067 million charge to interest expense, a $0.048 million charge to depreciation expense, and $0.008 million in administrative and other miscellaneous expenses.  For the three month period ended May 31, 2007, the consolidation of the VIE            comprised of $0.470 million in rental income, offset by a $0.103 million charge to interest expense, a $0.050 million charge to depreciation expense, and $0.008 administrative and other miscellaneous expenses.

 

 

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For the nine month period ended May 31, 2008, the consolidation of the VIE comprised of $1.283 million in rental income, offset by a $0.293 million charge to interest expense, a $0.144 million charge to depreciation expense, $0.047 loss on disposal of building, $0.025 million in administrative and other miscellaneous expenses.  For the nine month period ended May 31, 2007, the consolidation of            the VIE comprised of $1.054. million in rental income, offset by a $0.382 million charge to interest expense, a $0.148 million charge to depreciation expense, and $0.051 administrative and other miscellaneous expenses.

 

Refer to Note 2 of the accompanying consolidated financial statements for detailed information regarding the variable interest entity.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our principal sources of liquidity include cash and equivalents and proceeds from debt borrowings.  We had cash and equivalents of $3.097 million at May 31, 2008 and $9.830 million at August 31, 2007.  At May 31, 2008, we had no borrowings available on our line of credit with the bank.

 

We had working capital of ($25) million at May 31, 2008 compared with ($16) million at August 31, 2007. The decrease in working capital was primarily due to a decrease in cash and equivalents and a decrease in accounts receivable.  Current assets are primarily comprised of cash and equivalents, net accounts receivable, inventories, and costs and estimated earnings in excess of billings on            uncompleted contracts. Current liabilities are primarily comprised of the line of credit, accounts payable and accrued expenses.

 

Total debt at May 31, 2008 was $44.00 million including a $4.1 million convertible term note, $32 million in bank debt, $1.3 million in debt to a related party, and $6.6 million in the variable interest entity’s debt.  Total debt at August 31, 2007 was $47.6 million.  There were no unused borrowings under the line of credit at May 31, 2008 and August 31, 2007. The various debt            agreements contain restrictive covenants that limit, among other things, certain mergers and acquisitions, redemptions of common stock, and payment of dividends. In addition, we must meet certain financial ratios.  Total capital expenditures were approximately $0.318 million and $0.1 million for the three month periods ended May 31, 2008 and 2007, respectively.  Total capital expenditures were approximately $1.3 million and $0.9 million for the nine month periods            ended May 31, 2008 and 2007, respectively.  Sources of funds for these expenditures have primarily been from additional borrowings from the bank.

 

As of May 31, 2008, the Company was not in compliance with certain bank debt covenants.  As stated in Note 22, the Company refinanced this debt subsequent to the quarter ended May 31, 2008.

 

***Cash Flows***

 

Cash flows provided by (used in) operations for the nine month period ended May 31, 2008 and 2007 were ($1.006) million and $7.775 million, respectively.  This decrease in operating cash flows was due primarily to increased costs and estimated earning in excess of billings on uncompleted contracts.

 

Net cash flow used in investing activities was ($0.893) million for the nine month period ended May 31, 2008 compared to ($8.077) million for the nine month period ended May 31, 2007.  The decrease was primarily due to not acquiring any new companies.

 

Net cash flow provided by (used in) financing activities was ($4.871) million for the nine month period ended May 31, 2008 compared to $5.706 million for the nine month period ended May 31, 2007.  The decrease was primarily the result of less borrowing and more debt repayment.

 

**CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS**

 

The following table summarizes our contractual obligations as of May 31, 2008:

 

|                               |   | Payments Due By |   |
|------------------------------------|--------|---------------------------|--------|
| Contractual obligation             |   | Total                     |   |   | Less than 1year |   |   | 1-2 years |   |   | 3-5 years |   |   | More than 5years |   |
|                               |   | (Dollars in thousands)    |   |
| Debt and capital lease obligations |   | $                         | 43,920 |   |   | $ | 40,738 |   |   | $ | 1,660 |   |   | $ | 1,522 |   |   | $ | - |   |
| Operating lease (1)                |   |                      | 16,279 |   |   |   | 2,643 |   |   |   | 2,347 |   |   |   | 9,624 |   |   |   | 1,665 |   |
| Total                              |   | $                         | 60,199 |   |   | $ | 43,381 |   |   | $ | 4,007 |   |   | $ | 11,146 |   |   | $ | 1,665 |   |

 

|   | (1) | Operating leases represent the total future minimum lease payments, and are primarily comprised of lease obligations between the Company and the VIE. This operating lease expense is eliminated in the Company’s consolidated statement of operations. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

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**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 majority shareholder, Mr. Carter Fortune, related to the Company’s stock provided as consideration under the acquisitions.  The option agreements provide for put/call options on the Company’s common stock held by            the sellers of the acquired companies.   Total estimated cash outlays by the Company’s majority shareholder subsequent to May 31, 2008 for these options are estimated between $2.4 million and $4.0 million and are expected to be exercised over the next three months.

