-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SJ4n75SKBvfblK4Hl6dNvvyGihyePhsdIXK0jOPGAWE4COjhtQP6kdBYnfVMlUB/ Yz9nP9c2Pm84YS29VUSZMw== 0000926274-05-000129.txt : 20050414 0000926274-05-000129.hdr.sgml : 20050414 20050414105617 ACCESSION NUMBER: 0000926274-05-000129 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050228 FILED AS OF DATE: 20050414 DATE AS OF CHANGE: 20050414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORTUNE DIVERSIFIED INDUSTRIES INC CENTRAL INDEX KEY: 0000851249 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ALLIED TO MOTION PICTURE PRODUCTION [7819] IRS NUMBER: 742504501 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-19049 FILM NUMBER: 05749717 BUSINESS ADDRESS: STREET 1: ATTN: AMY GALLO STREET 2: 6809 CORPORATE DRIVE CITY: INDIANAPOLIS STATE: IN ZIP: 46278 BUSINESS PHONE: 3172368020 MAIL ADDRESS: STREET 1: ATTN: AMY GALLO STREET 2: 6809 CORPORATE DRIVE CITY: INDIANAPOLIS STATE: IN ZIP: 46278 FORMER COMPANY: FORMER CONFORMED NAME: WOW ENTERTAINMENT INC DATE OF NAME CHANGE: 20001116 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN GAMING & ENTERTAINMENT LTD /DE DATE OF NAME CHANGE: 19941229 FORMER COMPANY: FORMER CONFORMED NAME: GAMMA INTERNATIONAL LTD DATE OF NAME CHANGE: 19940819 10QSB 1 fdi-305qsb.txt United States Securities and Exchange Commission Washington, D.C. 20549 Form 10QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 2005 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________ to ___________ Commission file number 0-19049 Fortune Diversified Industries, Inc. ----------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 74-2504501 - ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 6402 Corporate Drive, Indianapolis, Indiana 46278 ------------------------------------------------- (Address of principal executive offices) (317) 532-1374 -------------- (Issuer's telephone number, including area code) ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: On April 13, 2005, there were 105,220,944 shares of the Company's Common Stock outstanding. Transitional Small Business Disclosure Format (Check one): Yes No X --- --- FORTUNE DIVERSIFIED INDUSTRIES, INC. FORM 10-QSB For The Quarterly Period Ended February 28, 2005 INDEX Page(s) PART I. Financial Information ITEM 1. Financial Statements Consolidated Balance Sheets as of February 28, 2005 (unaudited) and August 31, 2004 1 Consolidated Statements of Operations for the Six Months Ended February 28, 2005 and February 29, 2004 (unaudited) 2 Consolidated Statements of Operations for the Three Months Ended February 28, 2005 and February 29, 2004 (unaudited) 3 Consolidated Statements of Stockholders' Equity as of February 28, 2005 (unaudited) and August 31, 2004 4 Consolidated Statements of Cash Flows for the Six Months Ended February 28, 2005 and February 29, 2004 (unaudited) 5 Notes to Interim Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 ITEM 3. Controls and Procedures 27 PART II. Other Information ITEM 1. Legal Proceedings 27 ITEM 2. Changes in Securities and Use of Proceeds 27 ITEM 3. Defaults upon Senior Securities 27 ITEM 4. Submission of Matters to a Vote of Security Holders 27 ITEM 5. Other Information 27 ITEM 6. Exhibits and Reports on Form 8-K 28 Signatures 29 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements. FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
Unaudited Audited February 28, August 31, 2005 2004 CURRENT ASSETS Cash and equivalents $ 4,551 $ 3,527 Restricted savings account 210 210 Available for sale investments 2,131 1,959 Accounts receivable, net 14,060 15,894 Costs and estimated earnings in excess of billings on uncompleted contracts 2,099 1,879 Inventory, net 10,460 9,746 Deferred tax asset 1,014 1,014 Other current assets 756 815 -------- -------- Total Current Assets 35,281 35,044 -------- -------- OTHER ASSETS Property, plant & equipment, net 4,014 4,038 Goodwill 11,162 10,192 Other intangible assets, net 2,612 2,111 Other long term assets 222 184 -------- -------- Total Other Assets 18,010 16,525 -------- -------- TOTAL ASSETS $ 53,291 $ 51,569 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Lines of credit $ 9,778 $ 7,948 Current maturities of long-term debt 2,022 1,999 Current maturities of long-term debt - related party 643 47 Accounts payable 5,866 4,670 Due to related party 3 29 Health and workers' compensation reserves 3,762 3,750 Accrued expenses 3,918 5,242 Income tax liability 44 172 Billings in excess of costs and estimated earnings on uncompleted contracts 1,870 1,912 Other current liabilities 100 101 -------- -------- Total Current Liabilities 28,006 25,870 -------- -------- LONG-TERM LIABILITIES Line of credit - related party $ 6,268 $ 6,268 Long-term debt - related party, less current maturities 85 106 Long-term debt, less current maturities 5,273 6,254 Other long-term liabilities 253 253 -------- -------- Total Long-term Liabilities 11,879 12,881 -------- -------- STOCKHOLDERS' EQUITY Common stock 1,021 1,008 Additional paid-in capital and warrants outstanding 16,909 15,893 Accumulated deficit (4,710) (4,089) Accumulated other comprehensive income 186 6 -------- -------- Total Stockholders' Equity 13,406 12,818 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 53,291 $ 51,569 ======== ========
See Accompanying Notes to Unaudited Interim Consolidated Financial Statements 1 FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT SHARE DATA) (UNAUDITED)
Six Months Ended February 28, February 29, 2005 2004 NET REVENUES BUSINESS SOLUTIONS SEGMENT (gross billings of $73,043,000 less worksite employee payroll cost of $62,745,000) $ 10,298 $ 8,120 NET REVENUES WIRELESS INFRASTRUCTURE SERVICES 5,023 4,497 NET REVENUE WIRELESS INFRASTRUCTURE PRODUCTS 19,512 -- NET REVENUES MANUFACTURING AND DISTRIBUTION SEGMENT 10,364 10,399 -------- -------- TOTAL NET REVENUES 45,197 23,016 COST OF REVENUES BUSINESS SOLUTIONS SEGMENT 7,984 6,537 COST OF REVENUES WIRELESS INFRASTRUCTURE SERVICES 3,395 3,606 COST OF REVENUES WIRELESS INFRASTRUCTURE PRODUCTS 17,701 -- COST OF REVENUES MANUFACTURING AND DISTRIBUTION SEGMENT 7,518 6,966 -------- -------- TOTAL COST OF REVENUES 36,598 17,109 -------- -------- GROSS PROFIT 8,599 5,907 OPERATING EXPENSES Selling, general and administrative expenses 7,998 4,659 Depreciation and amortization 731 446 -------- -------- Total Operating Expenses 8,729 5,105 -------- -------- OPERATING INCOME (LOSS) (130) 802 -------- -------- OTHER INCOME (EXPENSE) Interest income 18 30 Interest expense (589) (189) Gain (loss) on investments in marketable securities, net (42) 29 Exchange rate gain 59 -- Other income (expense) 127 (29) -------- -------- Total Other Income (Expense) (427) (159) -------- -------- NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (557) 643 PROVISION FOR INCOME TAXES 64 -- -------- -------- NET INCOME (LOSS) $ (621) $ 643 ======== ======== BASIC INCOME (LOSS) PER SHARE $ (0.01) $ 0.01 ======== ======== DILUTED INCOME (LOSS) PER SHARE $ (0.01) $ 0.01 ======== ========
See Accompanying Notes to Unaudited Interim Consolidated Financial Statements 2 FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended February 28, February 29, 2005 2004 NET REVENUES BUSINESS SOLUTION SEGMENT (gross billings of $38,455,000 less worksite employee payroll cost of $32,821,000) $ 5,634 $ 5,294 NET REVENUE WIRELESS INFRASTRUCTURE SERVICES 2,321 2,635 NET REVENUE WIRELESS INFRASTRUCTURE PRODUCTS 7,514 -- NET REVENUE MANUFACTURING AND DISTRIBUTION SEGMENT 4,680 4,881 -------- -------- TOTAL NET REVENUES 20,149 12,810 COST OF REVENUES BUSINESS SOLUTIONS SEGMENT 4,324 4,268 COST OF REVENUES WIRELESS INFRASTRUCTURE SERVICES 1,595 2,135 COST OF REVENUES WIRELESS INFRASTRUCTURE PRODUCTS 7,097 -- COST OF REVENUES MANUFACTURING AND DISTRIBUTION SEGMENT 3,424 3,255 -------- -------- TOTAL COST OF REVENUES 16,440 9,658 GROSS PROFIT 3,709 3,152 OPERATING EXPENSES Selling, general and administrative expenses 4,445 2,457 Depreciation and amortization 354 231 -------- -------- Total Operating Expenses 4,799 2,688 -------- -------- OPERATING INCOME (LOSS) (1,090) 464 OTHER INCOME (EXPENSE) Interest income 18 27 Interest expense (323) (94) Loss on sales of investments in marketable securities, net (13) -- Exchange rate gain 16 -- Other income 68 12 -------- -------- Total Other Income (Expense) (234) (55) -------- -------- NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (1,324) 409 PROVISION FOR INCOME TAXES -- -- -------- -------- NET INCOME (LOSS) $ (1,324) $ 409 ======== ======== BASIC INCOME (LOSS) PER SHARE $ (0.01) $ 0.00 ======== ======== DILUTED INCOME (LOSS) PER SHARE $ (0.01) $ 0.00 ======== ========
See Accompanying Notes to Unaudited Interim Consolidated Financial Statements 3 FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS) (UNAUDITED)
Additional Accumulated Paid-in Capital Cost of Accumulated Other Total Comprehensive Common and Warrants Treasury Earnings Comprehensive Stockholders Income Stock Outstanding Stock (Deficit) Income Equity (Loss) BALANCE AT AUGUST 31, 2004 $ 1,008 $ 15,893 $-- $ (4,089) $ 6 $ 12,818 $ 2,523 ======== ======== ==== ======== ======== ======== ======== Issuance of 1,334,500 shares of common stock for acquisitions 13 1,016 -- -- -- 1,029 -- Net loss -- -- -- (621) -- (621) (621) Translation adjustments, net of tax -- -- -- -- 65 65 65 Net unrealized investments gains, net of tax -- -- -- -- 115 115 115 -------- -------- ---- -------- -------- -------- -------- BALANCE AT FEBRUARY 28, 2005 $ 1,021 $ 16,909 $-- $ (4,710) $ 186 $ 13,406 $ 2,082 ======== ======== ==== ======== ======== ======== ========
See Accompanying Notes to Unaudited Interim Consolidated Financial Statements 4 FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
Six Months Ended February 28, February 29, 2005 2004 OPERATING ACTIVITIES Net Income (Loss) $ (621) $ 643 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 731 446 (Gain) loss on sale of investments 42 (29) Loss on disposal of fixed assets 5 -- (Increase) decrease in certain operating assets: Accounts receivable 2,204 (1,563) Costs and estimated earnings in excess of billings on uncompleted contracts (220) -- Inventory (608) (1,539) Other current assets 60 (61) Other long term assets (43) (2) Increase (decrease) in certain operating liabilities: Accounts payable 1,052 1,880 Accrued expenses and other current liabilities (1,634) (392) Billings in excess of costs and estimated earnings on uncompleted contracts (42) -- Health and workers' compensation reserves 12 517 Due to related party (26) -- ------- ------- Net Cash Provided (Used) by Operating Activities 912 (100) ------- ------- INVESTING ACTIVITIES Capital Expenditures (451) (370) Purchases of available for sale securities (99) (2,010) Sales of available for sale securities -- 344 Acquisition of productive assets and businesses, net of cash received (690) 3,302 ------- ------- Net Cash Provided (Used) by Investing Activities (1,240) 1,266 ------- ------- FINANCING ACTIVITIES Borrowings short term debt - related party 800 -- Payments to related party (202) (230) Net borrowings under line of credit 1,830 955 Borrowings on long-term debt 48 265 Payments on long-term debt (1,168) (450) Payments on long-term debt - related party (21) -- Borrowings on long-term debt - related party -- 452 ------- ------- Net Cash Provided by Financing Activities 1,287 992 ------- ------- Effect of exchange rate changes on cash 65 238 ------- ------- NET INCREASE IN CASH AND EQUIVALENTS 1,024 2,396 CASH AND EQUIVALENTS Beginning of Period 3,527 885 ------- ------- End of Period $ 4,551 $ 3,281 ======= ======= SUPPLEMENTAL DISCLOSURES Noncash investing and financing activities: Unrealized net (loss) gain on marketable securities 115 (35) Interest paid 356 99
