Clearfield, Inc. - Quarter Report: 2009 March (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2009
[
]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission
File Number 0-16106
Clearfield,
Inc.
(Exact
name of Registrant as specified in its charter)
|
Minnesota
|
41-1347235
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
5480
Nathan Lane North, Suite 120, Plymouth, Minnesota 55442
(Address
of principal executive offices and zip code)
(763)
476-6866
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) 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
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
o 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
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o YES x NO
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
Class:
|
Outstanding
at March 31, 2009
|
|
Common
stock, par value $.01
|
11,938,131
|
1
CLEARFIELD,
INC.
FORM
10-Q
TABLE
OF CONTENTS
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3
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3
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3
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4
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5
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6
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7
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16
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16
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17
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17
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17
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17
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17
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17
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17
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18
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18
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2
CLEARFIELD,
INC.
UNAUDITED
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March
31, 2009
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September
30, 2008
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|||||||
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Assets
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||||||||
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Current
Assets
|
||||||||
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Cash
and cash equivalents
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$ | 3,133,588 | $ | 4,333,709 | ||||
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Short-term
investments
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3,081,000 | - | ||||||
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Accounts
receivable, net
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2,262,100 | 2,533,447 | ||||||
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Inventories
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1,553,256 | 2,088,769 | ||||||
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Other
current assets
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218,084 | 115,344 | ||||||
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Total current
assets
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10,248,028 | 9,071,269 | ||||||
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Property,
plant and equipment, net
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1,425,291 | 1,604,202 | ||||||
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Other
Assets
|
||||||||
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Long-term
investments
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1,839,663 | 3,143,941 | ||||||
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Goodwill
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2,570,511 | 2,570,511 | ||||||
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Other
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176,368 | 176,368 | ||||||
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Notes
receivable
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412,755 | 432,846 | ||||||
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Total
other assets
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4,999,297 | 6,323,666 | ||||||
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Total
Assets
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$ | 16,672,616 | $ | 16,999,137 | ||||
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Liabilities
and Shareholders’ Equity
|
||||||||
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Current
Liabilities
|
||||||||
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Current
maturities of long-term debt
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$ | 64,798 | $ | 62,126 | ||||
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Accounts
payable
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1,116,982 | 1,849,633 | ||||||
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Accrued
compensation
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823,025 | 903,276 | ||||||
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Accrued
expenses
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104,398 | 301,859 | ||||||
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Total current
liabilities
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2,109,203 | 3,116,894 | ||||||
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Long-term
debt, net of current maturities
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- | 33,081 | ||||||
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Deferred
rent
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89,758 | 89,641 | ||||||
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Deferred
income taxes
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211,615 | 166,904 | ||||||
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Total
Liabilities
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2,410,576 | 3,406,520 | ||||||
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Shareholders’
Equity
|
||||||||
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Undesignated
shares, 4,999,500 authorized shares; no shares issued and
outstanding
|
- | - | ||||||
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Preferred
stock, $.01 par value; 500 shares; no shares
outstanding
|
- | - | ||||||
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Common
stock, authorized 50,000,000, $ .01 par value; 11,938,131 shares issued
and outstanding at March 31, 2009 and September 30, 2008
|
119,381 | 119,381 | ||||||
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Additional
paid-in capital
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52,223,106 | 52,166,219 | ||||||
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Accumulated
deficit
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(38,080,447 | ) | (38,428,983 | ) | ||||
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Accumulated
other comprehensive loss
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- | (264,000 | ) | |||||
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Total
shareholders’ equity
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14,262,040 | 13,592,617 | ||||||
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Total
Liabilities and Shareholders’ Equity
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$ | 16,672,616 | $ | 16,999,137 | ||||
SEE
ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
CLEARFIELD,
INC.
