Clearfield, Inc. - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
| x |
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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| For the fiscal year ended September 30, 2008. |
| o |
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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| For the transition period from ______________ to _______________. |
Commission
File Number 0-16106
CLEARFIELD,
INC.
(Exact
Name of Registrant as Specified in its Charter)
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Minnesota
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41-1347235
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(State
of incorporation)
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(I.R.S.
Employer Identification No.)
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5480
Nathan Lane North,
Suite
120
Plymouth,
Minnesota 55442
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(763)
476-6866
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(Address
of principal executive office)
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Registrant’s
telephone number, including area
code
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Securities
registered pursuant to Section 12(b) of the Act:
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(Title
of class)
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(Name
of exchange on which registered)
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Common
Stock, par value $.01 per share
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The
NASDAQ Stock Market LLC
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(Including
Series B Preferred Share Purchase Rights)
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Securities
registered pursuant to Section 12(g) of the Act:
NONE
Indicate
by check mark if the registrant is a well-seasoned issuer, as defined in Rule
405 of the Securities Act.
o
YES x NO
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or section 15(d) of the Exchange Act.
o
YES x
NO
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
YES o
NO
1
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
x
YES o NO
Indicate
by check mark whether the registrant is a “large accelerated filer”, an
“accelerated filer”, a “non-accelerated filer” or a “smaller reporting company”
(as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller Reporting Company x
Indicate
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
o
YES x NO
The
aggregate market value of the voting and non-voting equity held by
non-affiliates of the registrant, as of the last business day of the
registrant’s most recently completed second fiscal quarter computed by reference
to the price at which the common equity was last sold was approximately
$13,848,232.
The number
of shares of common stock outstanding as of November 30, 2008 was
11,938,131.
Documents
Incorporated by Reference:
Portions
of our proxy statement for the annual shareholders meeting to be held on
February 26, 2009 are incorporated by reference into Part III.
2
CLEARFIELD,
INC.
ANNUAL
REPORT ON FORM 10-K
TABLE
OF CONTENTS
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3
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BUSINESS
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Background
Clearfield, Inc. (“Clearfield” or the
“Company”), formerly APA Enterprises, Inc., is a Minnesota corporation which was
founded in 1979. Our corporate headquarters is located at 5480 Nathan
Lane North, Suite 120, Plymouth, MN 55442 and our corporate website is
http://www.clearfieldconnection.com/. The information available on our website
is not part of this Report. You can access, free of charge, our filings with the
Securities and Exchange Commission, including our annual report on Form 10-K,
our quarterly reports on Form 10-Q, current reports on Form 8-K and any other
amendments to those reports, through a link at our website, or at the
Commission’s website at www.sec.gov.
On January
2, 2008, Clearfield, Inc., formerly known as APA Enterprises, Inc., consolidated
its sole subsidiary APA Cables & Networks, Inc., (APACN) into the parent
company, Clearfield, Inc. The Company also changed its NASDAQ stock symbol to
CLFD from APAT. The Company’s Optronics business was discontinued during the
quarter ended June 30, 2007, and the operations of the Company have now
consisted solely of the operations of Clearfield formerly known as
APACN.
Description
of Business
Clearfield,
Inc. is a manufacturer and seller of telecommunications equipment. The Company
provides telecommunications service providers, as well as commercial and
industrial original equipment manufacturers (“OEM’s”) a suite of modular,
highly-configurable passive connectivity solutions. The Company has successfully
established itself as a value-added supplier to its target market of independent
telephone companies and cable television operators as well as OEMs who value a
high level of engineering services as part of their procurement process.
Clearfield has expanded its product offerings and broadened its customer base
during the last four years.
Clearfield
offers a broad range of telecommunications equipment and products. Its broad
range of product offerings include the design and manufacture of standard and
custom connectivity products such as fiber distribution systems, optical
components, Outside Plant (“OSP”) cabinets, and fiber and copper cable
assemblies that serve the communication service provider including
Fiber-to-the-Home (“FTTH”), large enterprise, and OEM markets. Clearfield
maintains a range of engineering and technical knowledge in-house that works
closely with customers to develop, customize and enhance products from design
through production. Most products are produced at Clearfield’s plant in
Plymouth, Minnesota with support from a network of domestic and global
manufacturing partners. Clearfield specializes in producing these products on
both a quick-turn and scheduled delivery basis. Key to the continuing positive
results is strong acceptance of Clearfield’s proprietary Fieldsmart Fiber
Management Platform product line within broadband service providers deploying
FTTH networks.
Products
Clearview
Cassette The Clearview Cassette, introduced in November 2007,
is the main building block of the FieldSmart product platform, positioning
Clearfield as the only company to provide the needs of every leg of the
telecommunications network with a single building block. This patent-pending
technology is a system of five parts that nest together in the cassette’s main
housing to support a wide range of applications. Parts can be added or removed
as needed to support the environment in which it’s deployed. Within the
cassette, all fibers from the sub-assembly are slack stored, bend radius
protected and secured against accidental physical damage from handling. A
transparent design allows the user to see components inside, while the
snap-together components provide access without tools for maintenance, cleaning
or troubleshooting.
4
FieldSmart Fiber
Distribution Systems (“FDS”) The FieldSmart FDS is a high
density, easy access fiber distribution system of panels and cable management
devices, built around the Clearview cassette, systems that are designed to
reduce installation time, guarantee bend radius protection and improve
traceability. In the 144-port count configuration, Clearfield is the industry
leader for density, saving the customer expensive real estate in the central
office. The product line fully supports a wide range of panel configurations,
densities, connectors, and adapters that can be utilized on a stand-alone basis
or integrated into the panel system. The unique interchangeable building block
design delivers feature rich solutions which are able to meet the needs of a
broad range of network deployments. Unlike conventional fiber management
solutions where radius and physical fiber protection is met through an expensive
fixed bulkhead design inside an overall housing, FieldSmart every 12-fiber
increment is encased in its own module.
FieldSmart Fiber Scalability
Center (FSC) The FieldSmart FSC is a modular and
scalable outside plant cabinet to allow users to align their capital
equipment expense as they recognize subscriber
revenue. This allows rollout of FTTH services by
communication service providers without a large initial expense. Each outside
plant cabinet stores feeder and distribution splices, splitters, connectors and
slack cable neatly and compactly, utilizing field-tested designs to maximize
bend radius protection, connector access, ease of cable routing and physical
protection, thereby minimizing the risk of fiber damage. The FSC product, with
the Clearview cassette at its heart has been designed to scale with the
application environment as demand requires and to reduce service turn-up time
for the end-user.
Optical
Components Clearfield packages optical components for signal
coupling, splitting, termination, multiplexing, demultiplexing and attenuation
to seamlessly integrate with the FieldSmart FDS and FieldSmart FSC. This
value-added packaging allows the customer to source from a single supplier and
reduce space requirements. The products are built and tested to meet the
strictest industry standards ensuring customers trouble-free performance in
extreme outside plant environments.
Cable
Assemblies Clearfield manufactures high quality fiber and
copper assemblies with an industry-standard or customer-specified
configuration. Industry-standard assemblies built include but are not
limited to: single mode fiber, multimode fiber, multi-fiber, CATV node assembly,
DS1 Telco, DS 3 (734/735) coax, Category 5e and 6, SCSI, Token Ring, and
V.35. In addition, Clearfield’s engineering services team works
alongside the engineering design departments of our OEM customers to design and
manufacturer custom solutions for both in-the-box as well as network
connectivity assemblies specific to that customer’s product line.
Marketing
and Distribution
Clearfield
markets its products in the United States through a direct field sales force
supported by an internal customer sales and support team. This
internal team works proactively with the outside sales force to maintain a high
level of customer contact through regular communication of product availability,
order processing and status along with and delivery information. Clearfield
works closely with its target customers to configure the Company’s product
platform to the client’s unique requirements. Our high level of
customer service helps bring new products to markets with the design input from
our customers and network of consulting engineering firms. To ensure we cover
all markets we leverage our internal customer support team with a combination of
manufacturer representative organizations
Competition
Competitors
for the FieldSmart FDS and FSC product lines markets include, but are not
limited to, ADC Telecommunications, Inc., Corning Cabling Systems, Inc., OFS
(Furukawa Electric North America, Inc.), Telect Inc., Alcatel, Inc., and Tyco
Electronics, Inc. Nearly all of these firms are substantially larger
than Clearfield and as a result may be able to procure pricing for necessary
components and labor at much lower prices. Competition for the custom fiber and
copper termination services for cable assemblies is intense. Competitors range
from small, family-run businesses to very large contract manufacturing
facilities. Clearfield believes that it has a competitive advantage with
customers who can leverage the cost savings the Clearview cassette can provide
and those who require quick-turn, high-performance customized products, and that
it is at competitive disadvantage with customers who principally seek large
volume commodity products.
5
Sources
of Materials and Outsourced Labor
Numerous purchased
materials, components, and labor are used in the manufacturing of the Company’s
products. Most of these are readily available from multiple suppliers. However,
some critical components and outsourced labor are purchased from a single or a
limited number of suppliers. The loss of access to some components
and outsourced labor would have an adverse effect on our ability to deliver
products on a timely basis and on our financial performance.
Major
Customers
Two
customers comprised approximately 23%, 18% and 23% of total sales for the
periods ended September 30, 2008, September 30, 2007 and March 31,
2007.
Patents
and Intellectual Property
As of
September 30, 2008, we had one patent pending in the United States and two
pending patent applications inside and outside the United States.
Backlog
Backlog
reflects purchase order commitments for our products received from customers
that have yet to be fulfilled. Backlog orders are generally shipped within three
months. The Company had backlogs of $1,865,629 as of September 30, 2008 and
$1,396,000 as of September 30, 2007.
Seasonality
We are
affected by the seasonal trends in the industries, we serve. We typically
experience sequentially lower sales in our first and second fiscal quarter,
primarily due to customer budget cycles, deployment schedules, some customer
geographical concentrations as well as standard vacation and holiday calendars.
Sales usually reach a seasonal peak in our third and fourth fiscal
quarters.
Research
and Development
We believe
that the communication industry environment is constantly evolving and our
success depends on our awareness of and our response to these
changes. Our focus is to analyze the environment and technology and
work to develop products that simplify our customers’ lives by developing
innovative high quality products utilizing modular design wherever possible. We
believe our design and engineering teams are highly responsive and nimble. We
have empowered this group to take calculated risks which result in our ability
to bring products to market in a manner that we believe is faster than some of
our larger competitors. Our financial resources are not unlimited so we make
special effort to target areas where we see niche opportunities.
6
Employees
As of
September 30, 2008, the Company had 103 full-time and 9 temporary employees,
mainly in Plymouth, MN. Our future performance is dependent on our ability to
attract, train, and retain highly qualified personnel. We have no employment
agreements with our employees. The loss of one or more key employees could
negatively impact the Company. Our employees are not covered by collective
bargaining agreements. We consider our employee relations to be
favorable.
Regulation
To date,
our compliance with foreign, federal, state and local laws and regulations that
have been enacted to regulate the environment has not had a material adverse
effect on our capital expenditures, earnings, competitive or financial
position.
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RISK
FACTORS
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Risks
Related to Our Business
Recent
turmoil in the credit markets and the financial services industry could
negatively impact the Company’s business, results of operations, financial
condition or liquidity.
Recently,
the credit markets and the financial services industry have been experiencing a
period of unprecedented turmoil and upheaval characterized by the bankruptcy,
failure, collapse or sale of various financial institutions, an unprecedented
level of intervention from the United States federal government and other
foreign governments and tighter availability of credit. While the ultimate
outcome of these events cannot be predicted, they could have a negative impact
on our liquidity and financial condition if our ability to borrow money to
finance operations or obtain credit from trade creditors were to be impaired. In
addition, the recent economic crisis could also adversely impact our customers’
ability to purchase or pay for products from us or our suppliers’ ability to
provide us with product, either of which could negatively impact our business
and results of operations.
During economic downturns or a
rising interest rate environment, the cyclical nature of our business
could result in lower demand for our
products and reduced revenue.
Overall
economic conditions and the purchasing practices of telecommunications buyers
have a significant effect upon our businesses. As a result, during
downturns, we could operate with a lower level of backlog and may temporarily
slow down or halt production for a period of time at our facility. Economic
conditions that result in higher interest rates increase the cost of new leasing
arrangements, which could cause some of our customers to reduce plans or demand
extended terms. An economic downturn or increase in interest rates may reduce
demand, resulting in lower sales volumes, lower prices, and decreased profits or
losses.
Our financial performance and market
value could cause future write-downs of goodwill in future
periods.
With the
adoption of Statement of Accounting Standards (SFAS) No. 142, Accounting
for Goodwill and Other Intangibles, goodwill is no longer amortized; however, we
are required to perform an annual impairment review which could result in
impairment write-downs to goodwill. If the carrying value is in excess of the
fair value, the carrying value will be adjusted to fair value through an
impairment charge. As of September 30, 2008, we had $2,570,511 of goodwill. Our
stock price can impact the results of the impairment review of goodwill. The
recent drop in our stock price could cause us to record an impairment of
goodwill during 2009.
7
Our Results of
Operations
Unless
we generate significant revenue growth, our expenses and negative cash flow will
significantly harm our financial position.
We have
been profitable since the first quarter of fiscal year ended September 30,
2008. However, we have operated at a loss since fiscal 1990 and as a
consequence we have an accumulated deficit of $38.4 million. We anticipate
profitability for the foreseeable future; however we are operating in turbulent
and uncertain times and we may incur operating loses in the
future. Further, we may incur negative operating cash flow in the
future. We have funded our operations primarily through the sale of equity
securities and borrowings. We will need to demonstrate continued growth in
revenues while containing costs and operating expenses if we are to achieve
profitability.
Our Products and
Introduction of New Products
We
must introduce new products and product enhancements to increase
revenue.
The
successful operation of our business depends on our ability to anticipate market
needs and develop and introduce new products and product enhancements that
respond to technological changes or evolving industry standards on a timely and
cost-effective basis. Our products are complex, and new products may take longer
to develop than originally anticipated. These products may contain defects or
have unacceptable manufacturing yields when first introduced or as new versions
are released. Our products could quickly become obsolete as new technologies are
introduced or as other firms introduce lower cost alternatives. We must continue
to develop leading-edge products and introduce them to the commercial market
quickly in order to be successful. Our failure to produce technologically
competitive products in a cost-effective manner and on a timely basis will
seriously harm our business, financial condition and results of
operations.
Our
products may infringe on the intellectual property rights of
others.
Our
products are sophisticated and rely on complicated manufacturing
processes.
We
may make additional strategic changes in our product portfolio, but our
strategic changes and restructuring programs may not yield the benefits that we
expect.
The impact
of potential changes to our product portfolio and the effect of such changes on
our business, operating results and financial condition, are unknown at this
time. If we acquire other businesses in our areas of strategic focus,
assimilating these businesses and their products, services, technologies and
personnel into our operations may be challenging. These difficulties
could disrupt our ongoing business, distract our management and workforce,
increase our expenses and adversely affect our operating results and financial
condition. In addition to these integration risks, if we acquire new
businesses, we may not realize all of the anticipated benefits of these
acquisitions, and we may not be able to retain key management, technical and
sales personnel after an acquisition. Divestitures or elimination of
existing businesses or product lines could also have disruptive effects and may
cause us to incur material expenses.
Manufacturing and
Operations
Our dependence on outside
manufacturers may result in product delivery delays.
We have
increased our reliance on the use of contract manufacturers to assemble some of
our products. If these contract manufacturers do not fulfill their obligations
or if we do not properly manage these relationships, our existing customer
relationships may suffer.
8
We
may be required to rapidly increase our manufacturing capacity to deliver our
products to our customers in a timely manner.
We have
limited experience in rapidly increasing our manufacturing capacity or in
manufacturing products at high volumes. If demand for our products significantly
increases, we may be required to hire, train and manage additional manufacturing
personnel and improve our production processes in order to increase our
production capacity. There are numerous risks associated with rapidly increasing
capacity, including:
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Difficulties
in achieving adequate yields from new manufacturing
lines,
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Difficulty
maintaining the precise manufacturing processes required by our products
while increasing
capacity,
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The
inability to timely procure and install the necessary equipment,
and
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Lack
of availability of qualified manufacturing
personnel.
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If we
apply our capital resources to expanding our manufacturing capacity in
anticipation of increased customer orders, we run the risk that the projected
increase in orders will not be realized. If anticipated levels of customer
orders are not received, we will not be able to generate positive gross margins
and profitability.
We
are dependent upon skilled employees; if we lose the services of our key
personnel our ability to execute our operating plan, and our operating results,
may suffer.