See Accompanying Notes to Unaudited Interim Consolidated Financial Statements 5 FORTUNE DIVERSIFIED INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 2004 annual report on Form 10-K filed by Fortune Diversified Industries, Inc. (together with all its subsidiaries, the "Company"). The accompanying unaudited consolidated financial statements have been prepared by Fortune Diversified Industries, Inc. (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 six-month period ended February 28, 2005 are not necessarily indicative of the operating results to be expected for the full fiscal year. Nature of Business: The Company is the parent company of Professional Staff Management, Inc., Professional Staff Management, Inc. II and Pro Staff, Inc. (collectively "PSM"); CSM, Inc. (CSM); Nor-Cote International, Inc. (Nor-Cote); Kingston Sales Corporation (Kingston); Commercial Solutions, Inc. (Commercial Solutions); James H. Drew Corp. (JH Drew); PDH, Inc. (PDH); Cornerstone Wireless Services, Inc. (Cornerstone Wireless); Magtech Services, Inc. (Magtech); Cornerstone Wireless Construction Services, Inc. (Cornerstone Construction); Innovative Telecommunications Consultants, Inc. (ITC); Telecom Technology Corp. (TTC); StarQuest Wireless Services, Inc. (StarQuest); Women of Wrestling, Inc. (WOW); and Murphy Development, Ltd (Murphy). Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Nor-Cote contains foreign subsidiaries from the United Kingdom, Singapore, and Malaysia, which have been eliminated in consolidation at the Nor-Cote subsidiary level. All significant intercompany accounts and transactions of the Company have been eliminated. Foreign Currency Translation: Assets and liabilities of the foreign subsidiaries of the Company's wholly owned subsidiary 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 stockholders' 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 entities' 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 has elected to report comprehensive income (loss) in the consolidated statements of stockholders' 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 revenues 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 Company's Manufacturing and Distribution segment, revenue from the sale of products is recognized according to the terms of the sales arrangement, which is generally upon shipment. Commission revenue is recognized when realizable and earned, which is typically upon receipt of the commission payment. Revenues are recognized, net of estimated costs of returns, allowances and sales incentives, 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 the Company does not generally require collateral to secure accounts receivable. 6 In its Wireless Infrastructure Segment, PDH, Cornerstone Wireless, Cornerstone Construction, ITC, and Magtech enter 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 the Company agrees to do the work for units of work performed. The Company also performs services on a cost-plus or time and materials basis. The Company completes most projects within six months. The Company generally recognizes revenue utilizing output measures, such as when services are performed, units are delivered or when contract milestones are reached. Additionally, in the Wireless Infrastructure Segment, JH Drew, a construction company, 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 costs 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. TTC and StarQuest recognize revenue when product is shipped and installation is complete. In its Business Solutions Segment, PSM, a licensed Professional Employer Organization (PEO), bills clients under its Professional Services Agreement, which includes each worksite employee's gross wages, plus additional charges for employment related taxes, benefits, workers' compensation insurance, administrative and record keeping, as well as safety, human resources, and regulatory compliance consultation. All wages, taxes and insurance coverages are provided under the PSM 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. All calculations or amounts PSM owes the government and its employment insurance vendors are based on the experience levels and activity of PSM with no consideration to client detail. There is no direct relationship between what PSM pays versus what is billed to a client. PSM bills the client its worksite employees' gross wages plus an overall service fee that includes all components of employment related taxes, employment benefits insurance, and administration of those items. This service fee is intended to cover PSM's cost of those items and yield a profit to PSM. What is paid to the government and vendors is different than what is charged to the client due to the different methods of calculation as to what PSM owes those entities versus what the client is charged. 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 workers' compensation and unemployment insurance is based, in part, on the client's historical claims experience. All charges by PSM are invoiced along with each periodic payroll delivered to the client. PSM reports revenues in accordance with Emerging Issues Task Force ("EITF") No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. PSM reports revenues on a gross basis, the total amount billed to clients for service fees which includes health and welfare benefit plan fees, workers' compensation insurance, unemployment insurance fees, and employment-related taxes. PSM reports revenues on a gross basis for such fees because PSM is the primary obligor and deemed to be the principal in these transactions under EITF No. 99-19. However, PSM reports revenues on a net basis for the amount billed to clients for worksite employee salaries and wages. The Company as a result of recommendations by the Securities and Exchange Commission staff to public companies in the PEO industry subject to reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934, adopted this accounting policy of reporting revenues net as an agent. 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. PSM accounts for their revenues using the accrual method of accounting. Under the accrual method of accounting, PSM recognizes their revenues in the period in which the worksite employee performs work. PSM accrues revenues for service PSM accounts for their revenues using the accrual method of accounting. Under the accrual method of accounting, PSM recognizes their revenues in the period in which the worksite employee performs work. PSM accrues 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. PSM accrues unbilled receivables for payroll and 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 year, such costs are paid and the related service fees are billed. 7 Consistent with its revenue recognition policy, PSM's 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. The Company acquired another PEO, CSM, on April 5, 2005 as disclosed in Note 2. CSM generally follows the same revenue recognition policy as PSM. 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 and certificates of deposits, and other instruments with original maturities of three months or less. Marketable Securities: Marketable securities include common stocks classified as "available for sale" in accordance with the provisions of Statement of Financial Accounting Standards 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 stockholders' 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. Accounts Receivable: Accounts receivable is stated at the amount billable to customers. The Company provides allowances for doubtful accounts and for returns and sales allowances, which are based upon a review of outstanding receivables, historical information and existing economic conditions. Accounts receivable are ordinarily due 30 days after the issuance of the invoice. Delinquent receivables 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 of raw materials are recorded at the lower of cost (primarily first-in, first-out) or market value. Inventories of work-in-process and finished goods include estimated direct labor, indirect labor, and other manufacturing expenses applied as a function of material costs. The Company's JH Drew, Kingston and Commercial Solutions subsidiaries record finished goods inventory on an average cost basis. 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, Equipment, and Depreciation: Property and equipment are carried at cost and includes expenditures for new additions and those, which substantially increase the useful lives of existing assets. Depreciation is computed at various rates by use of the straight-line method and certain accelerated methods. Depreciable lives are generally ranging 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 year of disposal with the resulting gain or loss reflected in earnings or in the cost of the replacement asset. The provision for depreciation amounted to $528,000 for the six months ended February 28, 2005. Goodwill and Other Intangible Assets: The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". With the adoption of SFAS No. 142, goodwill is no longer amortized but instead is assessed for impairment at least as often as annually and as triggering events occurs. In making this assessment, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and market place data. There are inherent uncertainties related to these factors and management's judgment in applying them to the analysis of goodwill impairment. Since management's judgment is involved in performing goodwill and other intangible assets valuation analyses, there is risk that the carrying value of the goodwill and other intangible assets may be overstated or understated. The Company has elected to perform the annual impairment test of recorded goodwill as required by SFAS 142 as of August 31, the Company's fiscal year-end. The results of the most recent impairment test indicated that the fair value of each of the reporting units as of August 31, 2004, exceeded their respective carrying, or book values, including goodwill, and therefore recorded goodwill was not subject to impairment. 8 Long-lived Assets: The Company periodically considers whether indicators of impairment of long-lived assets are present. If such indicators 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. Fair value is determined by discounted future cash flows, appraisals or other methods. If the assets determined to be impaired are to be held and used, the Company recognizes an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset's carrying value. 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. Long-lived assets including the Company's property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount to future net undiscounted cash flows expected to be generated by the related asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair market value of the assets. 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, marketable securities, receivables, and payables approximate fair value. Stock-based Compensation: In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) is effective for public companies for interim or annual periods beginning after June 15, 2005, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. The new standard will be effective for the Company, beginning July 1, 2005. The Company has not yet completed their evaluation and expects the adoption to have no effect on the consolidated financial statements. Income Per Common Share: Income per share has been computed in accordance with SFAS No. 128, "Earnings Per Share." Under SFAS No. 128, basic income per 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 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 U.S., U.K., Singapore, and Malaysia income tax returns. Research and Development Costs: Research and development costs are expensed as incurred and totaled $243,000 for the six month period ended February 28, 2005. Research and development expense is recorded in the Company's Nor-Cote subsidiary. Self Insurance: The Company's Nor-Cote subsidiary has elected to act as a self-insurer for certain costs related to employee health and accident benefit programs. Costs resulting from non-insured losses are estimated and charged to expense when incurred. The Company has purchased insurance which limits its annual exposure for individual claims to $40,000 and which limits its aggregate annual exposure to approximately $460,000. The Company's PSM subsidiary has elected to enter into a partially self-funded arrangement related to worksite employees' health and accident benefit programs. Under the insurance policy, PSM's self-funded liability is limited to $175,000 per employee, with an aggregate liability limit of approximately $11,150,000. The liability limits are adjusted monthly, based on the number of participants. 