UNAUDITED
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Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
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March
31,
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March
31,
|
|||||||||||||||
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2009
|
2008
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2009
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2008
|
|||||||||||||
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Revenues
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$ | 5,232,604 | $ | 5,442,493 | $ | 11,165,891 | $ | 10,139,933 | ||||||||
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Cost
of sales
|
3,414,452 | 3,676,929 | 7,333,531 | 6,924,898 | ||||||||||||
|
Gross
profit
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1,818,152 | 1,765,564 | 3,832,360 | 3,215,035 | ||||||||||||
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Operating
expenses
|
||||||||||||||||
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Selling,
general and administrative
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1,689,950 | 1,721,252 | 3,494,928 | 3,143,711 | ||||||||||||
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Income
from operations
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128,202 | 44,312 | 337,432 | 71,324 | ||||||||||||
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Interest
income
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17,244 | 79,285 | 48,994 | 167,091 | ||||||||||||
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Interest
expense
|
(1,585 | ) | (2,836 | ) | (3,491 | ) | (5,972 | ) | ||||||||
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Other
income
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13,931 | 15,984 | 27,575 | 29,401 | ||||||||||||
| 29,590 | 92,433 | 73,078 | 190,520 | |||||||||||||
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Income
before income taxes
|
157,792 | 136,745 | 410,510 | 261,844 | ||||||||||||
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Income
tax expense
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26,743 | 21,407 | 61,974 | 48,577 | ||||||||||||
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Net
income from continuing operations
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131,049 | 115,338 | 348,536 | 213,267 | ||||||||||||
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Net
income from discontinued operations
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- | - | - | 342,390 | ||||||||||||
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Net
loss on disposal of assets of discontinued operations
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- | - | - | (44,951 | ) | |||||||||||
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Total
income from discontinued operations
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- | - | - | 297,439 | ||||||||||||
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Net
income
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$ | 131,049 | $ | 115,338 | $ | 348,536 | $ | 510,706 | ||||||||
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Net
income per share:
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||||||||||||||||
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Continuing
operations
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$ | .01 | $ | .01 | $ | .03 | $ | .02 | ||||||||
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Discontinued
operations
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$ | .00 | $ | .00 | $ | .00 | $ | .02 | ||||||||
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Basic
and diluted
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$ | .01 | $ | .01 | $ | .03 | $ | .04 | ||||||||
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Weighted
average shares outstanding:
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||||||||||||||||
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Basic
and diluted
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11,938,131 | 11,872,331 | 11,938,131 | 11,872,331 | ||||||||||||
SEE
ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
4
CLEARFIELD,
INC.
UNAUDITED
Six Months
Ended March 31, 2009
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Additional
paid-in
|
Accumulated
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Accumulated
other comprehensive
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Total
shareholders
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|||||||||||||||||||||
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Shares
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Amount
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Capital
|
deficit
|
loss
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equity
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|||||||||||||||||||
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Balance
at September 30, 2008
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11,938,131 | $ | 119,381 | $ | 52,166,219 | $ | (38,428,983 | ) | $ | (264,000 | ) | $ | 13,592,617 | |||||||||||
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Stock
based compensation expense
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- | - | 29,119 | - | - | 29,119 | ||||||||||||||||||
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Other
comprehensive income
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- | - | - | - | 264,000 | 264,000 | ||||||||||||||||||
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Net
income
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- | - | - | 217,487 | - | 217,487 | ||||||||||||||||||
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Comprehensive
income
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- | - | - | - | - | 481,487 | ||||||||||||||||||
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Balance
at December 31, 2008
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11,938,131 | $ | 119,381 | $ | 52,195,338 | $ | (38,211,496 | ) | $ | - | $ | 14,103,223 | ||||||||||||
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Stock
based compensation expense
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- | - | 27,768 | - | - | 27,768 | ||||||||||||||||||
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Net
income
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- | - | - | 131,049 | - | 131,049 | ||||||||||||||||||
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Balance
at March 31, 2009
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11,938,131 | $ | 119,381 | $ | 52,223,106 | $ | (38,080,447 | ) | $ | - | $ | 14,262,040 | ||||||||||||
SEE
ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
CLEARFIELD,
INC.
UNAUDITED
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Six
Months Ended March 31,
|
||||||||
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2009
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2008
|
|||||||
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Cash
flow from operating activities
|
||||||||
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Net
income
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$ | 348,536 | $ | 510,706 | ||||
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Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
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Depreciation
and amortization
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216,633 | 265,427 | ||||||
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Deferred
taxes
|
44,711 | 44,492 | ||||||
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Loss
on disposal of assets
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- | 55,251 | ||||||
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Stock
based compensation
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56,887 | 25,535 | ||||||
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Lease
termination accrual
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- | (362,028 | ) | |||||
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Changes
in operating assets and liabilities:
|
||||||||
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Accounts
receivable, net
|
271,347 | (370,816 | ) | |||||
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Inventories
|
535,513 | 154,448 | ||||||
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Prepaid
expenses and other
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(82,649 | ) | (127,006 | ) | ||||
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Accounts
payable and accrued expenses
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(1,010,246 | ) | 79,908 | |||||
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Net
cash provided by operating activities
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380,732 | 275,917 | ||||||
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Cash
flow from investing activities
|
||||||||
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Purchases
of property and equipment
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(37,722 | ) | (1,801,809 | ) | ||||
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Proceeds
from sale of assets
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- | 1,451,624 | ||||||
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Purchase
of investments
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(4,812,722 | ) | (3,677,720 | ) | ||||
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Sale
of investments
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3,300,000 | 3,200,000 | ||||||
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Net
cash used in investing activities
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(1,550,444 | ) | (827,905 | ) | ||||
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Cash
flow from financing activities
|
||||||||
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Repayment
of long-term debt
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(30,409 | ) | (35,351 | ) | ||||
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Net
cash used in financing activities
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(30,409 | ) | (35,351 | ) | ||||
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Decrease
in cash and cash equivalents
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(1,200,121 | ) | (587,339 | ) | ||||
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Cash
and cash equivalents at beginning of period
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4,333,709 | 3,304,645 | ||||||
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Cash
and cash equivalents at end of period
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$ | 3,133,588 | $ | 2,717,306 | ||||
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Supplemental
cash flow information:
|
||||||||
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Cash
paid during the period for:
|
||||||||
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Interest
|
$ | 3,492 | $ | 2,836 | ||||
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Income
taxes
|
15,468 | 1,185 | ||||||
SEE
ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
6
Note
1. Basis of Presentation
The
accompanying unaudited consolidated condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) for interim financial statements and with the instructions of
Regulation S-K as they apply to smaller reporting companies. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles in the United States of America for complete
financial statements. For further information, refer to the financial statements
and footnotes thereto included in the Company’s report on Form 10-K for the
period ended September 30, 2008.