Our future
performance depends in part upon the continued service and contributions of key
management, engineering, sales and marketing personnel, many of whom would be
difficult to replace quickly. If we lose any of these key personnel, our
business, operating results and financial condition could be materially
adversely affected or delay the development or marketing of existing or future
products. Competition for these personnel is intense and we may not
be able to retain or attract such personnel. Our success will depend in part
upon our ability to attract and retain additional personnel with the highly
specialized expertise necessary to generate revenue and to engineer, design and
support our products and services.
Markets and Market
Conditions
Demand
for our products is subject to significant fluctuation. Adverse market
conditions in the communications equipment industry and any slowdown in the
United States economy may harm our financial condition.
Demand for
our products is dependent on several factors, including capital expenditures in
the communications industry. Capital expenditures can be cyclical in nature and
result in protracted periods of reduced demand for component parts. Similarly,
periods of slow economic expansion or recession can result in periods of reduced
demand for our products. Such periods of reduced demand will harm our business,
financial condition and results of operations. Changes to the regulatory
requirements of the telecommunications industry could also affect market
conditions, which could also reduce demand for our products.
Our
industry is highly competitive and subject to pricing pressure.
Competition
in the communications equipment market is intense. We have experienced and
anticipate experiencing increasing pricing pressures from current and future
competitors as well as general pricing pressure from our customers as part of
their cost containment efforts. Many of our competitors have
more extensive engineering, manufacturing, marketing, financial and personnel
resources than we do. As a result, these competitors may be able to
respond more quickly to new or emerging technologies and changes.
9
Declining
average selling prices for our fiber optic products will require us to reduce
production costs to effectively compete and market these products.
Market
pressure for lower prices for our category of products continues to be strong.
We expect this trend to continue. To achieve profitability in this environment
we must continually decrease our costs of production as well as improve the
value proposition of the products we offer. In order to reduce our production
costs, we will continue to pursue one or more of the following:
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seek
lower cost suppliers of raw materials or
components,
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work
to further automate our assembly
process,
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develop
value-added solutions,
and
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seek
offshore sources for manufacturing and assembly services where
appropriate.
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We will
also seek to form strategic alliances with companies that can supply these
services. Decreases in average selling prices also require that we increase unit
sales to maintain or increase our revenue. There can be no guarantee that we
will achieve these objectives. Our inability to decrease production costs or
increase our unit sales could seriously harm our business, financial condition
and results of operations.
Our
markets are characterized by rapid technological changes and evolving
standards.
The
markets we serve are characterized by rapid technological change, frequent new
product introductions, changes in customer requirements and evolving industry
standards. In developing our products, we have made, and will continue to make,
assumptions with respect to which standards will be adopted within our industry.
If the standards that are actually adopted are different from those that we have
chosen to support, our products may not achieve significant market
acceptance.
Conditions
in global markets could affect our operations.
We source
key materials and products globally and as such are subject to the risks of
conducting business internationally. Those risks include but are not limited
to:
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local
economic and market
conditions,
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political
and economic
instability,
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fluctuations
in foreign currency exchange
rates,
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tariffs
and other barriers and
restrictions,
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geopolitical
and environmental risks;
and
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changes
in diplomatic or trade relationships and natural
disasters.
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We cannot
predict whether our business operations and reliance in these markets will be
affected adversely by these conditions.
Our
profitability can be adversely affected due to increased raw material
costs
10
Our
manufacturing costs may be impacted by unanticipated increases in raw material
costs during the time span between the cost quotes and actual procurement of raw
materials. The impact can be significant for purchase orders requiring multiple
scheduled deliveries. Whereas we may be able to approach some of the customers
for costs adjustments, there is no assurance that we would be successful in
obtaining these adjustments. Failure to obtain price adjustments would result in
decreased profitability and/or losses.
Our
inventory of raw material and supplies may incur significant
obsolescence
Our market
demands rapid turn around from receipt of purchase orders to shipping of the
products. We maintain significant inventory of raw materials and supplies to
meet this demand resulting in risk of inventory obsolescence. Whereas we
anticipate and make provisions for a reasonable fraction of inventory
obsolescence, a significant higher level of obsolescence can adversely impact
our profitability.
Our
Customers
Our
sales could be negatively impacted if one or more of our key customers
substantially reduce orders for our products.
If we lose
a significant customer, our sales and gross margins would be negatively
impacted. In addition, the loss of sales may require us to record impairment,
restructuring charges or exit a particular business or product
line.
Consolidation
among our customers could result in our losing a customer or experiencing a
slowdown as integration takes place.
It is
likely that there will be increased consolidation among our customers in order
for them to increase market share and achieve greater economies of
scale. Consolidation is likely to impact our business as our
customers focus on integrating their operations and choosing their equipment
vendors. After a consolidation occurs, there can be no assurance that we will
continue to supply the surviving entity.
Customer
payment defaults could have an adverse effect on our financial condition and
results of operations.
As a result of current worldwide
financial markets and competitive conditions in the telecommunications market,
some of our customers may experience financial difficulties. It
is possible that customers from whom we expect to derive substantial revenue
will default or that the level of defaults will increase. Any material payment
defaults by our customers would have an adverse effect on our results of
operations and financial condition.
Performance Requirements and
Performance of our Products
Our
products may have defects that are not detected before delivery to our
customers.
Some of
the Company’s products are designed to be deployed in large and complex networks
and must be compatible with other components of the system, both current and
future. Our customers may discover errors or defects in our products only after
they have been fully deployed. In addition, our products may not operate as
expected over long periods of time. If we are unable to fix errors or other
problems, we could lose customers, lose revenues, suffer damage to our brand and
reputation, and lose our ability to attract new customers or achieve market
acceptance. Each of these factors would negatively impact cash flow and would
seriously harm our business, financial condition and results of
operations.
Product
defects could cause us to lose customers and revenue or to incur unexpected
expenses.
11
If our
products do not meet our customers’ performance requirements, our customer
relationships may suffer. Also, our products may contain
defects. Any failure or poor performance of our products could result
in:
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delayed
market acceptance of our
products.
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delays
in product
shipments.
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unexpected
expenses and diversion of resources to replace defective products or
identify the source of errors and correct
them.
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damage
to our reputation and our customer
relationships.
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delayed
recognition of sales or reduced sales;
and
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product
liability claims or other claims for damages that may be caused by any
product defects or performance
failures.
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Intellectual
Property
If
we are unable to adequately protect our intellectual property, third parties may
be able to use our technology, which could adversely affect our ability to
compete in the market.
We rely
principally on trade secret protection for our confidential and proprietary
information. We have taken security measures to protect our
proprietary information and trade secrets, but these measures may not provide
adequate protection. While we seek to protect our proprietary
information by entering into confidentiality agreements with employees,
collaborators and consultants, we cannot assure you that our proprietary
information will not be disclosed, or that we can meaningfully protect our trade
secrets. In addition, our competitors may independently develop
substantially equivalent proprietary information or may otherwise gain access to
our trade secrets.
Intellectual
property litigation could harm our business.
It is
possible that we may have to defend our intellectual property rights in the
future. In the event of an intellectual property dispute, we may be
forced to litigate or otherwise defend our intellectual property
assets. Intellectual property litigation can be extremely expensive,
and this expense, as well as the consequences should we not prevail, could
seriously harm our business.
If a third
party claimed an intellectual property right to technology we use, we might be
forced to discontinue an important product or product line, alter our products
and processes, pay license fees or cease certain activities. We may
not be able to obtain a license to such intellectual property on favorable
terms, if at all.
Factors That May Affect
Future Results
12
The
statements contained in this Report on Form 10-K that are not purely historical
are “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including, without
limitation, statements regarding the Company’s expectations, hopes, beliefs,
anticipations, commitments, intentions and strategies regarding the future.
Forward-looking statements include, but are not limited to, statements contained
in “Item 1. Business” and “Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.” Actual results could differ from
those projected in any forward-looking statements for the reasons, among others,
detailed below. We believe that many of the risks detailed here are part of
doing business in the industry in which we compete and will likely be present in
all periods reported. The fact that certain risks are characteristic to the
industry does not lessen the significance of the risk. The forward-looking
statements are made as of the date of this Report as Form 10-K and we assume no
obligation to update the forward-looking statements or to update the reasons why
actual results could differ from those projected in the forward-looking
statements.
13
Executive
Officers
The
following is a list of our executive officers, their ages, positions and offices
as of September 30, 2008.
|
Name
|
Age
|
Position
|
|
|
Cheryl
Beranek Podzimek
|
45
|
Chief
Executive Officer/President of Clearfield, Inc.
|
|
|
Bruce
G. Blackey
|
57
|
Chief
Financial Officer
|
Cheryl Beranek
Podzimek joined the Company in July 2003 as President of APACN. Ms.
Podzimek was appointed CEO and President of Clearfield, Inc in June of 2007. Ms.
Podzimek was previously President of Americable, which was acquired by APACN in
June 2003. She served as President of Americable from 2002 to 2003. From 2001 to
2002 Ms. Podzimek was Chief Operating Officer of Americable. Previously, Ms.
Podzimek held a variety of lead marketing positions with emerging high-growth
technology companies. She served as Vice President of Marketing from
1996-2001 at Transition Networks, a manufacturer of network connectivity
products, Director of Marketing from 1992 to 1996 at Tricord Systems, an early
stage multi-processor based super server manufacturer, and Director of Marketing
from 1988 to 1992 at Digi International, a designer and manufacturer of
connectivity products. Earlier in her career Ms. Podzimek held marketing
positions for non-profit organizations, including the City of Fargo, the
Metropolitan Planning Commission of Fargo/Moorhead and North Dakota State
University. Ms. Podzimek holds a Bachelor of Science Degree from Southwest
Minnesota State University and a Masters of Science Degree from North Dakota
State University.
Bruce G.
Blackey joined the Company in June of 2007 as Chief Financial
Officer. Mr. Blackey has extensive experience in finance and
administration and has worked as an independent business consultant and interim
CFO from 2001 to the present for several companies. Mr. Blackey held the
position of CFO with Tiro Industries a contract manufacturing firm serving the
cosmetic industry from 1997 to 2001. Prior to that he held the senior financial
position with Conwed Plastics, a manufacturer of plastic netting from 1988 to
1997. Mr. Blackey holds a Bachelors of Science degree in Business Administration
and Accounting from the University of Minnesota business school, now known as
the Carlson School of Management.
|
UNRESOLVED
STAFF COMMENTS
|
None
|
PROPERTIES
|
Clearfield
leases a 30,000 square foot facility at 5480 Nathan Lane North in Plymouth,
Minnesota consisting of our corporate offices, manufacturing and warehouse
space.
We own a
24,000 square foot production facility in Aberdeen, South Dakota, which is
partially leased and occupied. (See Note M in the Financial Statements included
in Item 8 of this Form 10-K.)
On October
30, 2007 we purchased and immediately sold an industrial building at 2950 N.E.
84th
Lane, Blaine Minnesota that we leased from Jain-Olsen Properties as our former
corporate offices. We exercised an option to buy the building in August 2007 as
contained in our lease. (See Note M in the Financial Statements included in Item
8 this Form 10-K)
14
|
LEGAL
PROCEEDINGS
|
None
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
On
February 27, 2008, the Company held its Annual Meeting of
Shareholders. At the meeting, the shareholders elected as directors
Anil K. Jain (with 10,741,102 shares voting for and 208,855 withheld), John G.
Reddan (with 10,820,648 shares voting for and 129,309 withheld), Ronald G. Roth
(with 10,839,148 shares voting for and 110,809 withheld), Stephen A. Zuckerman
(with 9,147,896 shares voting for and 1,802,061 withheld), Cheryl B. Podzimek
(with 10,812,102 shares voting for and 137,855 withheld) and Donald R. Hayward
(with 10,826,402 shares voting for and 123,555 withheld)
The
shareholders also approved the amendment to the Stock Option Plan of 2007 to
permit the addition of 750,000 share options to the plan (with 3,419,036 shares
voting for; 960,717 against; 1,705,699 abstain and 4,864,505 broker
non-vote).
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
|
Our common stock is traded on The
Nasdaq Global Market under the symbol “CLFD.” The following table sets forth the
quarterly high and low sales prices for our common stock for each quarter of the
past two fiscal years as reported by Nasdaq. There were approximately 318
holders of record of our common stock as of September 30, 2008.
|
Fiscal Year Ended
September 30, 2008
|
High
|
Low
|
||
|
Quarter
ended December 31, 2007
|
$1.19
|
$0.96
|
||
|
Quarter
ended March 31, 2008
|
1.18
|
0.82
|
||
|
Quarter
ended June 30, 2008
|
1.87
|
1.03
|
||
|
Quarter
ended September 30, 2008
|
1.37
|
1.01
|
||
|
Transition Period
Ended September 30, 2007
|
High
|
Low
|
||
|
Quarter
ended June 30, 2007
|
$1.48
|
$1.12
|
||
|
Quarter
ended September 30, 2007
|
1.17
|
0.75
|
||
|
Fiscal Year Ended
March 31, 2007
|
High
|
Low
|
||
|
Quarter
ended June 30, 2006
|
$2.23
|
$1.25
|
||
|
Quarter
ended September 30, 2006
|
1.59
|
1.21
|
||
|
Quarter
ended December 31, 2006
|
1.56
|
1.25
|
||
|
Quarter
ended March 31, 2007
|
1.67
|
1.21
|
We have never paid cash dividends
on our common stock. We do not intend in the foreseeable future to pay cash
dividends on our common stock.
15
The
following graph compares the cumulative 5-year total return attained by
shareholders on Clearfield, Inc.'s common stock relative to the cumulative total
returns of the NASDAQ Composite index and the NASDAQ Non-Financial index. The
graph tracks the performance of a $100 investment in our common stock and in
each of the indexes (with the reinvestment of all dividends) from 3/31/2003 to
9/30/2008.
|
3/03
|
3/04
|
3/05
|
3/06
|
3/07
|
3/08
|
|
|
Clearfield,
Inc.
|
100.00
|
187.22
|
106.02
|
146.62
|
78.206
|
87.22
|
|
NASDAQ
Composite
|
100.00
|
150.82
|
152.84
|
187.61
|
214.25
|
160.53
|
|
NASDAQ
Non-Financial
|
100.00
|
146.75
|
147.79
|
173.58
|
201.14
|
152.92
|
The
stock price performance included in this graph is not necessarily indicative of
future stock price performance.
16
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Change
in Year End
In June
2007, we elected to change our fiscal year end from March 31 to September 30. In
view of this change, this Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations (“MD&A”) compares
the consolidated financial statements as of and for the year ended September 30,
2008 with the most recently completed prior year which ended March 31,
2007. We are also comparing the consolidated financial statements as
of and for the year ended September 30, 2008 with the unaudited consolidated
financial statements as of and for twelve months ended September 30, 2007. In
addition we are comparing the transition period of six months ended September
30, 2007 with the unaudited six months ended September 30, 2006. We have
included summary information from the consolidated financial statements for the
six months ended September 30, 2006 in Note B to the consolidated financial
statements.
Throughout the MD&A, data for all
periods except as of and for the twelve months ended September 30, 2007 and the
six months ended September 30, 2006, are derived from our audited consolidated
financial statements, which appear in this Report. All data as of and
for the twelve months ended September 30, 2007 and six months ended September
30, 2006, are derived from our unaudited financial statements, which are
presented elsewhere in this Report.
General
The
Company focuses on highly configurable products for telecommunications
customers, primarily related to cabling management requirements of the FTTH
marketplace and the design, manufacture, distribution, and marketing of a
variety of fiber optics and copper components to the data communication and
telecommunication industries. The Companies primary manufactured
products include standard and custom fiber optic cable assemblies, copper cable
assemblies, OSP cabinets, value–added fiber optics frames, panels and
modules.
Application
of Critical Accounting Policies
In
preparing our consolidated financial statements, we make estimates, assumptions
and judgments that can have a significant impact on our revenues, loss from
operations and net loss, as well as on the value of certain assets and
liabilities on our consolidated balance sheet. We believe that there are several
accounting policies that are critical to an understanding of our historical and
future performance, as these policies affect the reported amounts of revenues,
expenses and significant estimates and judgments applied by management. While
there are a number of accounting policies, methods and estimates affecting our
consolidated financial statements, areas that are particularly significant
include:
|
●
|
Stock
option accounting;
|
|
●
|
Accounting
for income taxes; and
|
|
●
|
Valuation
and evaluating impairment of long-lived assets and
goodwill.
|
17
Stock Option
Accounting
We adopted
Statement of Financial Accounting Standards No. 123—revised 2004 (“SFAS 123R”),
“Share-Based Payment,” using the modified prospective transition method, which
requires the application of the accounting standard as of April 1, 2006, the
first day of our fiscal year 2007. Our consolidated financial statements as of
and for the twelve months ended March 31, 2007 reflect the impact of SFAS 123R.