9 NOTE 2 - ACQUISITIONS Ink Source, Inc. - ---------------- The Company's Nor-Cote subsidiary, acquired certain assets and assumed certain liabilities of Ink Source through an asset purchase agreement entered into as of September 30, 2004 by and among Ink Source, Inc. a Wisconsin corporation ("Seller"), Michael Sloan ("Shareholder") and Nor-Cote International, Inc., an Indiana corporation ("Purchaser). Purchased assets in the agreement include at the minimum goodwill, customer lists, customer deposits, proprietary property and products, prepaid expenses, software, furniture, equipment, machinery and other intellectual property, to its Nor-Cote subsidiary. Nor-Cote accepted and assumed $239,747 of specifically identified accounts payable and bank debt. In addition to the assumed liabilities, the consideration given for the acquired assets was $220,000, which includes a non-compete agreement with Michael Sloan. Additionally, 400,000 restricted shares of the Company's common stock vest per the employment agreement with Michael Sloan in two years based upon certain sales volume within the Ink Source division, as defined in the agreement. The purchase price includes $360,000 of contingent stock consideration. This amount consists of 400,000 shares valued at the closing price of the Company's stock on the date of purchase at $.90 share. The contingent stock consideration is included as a component of the purchase price in accordance with Emerging Issues Task Force 95-8, "Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination," under arrangements not affected by employment termination. The consideration is included in permanent equity under SFAS 141 as management of the Company deems likelihood that payment of such contingent consideration is beyond a reasonable doubt. Ink Source provides technology in Ultra Violet point of purchase (POP) inks to round out the suite of ink products provided by Nor-Cote. MAGTECH Services, Inc. - ---------------------- In November 2004, the Company acquired all of the assets and certain liabilities of Magtech pursuant to an Asset Purchase Agreement effective November 1, 2004. The acquired assets include all fixed assets, accounts receivable, certain intangible assets, sales proposals and like documents and contracts. The Company accepted and assumed certain specific accounts payable and all of Sellers' rights and executory obligations under the Assumed Contracts, as defined in the Asset Purchase Agreement, to be performed after the Closing Date (excluding any obligations or liabilities of Sellers under any Assumed Contracts that were to have been performed, fulfilled or satisfied on or prior to the Closing Date). In addition to the assumed liabilities, the consideration given for the acquired assets was $445,213 cash and 484,500 restricted shares of the Company's stock. Of the 484,500 shares, 84,500 shares shall vest immediately in Seller and the remaining 400,000 shares are contingent upon certain EBIT requirements through the period November 1, 2004 to October 31, 2006, as defined in the agreement. The 484,500 shares are valued at the closing price of the Company's stock on the date of purchase at $.70 share. The contingent stock consideration is included as a component of the purchase price in accordance with Emerging Issues Task Force 95-8, "Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination," under arrangements not affected by employment termination. The consideration is included in permanent equity under SFAS 141 as management of the Company deems likelihood that payment of such contingent consideration is beyond a reasonable doubt. Magtech operates in the Company's Wireless Infrastructure segment. EI Solution, Inc. - ------------------ The Company's ITC subsidiary acquired all of the assets of EI Solution, Inc. pursuant to an Asset Purchase Agreement effective February 28, 2005. The acquired assets include personnel, certain intangible assets, sales proposals and like documents and contracts. The consideration given for the acquired assets was $175,000 cash and 450,000 restricted shares of the Company's stock. Of the 450,000 shares, 250,000 shares shall vest immediately in Seller and the remaining 200,000 shares are contingent upon certain sales requirements through the period March 1, 2005 to February 28, 2006, as defined in the agreement. The 450,000 shares are valued at the closing price of the Company's stock on the date of purchase at $.40 share. The contingent stock consideration is included as a component of the purchase price in accordance with Emerging Issues Task Force 95-8, "Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination," under arrangements not affected by employment termination. The consideration is included in permanent equity under SFAS 141 as management of the Company deems likelihood that payment of such contingent consideration is beyond a reasonable doubt. EI Solution operates in the Company's Wireless Infrastructure segment under ITC's name and management team. 10 NOTE 2 - ACQUISITIONS (CONTINUED) Ink-Source: Accounts receivable, net $ 66 Inventory, net 106 Property and equipment 57 Goodwill 373 Intangible assets 342 ---------- 944 ---------- Accounts payable 80 Notes Payable 160 Other accrued liabilities 124 ---------- 364 ---------- $ 580 ========== Cash consideration $ 220 Fair value of common stock consideration 360 ---------- $ 580 ========== Magtech: Accounts receivable, net $ 304 Other current assets 151 Property and equipment 6 Goodwill 327 Intangible assets 102 ---------- 890 ---------- Accounts payable 64 Other accrued liabilities 42 ---------- 106 ---------- $ 784 ========== Cash consideration $ 445 Fair value of common stock consideration 339 ---------- $ 784 ========== EI Solutions: Goodwill 270 Intangible assets 250 ---------- 520 ---------- Other accrued liabilities 15 ---------- 15 ---------- $ 505 ========== Cash consideration $ 175 Fair value of common stock consideration 330 ---------- $ 505 ========== 11 NOTE 2 - ACQUISITIONS (CONTINUED) Effective April 5, 2005, the Company acquired CSM, pursuant to an Agreement and Plan of Merger by and between the Company, CSM, CSM Merger Corporation, Carter M. Fortune, Marc Fortune, Greg Daily, Harbinger Mezzanine Partners, L.P., Doug Altenbern, Jeff Gould, Bob Boston, and Don Denbo. CSM is the holding company for Century II Staffing, Inc. and other related subsidiary entities. Century II is a professional employer organization that is based in Tennessee. The terms of the Agreement include, among other things, the payment of approximately $2 million by the Company to retire certain debts owed by CSM, the payment of approximately $650,000 in cash by the Company to the shareholders of CSM, a portion of which shall be held in escrow for payment of certain tax debts that may be owed by CSM, and the issuance of 1,500,000 shares of the Company's Common Stock to be held in escrow until such time as the shares may be earned by the shareholders of CSM upon the achievement of certain financial performance measures by Century II. The following unaudited pro forma data summarize the results of operations for the periods indicated as if the CSM, Ink Source, Magtech, EI Solution, JH Drew, ITC, Commercial Solutions and PSM acquisitions 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 (dollars in thousands) 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. Six months Six months Ended Ended February 28, February 29, 2005 2004 ------------- ------------- Net revenue $ 53,260 $ 56,703 Cost of revenues 43,286 45,454 ------------- ------------- Gross profit 9,974 11,249 Operating expenses 10,451 9,793 ------------- ------------- Operating income (loss) (477) 1,456 Other income (expenses) (598) (605) ------------- ------------- Net Income (Loss) (1,075) 851 Dividends -- -- ------------- ------------- Net Income (Loss) Available for Common Stockholders $ (1,075) $ 851 ============= ============= Basic Income (Loss) Per Share: $ (.01) $ .01 ============= ============= Diluted Income (Loss) Per Share: $ (.01) $ .01 ============= ============= Shares Outstanding: Basic weighted average number of common shares outstanding 105,220,944 105,220,444 Dilutive effect of conversion of options -- -- ------------- ------------- Total Shares Outstanding 105,220,944 105,220,444 ============= ============= 12 NOTE 3 - ACCOUNTS RECEIVABLE AND CONTRACTS RECEIVABLE Accounts receivable and contracts receivable include the following (amounts in thousands): Unaudited Audited February 28, August 31, 2005 2004 --------- --------- Amounts currently due $9,786 $12,005 Contracts in process Progress billing 3,822 4,560 Retainages 1,707 576 --------- --------- 15,315 17,141 Less allowance for doubtful accounts (1,120) (1,112) Less allowance for sales returns (135) (135) --------- --------- $14,060 $15,894 ========== ========= NOTE 4 - COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS Information related to contracts in progress are as follows (amounts in thousands): Unaudited Audited February 28, August 31, 2005 2004 --------- --------- Costs incurred on uncompleted contracts $ 28,078 $ 24,475 Estimated earnings recognized to date on uncompleted contracts 6,450 5,502 --------- --------- 34,528 29,977 Less billings on uncompleted contracts (34,299) (30,010) --------- --------- Net $ 229 ($33) ========= ========= The net amount is included in the accompanying consolidated balance sheets under the following captions (amounts in thousands): Unaudited Audited February 28, August 31, 2005 2004 --------- --------- Costs and estimated earnings in excess of billings on uncompleted contracts $ 2,099 $ 1,879 Billings in excess of costs and estimated earnings on uncompleted contracts 1,870 1,912 --------- --------- $ 229 ($33) ========= ========= NOTE 5 - INVENTORIES Inventories reflected on the accompanying consolidated balance sheets are summarized as follows (amounts in thousands): Unaudited Audited February 28, August 31, 2005 2004 --------- --------- Raw materials $ 758 $ 559 Work-in-process 23 12 Finished goods 9,979 9,425 Less inventory reserve (300) (250) --------- --------- $ 10,460 $ 9,746 ========= ========= 13 NOTE 6 - PROPERTY AND EQUIPMENT Property and equipment, including capital leases, is comprised of the following (amounts in thousands): Unaudited Audited February 28, August 31, 2005 2004 --------- --------- Land and building $ 1,938 $ 1,903 Machinery and equipment 4,784 5,181 Research equipment 383 380 Office equipment 3,184 2,943 Vehicles 3,087 3,631 Leasehold improvements 146 151 --------- --------- 13,522 14,189 Less accumulated depreciation (9,508) (10,151) --------- --------- $ 4,014 $ 4,038 ========= ========= NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS The changes in the carrying amount of goodwill, as reclassified for the adoption of SFAS 142, are as follows (amounts in thousands) :
BUSINESS MANUFACTURING AND WIRELESS HOLDING SEGMENT SOLUTIONS DISTRIBUTION INFRASTRUCTURE COMPANY TOTALS ----------- ------------ --------------- ------- ------ Goodwill at August 31, 2004 $ 3,580 $ 5,957 $ 655 $ -0- $ 10,192 Goodwill Acquired -0- 373 597 -0- 970 Impairment losses -0- -0- -0- -0- -0- ------- ------- --------- ------- -------- Goodwill at February 28, 2005 $ 3,580 $ 6,330 $ 1,252 $ -0- $ 11,162 ======= ======== ========= ======= ========