In the
opinion of management, all estimates and adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Certain reclassifications of previously reported amounts have been
made to conform that presentation to the current period
presentation.
In
preparation of the Company’s consolidated financial statements, management is
required to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses during the reporting
periods. Actual results could differ from the estimates used by
management.
Effective
January 2, 2008 the Company merged its sole subsidiary APA Cables and Networks,
Inc. (APCAN) 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. Significant intercompany accounts
and transactions have been eliminated. The Company's consolidated financial
statements include the accounts of wholly-owned subsidiaries of Clearfield,
Inc.
Note
2. Net Income Per Share
Basic and
diluted income per common share is computed by dividing net income by the
weighted-average number of common shares outstanding during each period. Diluted
income per share is computed by dividing net income by the weighted-average
number of common shares and common equivalent shares outstanding during each
period.
Common
stock options and warrants to purchase 1,045,200 and 464,700 shares of common stock with
a weighted average exercise price of $1.13 and $1.40 were outstanding at March
31, 2009 and 2008, respectively, but were excluded from calculating diluted net
income per share because they were antidillutive. There were no dilutive shares
at March 31, 2009 and 2008.
Note
3. Discontinued Operations
Blaine
Facility
On October
30, 2007 the Company purchased its previous corporate headquarters in Blaine,
Minnesota for $1,500,000 under the provisions of its option to purchase as
stated in its lease with Jain-Olsen Properties. The Company, as owner of the
building, canceled the related lease. The lease was scheduled to run through
November of 2009. The elimination of the lease resulted in the elimination of
approximately $342,000 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 was taken into income during the
three months ending December 31, 2007. On the same day, October 30, 2007, the
Company sold the land and building for $1,450,000 incurring a loss of
$50,000.
7
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 upcoming three year period. On March 3, 2009 the tenant
defaulted on the lease and continues to be in arrears on payments. We
are in the process of working with the tenant to resolve this
matter.
Prior
Year
The
Company did not have discontinued operations for the six month period ended
March 31, 2009. For the comparable period ended March 31, 2008, the Company
incurred income, net of expenses, of approximately $297,000 as a result of the
purchase and resale of the Blaine building which resulted in the termination of
the lease and subsequent reversal of accrued rent. The Blaine Building was
formerly the corporate headquarters prior to the discontinuation of the
Optronics segment in June 2007.
Note
4. 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 recorded a severance charge of $397,000 in the statement of
operations for the six months ended September 30, 2007. This severance
provision applies notwithstanding the absence of a "change of control”. As of
March 31, 2009 the balance due is $51,138 and is included in the accrued
compensation as it is all short term.
Note 5.
Cash Equivalents and Investments
The
Company currently invests its excess cash in money market accounts and bank
certificates of deposit (CD’s) that are fully insured by the FDIC with a term of
not more than three years. CD’s with original maturities of more than three
months are reported as held-to-maturity investments. The maturity dates of our
CD’s are as follows at March 31. 2009.
|
Less
than one year
|
$ | 3,081,000 | ||
|
1-5
years
|
1,839,663 | |||
|
Total
|
$ | 4,920,663 |
As of
September 2008, Credit Suisse, our broker and financial advisor, settled a
lawsuit with the state of New York related to its Auction Rate Securities (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. The sale of these assets and the related mark up to par
value was reflected in the financial statements for the fiscal quarter ended
December 31, 2008.
Note
6. Warrants and Stock Based Compensation
The
Company accounts for warrant and stock based compensation
under Statement of Financial Accounting Standard No. 123R, Share-Based Payment (SFAS
123R), which requires all share-based payments, including grants of stock
options, to be recognized in the income statement as an operating expense, based
on their fair values over the requisite service period.