The compensation expense impacted both basic and diluted loss per share by less
than $0.01 for the year ended September 30, 2008 and the six months ended
September 30, 2007 and the twelve months ended March 31, 2007. The Company
recorded related compensation expense of $50,052, $18,477
and $50,363 respectively for the twelve months ended September 30, 2008, the six
months ended September 30, 2007 and the twelve months ended March 31,
2007.
As of
September 30, 2008, $86,630 of total unrecognized compensation expense related
to non-vested awards is expected to be recognized over a weighted average period
of approximately 3.46 years. In accordance with the modified prospective
transition method, our consolidated financial statements for prior periods have
not been restated and do not include the impact of compensation expense
calculated under SFAS 123R.
For
purposes of determining estimated fair value of stock-based payment awards on
the date of grant under SFAS 123(R), the Company used the Black-Scholes Model.
The Black-Scholes Model requires the input of certain assumptions that require
subjective judgment. Because employee stock options have characteristics
significantly different from those of traded options, and because changes in the
input assumptions can materially affect the fair value estimate, the existing
models may not provide a reliable single measure of the fair value of the
employee stock options. Management will continue to assess the assumptions and
methodologies used to calculate estimated fair value of stock-based
compensation. Circumstances may change and additional data may become available
over time, which could result in changes to these assumptions and methodologies
and thereby materially impact our fair value determination.
Accounting for Income
Taxes
As part of
the process of preparing our consolidated financial statements, we are required
to estimate our income tax liability in each of the jurisdictions in which we do
business. This process involves estimating our actual current tax expense
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities. We must then assess the likelihood that these
deferred tax assets will be recovered from future taxable income and, to the
extent we believe that recovery is not more likely than not or unknown, we must
establish a valuation allowance.
Management
judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance recorded against our
deferred tax assets. At September 30, 2008, we have recorded a full valuation
allowance of approximately $13,145,000 against our deferred tax assets, due to
uncertainties related to our ability to utilize our deferred tax assets,
consisting principally of certain net operating losses carried forward. The
valuation allowance is based on our estimates of taxable income by jurisdiction
and the period over which our deferred tax assets will be recoverable. The
Company had U.S. federal and state net operating loss (NOL) carry
forwards of approximately $32,710,000 which expire in fiscal years 2009 to 2027.
To date the Company has not completed a “Section 382” analysis. If
certain ownership changes occurred under Internal Revenue Code Section 382,
there may be further limitations on the usage of the net operating loss carry
forwards.
Realization
of the NOL carry forwards and other deferred tax temporary differences are
contingent on future taxable earnings. The deferred tax asset was reviewed for
expected utilization using a “more likely than not” approach as required by
SFAS No. 109, “Accounting for Income Taxes,” by assessing the
available positive and negative evidence surrounding its
recoverability.
18
We will
continue to assess and evaluate strategies that will enable the deferred tax
asset, or portion thereof, to be utilized, and will reduce the valuation
allowance appropriately at such time when it is determined that the “more likely
than not” approach is satisfied.
During the
fiscal year ended September 30, 2008, the Company recorded a deferred income tax
expense of $88,985 for the book and income tax basis difference in goodwill on
acquisitions.
In June
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes” - an interpretation of FASB
Statement No. 109, “Accounting for Income Taxes” (“FIN 48”), which clarifies the
accounting for income tax provisions. FIN 48 prescribes a recognition threshold
and measurement attribute for recognition and measurement of a tax position
taken or expected to be taken in a tax return. The interpretation requires that
the Company recognize in the financial statements the impact of a tax position.
Recognition is allowed if the tax position is more likely than not to be
sustained on audit, based on the technical merits of the position. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure. The provisions of FIN 48 became
effective for the Company on April 1, 2007. The adoption of this statement
did not have a material impact on the Company's consolidated financial position
or results of operations.
Valuation and evaluating
impairment of long-lived assets and goodwill
The
Company records the excess of purchase cost over the fair value of net tangible
assets of acquired companies as goodwill or other identifiable intangible
assets. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 142 "Goodwill and Other Intangible Assets," in the last quarter of each
year, or as an event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying amount, the
Company completes the impairment testing of goodwill primarily utilizing a
discounted cash flow method.
Determining
market values using a discounted cash flow method requires the Company to make
significant estimates and assumptions, including long-term projections of cash
flows, market conditions and appropriate discount rates. The Company's judgments
are based on historical experience, current market trends, consultations with
external valuation specialists and other information. While the Company believes
that the estimates and assumptions underlying the valuation methodology are
reasonable, different estimates and assumptions could result in a different
outcome. The Company generally develops these forecasts based on recent sales
data for existing products, planned timing of new product launches, and
estimated expansion of the FTP market.
If the
carrying amount of a reporting unit exceeds its fair value, the Company measures
the possible goodwill impairment loss based on an allocation of the estimate of
fair value of the reporting unit to all of the underlying assets and liabilities
of the reporting unit, including any previously unrecognized intangible assets.
The excess of the fair value of a reporting unit over the amounts assigned to
its assets and liabilities is the implied fair value of goodwill. An impairment
loss is recognized to the extent that a reporting unit's recorded goodwill
exceeds the implied fair value of goodwill. This test for the period ended
September 30, 2008 resulted in no change to goodwill from the prior
period. The test for fiscal year ended March 31, 2007 indicated that
goodwill related to APACN was impaired. Accordingly, the Company recognized a
non-cash, pre-tax impairment charge of $852,000 ($519,717, after tax) in the
quarter ended March 31, 2007.
19
The
Company evaluates the recoverability of its long lived assets in accordance with
SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.” SFAS 144 required recognition of impairment of long lived
assets in the event that events or circumstances indicate an impairment may have
occurred and when the net book value of such assets exceeds the future
undiscounted cash flow attributed to such assets. We assess the
impairment of long lived assets whenever events or changes in circumstances
indicate that that the carrying value may not be recoverable. No
impairment of long-lived assets has occurred during the periods ended September
30, 2008, September 30, 2007 and March 31, 2007, respectively.
New Accounting
Pronouncements
In May
2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
162, The Hierarchy of
Generally Accepted Accounting Principles. SFAS No. 162 identifies the
sources of accounting principles and provides entities with a framework for
selecting the principles used in preparation of financial statements that are
presented in conformity with GAAP. The current GAAP hierarchy has been
criticized because it is directed to the auditor rather than the entity, it is
complex, and it ranks FASB Statements of Financial Accounting Concepts, which
are subject to the same level of due process as FASB Statements of Financial
Accounting Standards, below industry practices that are widely recognized as
generally accepted but that are not subject to due process. The Board believes
the GAAP hierarchy should be directed to entities because it is the entity (not
its auditors) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP. The adoption of
FASB 162 is not expected to have a material impact on the Company's financial
position.
On
February 15, 2007, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities — Including an Amendment of FASB No. 115. This
standard permits an entity to choose to measure many financial instruments and
certain other items at fair value. The fair value option established by SFAS
No. 159 permits all entities to choose to measure eligible items at fair
value at specified election dates. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. The Company is currently
evaluating the impact this pronouncement will have on its consolidated financial
position or results of operations.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurement but does not require
any new fair value measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. However on February 12, 2008, the
FASB issued proposed FSP FAS 157-2 which delayed the effective date of SFAS 157
for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). This FSP partially defers the effective date of SFAS
157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of this FSP. We
will adopt SFAS 157, except as it applies to those nonfinancial assets and
nonfinancial liabilities as noted in proposed FSP FAS 157-2, on October 1, 2008
and do not believe the impact of this pronouncement will be material
to our consolidated financial position or results of operations.
On
December 4, 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations.
SFAS No. 141R will significantly change the accounting for business
combinations. Under SFAS 141R, an acquiring entity will be required to recognize
all the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. SFAS No. 141R will change
the accounting treatment for certain specific items. SFAS No. 141R also includes
a substantial number of new disclosure requirements. SFAS No. 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Earlier adoption is prohibited. This statement will only have
an impact if we execute applicable transactions after the effective
date.
20
On
December 4, 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51. Statement
160 establishes new accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No.
160 also includes expanded disclosure requirements regarding the interests of
the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal
years, and interim periods with those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. This statement will only have
an impact if we execute applicable transactions after the effective
date.
Contractual
Obligations
Our
contractual obligations and commitments are summarized in the table below (in
000’s):
|
Total
|
Less
than
1
Year
|
1-3
years
|
4-5
years
|
After
5
years
|
||||||||||||||||
|
Long-term
debt (1)
|
$ | 102 | $ | 68 | $ | 34 | $ | 0 | $ | 0 | ||||||||||
|
Operating
leases
|
1,232 | 227 | 471 | 491 | 43 | |||||||||||||||
|
Total
Contractual Cash
|
||||||||||||||||||||
|
Obligations
|
$ | 1,334 | $ | 295 | $ | 505 | $ | 491 | $ | 43 | ||||||||||
(1) Includes
fixed interest ranging from 6.2% to 8.45%.
21
Results
of Operations
Year ended September 30,
2008 compared to year ended March 31, 2007
Revenues
for the fiscal year ended 2008 increased 28% to $23,494,000 from revenue of
$18,363,000 in 2007. This increase is attributable to the acceptance of the
Company’s products, the introduction and acceptance of the Fieldsmart fiber
management product line and engineering-led design services within the FTTH
market.
Revenue to
broadband service providers and commercial data networks amounted to $18,359,000
or 78% of revenue compared to $13,941,000 or 76% of sales in
2007. Sales to OEMs, consisting primarily of fiber optic and copper
cable assemblies produced to customer design specifications, were 22% of revenue
or $ 5,134,000 compared to $4,422,000 or 24% of sales in 2007.
Gross
margin increased from 29% in 2007 to 33% in 2008 resulting in a gross profit of
$7,852,000 in 2008 as compared to $5,265,000 in 2007, an increase of $2,587,000
or 50%. The 6% increase in gross margin is attributable to product mix and the
introduction of the Fieldsmart management product line, and the results of
on-going programs to reduce the cost of products through a combination of new
product introduction, process improvement, global sourcing of components and
outside manufacturing.
There were
no research and development expenses for the on-going business.
S G &A
increased 2% or $163,000 from $6,692,000 for 2007 to $6,855,000 for 2008.
However in 2007 the Company recognized the severance agreement to former chief
executive officer of the Company, Dr. Anil Jain, in the amount of $397,000 and a
goodwill impairment of $852,000. Adjusting the 2007 S G & A to reflect these
items would have resulted in S G & A of $5,443,000 and the comparative
increase in expense would be $1,412,000 or an increase of 26%. This
increase reflects a significant investment in sales, marketing, product
management, product engineering and performance-based compensation that
contributed to increased sales and profitability.
In 2007
the Company incurred a goodwill impairment charge of $852,000 ($519,717 after
tax) to properly
reflect the carrying value of the assets associated with APACN, a wholly owned
subsidiary. No such impairment was recorded in 2008.
Income
from operations for 2008 was $997,000 compared to a loss of $1,427,000 for
2007,.an improvement of $2,424,000. This change is attributable to
increased revenue and increased gross margin. Adjusting for the goodwill
impairment of $852,000 in 2007, the increase in income would have been
$1,572,000.
Interest
income in 2008 declined 30% from $379,000 in 2007 to $268,000 in
2008. This is attributable to declining interest rates from the two
periods and a reduction in cash available for investing during the same
period.
Interest
expense decreased from $49,000 in 2007 to $11,000 in 2008. The 2008 interest
is attributable to financing associated with the enterprise
information system installed during 2007 and 2008. The 2007 interest is related
to bonds held by the South Dakota Economic Development and Finance Authority
that was paid off in October of 2006.
Other
income consists of $55,000 of lease income on the Company’s Aberdeen facility
which was rented beginning in October 2007. The building was vacant and
generated no income in the prior year.
22
Income
taxes for 2008 were $93,003, of which 89,203 is directly related to taxes on
goodwill. The balance was paid to various states for income, sales and use
taxes. In 2007 taxes were recorded as income of $237,000 most of which were
related to the tax effect of the goodwill impairment.
Net income
from continuing operations for 2008 were $1,217,000 or $0.10 per diluted share
compared to a loss of $838,000 or $0.07 per diluted share.
Net
income from discontinued operations for 2008 were $297,000 or $0.02 per diluted
share compared to a loss of $1,309,000 or $0.11 per diluted share. The 2008
income consisted of the reversal of a portion of the Blaine building lease
termination accrual, totaling $362,000 and expenses of $65,000 associated with
the sale of the Blain Building.
The
Company’s net income was $1,514,000 or $0.13 per diluted share for the year 2008
compared to a loss of $2,147,000 or $0.18 per share for the year
2007. This is a net change of $3,661,000.
Twelve months ended
September 30, 2008 Compared to twelve months ended September 30,
2007
Condensed
Statement of Operations
|
Year
ended
September
30,
|
Twelve
months
ended
September
30,
|
|||||||
|
2008
|
2007
|
|||||||
|
(Unaudited)
|
||||||||
|
Revenues
|
$ | 23,493,796 | $ | 18,697,245 | ||||
|
Gross
Profit
|
7,851,835 | 5,572,995 | ||||||
|
SG&A
|
6,854,934 | 7,407,038 | ||||||
|
Income
(loss) from operations
|
997,000 | (1,834,000 | ) | |||||
|
Net
income (loss) before taxes
|
1,310,124 | (1,540,501 | ) | |||||
|
Income
taxes
|
93,303 | (229,103 | ) | |||||
|
Net
income (loss) from continuing operations
|
1,216,821 | (1,311,398 | ) | |||||
|
Net
income (loss) from discontinued operations
|
297,439 | (1,613,900 | ) | |||||
|
Net
income (loss)
|
$ | 1,514,260 | $ | (2,925,298 | ) | |||
|
Net
income (loss) per share (basic and diluted):
|
||||||||
|
Continuing
operations
|
$ | 0.10 | $ | (0.11 | ) | |||
|
Discontinued
operations
|
0.03 | (0.14 | ) | |||||
|
Total
|
$ | 0.13 | $ | (0.25 | ) | |||
Revenues
for the fiscal year ended 2008 increased 26% to $23,494,000 from revenue of
$18,697,000 in 2007. This increase is attributable to the continued
acceptance of the Company’s products the introduction and acceptance of the
Fieldsmart fiber management product line and engineering-led design services
within the FTTH market. Revenue to broadband service providers and
commercial data networks amounted to $18,359,000 or 78% of revenue compared to
$13,941,000 or 76% of sales in 2007. Sales to OEMs consisting
primarily of fiber optic and copper cable assemblies produced to customer design
specifications were 22% of revenue or $5,135,000 compared to $4,422,000 or 24%
of sales in 2007.
Gross
margin increased from 30% in 2007 to 33% in 2008 resulting in a gross profit of
$7,852,000 in 2008 as compared to $5,573,000 in 2007, an increase of $2,279,000
or 41%. This 3% increase in gross margin is attributable to product mix and the
introduction of the Fieldsmart management product line, and the results of
on-going programs to reduce the cost of products through a combination of new
product introduction, process improvement, global sourcing of components and
outside manufacturing.
23
There have
been no research and development expenses for the on-going
business.
S G &A
increased 4% or $286,000 from $6,569,000 for 2007 to $6,855,000 for 2008.
However in 2007 the Company recognized the severance agreement to former chief
executive officer of the Company, Dr. Anil Jain, in the amount of $397,000.
Adjusting the 2007 S G & A to reflect the Jain severance would have resulted
in S G & A of $6,172,000 and the comparative increase in expense would be
$683,000 or an increase of 11%. This increase is an investment in
sales, marketing and product management and product engineering and performance
based compensation which has contributed to the increase sales.
In 2007
the Company incurred a goodwill impairment charge of $852,000 ($519,717, after
tax) to properly
reflect the carrying value of the assets associated with APACN a wholly owned
subsidiary. No such impairment was recorded in 2008.
Gain on
disposal of assets in 2007 were $13,000: none were incurred in
2008.
Income
from operations for 2008 was $997,000 compared to a loss of $1,834,000 for 2007,
an improvement of $2,831,000. This change is attributable to the
increased revenues and overall increased margins. Adjusting for the goodwill
impairment of $852,000 in 2007, the increase in income would have been
$1,979,000.