The total amount of goodwill that is deductible for tax purposes is $2,328 at February 28, 2005. The following table sets forth the gross carrying amount and accumulated amortization of the Company's intangible assets (amounts in thousands):
AT FEBRUARY 28, 2005 AT AUGUST 31, 2004 ---------------------------------------- ------------------------------------------ WEIGHTED WEIGHTED GROSS AVERAGE GROSS AVERAGE CARRYING ACCUMULATED AMORT CARRYING ACCUMULATED AMORT AMOUNT AMORTIZATION PERIOD AMOUNT AMORTIZATION PERIOD ---------- ------------ ------ --------- ------------ ------ Customer Relationships $ 2,068 $ 340 10 YRS $ 1,824 $ 239 10 YRS Non-compete 234 151 4 YRS 234 122 4 YRS Non-compete 399 113 5 YRS 399 73 5 YRS Non-compete 100 27 3 YRS 100 12 3 YRS Non-compete 200 8 10 YRS -0- -0- 0 YRS Non-compete 250 0 4 YRS -0- -0- 0 YRS ---------- ---------- ------ ---------- ---------- ------ Total $ 3,251 $ 639 8 YRS $ 2,557 $ 446 7 YRS ========== ========== ====== ========== ========== ======
14 NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) Intangible asset amortization expense for the six months ended February 28, 2005 was $203,000 which includes $10,000 of amortization related to loan origination fees. Amortization expense on intangible assets currently owned by the Company at February 28, 2005 for each of the next five fiscal years are approximately as follows (amounts in thousands): 2006 457 2007 457 2008 392 2009 368 2010 233 2011 and thereafter 705 ------ Total $2,612 ====== NOTE 8 - LINES OF CREDIT AND DEBT ARRANGEMENTS Lines of Credit: Effective February 28, 2005, the Company entered into an agreement with the bank for a $13.0 million revolving line of credit available through February 28, 2006. Interest on the line is charged at .5% less than the credit facility's Prime Rate. Subsequent to February 28, 2005 the funds from this line of credit are to be used to pay off all of the Company's other lines of credit with the same bank. As of February 28, 2005 $0 was borrowed on this line of credit. The Company has a $1.3 million line of credit available through February 28, 2005. Interest on the line is charged at .5% less than the credit facility's Prime Rate. Outstanding borrowings amounted to $1.11 million at February 28, 2005 and $909,000 at August 31, 2004. The Company has a $1.6 million line of credit available through February 28, 2005. Interest on the line is charged at .5% less than the credit facility's Prime Rate. Outstanding borrowings amounted to $1.473 million at February 28, 2005 and $1.383 million at August 31, 2004. The Company has a $3.0 million line of credit available through February 28, 2005. Interest on the line is charged at .5% less than the credit facility's Prime Rate. Outstanding borrowings amounted to $3.0 million at February 28, 2005 and $1.621 million at August 31, 2004. The Company has a $5.0 million line of credit available through February 28, 2005. Interest on the line is charged at the credit facility's Prime Rate less ..5%. Outstanding borrowings amounted to $4.195 million at February 28, 2005 and $4.035 August 31, 2004. The aforementioned lines of credit are secured by substantially all assets of the Company and personal guarantees of the Company's majority stockholder and a different stockholder. The Company also has a $6.5 million long-term unsecured line of credit with a stockholder available through May 1, 2007. Interest on the line is charged at 3% plus the one-month London Interbank Offered Rate (one-month LIBOR). Outstanding borrowings amounted to $6.268 million at February 28, 2005 and August 31, 2004. Total unused lines of credit amounted to approximately $3.454 million at February 28, 2005. Other Debt Arrangements: - ------------------------ The Company borrowed $600,000 from a stockholder on December 15, 2004. The terms of the promissory note agreement dated December 15, 2004 include borrowings of $600,000 to be paid by May 1, 2005. Interest is payable monthly at an annual percentage rate of 6.5%. Long-term debt arrangements: - ---------------------------- Long-term debt consisted of the following (amounts in thousands):
Unaudited Audited February 28, August 31, 2005 2004 ------------ ---------- Notes payable to financial institutions: - ---------------------------------------- $2,400 reducing term loan with monthly line reductions equal to 1/60th of the loan amount through maturity date, July 15, 2009. Interest is variable at .5% less 15 NOTE 8 - LINES OF CREDIT AND DEBT ARRANGEMENTS (CONTINUED) Unaudited Audited February 28, August 31, 2005 2004 ------------ ---------- than the credit facility's Prime Rate. The loan is secured by the business assets of Kingston, with a second lien on assets pledged by a stockholder. $0 $2,400 $2,160 reducing term loan with monthly line reductions equal to 1/54th of the loan amount through maturity date, June 15, 2009. Interest is variable at .5% less than the credit facility's Prime Rate. The loan is secured by the business assets of the Company, with a second lien on assets pledged by a stockholder. 2,160 0 $1,200 reducing term loan with monthly line reductions equal to 1/24th of the loan amount through maturity date, March 31, 2007. Interest is variable at .5% less than the credit facility's Prime Rate. The loan is secured by the business assets of the Company, with a second lien on assets pledged by a stockholder. 0 0 $2,000 reducing term loan with monthly line reductions equal to 1/60th of the loan amount through maturity date, July 15, 2009. Interest is variable at .5% less than the credit facility's Prime Rate. The loan is secured by the business assets of Nor-Cote, with a second lien on assets pledged by a stockholder. 0 2,000 $1,800 reducing term loan with monthly line reductions equal to 1/54th of the loan amount through maturity date, June 15, 2009. Interest is variable at .5% less than the credit facility's Prime Rate. The loan is secured by the business assets of the Company, with a second lien on assets pledged by a stockholder. 1,800 0 $1,950 secured term loan with monthly line reductions equal to 1/60th of the loan amount through maturity date 4/30/2009. Interest is variable at Prime rate less .5%. The loan is secured by the business assets of JH Drew, with guarantees by the Company's majority stockholder and a different stockholder. 0 1,853 $1,690 secured term loan with monthly line reductions equal to 1/54th of the loan amount through maturity date 4/30/2009. Interest is variable at Prime rate less .5%. The loan is secured by the business assets of the Company, with guarantees by the Company's majority stockholder and a different stockholder. 1,660 0 $2,050 secured term loan with monthly line reductions equal to 1/36th of the loan amount through maturity date 4/30/2007. Interest is variable at Prime rate less .5%. The loan is secured by the business assets of JH Drew, with guarantees by the Company, the Company's majority stockholder and a different stockholder. 0 1,879 $1,594 secured term loan with monthly line reductions equal to 1/30th of the loan amount through maturity date 4/30/2007. Interest is variable at Prime rate less .5%. The loan is secured by the business assets of the Company, with guarantees by the Company's majority stockholder and a different stockholder. 1,540 0 Due in monthly installments of $2.105, including interest at ranges from 4.9% to 9.03% through October 2007. Secured by vehicles. 32 23 Debt with stockholder: - ---------------------- Due in monthly installments of $3.637, including interest at 4.00% through September 2008. Secured by vehicles. 128 153 16 Unaudited Audited February 28, August 31, 2005 2004 ------------ ---------- Capital Leases: Due in monthly installments of $5.472, including interest at 4.00% through February 2007. Secured by vehicles and equipment. 103 98 ------- ------- 7,423 8,406 Less current maturities (2,065) (2,046) ------- ------- $ 5,358 $ 6,360 ======= =======
Principal payments due on long-term debt outstanding at February 28, 2005 are approximately as follows (amounts in thousands):
2006 2,065 2007 2,024 2008 1,496 2009 1,289 2010 549 2011 & thereafter 0 ------- $ 7,423 =======
NOTE 9 - STOCKHOLDERS' EQUITY The following are the details of the Company's common stock as of February 28, 2005 and August 31, 2004: Number of Shares ---------------------------------------------- Authorized Issued Outstanding Amount ---------- ------ ----------- ------ February 28, 2005 (Unaudited) Common stock, $0.01 par value 150,000,000 103,720,944 103,720,944 $ 1,021 ======= August 31, 2004 (Audited) Common stock, $0.01 par value 150,000,000 102,386,444 102,386,444 $ 1,008 ======= NOTE 10 - INCOME TAXES The reconciliation for 2004 and 2003 of income tax expense (benefit) computed at the U.S. Federal statutory tax rate to the Company's effective income rate is as follows: Unaudited Audited February 28, August 31, 2005 2004 -------- -------- Tax at U.S. Federal statutory rate 34.0% 34.0% State and local taxes, net of federal benefit 5.6 5.8 Other 0.0 1.4 Change in valuation allowance (39.6) (73.3) -------- -------- 0.0% (32.1)% ======== ======== Significant components of the provision for income tax expense (benefit) from continuing operations are as follows (in thousands): Unaudited Audited February 28, August 31, 2005 2004 -------- -------- Current: Federal $ (186) $ 690 State (30) 172 -------- -------- (216) 862 -------- -------- 17 NOTE 10 - INCOME TAXES (CONTINUED) Deferred: Federal (12) (55) State (2) (3) -------- -------- (14) 804 -------- -------- Change in valuation allowance 294 (1,257) -------- -------- et income tax (benefit) $ 64 $ (453) ======== ======== 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: (amounts in thousands) Unaudited Audited February 28, August 31, 2005 2004 ------------ ---------- Deferred Tax Assets: Current: Allowances for doubtful accounts and inventory $ 212 $ 156 Accrued liabilities and other 358 446 Noncurrent: Amortization of covenants 57 50 Depreciation 284 170 Net operating losses and other carryforwards 2,492 2,287 ------- ------- 3,403 3,109 Valuation allowance (2,389) (2,095) ------- ------- 1,014 1,014 ======= ======= Deferred tax liabilities: Noncurrent: Depreciation -- -- ------- ------- -- -- ------- ------- $ 1,014 $ 1,014 ======= ======= SFAS 109 requires a valuation allowance to reduce the deferred tax assets reported if, at February 28, 2005, 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 $2,389 valuation allowance at February 28, 2005 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 $294. At February 28, 2005 the Company has federal net operating loss carryforwards of approximately $4,950 which expire during the years of 2020, 2021, 2022 and 2023. The state tax operating loss carryforwards were approximately $500. 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 $933 and it expires in the fiscal year ending August 31, 2007. The Company also incurred net operating losses related to European operations that can be carried forward indefinitely. NOTE 11 - PER SHARE DATA The following presents the computation of basic income per share and diluted income per share (amounts in thousands): 18 NOTE 11 - PER SHARE DATA (CONTINUED)
Unaudited Unaudited Three Months Three Months Ended Ended February 28, February 29, 2005 2004 ------------- ------------- Net Income (Loss) Available for Common Stockholders ($1,324) $ 409 ============= ============= Basic Income (Loss) Per Share: ($0.01) $ 0.00 Diluted Income (Loss) Per Share: ($0.01) $ 0.00 Shares Outstanding: Basic weighted average number of common shares outstanding 103,185,594 95,964,463 Dilutive effect of conversion of options 400,000 -- ------------- ------------- Total Shares Outstanding 103,585,594 95,964,463 ============= =============