During the
six-month period ended March 31, 2009 the Company granted 244,000 non-qualified
stock options to employees with a contractual term of 10 years, a three-year
vesting term and an exercise price of $1.03 with a fair value of $0.42 per
share. A second group of employees received 5,000 incentive stock options with a
term of six years, four year vesting and an exercise price of $1.16 with a fair
value of $0.55 per share. Senior executives and officers were granted 392,000
incentive stock options with a contractual term of 10 years, a three year
vesting term and an exercise price of $1.03 with a fair value of $0.42 per
share. Directors were granted 37,500 non-qualified stock options with a
contractual term of six years, a one year vesting term and an exercise price of
$1.16 with a fair value of $0.58 per share.
8
The
Company recorded $56,888 and $25,535 of compensation expense related to current
and past option grants for the six month periods ended March 31, 2009 and 2008,
respectively. This expense is included in selling, general and
administrative expense. There was no tax benefit from recording this
non-cash expense. As of March 31, 2009, $298,941 of total
unrecognized compensation expense related to non-vested awards is expected to be
recognized over a weighted average period of approximately
2.68 years.
In April
of 2003, 350,000 warrants were issued at an exercise price of $3.00 per share;
on June 30, 2008 they were unexercised and expired.
Note
7. Inventories
Inventories
consist of the following as of:
|
March 31, 2009
|
September 30, 2008
|
|||||||
|
Raw
materials
|
$ | 1,088,927 | $ | 1,815,777 | ||||
|
Work-in-progress
|
8,318 | 14,481 | ||||||
|
Finished
goods
|
456,011 | 258,511 | ||||||
| $ | 1,553,256 | $ | 2,088,769 | |||||
Note
8. Major Customer Concentration
Two
customers comprised approximately 41% of total sales for the six months ended
March 31, 2009 and one customer who was part of the sales concentration
comprised 47% of accounts receivable. Three customers comprised 27% of total
sales for the six months ended March 31, 2008 and three customers accounted for
32% of accounts receivable, two of which were part of the sales
concentration.
Note
9. Goodwill
As
disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2008, the Company performs an impairment analysis of goodwill
during the fourth quarter of each fiscal year in accordance with Statement of
Financial Accounting Standard No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). Fair values are estimated based on our best
estimate of the expected present value of future cash flows and compared with
the corresponding book value of the company. Where available and as appropriate
comparative market multiples are used to corroborate the results of the present
value method. We consider our net book value and market capitalization when we
test for goodwill impairment because we have consolidated our reporting units in
prior years into the parent company, resulting in one reporting
unit.
In
addition, we monitor on a quarterly basis our carrying value, the market
capitalization of our stock and other variables to determine whether a
triggering event has occurred that would require and interim impairment
evaluation of our goodwill. We have concluded that no triggering events
occurred during the fiscal quarter ended March 31, 2009. Should we experience
adverse changes in expected operating results, stock trading below per share
book value, or unfavorable changes in other economic factors we will reassess
goodwill impairment prior to the end of the fiscal year.
Note
10. Income Taxes
We
recorded a provision for income taxes of $62,000 and $49,000, for the six months
ended March 31, 2009 and 2008. Our tax provision includes estimated federal
alternative minimum taxes and state franchise taxes, but is primarily related to
deferred tax expense related to book and income tax basis difference in goodwill
on prior asset acquisitions.
Based upon
available evidence, there is uncertainty regarding our ability to realize our
deferred tax assets and we have therefore recorded a full valuation allowance
against the deferred tax assets in our consolidated financial statements. We
believe the uncertainty regarding the ability to realize our deferred tax assets
may diminish to the point where the recognition of our deferred tax assets may
be warranted in the future. If we determine that it is more likely than not that
we will be able to realize our deferred tax assets in the future, an adjustment
to the deferred tax asset valuation allowance would be recorded in the period
when such determination is made.
9
Effective
April 1, 2007, we adopted the provisions of FASB Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48) as required. The adoption did not
have a material impact on our financial statements. At the adoption date, we
recorded no gross unrecognized tax benefits. Subsequent to the
adoption date including current quarter ended March 31, 2009 the Company has not
recorded any unrecognized tax benefits.
We
recognize interest and penalties accrued on any unrecognized tax benefits as a
component of income tax expense. At the adoption date of FIN 48, we did not have
any accrued interest or penalties associated with any unrecognized tax benefits,
nor has any interest expense been recognized subsequent to the acquisition
date.
Note
11. Certain Relationships and Transactions
India
Facility
Prior to
June 28, 2007, Kul B. Jain, brother of our former chief executive officer, Anil
K. Jain, was a director of our APA Optronics (India) Private Limited subsidiary
that was established in fiscal 2005. Kul B. Jain was paid
approximately $250 per month in this position. He was not an employee of APA
Optronics (India) or Clearfield, Inc. (formerly APA Enterprises,
Inc.). On June 28, 2007, we sold all of our interest in our
Indian subsidiary to an entity controlled by Anil K. Jain, our former chief
executive officer, on terms deemed by the independent directors to be fair and
reasonable to the Company. The purchase price of $500,000 is payable
over five years and is secured by pledges of stock and Dr. Jain’s payments under
his separation agreement, as well as by a guarantee from Dr. Jain. The balance
of the outstanding note is $452,822 with accrued interest of $2,692. The rate of
interest charged is 7% and the holder is current on
payments.