Interest
income in 2008 declined 19% from $332,000 in 2007 to $268,000 in
2008. This is attributable to declining interest rates from the two
periods and a modest reduction in cash available for investing during the same
period.
Interest
expense for 2008 increased slightly from $8,000 to $11,000 this is all
attributable to financing associated with the enterprise information system
installed during 2007 and 2008.
Other
income consists of $55,000 of lease income on the Company’s Aberdeen facility
which was rented beginning in October 2007. The building was vacant and
generated no income in the prior year.
Income
taxes for 2008 were $93,003, of which 89,203 is directly related to taxes on
goodwill. The balance was paid to various states for income, sales and use
taxes. In 2007 taxes were recorded as income of $31,000 of which $22,000 were
related to the effect of the goodwill impairment.
Net income
from continuing operations for 2008 were $1,217,000 or $0.10 per diluted share
compared to a loss of $1,311,000 or $0.11 per diluted share.
Net income
from discontinued operations for 2008 were $297,000 or $0.02 per diluted share
compared to a loss of $1,614,000 or $0.14 per diluted share. Income for 2008 was
comprised of the reversal of the balance of the Blaine lease termination accrual
of $362,000 and the loss on the sale of the building and costs associated with
the sale totaling $70,000 and $6,000 of miscellaneous expenses. The net loss for
the prior year consisted of a gain of $265,000 on the sale of the Blaine lot, a
net loss on the sale of India and its operations totaling $255,000, the lease
accrual for the Blaine building of $501,000 and fixed asset and inventory write
downs totaling $309,000. In addition the costs associated with the
discontinuance of the Optics business were severance costs of $78,000,
depreciation of $115,000, facility costs of $80,000, and Optics operating costs
for the year totaling $537,000.
The
Company’s net income was $1,514,000 or $0.13 per diluted share for the year 2008
compared to a loss of $2,925,000 or $0.25 per share for the year
2007. This is a net change of $4,440,000.
24
Six months ended September
30, 2007 compared to six months ended September 30, 2006
Revenues
for the six months ended September 30, 2007 increased 3% to $10,297,000 from
sales of $9,963,000 for the comparable six month period in 2006. This increase
is attributable to the continued acceptance of the Company’s products within the
FTTH market resulting from increased sales and marketing activities during the
six months ended September 30, 2007. Sales to broadband service
providers and commercial data networks, include custom fiber distribution
systems, associated cable assemblies and optical components, were $7,672,000 or
75% of revenue. Sales to OEMs, consisting primarily of fiber optic and copper
cable assemblies produced to customer design specifications, were $2,625,000, or
25% of revenue. This compares to 76% for broadband and commercial data networks
and 24% for OEMs in the prior comparable period for 2006.
Gross
profit for the six months ended September 30, 2007 was $3,218,000, or 31% of
revenues, compared to $2,910,000, or 29% of revenues, in 2006. The increase of
$308,000 or 11% over the prior year is attributable to product mix and the
results of the continuing improvement in ongoing programs to reduce product
costs through a combination of aggressive product re-design, process improvement
and global sourcing of components and outside manufacturing.
There have
been no research and development expenses for the on-going
business.
S G &
A expenses for the six months ended September 30, 2007 were $3,685,000 compared
to $2,954,000 for the comparable period in 2006. The increase of $731,000 is the
result of two factors: a significant investment in sales and marketing and the
recognition of the severance agreement to Dr. Anil Jain, in the amount of
$397,000 recorded in the first quarter of the transition period.
Gains on
disposal of assets were $13,079 in fiscal year ending September 30, 2007 as
compared to losses of $2,162 in the comparable period for prior year
2006.
Loss from
operations was $376,000 in 2007 compared to income of $98,000 in 2006. This is a
direct reflection of the change in operating expenses of which is primarily
attributable to a one time severance accrual for Dr. Anil Jain, in the amount of
$397,000 in 2007. Excluding this one time expense, the operating loss
would have been approximately $21,000.
Interest
income for 2007 declined $47,000 to $168,000 from $215,000 for the comparable
period for 2006. This is attributable primarily to lower interest rates in the
2007 period.
Interest
expense for 2007 declined to $7,000 from $49,000 for 2006. This reflects the
payoff of the Aberdeen loan. In 2007 other expense of $31,000 reflected an
adjustment to the cash surrender value of a life insurance policy on Dr. Anil
Jain. In the comparable period for 2006 income of $21,000 resulted from short
term rental of warehouse space.
Income
taxes of $52,000 for 2007 increased $9,000 from $43,000 for 2006. Income taxes
are predominantly related to timing differences related to
goodwill.
Net loss
from continuing operations, before taxes, was $376,000 in 2007, or $.03, per
diluted share compared to income of $98,000 in 2006, or $.01 per share. Again,
excluding the one-time severance accrual of $397,000, amounting to $.03 per
diluted share, the Company would have recorded income of $21,000, before
taxes.
Discontinued operations amounted to a
loss of $915,000 for 2007 and $610,000 for the comparable period in 2006. The
Company ceased all remaining operations related to the Optronics segment in June
of 2007. Substantially all employees related to the Optronics segment
were terminated prior to June 30, 2007. The loss from discontinued
operations was comprised of the following for 2007:
25
|
•
|
Blaine
land was sold for $325,000 at a gain of
$265,000
|
|
•
|
APA
India was sold at a loss of
$126,566
|
|
•
|
APA
India incurred an operating loss of
$64,780
|
|
•
|
Closure
of Optronics resulted in recognition as a current expense all future lease
payments on the Blaine facility of $418,044. In addition, other Optronics
cost related to discontinuation were the write off of all remaining
inventory at $109,871 the write down of fixed assets of $233,383,
severance costs of $78,109 and general operating expenses of
$149,067.
|
In 2006
the loss from discontinued operations related exclusively to the operations of
the Optronics segment and the consolidated operations of the India
operation.
The Company’s net loss amounted to
$1,290,000 or $.11 per share for 2007. This is in comparison to a loss of
$512,000 or $.04 per share in the comparable period in 2006. This was an
increase of $778,000 over the comparable period.
Liquidity
and Capital Resources
As of
September 30 2008, our principal source of liquidity was our cash and cash
equivalents. Those sources total $4,334,000, compared to $6,130,000 at September
30, 2007 respectively. Our cash is invested in money market
accounts. In 2007 we recognized our auction rate securities as
current assets. We believe we have sufficient funds for operations for at least
the next twelve months.
Operating
Activities
Net cash
generated for the twelve months ended September 30, 2008 totaled $2,024,000.
This was primarily due to our net income of $1,514,000 and depreciation of
$498,000, deferred taxes of $89,000, stock based compensation of $129,000 and an
increase in accounts payable of $687,000. This was offset by non-cash charges
for the lease termination of $362,000 and an increase in inventories and
accounts receivable of $493,000 and $115,000, respectively.
Net cash
consumed by operating activities for the six months ended September 30, 2007
totaled $902,000. This was due primarily to our net loss from operations for the
period of $1,290,000 and an increase in both accounts receivable of $629,000 and
inventory of $266,000. This was offset by non-cash charges for depreciation of
$214,000, a loss on sale of assets $126,000, a severance accrual for Anil Jain
of $360,000 and an accrual for the lease termination of $376,000.
Net cash
consumed by operating activities for the twelve months ended March 31, 2007,
totaled $1,351,000. This was due primarily to the net loss from operations for
the period of $2,147,000 and reducing our accounts payable and accrued expenses
by $361,000 and prepaid expenses by $135,000 and sale of assets $433,433. This
was offset by non cash items; depreciation of $651,000, a goodwill impairment
charge of $852,000 and a reduction in inventory of $347,000. Deferred income
taxes of $243,000 were an application of working capital although
non-cash.
Investing
Activities
For the
twelve months ended September 30, 2008 we purchase $1,904,000 of property plant
and equipment; of that approximately $1,500,000 was for the purchase of the
Blaine building (Note M) which was subsequently sold. During this same period we
made a significant investment in our IT structure and manufacturing equipment
totaling $404,000. The proceeds from the sale of assets amounted to
$1,452,000 of which the Blaine building was the major portion at $1,450,000.
During the same period we purchased $3,675,000 and sold $3,200,000 of available
for sale securities. The net result is a net increase in cash from investing
activities of $927,000. For the year 2009 we do not anticipate
selling any significant fixed assets. The Company will continue to invest in the
necessary and appropriate manufacturing equipment to help maintain a competitive
position in manufacturing capability.
26
For the
six months ended September 30, 2007, we recovered $514,000 from the sale of
assets most of which were associated with discontinued operations. During the
same period we purchased $2,350,000 and sold $4,975,000 of available for sale
securities. This reduced our position in available for sale securities by
$2,625,000. These funds were reinvested in money market accounts. During this
same period we made a significant investment in our IT structure along with
manufacturing equipment totaling $232,000 resulting in a net increase in cash
from investing activities. For the year 2008 we do not anticipate selling any
significant fixed assets. The Company will continue to invest in the necessary
and appropriate manufacturing equipment to help maintain a competitive position
in manufacturing capability.
In the
fiscal year ended March 31, 2007, we netted approximately $2,770,000 in positive
cash flow from investing activities. Investments in property and equipment of
$581,000 including a new enterprise IT system and continued facility
construction in India were offset in-part by $627,000 cash received from the
sales of patents and excess equipment largely in our Optronics division. During
the same period we purchased $17,300,000 and sold $20,025,000 of available for
sale securities. This reduced our position in available for sale securities by
$2,725,000 and these funds were reinvested in money market
accounts.
Financing
Activities
For the
twelve months ended September 30, 2008 we used a net of $68,000 to make
scheduled debt principal payments principally associated with the financing of
our IT systems.
For the
six months ended September 30, 2007 we used a net of $34,000 to make scheduled
debt principal payments.
In the
year ended March 31, 2007 we used a net $873,000 in financing activities that
was applied primarily towards the payment of long-term debt relating to our
facility in Aberdeen, South Dakota.
The
Company believes that its current cash and cash equivalents and cash flow from
operations will be sufficient to meet its working capital and investment
requirements for the next 12 months. However, future growth, including potential
acquisitions, may require the Company to raise capital through additional equity
or debt financing. There can be no assurance that any such financing would be
available on commercially acceptable terms.
As
outlined in Note O to the consolidated financial statements, our available for
sale securities, which consisted of Auction Rate Securities, were purchased by
our broker, Credit Suisse, for par value in October 2008 resulting in proceeds
of $3.3 million which has been invested in cash equivalents providing additional
working capital.
27
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Our
exposure to market risk for changes in interest rates relates primarily to our
cash equivalents. The portfolio includes only marketable securities with active
secondary or resale markets to ensure liquidity. We have no investments
denominated in foreign country currencies and, therefore, our investments are
not subject to foreign exchange risk. See “Cash and Equivalents” under Note A of
the Consolidated Financial Statements.
Quarterly Results of Operations. The
following tables present our unaudited quarterly operating results for the eight
quarters ended September 30, 2008:
|
Quarter
Ended
|
||||||||||||||||
|
December
31,
2006
|
March
31,
2007(1)
|
June
30,
2007
|
September
30,
2007
|
|||||||||||||
|
Statement
of Operations Data
|
||||||||||||||||
|
Net
revenue
|
$ | 4,504,508 | $ | 3,896,057 | $ | 4,907,046 | $ | 5,389,634 | ||||||||
|
Gross
profit
|
1,355,193 | 1,000,145 | 1,450,145 | 1,767,512 | ||||||||||||
|
Net
loss
|
(429,368 | ) | (1,205,491 | ) | (1,409,939 | ) | 119,500 | |||||||||
|
Net
income (loss) loss per share, basic and diluted
|
$ | (0.04 | ) | $ | (0.10 | ) | $ | (0.12 | ) | $ | 0.01 | |||||
|
Quarter
Ended
|
||||||||||||||||
|
December
31,
2007
|
March
31,
2008
|
June
30,
2008
|
September
30,
2008
|
|||||||||||||
|
Statement
of Operations Data
|
||||||||||||||||
|
Net
revenue
|
$ | 4,697,440 | $ | 5,442,493 | $ | 6,165,379 | $ | 7,188,484 | ||||||||
|
Gross
profit
|
1,449,471 | 1,765,564 | 2,107,819 | 2,528,981 | ||||||||||||
|
Net
income (loss)
|
395,368 | 115,338 | 248,894 | 754,660 | ||||||||||||
|
Net
income (loss) per share, basic and diluted
|
$ | 0.03 | $ | 0.01 | $ | 0.02 | $ | 0.06 | ||||||||
|
(1)
|
During
the fourth quarter of fiscal year 2007, the Company recorded a goodwill
impairment charge of $852,000 ($519,717 after
tax).
|
28
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Shareholders
Clearfield,
Inc.
We have
audited the accompanying consolidated balance sheets of Clearfield, Inc. and
subsidiaries as of September 30, 2008 and 2007, and the related
consolidated statements of operations, shareholders’ equity and cash flows for
the year ended September 30, 2008, the six months ended September 30,
2007 and the year ended March 31, 2007. These consolidated
financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Clearfield,
Inc. and subsidiaries as of September 30, 2008 and 2007, and the
consolidated results of its operations and its cash flows for the year ended
September 30, 2008, the six months ended September 30, 2007 and the
year ended March 31, 2007, in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
/s/ Grant
Thornton LLP
Minneapolis,
Minnesota
December
22, 2008
29
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CLEARFIELD,
INC.
CONSOLIDATED
BALANCE SHEETS
|
September
30,
2008
|
September
30,
2007
|
|||||||
|
Assets
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 4,333,709 | $ | 3,304,645 | ||||
|
Available
for sale securities
|
- | 2,825,000 | ||||||
|
Accounts
receivable, net
|
2,533,447 | 2,418,651 | ||||||
|
Inventories
|
2,088,769 | 1,595,282 | ||||||
|
Other
current assets
|
115,344 | 102,473 | ||||||
|
Total current
assets
|
9,071,269 | 10,246,051 | ||||||
|
Property
plant and equipment, net
|
1,604,202 | 1,773,739 | ||||||
|
Other
Assets
|
||||||||
|
Available
for sale securities
|
3,036,000 | - | ||||||
|
Goodwill
|
2,570,511 | 2,570,511 | ||||||
|
Other
|
284,309 | 281,589 | ||||||
|
Notes
receivable
|
432,846 | 469,678 | ||||||
|
Total
other assets
|
6,323,666 | 3,321,778 | ||||||
|
Total
Assets
|
$ | 16,999,137 | $ | 15,341,568 | ||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Current
Liabilities
|
||||||||
|
Current
maturities of long term debt
|
$ | 62,126 | $ | 68,215 | ||||
|
Accounts
payable
|
1,849,633 | 1,176,280 | ||||||
|
Accrued
compensation
|
903,276 | 958,023 | ||||||
|
Accrued
expenses
|
301,859 | 107,209 | ||||||
|
Current
liabilities of discontinued operations
|
- | 205,885 | ||||||
|
Total current
liabilities
|
3,116,894 | 2,515,612 | ||||||
|
Long
term debt, net of current maturities
|
33,081 | 95,207 | ||||||
|
Deferred
rent
|
89,641 | 85,059 | ||||||
|
Deferred
income taxes
|
166,904 | 77,701 | ||||||
|
Other
long term liabilities
|
- | 150,470 | ||||||
|
Long
term obligations of discontinued operations
|
- | 204,832 | ||||||
|
Total
Liabilities
|
3,406,520 | 3,128,881 | ||||||
|
Shareholders’
Equity
|
||||||||
|
Undesignated
shares, 4,999,500 authorized shares: no shares issued and
outstanding
|
- | - | ||||||
|
Preferred
stock, $.01 par value; 500 shares; no shares
outstanding
|
- | - | ||||||
|
Common
stock, authorized 50,000,000, $ .01 par value; 11,938,131 and 11,872,331
shares issued and outstanding at September 30, 2008 and 2007,
respectively
|
119,381 | 118,723 | ||||||
|
Additional
paid-in capital
|
52,166,219 | 52,037,207 | ||||||
|
Accumulated
deficit
|
(38,428,983 | ) | (39,943,243 | ) | ||||
|
Accumulated
other comprehensive loss
|
(264,000 | ) | - | |||||
|
Total
shareholders’ equity
|
13,592,617 | 12,212,687 | ||||||
|
Total
Liabilities and Shareholders’ Equity
|
$ | 16,999,137 | $ | 15,341,568 | ||||
The
accompanying notes are an integral part of these financial
statements.