Unaudited Unaudited Six Months Six Months Ended Ended February 28, February 29, 2005 2004 ------------- ------------- Net Income (Loss) ($621) $ 643 Dividends -- -- ------------- ------------- Net Income (Loss) Available for Common Stockholders ($621) $ 643 ============= ============= Basic Income (Loss) Per Share: ($0.01) $ 0.01 Diluted Income (Loss) Per Share: ($0.01) $ 0.01 Shares Outstanding: Basic weighted average number of common shares outstanding 103,185,594 95,964,463 Dilutive effect of conversion of options 400,000 -- ------------- ------------- Total Shares Outstanding 103,043,444 95,964,463 ============= =============
At February 28, 2005 all common stock equivalents were anti-dilutive. NOTE 12 - RELATED PARTY TRANSACTIONS The Company leases office and warehouse space from a related party entity. All of the Company's subsidiaries, excluding JH Drew, Nor-Cote and PSM are located in the facility. The lease agreement includes a five-year term with one option to extend the lease term for a one-year period. The agreement provides for base rent of $20,000 plus 1% of the gross revenues of the Company's Commercial Solution's subsidiary. Following the first twelve-month period, 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. The Company recognized rent expense of approximately $196,000 for the six months ended February 28, 2005. 19 NOTE 12 - RELATED PARTY TRANSACTIONS (CONTINUED) The Company's JH Drew subsidiary leases three buildings located in Indiana, Tennessee and Missouri with the same related party. 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 $15,000. Following the first twelve-month period, 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. The Company recognized expense of approximately $90,000 for the six months ended February 28, 2005. The related party in the previous paragraphs is considered a variable interest entity by the Company. FIN 46, Consolidation of Variable Interest Entities, clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. For variable interest entities other than special-purpose entities, the provisions of FIN 46, as amended, are applicable no later than March 31, 2004. Consolidation is not required since the variable interest entity has sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. The Company borrowed $600,000 from a stockholder on December 15, 2004. The terms of the promissory note agreement dated December 15, 2004 include borrowings of $600,000 to be paid by May 1, 2005. Interest is payable monthly at an annual percentage rate of 6.5%. Following is a summary of all related party assets and (liabilities) included in the consolidated balance sheets at February 28, 2005 and August 31, 2004 (amounts in thousands): February 28, August 31, 2005 2004 ----------- ---------- Due to shareholders (3) (29) Long-term line of credit (6,268) (6,268) Promissory notes payable (600) -- Installment notes payable (128) (153) ------- ------- Net assets (liabilities) $(6,999) $(6,450) ======= ======= NOTE 13 - SUBSEQUENT EVENTS Effective April 5, 2005, The Company acquired CSM as disclosed in Note 2. 20 NOTE 14 - SEGMENT INFORMATION
Professional Manufacturing Business and Wireless Holding Segment Solutions Distribution Infrastructure Company Totals Three Months Ended February 28, 2005 Net revenues $ 5,634 $ 4,680 $ 9,835 $ -- $ 20,149 Cost of revenues 4,324 3,424 8,692 -- 16,440 -------- -------- -------- -------- -------- Gross profit 1,310 1,256 1,143 -- 3,709 Operating expenses Selling, general and administrative expenses 745 1,647 1,572 481 4,445 Depreciation and amortization 42 154 138 20 354 -------- -------- -------- -------- -------- Total operating expense 787 1,801 1,710 501 4,799 -------- -------- -------- -------- -------- Segment operating income (loss) $ 523 $ (545) $ (567) $ (501) $ (1,090) ======== ======== ======== ======== ======== Six Months Ended February 28, 2005 Net revenues $ 10,298 $ 10,364 $ 24,535 $ -- $ 45,197 Cost of revenues 7,984 7,518 21,096 -- 36,598 -------- -------- -------- -------- -------- Gross profit 2,314 2,846 3,439 -- 8,599 Operating expenses Selling, general and administrative expenses 1,366 3,301 2,511 820 $ 7,998 Depreciation and amortization 82 291 320 38 731 -------- -------- -------- -------- -------- Total operating expense 1,448 3,592 2,831 858 8,729 -------- -------- -------- -------- -------- Segment operating income (loss) $ 866 $ (746) $ 608 $ (858) $ (130) ======== ======== ======== ======== ======== As of February 28, 2005 Cash $ 3,691 $ 715 $ 30 $ 115 $ 4,551 Restricted savings account 210 -- -- -- 210 Available for sale investments 2,131 -- -- -- 2,131 Accounts receivable 831 2,941 10,257 31 14,060 Costs and estimated earnings in excess of billing of billing on uncompleted contracts -- -- 2,099 -- 2,099 Inventory, net 19 3,567 6,874 -- 10,460 Other current assets 80 215 429 32 756 Deferred tax asset 563 -- 451 -- 1,014 Property and equipment, net 104 2,109 1,490 311 4,014 Goodwill 3,579 6,330 1,253 -- 11,162 Other intangible assets, net 887 1,258 467 -- 2,612 Other long term assets 43 154 -- 25 222 -------- -------- -------- -------- -------- Total Segment Assets $ 12,138 $ 17,289 $ 23,350 $ 514 $ 53,291 ======== ======== ======== ======== ======== Three Months Ended February 29, 2004 Net revenues $ 5,294 $ 4,881 $ 2,635 $ -- $ 12,810 Cost of revenues 4,268 3,255 2,135 -- 9,658 -------- -------- -------- -------- -------- Gross profit 1,026 1,626 500 -- 3,152 Operating expenses Selling, general and administrative expenses 535 1,321 392 209 2,457 Depreciation and amortization 47 147 31 6 231 -------- -------- -------- -------- -------- Total operating expense 582 1,468 423 215 2,688 -------- -------- -------- -------- -------- Segment operating income (loss) $ 444 $ 158 $ 77 $ (215) $ 464 ======== ======== ======== ======== ======== Six Months Ended February 29, 2004 Net revenues $ 8,120 $ 10,399 $ 4,497 $ -- $ 23,016 Cost of revenues 6,537 6,966 3,606 -- 17,109 -------- -------- -------- -------- -------- Gross profit 1,583 3,433 891 -- 5,907 Operating expenses Selling, general and administrative expenses 846 2,623 784 406 4,659 Depreciation and amortization 80 295 62 9 446 -------- -------- -------- -------- -------- Total operating expense 926 2,918 846 415 5,105 -------- -------- -------- -------- -------- Segment operating income (loss) $ 657 $ 515 $ 45 $ (415) $ 802 ======== ======== ======== ======== ======== As of August 31, 2004 Cash $ 2,767 $ 633 $ 50 $ 8 $ 3,458 Restricted savings account 210 -- -- -- 210 Certificates of deposit 69 -- -- -- 69 Available for sale investments 1,959 -- -- -- 1,959 Accounts receivable 844 3,601 11,442 7 15,894 Costs and estimated earnings in excess of billing of billing on uncompleted contracts -- -- 1,879 -- 1,879 Inventory, net 11 3,253 6,482 -- 9,746 Other current assets 227 198 358 32 815 Deferred tax asset 563 -- 451 -- 1,014 Property and equipment, net 37 2,121 1,649 231 4,038 Goodwill 3,580 5,957 655 -- 10,192 Other intangible assets, net 962 1,012 137 -- 2,111 Other long term assets 43 94 19 28 184 -------- -------- -------- -------- -------- Total Segment Assets $ 11,272 $ 16,869 $ 23,122 $ 306 $ 51,569 ======== ======== ======== ======== ========
21 Item 2. Management's Discussion And Analysis. Fortune Diversified Industries, Inc. (formerly known as WOW Entertainment, Inc. and prior to that American Gaming & Entertainment, Ltd.), is a Delaware corporation incorporated in 1988. The Company has conducted its business directly and through wholly-owned subsidiaries. The term "Company" as used herein refers to Fortune Diversified Industries, Inc. and such subsidiaries unless the context otherwise requires. The Company is the parent company of Professional Staff Management, Inc., Professional Staff Management, Inc. II and Pro Staff, Inc. (collectively "PSM"); Nor-Cote International, Inc. (Nor-Cote); Kingston Sales Corporation (Kingston); Commercial Solutions, Inc. (Commercial Solutions); James H. Drew Corp. (JH Drew); PDH, Inc. (PDH); Cornerstone Wireless Services, Inc. (Cornerstone Wireless); Magtech Services, Inc. (Magtech); Cornerstone Wireless Construction Services, Inc. (Cornerstone Construction); Innovative Telecommunications Consultants, Inc. (ITC); Telecom Technology Corp. (TTC); StarQuest Wireless Services, Inc. (StarQuest); Women of Wrestling, Inc. (WOW); and Murphy Development, Ltd (Murphy). Additionally, effective April 5, 2005, the Company purchased all of the common stock of CSM, Inc., the holding corporation for the companies operating as Century II Staffing and subsidiaries (collectively "CSM"). The Company's current operating focus is achieved through its Manufacturing and Distribution Segment (Kingston, Commercial Solutions, and Nor-Cote); its Wireless Infrastructure Segment (PDH, Cornerstone Wireless, Cornerstone Construction, Magtech, TTC, StarQuest, JH Drew, and ITC) and its Professional Business Solutions Segment (PSM and CSM). Manufacturing and Distribution Segment - -------------------------------------- The Company's Manufacturing and Distribution Segment is conducted through its Kingston, Commercial Solutions, and Nor-Cote subsidiaries. Kingston is a manufacturer's representative and distributor for prominent national companies in the electronic, sound, security, and video markets. Kingston offers the latest technology in TVs, sound systems, electronic locking devices, wire, cable and fiber optics, and intercom systems. Commercial Solutions is a distributor for commercial products of Thomson, Inc. (RCA products including televisions, DVD, and other electronic products), Panasonic (televisions, DVD, and other electronic products), and Rubbermaid (carts, cleaning equipment, trash receptacles, and other products). Additionally, beginning March 1, 2005 Commercial Solutions began selling the LG/Zenith commercial line of television products. Effective April 1, 2005, Commercial Solutions will lose its distributor agreement with Thomson, Inc. Commercial Solutions sells to distributors covering various territories in North America and to the hotel/ motel and healthcare industries. Nor-Cote is a manufacturer of UV curable screen printing inks. Nor-Cote inks are printed on many types of plastic, metals and other substrates that are compatible with the UV curing process. Typical applications are plastic sheets, cell phones, bottles & containers, CD and DVD disks, rotary-screen printed labels, and membrane switch overlays for which Nor-Cote provides conductive ink. Nor-Cote has operating facilities in the United States, United Kingdom, Singapore, and Malaysia, with worldwide distributors located in Africa, Australia, Canada, China, Colombia, Hong Kong, India, Italy, Japan, Korea, New Zealand, Poland, Taiwan, Thailand, Latin America and the United States. The acquisition of Ink Source on September 30, 2004 provides Nor-Cote with a new entry into the retail "Point of Purchase" (POP) ink/signage and decal market. Wireless Infrastructure Segment - ------------------------------- The Company's Wireless Infrastructure segment is conducted through its JH Drew, PDH, Cornerstone Wireless, Magtech, Cornerstone Construction, ITC, and TTC and StarQuest subsidiaries. JH Drew is a specialty contractor in the field of infrastructure, including fiber optic, smart highway systems, traffic signals, street signs, high mast and ornamental lighting, guardrail, wireless communications, and fabrications of structural steel. JH Drew has been operating over fifty years serving contractors and state departments of transportation, and has established relationships in the industry, earning a well-respected reputation for reliability and quality. PDH's business strategy is to offer a full range of network infrastructure, real estate development services to the telecommunications industry, among other types of real estate network critical industries. PDH's full service list of network real estate development services includes program management, site acquisition, zoning and permitting, architectural & engineering design, construction management, co-location facilitation, environmental services, lease capitalization, lease renegotiation, site marketing and asset management. 