Note
12. Accounting Pronouncements
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 Company adopted this provision on
October 1, 2008. Adoption of SFAS No. 162 did not have a significant
effect on the Company’s financial statements.
The
Company adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Liabilities – Including an Amendment of FASB statement No.
115, at the beginning of its 2009 fiscal year. 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. Adoption of SFAS No. 159 did
not have a significant effect on the Company’s financial statements because the
Company did not elect the fair value option for any financial assets or
liabilities.
The
Company adopted SFAS 157, Fair
Value Measurements, (SFAS 157) at the beginning of its 2009 fiscal year.
SFAS 157 clarifies the definition of fair value, describes the method used to
appropriately measure fair value in accordance with generally accepted
accounting principles and expands fair value disclosure requirements. This
statement applies whenever other accounting pronouncements require or permit
fair value measurements. The fair value hierarchy established under SFAS 157
prioritizes the inputs used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurement) and the lowest priority to
unobservable inputs (Level 3 measurement). The three levels of the fair value
hierarchy defined by SFAS 157 are as follows: Level 1 – Quoted prices are
available in active markets for identical assets or liabilities as of the
reporting date. Active markets are those in which transactions for the asset or
liability occur in sufficient frequency and volume to provide pricing
information on an ongoing basis. Level 2 – Pricing inputs are other than quoted
prices in active markets included in level 1, which are either directly or
indirectly observable as of the reporting date. Level 2 includes those financial
instruments that are valued using models or other valuation methodologies. These
models are primarily industry-standard models that consider various assumptions,
including quoted forward prices for commodities, time value, volatility factors,
and current market and contractual prices for the underlying instruments, as
well as other relevant economic measures. Substantially all of these assumptions
are observable in the marketplace throughout the full term of the instrument,
can be derived from observable data or are supported by observable levels at
which transactions are executed in the marketplace. Level 3 – Pricing inputs
include significant inputs that are generally less observable from objective
sources. These inputs may be used with internally developed methodologies that
result in management’s best estimate of fair value from the perspective of a
market participant. The Company determines fair value measurements on certain
assets and liabilities as the result of the application of accounting guidelines
and pronouncements that were relevant prior to the adoption of SFAS
157.
10
In April
of 2009, the FASB issued FSP FAS 107-1, APB 28-1, Interim Disclosures About Fair Value
of Financial Instrument (“FSP FAS 107-1, APB 28-1”). FSP FAS 107-1, APB
28-1 requires fair value disclosures in both interim as well as annual financial
statements in order to provide more timely information about the effects of
current market conditions on financial instruments. FSP FAS 107, APB 28-1 is
effective for interim and annual periods ending after June 15, 2009 and will be
adopted by us in the second quarter of 2009. We currently do not expect adoption
of this standard to have a material effect on our consolidated financial
position or results of operations.
In
December 2008, the FASB issued FSP No. 140-4 and FIN 46R-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities (“FSP 140-4 and FIN 46R-8”). FSP 140-4 and FIN 46R-8
require additional disclosures about transfers of financial assets and
involvement with variable interest entities. The requirements apply to
transferors, sponsors, servicers, primary beneficiaries and holders of
significant variable interests in a variable interest entity or qualifying
special purpose entity. The Company has adopted FSP 140-4 and FIN 46R-8 as of
December 26, 2008 since the disclosures required by FSP 140-4 and FIN 46R-8
became effective for the Company in the fiscal quarter ending December 26, 2008.
FSP 140-4 and FIN 46R-8 affect disclosures only and therefore have no impact on
the Company’s financial condition, results of operations or cash
flows.
11
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements
in this Report about future sales prospects and other matters to occur in the
future are forward looking statements and are subject to uncertainties due to
many factors, many of which are beyond our control. These factors include, but
are not limited to, the continued development of our products, acceptance of
those products by potential customers, our ability to sell such products at a
profitable price, and our ability to fund our operations. For further discussion
regarding these factors, see “Factors That May Influence Future
Results.”
OVERVIEW
General
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. Since the discontinuation of the Optronics business,
the operations of the Company consist solely of the operations of
APACN. In June 2007, we elected to change our fiscal year end from
March 31 to September 30. In view of this change the quarter ended December 31,
2008 is the first quarter of 2009 and the quarter ended December 31, 2007 is the
first quarter for 2008.