30
CLEARFIELD,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Year
Ended
September
30,
|
Six
Months
Ended
September
30,
|
Year
Ended
March
31,
|
||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
Revenues
|
$ | 23,493,796 | $ | 10,296,680 | $ | 18,363,836 | ||||||
|
Cost
of sales
|
15,641,961 | 7,079,023 | 13,098,972 | |||||||||
|
Gross
profit
|
7,851,835 | 3,217,657 | 5,264,864 | |||||||||
|
Operating
expenses
|
||||||||||||
|
Selling,
general and administrative
|
6,854,934 | 3,684,694 | 5,838,513 | |||||||||
|
Goodwill
impairment charge
|
- | - | 852,000 | |||||||||
|
Gain
on disposal of assets
|
- | (13,079 | ) | 1,435 | ||||||||
| 6,854,934 | 3,671,615 | 6,691,948 | ||||||||||
|
Income
(loss) from operations
|
996,901 | (453,958 | ) | (1,427,084 | ) | |||||||
|
Interest
income
|
268,063 | 167,881 | 378,977 | |||||||||
|
Interest
expense
|
(10,721 | ) | (7,148 | ) | (49,079 | ) | ||||||
|
Other
income (loss)
|
55,881 | (30,754 | ) | 21,476 | ||||||||
| 313,223 | 129,979 | 351,374 | ||||||||||
|
Income
(loss) before income taxes
|
1,310,124 | (323,979 | ) | (1,075,710 | ) | |||||||
|
Income
tax expense (benefit)
|
93,303 | 51,640 | (237,493 | ) | ||||||||
|
Net
income (loss) from continuing operations
|
1,216,821 | (375,619 | ) | (838,217 | ) | |||||||
|
Net
income (loss) from discontinued operations
|
297,439 | (1,071,010 | ) | (1,743,961 | ) | |||||||
|
Net
gain on disposal of assets of discontinued operations
|
- | 156,190 | 434,868 | |||||||||
|
Total
income (loss) from discontinued operations
|
297,439 | (914,820 | ) | (1,309,093 | ) | |||||||
|
Net
income (loss)
|
$ | 1,514,260 | $ | (1,290,439 | ) | $ | (2,147,310 | ) | ||||
|
Net
income (loss) per share:
|
||||||||||||
|
Continuing
operations
|
$ | 0.10 | $ | (0.03 | ) | $ | (0.07 | ) | ||||
|
Discontinued
operations
|
$ | 0.03 | $ | (0.08 | ) | $ | (0.11 | ) | ||||
|
Basic
and diluted
|
$ | 0.13 | $ | (0.11 | ) | $ | (0.18 | ) | ||||
|
Weighted
average shares outstanding:
|
||||||||||||
|
Basic
and diluted
|
11,873,773 | 11,872,331 | 11,872,331 | |||||||||
The
accompanying notes are an integral part of these financial
statements.
31
CLEARFIELD,
INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
Additional
paid-in
|
Accumulated
|
Accumulated
other
comprehensive
|
Total
shareholders
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
deficit
|
loss
|
equity
|
|||||||||||||||||||
|
Balance
at March 31, 2006
|
11,872,331 | 118,723 | $ | 51,968,366 | $ | (36,505,494 | ) | $ | (2,153 | ) | $ | 15,579,442 | ||||||||||||
|
Stock
based compensation expense
|
- | - | 50,363 | - | - | 50,363 | ||||||||||||||||||
|
Foreign
currency translation
|
- | - | - | - | (6,011 | ) | (6,011 | ) | ||||||||||||||||
|
Net
(loss)
|
- | - | - | (2,147,310 | ) | - | (2,147,310 | ) | ||||||||||||||||
|
Comprehensive
loss
|
- | - | - | - | - | (2,153,321 | ) | |||||||||||||||||
|
Balance
at March 31, 2007
|
11,872,331 | 118,723 | 52,018,729 | (38,652,804 | ) | (8,164 | ) | 13,476,484 | ||||||||||||||||
|
Stock
based compensation expense
|
- | - | 18,478 | - | - | 18,478 | ||||||||||||||||||
|
Foreign
currency translation
|
- | - | - | - | 8,164 | 8,164 | ||||||||||||||||||
|
Net
(loss)
|
- | - | - | (1,290,439 | ) | - | (1,290,439 | ) | ||||||||||||||||
|
Comprehensive
loss
|
- | - | - | - | - | (1,282,278 | ) | |||||||||||||||||
|
Balance
at September 30, 2007
|
11,872,331 | 118,723 | 52,037,207 | (39,943,243 | ) | - | 12,212,687 | |||||||||||||||||
|
Stock
based compensation expense
|
- | - | 50,052 | - | - | 50,052 | ||||||||||||||||||
|
Stock
issued as compensation
|
65,800 | 658 | 78,060 | - | - | 79,618 | ||||||||||||||||||
|
Other
comprehensive loss
|
- | - | - | - | (264,000 | ) | (264,000 | ) | ||||||||||||||||
|
Net
income
|
- | - | - | - | 1,514,260 | |||||||||||||||||||
|
Comprehensive
income
|
- | - | - | 1,514,260 | - | 1,250,260 | ||||||||||||||||||
|
Balance
at September 30, 2008
|
11,938,131 | 119,381 | $ | 52,166,219 | $ | (38,428,983 | ) | $ | (264,000 | ) | $ | 13,592,617 | ||||||||||||
The
accompanying notes are an integral part of these financial
statements.
32
CLEARFIELD,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
ended
September
30,
|
Six
months
ended
September
30,
|
Year
ended
March
31,
|
||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | 1,514,260 | $ | (1,290,439 | ) | $ | (2,147,310 | ) | ||||
|
Adjustments to reconcile net
income (loss) to cash provided by (used in) operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
498,418 | 213,697 | 651,399 | |||||||||
|
Deferred
income taxes
|
89,203 | 48,540 | (243,293 | ) | ||||||||
|
(Gain)
loss on sale of assets
|
55,251 | 126,408 | (433,433 | ) | ||||||||
|
Stock-based
compensation expense
|
129,012 | 18,478 | 50,363 | |||||||||
|
Goodwill
impairment charge
|
- | - | 852,000 | |||||||||
|
Severance
accrual
|
- | 360,826 | - | |||||||||
|
Lease
termination accrual
|
(362,028 | ) | 376,032 | - | ||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable, net
|
(114,796 | ) | (628,536 | ) | 69,423 | |||||||
|
Inventories
|
(493,487 | ) | (265,910 | ) | 346,553 | |||||||
|
Prepaid
expenses and other assets
|
21,241 | 104,548 | (135,206 | ) | ||||||||
|
Accounts
payable and accrued expenses
|
686,595 | 34,000 | (361,400 | ) | ||||||||
|
Net
cash provided by (used in) operating activities
|
2,023,669 | (902,356 | ) | (1,350,904 | ) | |||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of property and equipment
|
(1,903,672 | ) | (232,322 | ) | (581,446 | ) | ||||||
|
Purchase
of available for sale securities
|
(3,675,000 | ) | (2,350,000 | ) | (17,300,000 | ) | ||||||
|
Sale
of available for sale securities
|
3,200,000 | 4,975,000 | 20,025,000 | |||||||||
|
Proceeds
from sale of assets
|
1,451,624 | 513,805 | 626,807 | |||||||||
|
Net
cash provided by investing activities
|
(927,048 | ) | 2,906,483 | 2,770,361 | ||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Payment
of long-term debt
|
(68,215 | ) | (34,177 | ) | (872,854 | ) | ||||||
|
Proceeds
from Issuance of common stock
|
658 | - | - | |||||||||
|
Net
cash used in financing activities
|
(67,557 | ) | (34,177 | ) | (872,854 | ) | ||||||
|
Foreign
currency translation
|
- | 21,326 | (6,011 | ) | ||||||||
|
Increase
in cash balances of discontinued operations
|
- | 47,193 | 57,240 | |||||||||
|
Increase
in cash and cash equivalents
|
1,029,064 | 2,038,469 | 597,832 | |||||||||
|
Cash
and cash equivalents at beginning of year
|
3,304,645 | 1,266,176 | 668,344 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 4,333,709 | $ | 3,304,645 | $ | 1,266,176 | ||||||
|
Supplemental
cash flow information:
|
||||||||||||
| Cash paid during the year for: | ||||||||||||
|
Interest
|
$ | 10,721 | $ | 7,148 | $ | 41,841 | ||||||
|
Income
Taxes
|
4,100 | 3,120 | 5,800 | |||||||||
|
Noncash
investing and financing:
|
||||||||||||
|
Withdrawal
of bond reserve funds, net
|
- | - | 469,626 | |||||||||
|
Note
receivable for sale of India operations
|
- | 502,213 | - | |||||||||
|
Capital
expenditures included in accounts payable
|
- | 132,380 | - | |||||||||
|
Debt
incurred for purchase of equipment
|
- | - | 179,118 | |||||||||
The
accompanying notes are an integral part of these financial
statements.
33
Clearfield,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Year
ended September 30, 2008, six months ended September 30, 2007 and year
ended March 31, 2007
NOTE
A – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of
Business
Clearfield,
Inc., formerly APA Enterprises, Inc., (the Company) is a manufacturer of a broad
range of standard and custom passive connectivity products to customers
throughout the United States with a concentration in Minnesota. These
products include fiber distribution systems, optical components, Outside Plant
(“OSP”) cabinets, and fiber and copper cable assemblies that serve the
communication service provider, including Fiber-to-the-Home (“FTTH”), large enterprise, and
original equipment manufacturers (“OEMs”) markets.
Principles of
Consolidation
The
consolidated financial statements include the accounts of Clearfield, Inc. and
its wholly-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation. Effective
January 2, 2008 the Company merged its sole subsidiary APA Cables and Networks,
Inc. into the Company (the “Parent – Subsidiary Merger”) and changed the name of
the Company from APA Enterprises, Inc. to Clearfield, Inc. Since the Parent –
Subsidiary Merger on January 2, 2008, the Company has no subsidiaries. For
periods prior to January 2, 2008 the consolidated financial statements represent
all companies of which Clearfield, Inc. directly or indirectly had majority
ownership or otherwise controlled.
Foreign Currency
Translation
The
Company used the United States dollar as its functional
currency. There were no significant foreign exchange translation
gains or losses during periods ended September 30, 2008, September 30, 2007 and
March 31, 2007.
Revenue
Recognition
Revenue is
recognized when persuasive evidence of an arrangement exists, the product has
been delivered, the fee is fixed, acceptance by the customer is reasonably
certain and collection is probable. This generally occurs upon
shipment of product to the customer. The Company records freight revenues billed
to customers as revenue and the related cost in cost of revenues. Taxes
collected from customers and remitted to governmental authorities are presented
on a net basis.
Cash and Cash
Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents at
September 30, 2008 and 2007 respectively consist entirely of short-term
money market accounts. Cash equivalents are stated at cost, which
approximates fair value.
The
Company maintains cash balances at several financial institutions, and at times,
such balances exceed insured limits. The Company has not experienced
any losses in such accounts and believes it is not exposed to any significant
credit risk on cash. No cash was in foreign financial institutions as of
September 30, 2008.
34
NOTE
A – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES – Continued
Available for Sale
Securities
Available-for-Sale
Securities consist of Auction Rate Securities (“ARS”) with underling investments
in AAA rated securities with varying maturities and interest rates are reset for
periods not exceeding 30 days. The Company has experienced an
unrealized loss of value of its securities but believes it is not exposed to
significant credit risk on its investments. Unrealized gains and losses are
reflected as other comprehensive income. See Note O.
Accounts
Receivable
Credit is
extended based on the evaluation of a customer’s financial condition and,
generally, collateral is not required. Accounts outstanding longer
than the contractual payment terms are considered past due. The
Company determines its allowance by considering a number of factors, including
the length of time trade receivables are past due, the Company’s previous loss
history, the customer’s current ability to pay its obligation to the Company,
and the condition of the general economy and the industry as
whole. The Company writes off accounts receivable when they become
uncollectible; payments subsequently received on such receivables are credited
to the allowance for doubtful accounts. The allowance for
uncollectible accounts was $69,381 and $78,973 at September 30, 2008 and 2007,
respectively.
Inventories
Inventories
consist of finished goods, raw materials and work in process and are stated at
the lower of average cost (which approximates the first-in, first-out method) or
market. Cost is determined using material costs, labor charges, and
allocated factory overhead charges.
Property, Plant and
Equipment
Property,
plant and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided on the
straight-line method for book and tax purposes over the following estimated
useful lives of the assets:
|
Years
|
|||
|
Building
|
20
|
||
|
Equipment
|
3 –
7
|
||
|
Leasehold
improvements
|
7 –
10 or life of lease
|
Goodwill
The
Company records the excess of purchase cost over the fair value of net tangible
assets of acquired companies as goodwill or other identifiable intangible assets
and tests for impairment annually and under certain
circumstances. The Company performs such testing of goodwill and
other indefinite-lived intangible assets in the fourth quarter of each year or
as events occur or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying amount. The
Company compares the fair value of the reporting units to the carrying value of
the reporting units for goodwill impairment testing. Fair value is
determined using a discounted cash flow method.
The
Company completed its annual impairment testing of goodwill in the final quarter
of the periods ended March 31, 2007, September 30, 2007 and 2008
respectively. This testing indicated that goodwill recorded as of
March 31, 2007 for the APACN subsidiary was impaired, principally due to
weakness in operating results of this subsidiary. The Company
recognized the related non-cash, pre-tax impairment charge of
$852,000 ($519,717 after tax) for the year ended March 31, 2007. For the year
ended September 30, 2008 and for the six months ended September 30, 2007 no
impairment was recorded.
35
NOTE
A – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES – Continued
Stock-Based
Compensation
The
Company has various incentive and non-qualified stock option plans which are
used as an incentive for directors, officers, and other employees, as described
more fully in Note N. Effective April 1, 2006, the Company adopted
FASB Statement No. 123(R), “Share-Based Payment, ” (SFAS 123(R)) which requires
an entity to reflect an expense, instead of pro forma disclosures in its
financial footnotes, the cost of employee services received in exchange for an
award of equity instruments based on the grant date fair value of the award.
Statement 123(R) supersedes the Company’s previous accounting under Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The
Company adopted SFAS 123(R) using the modified prospective transition method,
which provides that the Company’s consolidated financial statements for prior
periods have not been restated to reflect, and do not include, the impact of
SFAS 123(R).
SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods using the straight-line attribution
model. The Company recorded $50,052 of related compensation expense for the year
ended September 30, 2008 and $18,478 of related compensation expense for the six
months ended September 30, 2007 and $50,363 for the year ended March 31,
2007. Stock-based compensation expense is included in selling,
general and administrative expense. There was no tax benefit from
recording this non-cash expense. The impact of this compensation
expense on both basic and diluted loss per share was less than $0.01 for the
year ended September 30, 2008. As of September 30, 2008, $86,630 of
total unrecognized compensation expense related to non-vested awards is expected
to be recognized over a weighted average period of approximately 3.46
years.
The total
fair value of options vested during the year ended September 30, 2008, and the
six months ended September 30, 2007 and March 31, 2007 are $48,394, $13,998 and
$64,545 respectively. The Company uses the Black-Scholes-Merton
(“Black-Scholes”) option-pricing model as a method for determining the estimated
fair value for employee stock awards.
The
Company estimates the fair value of stock option awards based on the following
assumptions for the periods ended:
|
September 30,
2008
|
September 30,
2007
|
March 31,
2007
|
|
|
Expected
volatility
|
52%
|
51%
|
64%
|
|
Expected
life (in years)
|
5
years
|
5
years
|
5
years
|
|
Expected
dividends
|
0%
|
0%
|
0%
|
|
Risk-free
interest rate
|
2.98%
|
4.42%
|
4.78%
|
36
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
The
weighted average fair value of options granted during for the year ended
September 30, 2008 and the six months ended September 30, 2007, and for the year
ended March 31, 2007 are $0.45, $ 0.59 and $0.77. The Company’s approach to
estimating expected volatility on its stock awards granted during the year
considers both the historical volatility in the trading market for its common
stock and a look back period equal to the expected life of the
grants. Expected volatility is one of several assumptions in the
Black-Scholes model used by the Company to make an estimate of the fair value of
options granted under the Company’s stock plans. The Company uses a forfeiture
rate of 10%. In estimating the expected term, both exercise behavior and
post-vesting termination behavior were included in the analysis, as well as
consideration of outstanding options. The risk-free interest rate
used in the Black-Scholes option valuation model is the historical yield on U.S.
Treasury zero-coupon issues with equivalent remaining terms. The Company does
not pay any cash dividends on the Company’s common stock and does not anticipate
paying any cash dividends in the foreseeable future. Consequently, an
expected dividend yield of zero is used in the Black-Scholes option valuation
model.