22 Cornerstone Wireless and Magtech specialize in providing engineering and architectural services for the telecommunications and the traditional real estate development industries. 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. Cornerstone Construction offers a full range of construction services to the telecommunications industry, primarily developing wireless networks for wireless carriers. Such services include: civil construction, electrical, foundation and tower installations, as well as, antennae and line installations. Cornerstone Construction can provide a complete turnkey solution to the development of telecommunications infrastructure. ITC is a technical services company that provides customer specific turnkey solutions for wireless equipment manufacturers and wireless service providers. Technical services include switch and radio base station engineering as well as providing the site, survey, delivery, installation and integration process for the implementation of end user equipment offered by a wide range of wireless equipment manufacturers. Nationwide availability is provided by individual program management allowing ITC to offer maintenance solutions for the continuous development of existing service provider's wireless networks. Effective February 28, 2005, ITC acquired the assets of EI Solution, Inc. This acquisition expanded the product service capabilities that ITC can offer to wireless equipment manufacturers and wireless service providers. TTC specializes in the design, engineering and installation of structured cabling systems for the commercial marketplace and sells telephone and voice mail systems. TTC provides the data cabinets, racks, cable trays, HUBS, patch panels, computer furniture, cable management and any peripheral equipment necessary for a complete voice and data-cabling infrastructure. StarQuest is a provider of premium communication/ information services, including digital satellite television, high speed (broadband) Internet, both wired and wireless. These services are provided exclusively to the United States multi-dwelling unit (MDU) marketplace. Professional Business Solutions Segment - --------------------------------------- The Company's Professional Business Solutions segment is conducted through its PSM and effective April 5, 2005, CSM subsidiaries. PSM and CSM, Professional Employer Organizations (PEO), provide cost-effective employee administrative solutions to companies in 37 states nationwide. The companies provide services typically managed by a company's internal human resources and accounting departments - including payroll and tax processing and management, worker's compensation and risk management, benefits administration, unemployment administration, human resource compliance services, 401k and retirement plan administration and employee assessments. RESULTS OF OPERATIONS: COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 - --------------------------------------- Manufacturing and Distribution - ------------------------------ Revenues Revenues for the quarter ended February 28, 2005 were $4.680 million compared to $4.881 million for the quarter ended February 29, 2004, a decrease of $201,000 or 4%. Year to date revenues for the six months ended February 28, 2005 were down slightly at $10.364 million compared to $10.399 million for the six months ended February 29, 2004. Segment revenues decreased despite the Company reporting only one month of activity for the quarter and year to date ended February 28, 2004 in its Commercial Solution subsidiary. Revenue for Commercial Solutions, a start up company in February 2004, increased by $497,000 (net of intercompany sales to Kingston) for the three months ended February 28, 2005 and increased $1.66 million (net of intercompany sales to Kingston) for the six months ended February 28, 2005. Although Commercial Solutions had an increase in pro forma revenues compared to the previous year, revenues were down dramatically in the second quarter compared to previous quarters. The decrease is primarily attributable to the depletion of healthcare television inventory in November 2004 due to lack of product availability from a key supplier. Historically this product line has generated 40% of Commercial Solutions revenues. Kingston revenues decreased $698,000 or 30% for the quarter ended February 28, 2005 and decreased by $1.494 million or 30% for the six months ended February 28, 2005. Second quarter revenue decreased due mainly to lack of healthcare television set availability from Commercial Solutions, Kingston's supplier for the product. Nor-Cote's revenues decreased 1% for the 23 quarter from $2.417 million as compared to $2.446 million over the same period in the prior year. Year to date revenues decreased 4% from $5.214 million as compared to $5.009 million. The decrease in Nor-cote's revenues is attributable mainly to loss of sales and customers in the CD/DVD and tag & label markets in the US along with heavy price competition of local ink suppliers, mainly in the CD/DVD market in Asia. The decrease in revenues was partially offset by an increase in POP/decal ink revenues in the US and plastic container ink in Asia. Nor-Cote entered the POP/decal market with its acquisition of Ink-Source, Inc. on September 30, 2004. Year to date revenues as a result of this acquisition were $280,000. Commercial Solutions lost its master distributor agreement with Thomson, Inc., manufacturer of healthcare television sets and other commercial products, starting April 2005. The Company expects to regain market share through an agreement with LG/ Zenith and began selling their line of products in March 2005. Additionally Commercial Solutions has hired a national sales manager to sell directly to the hotel/ motel and healthcare facilities throughout the U.S. Management expects a reduction in sales volume for Commercial Solutions in the third quarter as a result of these changes, however, anticipates higher gross margin over the remaining fiscal year due to a stronger customer mix for products from new suppliers. Kingston will continue to sell the RCA product line, but will buy product direct through Thomson, Inc. Kingston has expanded its commercial television product line by offering its customers the LG/ Zenith brand of televisions in March 2005. Kingston's gross margin has been adversely affected by sales to insolvent customers. As a result, Kingston developed procedures to improve its processes of extending credit, collection of receivables and purchasing policies. Nor-Cote expects to launch new products in several new markets in the current and subsequent fiscal year. The new products are driven by a significant increase in research and development. Nor-Cote increased spending for research and development by approximately $62,000 or 34% for the six months ended February 28, 2005 as compared to six months ended February 29, 2004. Additionally, Nor-Cote expects to open a new US branch in Atlanta, GA in the fourth quarter in order to support the POP/ decal markets in the U.S. Future trends for revenue and profitability for Kingston and Commercial Solutions are difficult to predict due to a variety of known and unknown risks and uncertainties, including, without limitation, (i) dependence upon principal suppliers and availability and price of electronic and rubber products; (ii) loss of significant customers or a reduction in prices we charge these customers; (iii) lack of demand for our products and services in certain markets and our inability to maintain margins; (iv) our ability to absorb, through revenue growth, the increasing operating costs that we have incurred and continue to incur in connection with our activities; (v) uncertainty regarding whether electronic equipment manufacturers will continue to outsource aspects of their business to us; (vi) possible adverse effect on demand for our products resulting from consolidation of electronic manufacturers (vii) economic conditions in our markets; (viii) ability to respond to rapid technological changes in the electronics industry; (ix) possible difficulties collecting our accounts receivable; (x) access to or the cost of increasing amounts of capital, trade credit or other financing; (xi) risks of foreign operations, including currency, trade restrictions and political risks in our foreign markets; (xii) effect of hostilities or terrorist attacks on our operations; (xiii) reliance on sophisticated information systems technologies; (xiv) ability to meet intense industry competition; (xv) ability to manage and sustain future growth at our historical or industry rates; (xvii) success of relationships with electronics equipment manufacturers, (xviii) seasonality; (xix) ability to attract and retain qualified management and other personnel; (xx) ability to maintain adequate business insurance at reasonable cost and (xxi) existence of anti-takeover measures. Because of the aforementioned uncertainties affecting our future operating results, past performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate future results or trends. The demand for some of Nor-Cote's new products, such as the membrane switch for high ticket durable goods, is sensitive to interest rate fluctuations and consumer spending. Gross Profits Gross profits for the quarter ended February 28, 2005 were $1.256 million or 27% of revenues compared to $1.626 million or 33% of revenues for the quarter ended February 29, 2004. Year to date gross profits for the six months ended February 28, 2005 were $2.846 million or 28% of revenues compared to $3.433 million or 33% of revenues over the same period in the prior year. The decrease in gross profits was due mainly to Kingston's decrease in year to date sales along with an $85,000 direct write off of damaged inventory in the second quarter. The gross profit percentage decrease was due mainly to the addition of Commercial Solutions in February 2004 with reported gross profit of 7% quarter to date and year to date February 28, 2005. Compared to Kingston and Nor-Cote, this gross profit percentage is substantially lower due to the nature of Commercial Solutions primary product, commercial television sets and its customer base consisting of other distributors. 