The
Company focuses on highly configurable products for telecommunications
customers, primarily related to cabling management requirements of the
Fiber-to-the-Home (“FTTH”) marketplace and in designing and terminating custom
cable assemblies for commercial and industrial original equipment manufacturers
(“OEM’s”). Over the past four years the Company has expanded its
product offerings and broadened its customer base. We continue to see positive
trends in the markets we serve and believe our solid reputation of quality
service and competitive and innovative product line which will permit us achieve
our growth plans.
Not
withstanding our confidence in our products and long term strategies, we are
unable to provide short term guidance due to current economic conditions. If the
economy continues to erode, Clearfield is not immune to the broader effects of
such a decline and may suffer a reduction in revenues and profits. We remain
optimistic that the markets we serve are stable and are a core component of the
nation’s strategic infrastructure. However we are realistic and are closely
monitoring the trends with in our industry and our customer base and prepared to
take the necessary actions in our business model as appropriate.
Should the
Company continue to experience increased profits resulting in increased
shareholder equity value and the market price of our stock does not respond, it
is possible that this may trigger an impairment of goodwill. While it
is counterintuitive to believe that increased shareholder value would not be
recognized by the market, we believe it is important to disclose the potential
of such an occurrence.
12
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED MARCH 31, 2009 VS. THREE MONTHS ENDED MARCH 31, 2008
Revenues
for the second quarter ended March 31, 2009 of fiscal year 2009 decreased 4% to
$5,233,000 from revenue of $5,442,000 for the comparable period for fiscal 2008.
This change is attributable to the depressed overall economic climate within the
U.S.
Revenue
from broadband service providers and commercial data networks amounted to
$4,403,000 or 84% of revenue for 2009 compared to $4,181,000 or 77% of sales in
2008. Sales to OEMs, consisting primarily of fiber optic and copper
cable assemblies produced to customer design specifications, were 16% of revenue
or $830,000 for 2009 compared to $1,261,000 or 23% of sales in
2008.
Gross
margin increased from 32% of revenues in fiscal 2008 to 35% of revenues in
fiscal 2009, resulting in a gross profit of $1,818,000 in 2009 as compared to
$1,766,000 in 2008, an increase of $52,000 or 3%. The 3% increase in gross
margin as a percent of revenues is due to the results of on-going programs to
reduce the cost of products through a combination of process improvement, global
sourcing of components and subassembly manufacturing and new product
introduction, specifically our Fieldsmart product line.
Selling,
general and administrative expenses decreased 2% or $31,000 from $1,721,000 for
2008 to $1,690,000 for 2009. This decrease is composed of reduced sales
commissions directly related to decreased sales, and reduced performance-based
compensation programs. These reductions are offset by continued investment in
marketing, product management, and product engineering that are the driving
factors for increased sales and profitability.
Income
from operations for the quarter ended March 31, 2009 was $128,000 compared to
$44,000 for 2008, an improvement of $84,000 or 190%. This improvement
is attributable to improved gross margins and control of selling, general and
administrative expenses.
Interest
income in 2009 declined 78% from $79,000 in 2008 to $17,000 in
2009. This is attributable to declining interest rates as the Company
moved its excess cash into money markets and CD’s where rates are significantly
less than previous investments in Auction Rate Securities. In 2008
the Company invested in Auction Rate Securities that were paying rates of
approximately 5% as compared to U.S. Treasuries which returned approximately .5%
and CD’s returning 1 to 3%. We also receive 7% fixed interest from the note
receivable with Dr. Anil Jain associated with the sale of India
operations.
Interest
expense decreased from $3,000 in 2008 to $2,000 in 2009. Interest for both years
is attributable to financing associated with the enterprise information system
installed during 2007 and 2008.
Other
income consists of $14,000 and $16,000 for 2009 and 2008,
respectively. This is attributable to the lease of the Company’s
Aberdeen facility which was rented beginning in October 2007.
Income
taxes were $27,000 and $21,000 for 2009 and 2008, respectively. Tax
expense related to goodwill were $22,000 and $20,000 for 2009 and 2008,
respectively. The balance was paid to various states for income,
sales and use taxes.
Net income
for 2009 was $131,000 share compared to $115,000 for 2008 an increase of $16,000
or 14%. Income per diluted share was $0.01 in each
period.
13
SIX
MONTHS ENDED MARCH 31, 2009 VS. SIX MONTHS ENDED MARCH 31, 2008
Revenues
for the six months ended March 31, 2009 of fiscal year 2009 increased 10% to
$11,166,000 from revenue of $10,140,000 for the comparable period for fiscal
2008. This increase is attributable to the acceptance of the Company’s products,
the continued and improving acceptance of the Fieldsmart fiber management
product line and engineering-led design services within the FTTH
market.