In
September 2008, 65,800 shares of stock, with a market price of $1.21 per share,
were issued to employees of the Company under the Company’s 2007 Stock
Compensation Plan. This award to employees was part of the annual
incentive program, totaled $79,618 and was recorded in SG & A expense. The
awards were issued with out restriction. Recipients of the award included,
sales, professional staff and Company management.
Fair Value of Financial
Instruments
Due to their short-term nature, the
carrying value of current financial assets and liabilities approximates their
fair values. The fair value of long-term obligations, if recalculated
based on current interest rates, would not significantly differ from the
recorded amounts.
Net Income (Loss) Per
Share
Basic and
diluted net incomes (loss) per share are computed by dividing net income (loss)
by the weighted average number of common shares outstanding.
Common
stock options and warrants to purchase 386,700, 586,830 and 583,150 shares of
common stock with a weighted average exercise price of $1.37, $2.48 and $2.56
were outstanding during the year ended September 30, 2008, the six months ended
September 30, 2007 and the year ended March 31, 2007 respectively, but were
excluded from the calculation of net income (loss) per share because they were
antidillutive.
Use of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, related revenues and expenses and disclosure about
contingent assets and liabilities at the date of the financial
statements. Actual results may differ from those estimates used by
management.
Impairment of Long-Lived
Assets
The
Company evaluates the recoverability of its long-lived assets, including
goodwill, and requires recognition of impairment of long-lived assets if events
or circumstances indicate impairment may have occurred and when the net book
value of such assets exceeds the future undiscounted cash flows attributed to
such assets. The Company assesses the impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. No impairment of long-lived assets has occurred
during any of the periods presented.
37
NOTE
A – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES – Continued
Income
Taxes
The
Company records income taxes in accordance with the liability method of
accounting. Deferred taxes are recognized for the estimated taxes
ultimately payable or recoverable based on enacted tax law. The
Company establishes a valuation allowance to reduce the deferred tax asset to an
amount that is more likely than not to be realizable. Changes in tax
rates are reflected in the tax provision as they occur.
Recently Issued Accounting
Standards
In May
2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
162, The Hierarchy of
Generally Accepted Accounting Principles. SFAS No. 162 identifies the
sources of accounting principles and provides entities with a framework for
selecting the principles used in preparation of financial statements that are
presented in conformity with GAAP. The current GAAP hierarchy has been
criticized because it is directed to the auditor rather than the entity, it is
complex, and it ranks FASB Statements of Financial Accounting Concepts, which
are subject to the same level of due process as FASB Statements of Financial
Accounting Standards, below industry practices that are widely recognized as
generally accepted but that are not subject to due process. The Board believes
the GAAP hierarchy should be directed to entities because it is the entity (not
its auditors) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP. The adoption of
FASB 162 is not expected to have a material impact on the Company's financial
position.
On
February 15, 2007, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities — Including an Amendment of FASB No. 115. This
standard permits an entity to choose to measure many financial instruments and
certain other items at fair value. The fair value option established by SFAS
No. 159 permits all entities to choose to measure eligible items at fair
value at specified election dates. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. The Company is currently
evaluating the impact this pronouncement will have on its consolidated financial
position or results of operations.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurement but does not require
any new fair value measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. However on February 12, 2008, the
FASB issued proposed FSP FAS 157-2 which delayed the effective date of SFAS 157
for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). This FSP partially defers the effective date of SFAS
157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of this FSP. We
will adopt SFAS 157, except as it applies to those nonfinancial assets and
nonfinancial liabilities as noted in proposed FSP FAS 157-2, on October 1, 2008
and do not believe the impact this pronouncement will be material to
our consolidated financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115, or SFAS No. 159.” SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value at specified election dates. SFAS No. 159 applies to all
entities, including not-for-profit organizations. The provisions of SFAS
No. 159 are effective for fiscal years beginning after November 15,
2007. The Company is currently evaluating the impact of SFAS No. 159 on our
financial statements.
38
NOTE
B – TRANSITIONAL REPORTING RESULTS OF OPERATIONS
In June 2007, the Company elected to
change the fiscal year end
from March 31 to September 30. In view of this change, the following presents the condensed
consolidated statements of operations for the six months ended September 30,
2007 (the transition period) with the unaudited six months ended September
30, 2006. The September 30, 2007 condensed format was derived from the
audited consolidated statement of operations from the transition statement of
the same period.
Condensed
Statement of Operations:
|
Six
months ended September 30,
|
||||||||
|
(Unaudited)
|
||||||||
|
2007
|
2006
|
|||||||
|
Revenues
|
$ | 10,296,680 | $ | 9,963,271 | ||||
|
Gross
Profit
|
3,217,657 | 2,909,526 | ||||||
|
SG&A
|
3,671,615 | 2,956,525 | ||||||
|
Income
(loss) from operations
|
(453,958 | ) | (46,999 | ) | ||||
|
Net
income (loss) before taxes
|
(323,979 | ) | 140,812 | |||||
|
Income
taxes
|
51,640 | 43,250 | ||||||
|
Net
income (loss) from continuing operations
|
(375,619 | ) | 97,562 | |||||
|
Net
loss from discontinued operations
|
(914,820 | ) | (610,013 | ) | ||||
|
Net
loss
|
$ | (1,290,439 | ) | $ | (512,451 | ) | ||
|
Net
income (loss) per share (basic and diluted):
|
||||||||
|
Continuing
operations
|
$ | (0.03 | ) | $ | 0.01 | |||
|
Discontinued
operations
|
(0.08 | ) | (0.05 | ) | ||||
|
Total
|
$ | (0.11 | ) | $ | (0.04 | ) | ||
NOTE
C – DISCONTINUED OPERATIONS
The
Optronics business segment (GaN products) continued to experience lower than
expected demand for its products and services during the year ended March 31,
2007 and continued to record operating losses. This caused management
to critically evaluate the long term viability of the business and after careful
deliberation elected to cease operations and discontinue the business in June of
2007. As a result of the discontinuation of GaN products and the logistics and
time constraints for the Company’s (APACN’) fiber patch cords, India was no
longer a viable sourcing option and actions were taken to control ongoing costs
and recover the investment in the Company’s India subsidiary. In
addition, the Company elected to close its Blaine facility because it was
primarily dedicated to the Optronics segment.
Sale of India
Operations
On June
28, 2007, the Company sold APA Optronics (India) Private Limited ("APA India")
to an entity owned by the former chief executive officer of the Company, Dr.
Anil K. Jain. The purchase price of $504,499 was paid by
delivery of a five year promissory note. The terms of the note
include monthly installment payments of principal and interest with an annual
rate of 7% amortized over a ten year period with a balloon payment due November
2012 when the outstanding balance is due. The note is secured by a pledge of
Company stock by Dr. Jain, a pledge by Dr. Jain of payments under his Separation
Agreement with the Company, and a personal guaranty by Dr. Jain. The purchase
price was determined by the independent directors to be fair and reasonable to
the Company. The current portion of the note receivable is presented
within “prepaid expenses and other” and the long term portion is reflected as
note receivable on the balance sheet. The Company recorded a loss of
approximately $127,000 on the sale that is presented in discontinued operations
in the consolidated statements of operations.
39
NOTE
C – DISCONTINUED OPERATIONS -Continued
Discontinuance of Optronics
Segment
The
Company ceased all remaining operations related to the Optronics segment in June
of 2007. Substantially all employees related to the Optronics segment
were terminated prior to June 30, 2007. The Company recorded expense
of $78,109 for one time termination benefits. The decision to close
its facility in Blaine, Minnesota, that was fully dedicated to the Optronics
segment, occurred in June of 2007. The Company recorded a charge of
$418,044 for remaining contract obligations costs (“lease termination costs”)
through November of 2009 as the facility will not provide any economic benefit
to the Company in the future. A portion of the contract obligation, $171,000 as
of September 30, 2007, is reflected as a current liability of discontinued
operations and the balance $204,000, is included in long term liabilities of
discontinued operations (see also Note M). The Company recorded asset impairment
charges of $367,928 related to the write-off of inventory and write-down of
fixed assets to their realizable value. The assets remaining that
will not be retained will be sold or disposed of.
Operating
results related to the discontinuance of the Optronics segment, including APA
India, for the six months ended September 30, 2007 and 2006 and for the years
ended March 31, 2007 and 2006, which have been reclassified and presented in our
consolidated statements of income as discontinued operations, are summarized
below:
|
Six
Months Ended September 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Net
Sales
|
$ | 28,324 | $ | 83,919 | ||||
|
Cost
of goods sold
|
231,420 | 303,881 | ||||||
|
Gross
profit
|
(203,096 | ) | (219,962 | ) | ||||
|
Operating
expenses
|
711,724 | 390,051 | ||||||
|
Loss
from discontinued operations
|
$ | (914,820 | ) | $ | (610,013 | ) | ||
|
Years
Ended March 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Net
Sales
|
$ | 196,342 | $ | 76,8949 | ||||
|
Cost
of goods sold
|
648,471 | 1,073,145 | ||||||
|
Gross
profit
|
(452,129 | ) | (996,251 | ) | ||||
|
Operating
expenses
|
856,964 | 1,172,739 | ||||||
|
Loss
from discontinued operations
|
$ | (1,309,093 | ) | $ | (2,168,990 | ) | ||
The net
income from discontinued operations for the year ended September 30, 2008
relates to 1) the reversal of a portion of the lease termination accrual of
$393,000 and 2) operating expenses of approximately $96,000.
NOTE
D – SEVERANCE AGREEMENT
Effective
June 28, 2007 Anil K. Jain ceased to be Chief Executive Officer (principal
executive officer), Chief Financial Officer (principal financial and accounting
officer), and Chairman of the Board of Directors of the Company.
Pursuant
to the terms of an Amended and Restated Agreement Regarding
Employment/Compensation Upon Change In Control dated September 15, 2005, Dr.
Jain will be paid his current salary ($190,000 per year) for 24 months after the
date of termination of his employment, payable quarterly. As a
result, the Company has recorded a severance charge of $397,000 in the statement
of operations for the six months ended September 30, 2007, the short
term portion of the liability is include in accrued compensation and the
40
NOTE
D – SEVERANCE AGREEMENT - Continued
long term
portion of the liability is included in other long term liabilities. This
severance provision applies notwithstanding the absence of a "change of
control”. As of September 30, 2008 the balance due is $150,470 and is included
in the accrued compensation as it is all short term.
NOTE
E – INVENTORIES
Inventories
consist of the following at
|
September
30,
|
September
30,
|
|||||||
|
2008
|
2007
|
|||||||
|
Raw
materials
|
$ | 1,815,777 | $ | 1,422,374 | ||||
|
Work-in-process
|
14,483 | 50,468 | ||||||
|
Finished
Goods
|
258,511 | 122,440 | ||||||
| $ | 2,088,769 | $ | 1,595,282 | |||||
NOTE
F – PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consist of the following at:
|
September
30,
|
September
30,
|
|||||||
|
2008
|
2007
|
|||||||
|
Land
|
$ | 56,195 | $ | 56,195 | ||||
|
Buildings
|
1,679,424 | 1,679,424 | ||||||
|
Manufacturing
Equipment
|
685,425 | 602,432 | ||||||
|
Office
Equipment
|
1,405,147 | 1,163,221 | ||||||
|
Leasehold
Improvements
|
187,986 | 184,015 | ||||||
| 4,014,117 | 3,685,287 | |||||||
|
Less
accumulated depreciation and amortization
|
2,409,966 | 1,911,548 | ||||||
| $ | 1,604,202 | $ | 1,773,739 | |||||
NOTE
G – LONG-TERM DEBT
The
following is a summary of the outstanding debt, which consists of a capital
lease, at:
|
September
30,
|
September
30,
|
|||||||
|
2008
|
2007
|
|||||||
|
Long
term debt
|
$ | 95,207 | $ | 163,422 | ||||
|
Less:
current maturities
|
62,126 | 68,215 | ||||||
| $ | 33,081 | $ | 95,207 | |||||
Scheduled
maturities of the Company’s long-term debt are as follows:
|
Years ending September
30,
|
||||
|
2009
|
$ | 62,126 | ||
|
2010
|
33,081 | |||
| $ | 95,207 | |||
41
NOTE
H – EMPLOYEE BENEFIT PLAN
The Company maintains a contributory
401(k) profit sharing benefit plan covering all employees. The
Company matches 50% of the first 6% of the employee’s salary that was
contributed by the employee to the plan. The Company’s contributions
under this plan were $114,379, $72,765 and $127,000 for the periods ended
September 30, 2008 and September 30, 2007, and March 31, 2007,
respectively.
NOTE
I – INCOME TAXES
Deferred
taxes recognize the impact of temporary differences between the amounts of the
assets and liabilities recorded for financial statement purposes and such amount
measured in accordance with tax laws. Realization of net operating
loss carry forward and other deferred tax temporary differences are contingent
upon future taxable earnings. The Company’s deferred tax asset was
reviewed for expected utilization using a “more likely than not” approach as
required by SFAS 109 by assessing the available positive and negative factors
surrounding its recoverability. Accordingly, the Company has recorded
a full valuation allowance at September 30, 2008 and 2007,
respectively.
Significant
components of deferred income tax assets and liabilities are as follows
at:
|
September
30
|
September
30
|
|||||||
|
2008
|
2007
|
|||||||
|
Current
deferred income tax assets:
|
||||||||
|
Inventories
|
$ | 178,710 | $ | 129,463 | ||||
|
Accrued
expenses
|
239,956 | 478,294 | ||||||
| 418,666 | 607,757 | |||||||
|
Long-term
deferred income tax assets:
|
||||||||
|
Intangibles
|
29,607 | 31,550 | ||||||
|
Net
operating loss carry forwards and credits
|
12,762,440 | 13,337,200 | ||||||
| 12,792,047 | 13,368,750 | |||||||
|
Total
deferred income tax assets
|
13,210,713 | 13,976,507 | ||||||
|
Long-term
deferred income tax liabilities:
|
||||||||
|
Property
and equipment depreciation
|
65,925 | 20,022 | ||||||
|
Goodwill
|
166,890 | 77,701 | ||||||
| 232,815 | 97,723 | |||||||
|
Total
net deferred income taxes
|
12,977,898 | 13,878,784 | ||||||
|
Valuation
allowance
|
(13,144,802 | ) | (13,956,485 | ) | ||||
|
Total
|
$ | (166,904 | ) | $ | (77,701 | ) | ||
42
NOTE
I – INCOME TAXES - Continued
As of
September 30, 2007, the Company has net operating loss carry forwards for
federal and state income tax purposes of approximately $32,710,000 which expire
in fiscal years 2009 to 2027. To date the Company has not completed a Section
382 analysis. If certain ownership changes occurred under Section
382, there may be further limitations on the usage of the net operating loss
carry forwards.
The
following is a reconciliation of the federal statutory income tax rate to the
consolidated effective tax rate for the following periods ended:
|
Percent
of Pre-tax Income
|
||||||||||||
|
September
30,
|
September
30,
|
March
31,
|
||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
Federal
statutory rate
|
34 | % | (34 | %) | (34 | %) | ||||||
|
State
income taxes
|
5 | % | (5 | %) | (5 | %) | ||||||
|
Permanent
differences
|
2 | % | 3 | % | 9 | % | ||||||
|
Expiration
of net operating loss carryforwards
|
16 | % | 35 | % | - | % | ||||||
|
Other
|
- | % | - | % | 1 | % | ||||||
|
Change
in valuation allowance
|
(51 | %) | 5 | % | 21 | % | ||||||
|
Tax
rate
|
6 | % | 4 | % | (10 | %) | ||||||
Components
of the income tax expense (benefit) are as follows for the periods
ended:
|
September
30,
|
September
30,
|
March
31,
|
||||||||||
|
2008
|
2007
|
2007
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | - | $ | - | $ | - | ||||||
|
State
|
4,318 | 3,100 | 5,800 | |||||||||
| 4,318 | 3,100 | 5,800 | ||||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
785,260 | 94,741 | 228,973 | |||||||||
|
State
|
115,470 | 13,932 | 33,673 | |||||||||
| 900,667 | 108,673 | 262,646 | ||||||||||
|
Valuation
allowance
|
(811,682 | ) | (60,133 | ) | (505,939 | ) | ||||||
|
Income
tax expense (benefit)
|
$ | 93,303 | $ | 51,640 | $ | (237,493 | ) | |||||
The
Company adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), on April 1, 2007. Previously, the Company had accounted
for tax contingencies in accordance with Statement of Financial Accounting
Standards 5, Accounting for
Contingencies. As required by FIN 48, which clarifies Statement 109,
Accounting for Income
Taxes, the Company recognizes the financial statement benefit of a tax
position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions
meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit that has a greater
than 50 percent likelihood of being realized upon ultimate settlement with the
relevant tax authority. At the adoption date, the Company applied FIN 48 to all
tax positions for which the statute of limitations remained open. Both prior and
subsequent to the adoption of FIN 48, the Company had no liability for
unrecognized tax benefits.