 

We lease a total of five facilities from a VIE as described earlier in this filing. The VIE’s primary purpose is to own and lease these properties to the Company. The VIE does not have any other significant assets.  Effective, September 1, 2006, the Company elected to consolidate the VIE through its evaluation of Financial Interpretation No. 46R, Consolidation of Variable Interest            Entities ("FIN 46R").

 

*Guarantees*

 

A significant portion of our debt and surety bonds are personally guaranteed by the Company’s Chairman of the Board and Chief Executive Officer.  Future changes to these guarantees would affect financing capacity of the Company. The Company’s Chairman of the Board and its Chief Executive Officer are continuing discussions with the Company regarding the charging of a guarantee fee.            To date, the Chairman of the Board and Chief Executive Officer have not charged a guarantee fee.

 

*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 May 31, 2008, we had approximately            $5.4 million in restricted cash primarily to secure obligations under our PEO contracts in the Business Solutions segment.

 

*Payment and Performance Bonds*

 

Within our Wireless Infrastructure and Transportation Infrastructure segments, certain customers, particularly in connection with new construction, require us to post payment or performance bonds issued by a financial institution known as a surety. These bonds provide a guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If we fail            to perform under a contract or fail to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the surety for any expenses or outlays it incurs. Under our continuing indemnity and security agreement with the surety, we have posted letters of credit in the amount of $5.0 million in favor of the surety and, with the consent of our lender under our credit facility, we have granted security            interests in certain of our assets to collateralize our obligations to the surety. To date, we have not been required to make any reimbursements to the surety for bond-related costs. We believe that it is unlikely that we will have to fund claims under our surety arrangements in the foreseeable future. As of May 31, 2008, an aggregate of approximately $5.0 million in original face amount of bonds issued by the surety were outstanding.

 

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**Item 3.**  **Quantitative and Qualitative Disclosures about Market Risk**

 

The Company is exposed to certain market risks arising from adverse changes in interest rates, primarily due to the potential effect of such changes on its variable rate line of credit and convertible term note as described in Note 9 to the consolidated financial statements.  Almost all of the Company’s debt as of May 31, 2008 bears interest at variable rates. Based on amounts outstanding            at May 31, 2008, if the interest rate on the Company’s variable debt were to increase by 1.0%, annual interest expense would increase by approximately $0.466 million.

 

Cash and cash equivalents as of May 31, 2008 were $3.097 million and are primarily in subsidiary operating accounts. A hypothetical 10% adverse change in the average interest rate on the Company’s investments would not have had a material effect on net income for the three or nine month periods ended May 31, 2008. We do not currently utilize any derivative financial instruments to hedge            interest rate risks.

 

We are exposed to foreign currency risks due to both transactions and translations between functional and reporting currencies in our European, Singaporean, Chinese, and Mexican foreign subsidiaries. A hypothetical 10% adverse change in the foreign currency translation would not have had a material effect on net income for the three or nine month periods ended May 31, 2008. We do not currently utilize            any derivative financial instruments to hedge foreign currency risks.

 

**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 it files pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to the Company's management, including            its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. The Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that disclosure controls and procedures or internal controls can prevent all error and all fraud.  The Company's management also 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, any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired objectives.

 

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures as of May 31, 2008. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, for            the reasons more fully set forth below, the Company’s disclosure controls and procedures were not effective on May 31, 2008 in providing reasonable assurance that information required to be disclosed in the reports we 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 both at the parent company level and at certain subsidiaries at May 31, 2008 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.

 

During the period covered by this report, there have been no changes to our internal controls that have materially affected or that are reasonably likely to materially affect our internal controls over financial reporting.

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**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/A.

 

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

 

None

 

**Item 3. Defaults Upon Senior Securities.**

 

None

 

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

 

None

 

**Item 5. Other Information.**

 

None

 

**Item 6. Exhibits**

 

The following exhibits are included herein:

 

| 31.1 | Rule 15d-14(a) Certification of CEO |
|------|-------------------------------------|

| 31.2 | Rule 15d-14(a) Certification of CFO |
|------|-------------------------------------|

| 32.1 | Section 1350 Certification of CEO |
|------|-----------------------------------|

| 32.2 | Section 1350 Certification of CFO |
|------|-----------------------------------|

 

**SIGNATURES**

 

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

 

|                           | Fortune Industries, Inc. |
|--------------------------------|--------------------------|
|                           | (Registrant)             |
|                           |                     |
| Date:  July 15, 2008 | By: /s/ John F. Fisbeck  |   |
|                           | John F. Fisbeck,         |
|                           | Chief Executive Officer  |
|                           |                     |
|                           |                     |
| Date:  July 15, 2008 | By: /s/ Garth A. Allred  |   |
|                           | Garth A Allred,          |
|                           | Chief Financial Officer  |

 

 

 

 

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