Revenue
from broadband service providers and commercial data networks amounted to
$9,189,000 or 82% of revenue for 2009 compared to $7,618,000 or 75% of sales in
2008. Sales to OEMs, consisting primarily of fiber optic and copper
cable assemblies produced to customer design specifications, were 18% of revenue
or $1,977,000 for 2009 compared to $,2522,000 or 25% of sales in
2008.
Gross
margin increased from 32% of revenues in fiscal 2008 to 34% of revenues in
fiscal 2009 resulting in a gross profit of $3,832,000 in 2009 as compared to
$3,215,000 in 2008, an increase of $616,000 or 19%. The 2% increase in gross
margin as a percent of revenues is due to the results of on-going programs to
reduce the cost of products through a combination of process improvement, global
sourcing of components and subassembly manufacturing and new product
introduction, specifically our Fieldsmart product line.
Selling,
general and administrative expenses increased 11% or $351,000 from $3,144,000
for 2008 to $3,495,000 for 2009. This increase is composed of increased sales
commissions directly related to increased sales and investment in sales,
marketing, product management, and product engineering that are the driving
factors for increased sales and profitability.
Income
from operations for 2009 was $337,000 compared to $71,000 for 2008, an
improvement of $266,000 or 375%. This improvement is attributable to
increased revenue and improved gross margin.
Interest
income in 2009 declined 71% from $167,000 in 2008 to $49,000 in
2009. This is attributable to declining interest rates as the Company
moved its excess cash into money markets composed of 90 day U.S. Treasuries and
bank CD’s with yield ranging from 0% to 3%. In 2008 the Company
held $3.3 million in Auction Rate Securities that were paying rates of
approximately 5%. We also receive 7% fixed interest from the note receivable
with Dr. Anil Jain associated with the sale of India operations.
Interest
expense decreased from $6,000 in 2008 to $3,000 in 2009. Interest for both years
is attributable to financing associated with the enterprise information system
installed during 2007 and 2008.
Other
income consists of $28,000 and $29,000 for 2009 and 2008,
respectively. This is attributable to the lease of the Company’s
Aberdeen facility which was rented beginning in October 2007.
Income
taxes were $62,000 and $49,000 for 2009 and 2008, respectively. Tax
expense related to goodwill were $45,000 and $44,000 for 2009 and 2008,
respectively. The balance was paid to various states for income,
sales and use taxes except for $10,000 of alternative minimum taxes from 2008
paid and expensed in 2009.
Net income
from continuing operations for 2009 is $349,000 or $0.03 per diluted share
compared to a $213,000 or $0.02 per diluted share for 2008.
There was
no income from discontinued operations for 2009. In 2008 there was $297,000 of
income or $0.02 per diluted share. The 2008 income consisted of the reversal of
a portion of the Blaine building lease termination accrual, and expenses
incurred in the purchase and resale of the building netting to a gain of
$342,000, in addition there was a loss on the disposal of assets of discontinued
operations of totaling $44,000.
The
Company’s net income was $349,000 or $0.03 per diluted share for the six months
ended March 31, 2009 compared to $511,000 or $0.04 per share for the comparable
period in the prior year. This is a net decrease of $162,000. This
decrease was the result of factors explained above in discontinued
operations.
14
LIQUIDITY AND CAPITAL
RESOURCES
As of
March 31, 2009, our principal source of liquidity was our cash and cash
equivalents. Those sources total $6,215,000 at March 31, 2009 compared to
$4,334,000 at September 30, 2008. At September 30, 2008 we also held $3,036,000
of Auction Rate Securities (ARS) that were converted to cash in October 2008.
Our non-operating cash is invested in bank certificates of deposit (CD) that are
guaranteed by the Federal Deposit Insurance Corporation (FDIC) and in bank money
market account also guaranteed by the FDIC. The CDs are purchased with the
intent to hold to maturity, they range from three months to three years in
term. The Company is currently expecting to fund operations
with its working capital which is the combination of cash flow from operations,
accounts receivable and inventory which is managed to meet customer
demand.
Operating
Activities
Net cash
provided by operations for the six months ended March 31, 2009 totaled $381,000.
This was primarily due to net income of $349,000, depreciation of $217,000,
deferred taxes of $45,000, stock based compensation of $57,000, a decrease in
accounts receivable of $271,000 and inventory of $536,000 and an increase of
$83,000 in prepaid expenses. This was offset by a decrease in accounts payable
of $1,010,000.
Net cash provided by operating
activities from both continuing operations and discontinued operations for the
six month period ended March 31, 2008 was $276,000. This cash inflow was
attributable primarily to income of $511,000, depreciation of $265,000 and a
reduction of inventories of $154,000. This was offset by an increase in accounts
receivable of $370,000 and the termination of the lease accrual of $362,000, a
non cash charge associated with the elimination of the lease obligation for the
former corporate headquarters and an increase in prepaid expenses of $
127,000.