43
NOTE
I – INCOME TAXES – Continued
The
Company is subject to income taxes in the U.S. federal jurisdiction, and various
states and foreign jurisdictions. Tax regulations within each jurisdiction are
subject to the interpretation of the related tax laws and regulations and
require significant judgment to apply. With few exceptions, the Company is no
longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations by tax authorities for the years before 1993.
The
Company recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expenses for all periods presented.
The Company did not recognize any interest or penalties during the periods ended
September 30, 2008, September 30, 2007 and March 31, 2007.
NOTE
J – SHAREHOLDERS’ EQUITY
The Board of Directors may, by
resolution, establish from the undesignated shares different classes or series
of shares and may fix the relative rights and preferences of shares in any class
or series. The Company is authorized to issue 500 shares of preferred stock and
50,000,000 shares of common stock at $.01 par value. The Company has not issued
any shares of preferred stock.
NOTE
K – SHAREHOLDER RIGHTS PLAN
Pursuant to the Shareholder Rights
Plan each share of common stock has attached to it a right, and each share of
common stock issued in the future will have a right attached until the rights
expire or are redeemed. Upon the occurrence of certain change in
control events, each right entitles the holder to purchase one one-hundredth of
a share of Series B Junior Preferred Participating Share, at an exercise price
of $80 per share, subject to adjustment. The rights expire on
November 10, 2010 and may be redeemed by the Company at a price of $.001
per right prior to the time they become exercisable.
NOTE
L – STOCK OPTIONS AND WARRANTS
Stock
Options
The
Company has various incentive and non-qualified stock option plans which are
used as an incentive for directors, officers, and other
employees. Options are generally granted at fair market values
determined on the date of grant and vesting normally occurs over a five-year
period. The maximum contractual term is normally six years. However,
options granted to directors have a one year vesting period and a six
year contractual term. The Company issues new shares upon exercise of a stock
option. The plans had 1,232,500 shares of common stock available for issue at
September 30, 2008.
Option
transactions under these plans during the year ended September 30, 2008 the
transition period ended September 30, 2007 and the year ended March 31,
2007 are summarized as follows:
|
Number of
shares
|
Weighted
average
exercise price
|
Weighted
average
fair
value
|
||||||||||
|
Outstanding
at March 31, 2006
|
276,470
|
2.80 |
|
|||||||||
|
Granted
|
40,000 | 1.13 | $ | 0.77 | ||||||||
|
Cancelled
|
(83,320 | ) | 4.60 | |||||||||
|
Outstanding
at March 31, 2007
|
233,150 | 1.90 | ||||||||||
|
Granted
|
20,000 | 1.13 | $ | 0.59 | ||||||||
|
Cancelled
|
(16,320 | ) | 3.50 | |||||||||
|
Outstanding
at September 30, 2007
|
236,830 | 1.72 | ||||||||||
|
Granted
|
228,700 | 1.13 | $ | 0.45 | ||||||||
|
Cancelled
or Forfeited
|
(78,830 | ) | .97 | |||||||||
|
Outstanding
at September 30, 2008
|
386,700 | 1.37 | ||||||||||
44
NOTE
L – STOCK OPTIONS AND
WARRANTS – Continued
The number
of shares exercisable at September 30, 2008, September 30, 2007 and
March 31, 2007 was 122,240, 111,530 and 99,950 respectively, at a weighted
average exercise price of $1.81, $1.88 and $2.30 per share,
respectively.
The
following table summarizes information concerning currently outstanding and
exercisable stock options at September 30, 2008:
|
Options
outstanding
|
|||||||||||||||
|
Range
of
exercise
prices
|
Number
outstanding
|
Weighted
average
remaining
contractual
life
|
Weighted
average
exercise
price
|
Aggregate
intrinsic
value
|
|||||||||||
| $ | 0.00-$1.09 | 229,700 |
5.13
years
|
$ | 1.08 | $ | 247,249 | ||||||||
| 1.10-1.49 | 82,000 |
3.29
years
|
1.32 | 108,552 | |||||||||||
| 1.50-1.99 | 25,000 |
1.69
years
|
1.59 | 39,800 | |||||||||||
| 2.00-5.00 | 50,000 |
1.03
years
|
2.66 | 132,900 | |||||||||||
| 386,700 |
3.88
years
|
$ | 1.37 | $ | 528,501 | ||||||||||
|
Options
exercisable
|
|||||||||||||||
|
Range
of
exercise
prices
|
Number
outstanding
|
Weighted
average
remaining
contractual
life
|
Weighted
average
exercise
price
|
Aggregate
intrinsic
value
|
|||||||||||
| $ | 0.00-$1.09 | 10,000 |
4.90
years
|
$ | 1.03 | $ | 10,300 | ||||||||
| 1.10-1.49 | 48,840 |
3.16
years
|
1.34 | 65,509 | |||||||||||
| 1.50-1.99 | 22,400 |
1.58
years
|
1.59 | 35,692 | |||||||||||
| 2.00-5.00 | 41,000 |
1.01
years
|
2.68 | 109,950 | |||||||||||
| 122,240 |
2.29
years
|
$ | 1.81 | $ | 221,451 | ||||||||||
Stock
Warrants
The
following is a table of the warrants to purchase shares of the Company’s common
stock:
|
Warrants
outstanding
|
Exercise
price
per
share
|
Expiration
date
|
||||||||
|
Balance
at March 31, 2006
|
357,310 |
3.00
– 7.00
|
2007
– 2008
|
|||||||
|
Issued
|
- |
-
|
-
|
|||||||
|
Expired
|
(7,310 | ) |
7.00
|
2007
|
||||||
|
Balance
at March 31, 2007
|
350,000 |
3.00
|
2008
|
|||||||
|
Issued
|
- |
-
|
-
|
|||||||
|
Expired
|
- |
-
|
-
|
|||||||
|
Balance
September 30, 2007
|
350,000 |
3.00
|
2008
|
|||||||
|
Issued
|
- |
-
|
-
|
|||||||
|
Expired
|
(350,000 | ) |
3.00
|
2008
|
||||||
|
Balance
September 30, 2008
|
- |
-
|
-
|
|||||||
45
NOTE
M – COMMITMENTS AND FACILITIES
The
Company leases office and manufacturing facilities in Plymouth, MN for its
ongoing operations. This operating lease is renewable and noncancelable. The
Company also leases various office equipment. For the period ended September 30,
2008, rent expense was $325,000 with an offset of rent take back associated with
the Blaine facility purchase and resale of $362,000. This resulted in a net take
back of $37,000. Total rent expense for the Company in prior years was $628,000
and $459,000 for the periods ended September 30, 2007 and March 31,
2007.
Blaine
Facility
On October
30, 2007 the Company purchased its previous corporate headquarters in Blaine for
$1,500,000 under the provisions of its option to purchase as stated in its lease
from Jain-Olsen Properties. The Company as owner of the building canceled the
lease to itself. The lease was scheduled to run through November of 2009. The
elimination of the lease resulted in the elimination of approximately $362,000
of accrued obligations related to this lease in conjunction with the
discontinuation of the Optronics segment recorded during the fiscal quarter
ended June 30, 2007 and will be taken into income during the three months ending
December 31, 2007. The
Company, on the same day, then sold the land and building for $1,450,000
incurring a loss of $52,000. Rent expense of $14,000, $84,000 and
$166,000 was paid to the partnership for the periods ended September 30, 2008,
September 30, 2007 and March 31, 2007, respectively.
The
closure of the Optronics division housed in Blaine resulted in the Company
recording a charge of $418,044 for remaining contract obligations costs through
November of 2009 as the facility will not provide any economic benefit to the
Company in the future. This amount is reflected in the $621,000 rent for the six
months ended September 30, 2007.
Aberdeen
Facility
On October
1, 2007 the Company entered into a lease agreement for its Aberdeen, South
Dakota facility which allows the tenant first opportunity to purchase the
building over the three year period commencing on October 1, 2007.
The
following is a schedule of approximate minimum payments required under the
operating leases:
|
Year ending September
30
|
Operating
leases
|
|||
|
2009
|
$ | 227,067 | ||
|
2010
|
234,729 | |||
|
2011
|
235,943 | |||
|
2012
|
241,773 | |||
|
2013
|
249,480 | |||
|
Thereafter
|
42,756 | |||
|
Total
minimum lease payments
|
$ | 1,231,748 | ||
In
February 2007, the Company began implementing a new enterprise system and
entered into a contract to pay approximately $266,000 over a 3 year period for
software related to part number configuration and production scheduling. The
contract calls for payments of $88,800 and $29,600 for 2009 and 2010
respectively.
46
NOTE
N – CONCENTRATIONS
Suppliers
The
Company purchases raw materials, component parts and outsourced labor from many
suppliers. Although many of these items are single-sourced, the
Company has experienced no significant difficulties to date in obtaining
adequate quantities. These circumstances could change, however, and the Company
cannot guarantee that sufficient quantities or quality of raw materials,
component parts and outsourced labor will be as readily available in the future
or, if available, that we will be able to obtain them at favorable
prices.
Customers
Two
customers comprised approximately 23%, 18% and 23% of total sales for the
periods ended September 30, 2008, September 30, 2007 and March 31,
2007.
NOTE
O – AUCTION RATE SECURITIES
At
September 30, 2008 our long term investment portfolio consisted of $3.3 million
of Auction Rate Securities (ARS), with contractual maturities between 22 and 33
years. The ARS held by us are primarily backed by student loans and are
over-collateralized, and are insured by and guaranteed by the United States
Federal Department of Education. In addition, all ARS held by us are rated by
the major independent rating agencies as either AAA or Aaa. Most of these
auction rate securities were scheduled to reset every 7 to 28 days through a
Dutch Auction process. The auctions have historically provided a liquid market
for these securities as investors could readily sell their investments at
auction. As of February 2008, ARS had experienced failed auctions, due to sell
orders exceeding buy orders. These failures are not believed to be a credit
issue, but rather caused by a lack of liquidity due to pressure in other
segments of the securities markets. Under the contractual terms, the issuer is
typically obligated to pay penalty interest rates should an auction fail. The
funds associated with failed auctions are not expected to be accessible until
one of the following occurs: a successful auction occurs, the issuer redeems the
issue, a buyer is found outside of the auction process or the underlying
securities have matured.
At
September 30, 2008 there was insufficient observable ARS market information
available to determine fair value of our investments. Therefore, we estimated
fair value by using a discounted cash flow model with factors including tax
status, credit quality, duration, levels of federal guarantees and likelihood of
redemption. Based on this analysis, we have classified the
investments as long-term on our balance sheet as of March 31, 2008 through
September 30, 2008 and recorded and unrealized loss of $264,000. We
believe this unrealized loss is primarily attributable to the limited liquidity
of these investments, and it is our intent to hold these investments long enough
to avoid realizing any significant loss. There was no tax impact due to our net
operating loss position.
At
September 30, 2007 these securities were recorded as current assets because at
September 30, 2007 there was a market for ARS.
As of
September 2008, Credit Suisse, our broker and financial advisor, settled a
lawsuit with the state of New York related to its ARS marketing practices. On
October 2, 2008, Credit Suisse offered to buy back at par value the ARS
securities from individuals, charities and businesses with accounts valued up to
$10 million. We accepted the offer in October 2008. During the month of October
of 2008 Credit Suisse bought back all of the securities held by Clearfield at
par value resulting in proceeds of $3.3 million which
were
47
NOTE
O – AUCTION RATE SECURITIES - continued
invested money market fund
composed of 90 day U.S Treasuries. The sale of these assets and
the related mark up to par value will be reflected in our results for the
quarter ended December 31, 2008.
48
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
|
CONTROLS
AND PROCEDURES
|
Attached
as exhibits to this Form 10-K are certifications of our Chief Executive Officer
and Chief Financial Officer that are required in accordance with Rule 13a-14 of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This
“Controls and Procedures” section includes information concerning the controls
and controls evaluation referred to in the certifications.
Evaluation
of Disclosure Controls and Procedures
The
Company conducted an evaluation, under the supervision and with the
participation of the Company’s management, including our Chief Executive Officer
and Chief Financial Officer (the principal executive officer and principal
financial officer, respectively), we evaluated the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”)).
During the
evaluation of disclosure controls and procedures in connection with the
preparation of our financial statements to be included in this Annual Report on
Form 10-K, we determined that in the aggregate a material weakness in internal
control over financial reporting existed as of September 30, 2008 relating to
our accounting and control procedures for documentation and review of
significant accounting judgments and estimates, financial closing processes and
financial reporting processes at period ends. Accordingly, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures were not
effective to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported accurately, within the time periods specified in the
applicable rule and forms.
Management’s
Report on Internal Control over Financial Reporting
We are
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The
Company’s internal control over financial reporting is designed to provide
reasonable assurance to the Company’s management and Board of Directors
regarding the preparation and fair presentation of published financial
statements.
Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation of internal control over financial reporting, management identified
the following matter that we consider to be a material weakness as of September
30, 2008.
Operating Effectiveness of
Accounting and Control Procedures. We concluded that, in the aggregate, a
material weakness existed as of September 30, 2008 related to documentation and
review of significant accounting judgments and estimates, financial closing
processes, and financial reporting processes at period ends. We implemented
control procedures in the fourth quarter of 2008 and are in the process of
implementing additional control procedures as described
below. However, the controls implemented in the fourth quarter of
2008 have not yet operated for a sufficient period of time. Once we have
performed the procedures on a repeated basis and completed our further planned
remediation, we will be able to fully evaluate their effectiveness.
49
Because of
this material weakness, we concluded that, as of September 30, 2008, our
internal control over financial reporting was not effective. We have discussed
this material weakness with our audit committee.
This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission.
Changes
in Internal Control over Financial Reporting
The
following changes to our internal control over financial reporting were
substantially completed during our fourth quarter of fiscal 2008, and have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting:
|
·
|
We
have developed detailed methodologies for items requiring management’s
estimate and judgment;
|
|
·
|
We
have implemented processes to ensure that monthly close checklists are
implemented and followed;
|
|
·
|
We
have implemented the use of checklists for disclosure items and
preparation of periodic reports.
|
Remediation of Material
Weaknesses
As of
September 30, 2007, the Company determined material weaknesses existed related
to the following matters:
|
·
|
The
Company did not maintain effective controls over the accounting for
certain auction rate securities. This oversight was discovered in the
transition period ended September 30, 2007 and the financial statements
were restated accordingly.
|
|
·
|
The
Company did not maintain effective controls to ensure that it is regularly
checking for appropriate compliance on all GAAP and SEC reporting matters
as they change or become updated.
|
We
remediated the material weakness related to our auction rate securities
restatement by the Board of Directors’ (BOD) appointment of an Investment
Committee, composed of BOD members, to provide oversight on matters of banking
relationships and investing of cash. In addition the Company has approved a
formal investment policy. Company management is utilizing the expertise of its
professional investment advisor. In addition, management obtained additional
education related to this matter.
We
remediated the material weakness related to GAAP and SEC reporting matters
beginning with the third quarter of the fiscal year. We procured subscriptions
to publications and services that provide regular updates regarding SEC and GAAP
reporting. These services include checklists to ensure the internal accounting
staff has the necessary tools and resources to comply with both SEC and GAAP
regulations. These services along with the SEC website were used to incorporate
a process of regularly checking for appropriate compliance on all
GAAP and SEC reporting matters as they change or become updated.