24 Operating Income Operating income for the quarter ended February 28, 2005 was ($545,000), compared to $158,000 for the quarter ended February 29, 2004, a decrease of $698,000. Operating income was down $1,261,000 for the six months ended February 28, 2005 as compared to six months ended February 29, 2004. The decrease in operating income was due to the decreased sales of Kingston and Nor-Cote combined with the increase in general and administrative expenses of Nor-Cote due to the hiring of additional personnel. Operating income also decreased due to $100,000 increase to bad debt expense for customer receivables in the first fiscal quarter 2005. Wireless Infrastructure - ----------------------- Revenues Revenues for the quarter ended February 28, 2005 were $9.835 million compared to $2.635 million for the quarter ended February 29, 2004, an increase of $7.2 million. Year to date revenues for the six months ended February 28, 2005 were $24.535 million compared to $4.497 million for the six months ended February 29, 2004, and increase of $20.038 million. The increase in revenues is due mainly to the acquisition of JH Drew on April 30, 2004. JH Drew reported revenues of $7.461 million for the quarter ended February 28, 2005 and $19.417 million for the six months ended February 28, 2005. JH Drew, the Company's largest contributor to net revenue, had decreased sales in the second quarter ended February 28, 2005 as expected primarily attributable to the seasonality of the highway construction business in the Midwest states during the period. JH Drew has significant contract backlog at February 28, 2005. As a result, management anticipates improved sales, gross margin, and profitability for JH Drew over the next two fiscal quarters. ITC, which was acquired on May 1, 2004, reported $621,000 in revenues for the quarter ended February 28, 2005 and $1.161 million for the six months ended February 28, 2005. Net combined revenues of the other subsidiaries in the wireless infrastructure division decreased $882,000 for comparative quarters ended February 28, 2005 and 2004, and decreased $540,000 for the six months ended February 28, 2005 as compared to the six months ended February 29, 2004. This quarter to date and year to date decrease was due primarily to Cornerstone Construction, which reported revenue at $532,000 for the quarter ended February 28, 2005 as compared to $1.8 million for quarter ended February 28, 2004. Cornerstone Construction 2005 year to date revenues were $1.652 million as compared to $2.865 million for 2004. The decrease was due mainly to inclement weather conditions that existed in the Midwest during the Company's second quarter. PDH reported revenues of $526,000 for quarter ending February 28, 2005 as compared to $252,000 for the previous year's quarter, a 108% increase. PDH also reported a 91% increase in revenues year over year due to increased activity in the wireless communications industry and an increase in customer base. Cornerstone Wireless and Magtech reported revenues of $462,000 for quarter ending February 28, 2005 as compared to $144,000 for the previous year's quarter, a 220% increase. These subsidiaries reported a 199% increase in revenues year over year due mainly to the acquisition of Magtech on November 1, 2004. With additional capital investment by wireless carriers in the wireless communications industry, the Company expects an increase in future revenues in its PDH, Cornerstone Wireless, Magtech, ITC and Cornerstone Construction subsidiaries. In addition to increased activity in the industry, the Company's acquisition of ITC in May 2004, Magtech in November 2004, and EI Solution on February 28, 2005, further increased the Company's ability to offer turnkey services to wireless carriers, thus creating a competitive advantage over companies who do not offer these services. This growth has created the demand for increased investment in working capital. This investment in working capital may require additional debt or equity financing. Gross Profits Gross profit for the quarter ended February 28, 2005 was $1.143 million representing 12% of revenues, compared to $500,000 representing 19% of revenues for the quarter ended February 29, 2004. Year to date gross profits for the six months ended February 28, 2005 were $3.439 million or 14% of revenues compared to $891,000 or 20% of revenues for the six months ended February 29, 2004. The increase in the gross profit dollars is due mainly to the acquisitions of JH Drew and ITC. JH Drew reported gross profit of $385,000 and $1.749 million for the quarter and six months ended February 28, 2005. ITC reported gross profit of $246,000 and $467,000 for the quarter and six months ended February 28, 2005. PDH reported gross profits of $455,000 for the six months ending February 28, 2005 as compared to $215,000 for six months ended 2004. Cornerstone Wireless and Magtech reported gross profits of 298,000 for six months ended February 28, 2005 as compared to 73,000 for six months ended 2004. These increases were somewhat offset by the decrease in gross profits year to date of Cornerstone Construction. Cornerstone Construction reported gross profit for the six months ended February 28, 2005 of $228,000 as compared to $379,000 for the six months ended February 29, 2004. 25 The decrease in gross profit as a percentage of revenues was due mainly to the lower profit margins JH Drew generates due to being in the highway construction industry as compared to certain other subsidiaries in the segment which operate in the service industry. Operating Income (Loss) Operating income (loss) for the quarter ended February 28, 2005 was ($567,000) compared to $77,000 for the quarter ended February 29, 2004, a decrease of $649,000. Operating income for the six months ended February 28, 2005 was $608,000 as compared to $45,000 for the six months ended February 29, 2004. The increase in year to date operating income was due mainly to the acquisitions of JH Drew and ITC. JH Drew reported operating income of $148,000 and ITC reported operating income of $286,000 for the six months ended February 28, 2005. Combined operating income of the other subsidiaries in the wireless infrastructure division increased $124,000 for the six months ended February 28, 2005 as compared to the six months ended February 29, 2004 due mainly to increased revenues. Business Solutions - ------------------ Revenues Revenues for the quarter ended February 28, 2005 were $5.634 million compared to $5.294 million for the quarter ended February 29, 2004, representing a 6% increase. Year to date revenues for the six months ended February 28, 2005 were $10.298 million compared to $8.120 million for the six months ended February 29, 2004. PSM was acquired by the Company on October 1, 2003 and only reported five months of activity for year to date end February 29, 2004. PSM has increased its customer base over the last year and recently opened a new office in Dayton, OH in the fourth quarter of fiscal year 2004. Though PSM's primary focus involves fee revenue associated with the administration of payroll and related services, the Company continues to expand other services including human resource outsourcing, employment training and testing. The business variables that the Company works to overcome include the volatile insurance industry, government regulations on employment, and the risk of PSM's partially self funded insurance reserves. Gross Profit Gross profit for the quarter ended February 28, 2005 was $1.310 million representing 23% of sales, compared to $1.026 million representing 19% of sales for the quarter ended February 29, 2004. Year to date gross profits for the six months ended February 28, 2005 were $2.314 million or 22% compared to $1.583 or 19% for the six months ended February 29, 2004. The increase in gross profit as a percentage of sales was mainly due to PSM's estimated over funding of its health insurance reserve of $397,000. Operating Income Operating income for the quarter ended February 28, 2005 was $523,000, compared to $444,000 for the quarter ended February 29, 2004, an increase of $79,000. Operating income for the six months ended February 28, 2005 was $866,000 or 8% of revenues, as compared to $657,000 or 8% of revenues, for the five months ended February 29, 2004. The increase in profits from the health insurance reserve adjustments were offset by additional costs, mainly in the hiring additional sales and other HR professionals in order to increase client base and service expanding client base. Holding Company - --------------- The Company's Holding Company does not have any income producing operating assets. As such, the operating loss is equal to operating expenses. Operating expenses consist primarily of employee compensation and benefits, legal, accounting and consulting fees. Operating expenses for the quarter ended February 28, 2005 were $501,000, compared to $215,000 for the quarter ended February 29, 2004, an increase of $286,000 or 133%. Operating expenses for the six months ended February 28, 2005 were $858,000, compared to $415,000 for the quarter ended February 29, 2004, an increase of $443,000 or 106%. This increase was due mainly to an increase in (a) accounting fees of 72% and legal fees of 160% primarily attributable to Company growth through acquisitions, and (b) a 65% increase in internal salaries due to hiring of additional personnel mainly in administration, accounting and information technology departments. The Company expects to double its budget in fiscal year 2005 for 26 personnel and outside accounting and consulting due primarily to Sarbanes Oxley legislation. In order to absorb these increased costs the Company is looking to outside investors to provide financing through various private stock offering arrangements, or a move to a national stock exchange. In general, across the Company's diversified businesses the negative business risks the Company faces are not unusual or specific to the Company. Like other companies and industries, the Company faces rising oil and health care costs. The Company also faces the potential adverse affect of natural disasters, terrorist attacks, unexpected negative downturns in the economy and new competition. These factors can have an adverse impact on revenues and costs throughout all of the Fortune companies. Management is aware of these risks and works to manage the Company around and through these risks as a part of our planning and operational execution within our family of companies. The Company's strategy is to grow current companies; focus on acquisitions in the Wireless and Business Solutions Segments, and to review other opportunities for acquisition or expansion. These strategies have served the Company well to date, as demonstrated by the growth in revenues and earnings. Interest expense for the quarter and six months ended February 28, 2005 was $323,000 and $589,000 compared to $94,000 and $189,000 for the quarter and six months ended February 29, 2004. The Company financed a large portion of the acquisition of JH Drew on May 1, 2004. Additionally, a line of credit was established in February 2004 to support the supply of inventory on hand needed for Commercial Solutions. Increase in the prime interest rate during the second quarter of 2005 contributed significantly to a 21% increase in interest expense in the second quarter over the first quarter of fiscal year 2005. Income taxes for the first quarter of 2005 resulted in a state income tax expense of $64,000. Federal income tax expense for the same period was offset through the release of the Company's valuation allowance to the extent of current period earnings. Despite a significant taxable loss in the second quarter of 2005, the Company elected not to recognize an income tax benefit due to management's estimate for net income before taxes to exceed such current period losses during the third and fourth quarters of fiscal year 2005. As of February 28, 2005, the Company reported no additional release of the valuation allowance for future periods. Management deems the likelihood of incurring taxable income from March 1, 2005 through August 31, 2005, in excess of the deferred tax benefit of $1,014,000, to be more likely than not. Management believes a significant portion of the remaining net operating loss carryforwards may be absorbed in 2005. As a result of the release of our valuation allowance to offset 100% of current federal taxes in the first quarter of 2005 and recognition of the deferred tax benefit, our effective tax rate is substantially lower than statutory rates. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- As of February 28, 2005 the Company had working capital of approximately $7.275 million, composed primarily of cash and equivalents, net accounts receivable, available for sale investments, inventories, and costs & estimated earnings in excess of billings on uncompleted contracts. The Company's principal sources of liquidity included $6.682 million in cash, cash equivalents and available for sale investments along with availability on various lines of credit of approximately $3.454 million at February 28, 2005. The lines of credit and other bank loans are secured by substantially all assets of the Company and by personal guarantees of the Company's majority stockholder and a different stockholder. The various debt agreements contain restrictive covenants which limit, among other things, certain mergers and acquisitions, redemptions of common stock, and payment of dividends. In addition, the Company must meet certain financial ratios (as defined) and is subject to annual capital expenditure limitations. Cash flows from operations for the six month period ended February 28, 2005 of $912,000 along with an increase in short-term borrowings of $2.630 million was more than offset by cash used for capital expenditures of $451,000 and business acquisitions of $690,000. The Company reviews, as opportunities arise, the potential acquisition and/or operation of other businesses. Any such action will be based upon the Company's analysis of the specific business and the respective industry, as well as the Company's ability to utilize a capital structure that is beneficial to the Company's stockholders. The Company intends to continue to aggressively pursue acquisitions and other business opportunities. The Company's short and long term capital requirements will depend upon many factors, including whether it acquires and/or operates other businesses and the operating success of its current operating segments. Many of these and other factors are beyond the Company's control. 27 Over the next 12 months, the Company plans to hire additional employees in all of its segments; however, the hiring of these employees will be approximately correlated with an increase in operating revenue. The Company expects to fund current operations and other cash expenditures through the use of available cash, cash from operations, funds available under its credit facilities and possible new debt or equity sources. The Company believes that there will be sufficient funds from current cash, operations and available financing to fund operations and cash expenditures for the foreseeable future. We are considering the repayment of a portion of our debt during 2005 by registering our securities and moving to a national securities exchange. OFF BALANCE SHEET ARRANGEMENTS The Company does not have any material off balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. During May 2004, the Company's JH Drew subsidiary entered into an operating lease agreement to rent three buildings located in Indiana, Tennessee and Missouri with a related party. The lease agreement includes a five-year term with the option to extend the lease for a one-year period. The base rent for the first twelve months of the lease is $15,000 per month. Following the first twelve month period the base rent will be adjusted by the greater of 3% of the base rent or the increase in the Consumer Price Index. In addition JH Drew shall pay certain expenses including taxes, assessments, maintenance and repairs to the premises. During March 2004, the Company entered into an operating lease agreement to rent a building with a related party. All of the Company's subsidiaries, excluding JH Drew, Nor-Cote and PSM moved into the new facility between the months of March 2004 through May 2004. The lease agreement includes a five- year term with one option to extend the lease term for a one-year period. The agreement provides for base rent of $20,000 plus 1% of the gross revenues of the Company's Commercial Solution's subsidiary. Following the first twelve-month period, 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. The related party is considered a variable interest entity by the Company. FIN 46, Consolidation of Variable Interest Entities, clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. For variable interest entities other than special-purpose entities, the provisions of FIN 46, as amended, are applicable no later than March 31, 2004. Consolidation is not required since the variable interest entity has sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. The Company does not expect these Interpretations to have an effect on these arrangements and the Company's consolidated financial statements. The Company will continue to evaluate what effect, if any, the recognition and measurement provisions will have on its consolidated financial statements and related disclosures in future periods. FORWARD-LOOKING STATEMENTS This report contains statements that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words "expect," "estimate," "anticipate," "predict," "believe" and similar expressions and variations thereof are intended to identify forward-looking statements. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, trends affecting the Company's financial condition or results of operations. The readers of this report are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially. 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 "Management's Discussion and Analysis or Plan of Operations". The Company does not ordinarily make projections of its future operating results and undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers should carefully review the risk factors referred to above and the other documents filed by the Company with the Securities and Exchange Commission. 28 Item 3. Controls and Procedures The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect the 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. The Company carries out ongoing procedures under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the period covered by this report. There have been no significant changes in the Company's internal controls over financial reporting or in other factors that are reasonably likely to significantly affect internal controls over financial reporting. 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 2. Changes in Securities. - ------ --------------------- The following table sets forth, for the period covered by this Form 10QSB, all sales of unregistered securities by the Company. (c) Sales of Unregistered Securities by Company Date Title of Amount of Recipient of Of Sale Securities Sold Securities Issued Securities - ------------- ----------------- ----------------- ----------------- February 28, 2005 Common Stock 450,000 Ryan Smith (1) (1) Per the Terms of the Asset Purchase Agreement between Innovative Telecommunications Consultants, Inc., a subsidiary of the Company, EI Solution, Inc., and other parties, Ryan Smith, is to receive 450,000 shares of the Company's Common Stock as partial consideration for certain assets of EI Solution, Inc. 250,000 of those shares are to vest immediately and the remainder of those shares are to vest upon the achievement of certain performance criteria by EI Solution, Inc. Item 3. Defaults Upon Senior Securities. - ------ ------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- None Item 5. Other Information. - ------ ----------------- None 29 Item 6. Exhibits and Reports on Form 8-K. - ------ -------------------------------- (a) Exhibits 2.1 Agreement and Plan of Merger filed with the State of Tennessee on April 5, 2005, by and among the Company, CSM, CSM Merger Corporation, Carter M. Fortune, Marc Fortune, Greg Daily, Harbinger Mezzanine Partners, L.P., Doug Altenbern, Jeff Gould, Bob Boston, and Don Denbo. (1) 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 (1) This Exhibit is incorporated by reference from the Company's Current Report on 8-K dated April 11, 2005. (b) Reports on Form 8-K. The following reports were filed by the Company during the second quarter of fiscal year 2005: None. 30 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 Diversified Industries, Inc. (Registrant) Date: April 13, 2005 By: /s/ Carter M. Fortune -------------------------------- Carter M. Fortune, Chief Executive Officer Date: April 13, 2005 By: /s/ Amy Gallo -------------------------------- Amy Gallo, Chief Financial Officer 31 EX-31.1 2 ex31-1.txt EXHIBIT 31.1 CERTIFICATIONS I, Carter M. Fortune, Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Fortune Diversified Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Fortune Diversified Industries, Inc. as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14 and 15d-14) for Fortune Diversified Industries, Inc. and I have done the following: a) designed such disclosure controls and procedures to ensure that material information relating to Fortune Diversified Industries, Inc. is made known to us by others within Fortune Diversified Industries, Inc., particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of Fortune Diversified Industries, Inc.'s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to Fortune Diversified Industries, Inc.'s auditors and the audit committee of Fortune Diversified Industries, Inc.'s board of directors (or persons performing similar functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect Fortune Diversified Industries, Inc.'s ability to record, process, summarize and report financial data and have identified for Fortune Diversified Industries, Inc.'s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Fortune Diversified Industries, Inc.'s internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 4/13/05 /s/ Carter M. Fortune Date ------------------------------------------ Carter M. Fortune, Chief Executive Officer EX-31.2 3 ex31-2.txt EXHIBIT 31.2 CERTIFICATION I, Amy Gallo, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Fortune Diversified Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Fortune Diversified Industries, Inc. as of, and for, the periods presented in this quarterly report; 4. Fortune Diversified Industries, Inc.'s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14 and 15d-14) for Fortune Diversified Industries, Inc. and we have done the following: a) designed such disclosure controls and procedures to ensure that material information relating to Fortune Diversified Industries, Inc. is made known to us by others within Fortune Diversified Industries, Inc., particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of Fortune Diversified Industries, Inc.'s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Fortune Diversified Industries, Inc.'s other certifying officer and I have disclosed, based on our most recent evaluation, to Fortune Diversified Industries, Inc.'s auditors and the audit committee of Fortune Diversified Industries, Inc.'s board of directors (or others performing similar functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect Fortune Diversified Industries, Inc.'s ability to record, process, summarize and report financial data and have identified for Fortune Diversified Industries, Inc.'s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Fortune Diversified Industries, Inc.'s internal controls; and 6. Fortune Diversified Industries, Inc.'s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 4/13/05 /s/ Amy Gallo Date ---------------------------------- Amy Gallo, Chief Financial Officer EX-32.1 4 ex32-1.txt EXHIBIT 32.1 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Fortune Diversified Industries, Inc., a Delaware corporation, (the "Company") on Form 10-QSB for the period ending February 28, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Carter M. Fortune, Chief Executive Officer of the Company, certify the following pursuant to Section 18, U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. 4/13/05 /s/ Carter M. Fortune Date ------------------------------------------ Carter M. Fortune, Chief Executive Officer EX-32.2 5 ex32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Fortune Diversified Industries, Inc., a Delaware corporation, (the "Company") on Form 10-QSB for the period ending February 28, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Amy Gallo, Chief Financial Officer of the Company, certify the following pursuant to Section 18, U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. 4/13/05 /s/ Amy Gallo Date ----------------------------------------- Amy Gallo, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----