As of
September 30, 2008, the Company determined material weaknesses in our internal
control over financial reporting. To remediate the material weakness in
our internal control over financial reporting we have already implemented
several actions outlined above. In addition, we have implemented or
are in the process of implementing the following actions, which are all expected
to be completed by the end of our first quarter for our fiscal year ending
September 30, 2009:
50
|
·
|
We
have developed detailed methodologies for items requiring management’s
estimate and judgment. These methodologies formally document
management’s thought processes used to determine the amounts in
estimates. We intend to continue to develop and document the
methodology for additional items and to begin formally sharing a summary
analysis of significant estimate and judgment items with our audit
committee beginning in the first quarter of our fiscal year ending in
2009;
|
|
·
|
We
are implementing processes to provide for supporting documentation and
evidence of independent review and approval of journal entries, processes
to require sub-certifications of appropriate
personnel, processes to ensure that monthly close checklists
are implemented and followed, and documentation of the reconciliation of
the final trial balance to the final
report;
|
|
·
|
We
have implemented the use of checklists for disclosure items and
preparation of periodic reports. We are in the process of
developing procedures to formally prepare a supporting analysis for each
financial statement disclosure in accordance with relevant generally
accepted accounting principles (including relevant regulatory rules) and
the entity’s accounting and disclosure
policies.
|
|
OTHER
INFORMATION
|
There were
no events during the quarter ended September 30, 2008 required to be disclosed
on Form 8-K which were not so disclosed.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Information
regarding executive officers is included in Part I of this Report and is
incorporated in this Item 10 by reference.
|
EXECUTIVE
COMPENSATION
|
Information
required by Item 11 is incorporated in this Report by reference to the proxy
statement for our annual meeting of shareholders to be held in February
2009.
51
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Certain
information required by Item 12 is incorporated in this Report by reference to
the proxy statement for annual meeting of shareholders to be held in February
2009.
The
following table provides information about the Company’s equity compensation
plans (including individual compensation arrangements) as of September 30,
2008.
|
(a)
|
(b)
|
(c)
|
|
|
Plan
category
|
Number
of securities to
be
issued upon exercise
of
options, warrants or
rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities remaining
available
for future issuance
under
equity compensation
plans
(excluding securities
reflected
in column (a))
|
|
Equity
compensation
plans
approved by
security
holders
|
386,700
|
$1.37
|
1,232,500
|
|
Total
|
386,700
|
$1.37
|
1,232,500
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS. AND DIRECTOR
INDEPENDENCE
|
Information
required by Item 13 is incorporated in this Report by reference to the proxy
statement for our annual meeting of shareholders to be held in February
2009.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information
required by Item 14 is incorporated in this Report by reference to the proxy
statement for our annual meeting of shareholders to be held in February
2009
52
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
|
(a)
|
(1) The
following financial statements are filed herewith under Item
8.
|
|
(i)
|
Report
of Independent Registered Public Accounting Firm for the year ended
September 30, 2008, the six months ended September 30, 2007 and the year
ended March 31, 2007.
|
|
(ii)
|
Consolidated
Balance Sheets as of September 30, 2008 and
2007
|
|
(iii)
|
Consolidated
Statements of Operations for the year ended September 30, 2008, the six
months ended September 30, 2007 and the year ended March 31,
2007.
|
|
(iv)
|
Consolidated
Statement of Shareholders’ Equity for the year ended September 30, 2008,
the six months ended September 30, 2007 and the year ended March 31,
2007.
|
|
(v)
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2008
the six months ended September 30, 2007 and the year ended March 31,
2007
|
|
(vi)
|
Notes
to the Consolidated Financial Statements for the year ended September 30,
2008, the six months ended September 30, 2007 and the year ended March 31,
2007.
|
|
|
(2) Financial
Statement Schedules: See Schedule II on page following
signatures.
|
|
(b)
|
Exhibits.
See Exhibit Index.
|
53
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
| Clearfield, Inc. | ||
|
Date:
December 22, 2008
|
By: |
/s/
Cheryl Beranek Podzimek
|
|
Cheryl
Beranek Podzimek
|
||
|
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/ Cheryl Beranek Podzimek
|
President,
Chief Executive Officer and Director (principal executive officer
)
|
December
22, 2008
|
||
| Cheryl Beranek Podzimek | ||||
|
/s/ Bruce G. Blackey
|
Chief
Financial Officer (principal financial and accounting
officer)
|
December
22, 2008
|
||
| Bruce G. Blackey | ||||
|
/s/ Ronald G. Roth
|
Director
|
December
22, 2008
|
||
| Ronald G. Roth | ||||
|
/s/ John G. Reddan
|
Director
|
December
22, 2008
|
||
| John G. Reddan | ||||
|
/s/ Stephen L. Zuckerman MD
|
Director
|
December
22, 2008
|
||
| Stephen L. Zuckerman | ||||
|
/s/ Donald R. Hayward
|
Director
|
December
22, 2008
|
||
| Donald R. Hayward | ||||
|
/s/ Charles N. Hayssen
|
Director
|
December
22, 2008
|
||
| Charles N. Hayssen |
54
SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS
|
Description
|
Balance
at
Beginning of
Period
|
Charged
to
Cost
and
Expenses
|
Charges
to
Other
Accounts
(1)
|
Deductions
(2)
|
Balance
at
End
of
Period
|
|||||||||||||||
|
Allowance
for doubtful accounts
|
||||||||||||||||||||
|
September
30, 2008
|
$ | 78,973 | $ | - | $ | - | $ | 9,592 | $ | 69,382 | ||||||||||
|
September
30, 2007
|
78,500 | - | 843 | 370 | 78,973 | |||||||||||||||
|
March
31, 2007
|
77,831 | - | 5,550 | 4881 | 78,500 | |||||||||||||||
(1)
Represents recovery of bad debt and other adjustments
(2)
Represents write-offs of bad debt
55
|
Number
|
Description
|
Page
Number or Incorporated
by
Reference to
|
|
|
2.1
|
Asset
Purchase Agreement between CLFD and CSP, Inc.
|
Exhibit
2.1 to Form 8-K filed March 31, 2003
|
|
|
2.1
|
Asset
Purchase Agreement between CLFD and Americable, Inc.
|
Exhibit
2.1 to Form 8-K filed July 2, 2003
|
|
|
2.2
|
Agreement
Not to Compete with Peter Lee as part of CSP asset
purchase
|
Exhibit
2.2 to Form 8-K filed March 31, 2003
|
|
|
2.3
|
Asset
Purchase Agreement between Clearfield, Inc. and Software Moguls
India Private Limited and S M Infoexpert Private Limited
|
Exhibit
2.3 to Registrant’s Report on Form 10-K for the fiscal year ended March
31, 2005
|
|
|
3.1
|
Restated
Articles of Incorporation, as amended to date
|
Exhibit
3.1 to Registrant’s Report on Form 10-Q for the quarter ended September
30, 2000
|
|
|
3.1
(a)
|
Restated
Articles of Incorporation, as amended to date thru August 25,
2004
|
Exhibit
3.1 to Registrant’s Report on Form 10-Q for the quarter ended September
30, 2004
|
|
|
3.2
|
Bylaws,
as amended and restated to date
|
Exhibit
3.2 to Registrant’s Report on Form 10-KSB for the fiscal year ended March
31, 1999
|
|
|
4.1(a)
|
State
of South Dakota Board of Economic Development $300,000 Promissory Note,
REDI Loan: 95-13-A
|
Exhibit
4.1(a) to the Report on 10-QSB for the quarter ended June 30, 1996 (the
“June 1996 10-QSB”)
|
|
|
4.1(b)
|
State
of South Dakota Board of Economic Development Security Agreement REDI Loan
No: 95-13-A dated May 28, 1996
|
Exhibit
4.1(b) to the June 1996 10-QSB
|
|
|
4.2(a)
|
$700,000
Loan Agreement dated June 24, 1996 by and between Aberdeen Development
Corporation and Clearfield, Inc.
|
Exhibit
4.2(a) to the June 1996 10-QSB
|
|
|
4.2(b)
|
$300,000
Loan Agreement dated June 24, 1996 between Aberdeen Development
Corporation and Clearfield, Inc.
|
Exhibit
4.2(b) to the June 1996 10-QSB
|
|
|
4.2(c)
|
$250,000
Loan Agreement dated June 24, 1996 by and between Aberdeen Development
Corporation and Clearfield, Inc.
|
Exhibit
4.2(c) to the June 1996 10-QSB
|
|
|
4.2(d)
|
$300,000
Loan Agreement dated June 24, 1996 by and between Aberdeen Development
Corporation and Clearfield, Inc.
|
Exhibit
4.2(d) to the June 1996 10-QSB
|
|
|
4.2(e)
|
Amended
Loan Agreement with Aberdeen Development Corporation and Clearfield,
Inc.
|
Exhibit
4.2(e) to Registrants Report on Form 10-K for fiscal year ended March 31,
2004
|
56
|
Number
|
Description
|
Page
Number or Incorporated
by
Reference to
|
|
|
4.2(f)
|
Purchase
Agreement for land with Aberdeen Development Corporation and Clearfield,
Inc.
|
Exhibit
4.2(f) to Registrant’s Report on Form 10-K for the fiscal year ended March
31, 2005
|
|
|
4.3(a)
|
Loan
Agreement between South Dakota Economic Development Finance and
Clearfield, Inc.
|
Exhibit
4.3(a) to the June 1996 10-QSB
|
|
|
4.3(b)
|
Mortgage
and Security Agreement – One Hundred Day Redemption from Clearfield,
Inc. to South Dakota Economic Development Finance Authority
dated as of June 24, 1996
|
Exhibit
4.3(b) to the June 1996 10-QSB
|
|
|
4.4(a)
|
Subscription
and Investment Representation Agreement of NE Venture,
Inc.
|
Exhibit
4.4(a) to the June 1996 10-QSB
|
|
|
4.4(b)
|
Form
of Common Stock Purchase Warrant for NE Venture, Inc.
|
Exhibit
4.4(b) to the June 1996 10-QSB
|
|
|
4.5(a)
|
Certificate
of Designation for 2% Series A Convertible Preferred Stock
|
Exhibit
4.5(a) filed as a part of Registration Statement on Form S-3 (Commission
File No. 333-33968)
|
|
|
4.5(b)
|
Form
of common stock warrant issued in connection with 2% Series A Convertible
Preferred Stock
|
Exhibit
4.5(b) filed as a part of Registration Statement on Form S-3 (Commission
File No. 333-33968)
|
|
|
4.6
|
Common
Stock Purchase Warrant issued to Ladenburg Thalmann & Co. Inc. to
purchase 84,083 shares
|
Exhibit
4.6 to Registrant’s Report on Form 10-K for fiscal year ended March 31,
2000 (“2000 10-K”)
|
|
|
4.7
|
Share
Rights Agreement dated October 23, 2000 by and between the Registrant and
Wells Fargo Bank Minnesota NA as Rights Agent
|
Exhibit
1 to the Registration Statement on Form 8-A filed November 8,
2000
|
|
|
4.8
|
Common
Stock Warrant Purchase Agreement with Peter Lee as part of CSP asset
purchase
|
Exhibit
4.8 to Form 8-K filed March 31, 2003
|
|
|
10.1(a)
|
Sublease
Agreement between the Registrant and Jain-Olsen Properties and Sublease
Agreement and Option Agreement between the Registrant and Jain-Olsen
Properties
|
Exhibit
10.1 to the Registration Statement on Form S-18 filed with the Chicago
Regional Office of the Securities and Exchange Commission on June 26,
1986
|
|
|
10.1(b)
|
Amendment
and Extension of Sublease Agreement dated August 31, 1999
|
Exhibit
10.1(b) to 2000 10-K
|
|
|
10.1(c)
|
Lease
Agreement between Registrant and Jain-Olsen Properties
|
Exhibit
10.1(c) to Registrant’s Form 10Q-SB for quarter ended September 30,
2004
|
|
|
*10.2(a)
|
Stock
Option Plan for Nonemployee Directors
|
Exhibit
10.3a to Registrant’s Report on Form 10-KSB for the fiscal year ended
March 31, 1994 (the “1994 10-KSB”)
|
57
|
Number
|
Description
|
Page
Number or Incorporated
by
Reference to
|
|
|
*10.2(b)
|
Form
of option agreement issued under the Nonemployee Directors
Plan
|
Exhibit
10.3b to 1994 10-KSB
|
|
|
*10.3
|
1997
Stock Compensation Plan
|
Exhibit
10.3 to Registrant’s Report on Form 10-KSB for the fiscal year ended
March 31, 1997
|
|
|
*10.4
|
Insurance
agreement by and between the Registrant and Anil K. Jain
|
Exhibit
10.5 to Registrant’s Report on Form 10-K for the fiscal year ended March
31, 1990
|
|
|
*10.5
|
Form
of Agreement regarding Repurchase of Stock upon Change in Control Event
with Anil K. Jain and Kenneth A. Olsen
|
Exhibit
10.1 to Registrant’s Report on Form 10-QSB for the quarter ended September
30, 1997 (“September 1997 10-QSB”)
|
|
|
*10.6
|
Form
of Agreement regarding Employment/Compensation upon Change in Control with
Messrs. Jain and Olsen
|
Exhibit
10.2 to the September 1997 10-QSB
|
|
|
*10.7
|
Form
of Agreement regarding Indemnification of Directors and Officers with
Messrs. Jain, Olsen, Ringstad, Roth, Von Wald and
Zuckerman
|
Exhibit
10.7 to Registrant’s Report on From 10-K for the fiscal year ended March
31, 2002.
|
|
|
10.8
|
Sublease
agreement between Newport and CLFD
|
Exhibit
10.8 to Registrant’s Report of Form 10-QSB for the quarter ended June 30,
2003
|
|
|
10.9
|
Sublease
agreement between Veeco Compound Semiconductor and Clearfield,
Inc.
|
Exhibit
10.9 to Registrant’s Report of Form 10-K for the fiscal year ended March
31, 2004
|
|
|
10.9(b)
|
Amendment
to sublease between Veeco Compound Semiconductor and Clearfield,
Inc.
|
Exhibit
10.9 (b) to Registrant’s Report on Form 10-QSB for the quarter ended
September 30, 2004
|
|
|
*10.10
|
Ken
Olsen Separation Agreement
|
Exhibit
10.10 to Registrant’s Report on Form 10-K for the fiscal year ended March
31, 2004
|
|
|
*10.11
|
Stock
option agreement with Cheri Podzimek, President of CLFD
|
Exhibit
10.11 to Registrant’s Report on Form 10-K for the fiscal year ended March
31, 2005
|
|
|
10.12
|
Agreements
on sale of MOCVD Assets
|
Exhibit
10.12 to Registrant’s Report on for 8-K filed March 10,
2006
|
|
|
10.13
|
Patent
and Technology and Revenue Sharing License Agreement
|
Exhibit
10.13 to Registrant’s Report on for 8-K filed March 10,
2006
|
|
|
10.14
|
Lease
agreement between Bass Lake Realty, LLC and CLFD
|
**
|
|
|
*10.15
|
2007
Stock Compensation Plan
|
Exhibit
10.15 to Registrant’s Registration Statement on Form S-8 POS filed on
August 24, 2007
|
58
|
Number
|
Description
|
Page
Number or Incorporated
by
Reference to
|
|
|
10.16
|
Amended
and Restated Agreement Regarding Employment/Compensation Upon Change In
Control
|
Exhibit
10.16 to Registrant’s Report on for 8-K filed June 29,
2007
|
|
|
10.17
|
Supplemental
Separation Agreement with A. Jain
|
Exhibit
10.17 to Registrant’s Report on for 8-K filed June 29,
2007
|
|
|
10.18
|
Stock
Purchase Agreement
|
Exhibit
10.18 to Registrant’s Report on for 8-K filed June 29,
2007
|
|
|
10.19
|
Promissory
Note
|
Exhibit
10.19 to Registrant’s Report on for 8-K filed June 29,
2007
|
|
|
10.20
|
Guaranty-AK
Jain
|
Exhibit
10.20 to Registrant’s Report on for 8-K filed June 29,
2007
|
|
|
10.21
|
Stock
Pledge Agreement
|
Exhibit
10.21 to Registrant’s Report on for 8-K filed June 29,
2007
|
|
|
10.22
|
Separation
Payments Pledge Agreement
|
Exhibit
10.22 to Registrant’s Report on for 8-K filed June 29,
2007
|
|
|
10.23
|
Agreement
to Provide Additional Collateral
|
Exhibit
10.23 to Registrant’s Report on for 8-K filed June 29,
2007
|
|
|
10.24
|
Non-Compete
Agreement
|
Exhibit
10.24 to Registrant’s Report on for 8-K filed June 29,
2007
|
|
|
10.25
|
2007
Stock Compensation Plan Amended
|
Incorporated
by reference to exhibit filed as a part of from
S-8 Registration number 333-151504
|
|
|
14
|
Code
of Ethics
|
Exhibit
14 to Registrant’s Report on Form 10-K for the fiscal year ended March 31,
2004
|
|
|
23.1
|
Consent
of Grant Thornton LLP
|
**
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
**
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
||
|
32.1
|
Certification
of Chief Executive Officer and Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
**
|
|
|
32.2
|
Certification
of Chief Financial Officer and Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
**
|
59
*Indicates
management contract or compensation plan or arrangements required to be filed as
an exhibit to this form.
** Filed
with this Report.
60