Investing
Activities
We invest
our excess cash in money market accounts and bank certificate of deposits (CD)
in denominations across numerous banks so that they are guaranteed under the
FDIC. We believe we obtain a competitive rate return given the economic climate
along with the security provided by the FDIC. During the six month period ended
March 31, 2009 we utilized cash to purchase $4,813,000 of securities and
received $3,300,000 on the sale of our auction rate
securities. Purchases of capital equipment, consumed $38,000 of
cash.
For the
six months ended March 31, 2008 we invested our excess cash in money market
accounts and Student Loan-backed ARS to obtain a market rate return on our
excess cash. During the period we utilized cash to purchase $3,678,000 of
securities and received $3,200,000 on the sale of like
securities. During the same period we utilized $1,500,000 to purchase
the Blaine building and subsequently received proceeds on the sale of
$1,452,000. Purchases of capital equipment, enterprise resource planning
software and implementation services consumed $300,000 of cash. We
expect capital expenditures in fiscal 2009 will be under $200,000.
Financing
Activities
For the
six month period ended March 31, 2009 we used a net of $30,000. For the
comparable period ended 2008 we used $35,000 for scheduled debt principal
payments principally associated with the financing of our IT
systems.
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.
15
FACTORS THAT MAY INFLUENCE
FUTURE RESULTS
The
statements contained in this Report on Form 10-Q 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 Management's Discussion or Plan of Operation. 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-Q 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. Readers of this Report and prospective investors should also review
the Risk Factors set forth in our Report on Form 10-K for the period ended
September 30, 2008.
APPLICATION OF CRITICAL
ACCOUNTING POLICIES
Our
significant accounting policies are described in Note A to the Consolidated
Financial Statements in our Annual Report for the fiscal year ended September
30, 2008. The accounting policies used in preparing our interim 2009
Consolidated Financial Statements are the same as those described in our Annual
Report on Form 10-K.
RECENTLY ISSUED ACCOUNTING
STANDARDS
See Note
12 to the financial statements located in Part I, Item 1 of this
Report.
Not
Required.
Evaluation
of disclosure controls and procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, 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”)). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
Report, our disclosure controls and procedures were effective in ensuring that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in applicable rules and forms and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, in a manner that allows
timely decisions regarding required disclosure.
Changes
in Internal Control
Management,
with oversight from the Audit Committee, addressed the material weaknesses
disclosed in its Annual Report on Form 10-K for the fiscal year ended
September 30, 2008 and the quarter ended December 31, 2008. Management has
implemented new internal controls over financial reporting and tested these
controls, finding them to be effective. Management concludes that these
controls are operating effectively. We believe the weaknesses
disclosed in prior period to have been effectively remediated. There were no
other changes to the Company’s internal control over financial
reporting that occurred during the quarter ended March 31, 2009 that materially
affected , or are reasonably likely to materially effect the Company’s internal
control over financial reporting.
16
None.
None.
None.
None.
We held
our Annual Meeting of Shareholders on February 26, 2009 in Plymouth, Minnesota.
In connection with the Annual Meeting, we filed our definitive proxy statement
with the Securities and Exchange Commission pursuant to Regulation 14A under the
Exchange Act and solicited proxies. The only matters voted on at the Annual
Meeting were the election of directors and amending our 2007 Stock Incentive
Plan. The votes on these were as follows:
1. Election of
directors:
|
Director
|
For
|
Withhold
Authority
|
|
Ronald
G. Roth
|
10,336,176
|
593,060
|
|
Cheryl
Beranek Podzimek
|
10,858,869
|
70,367
|
|
John
G. Reddan
|
10,284,881
|
644,355
|
|
Stephen
L. Zuckerman
|
10,154,415
|
774,821
|
|
Donald
R. Hayward
|
10,849,282
|
79,954
|
|
Charles
N. Hayssen
|
10,857,869
|
71,367
|
2. Amendment of the
2007 Stock Compensation Plan
|
For
|
Against
|
Abstain
|
Broker
Non-Votes
|
|||
|
3,450,373
|
231,585
|
1,487,931
|
5,759,347
|
None.
17
Exhibit
31.1 – Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit
31.2 – Certification required of Chief Financial Officer by Section 302 of the
Sarbanes Oxley Act of 2002
Exhibit
32.1 – Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit
32.2 – Certification required of Chief Financial Officer by Section 906 of the
Sarbanes Oxley Act of 2002
Pursuant
to the requirements 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.
|
May
11, 2009
|
/s/
Cheryl Beranek Podzimek
|
|
|
By:
Cheryl Beranek Podzimek, President and CEO
|
||
|
(Principal
Executive Officer and Duly Authorized Officer)
|
||
|
/s/
Bruce G. Blackey
|
||
|
Bruce
G. Blackey, Chief Financial Officer
|
||
|
(Principal
Accounting Officer and Duly Authorized
Officer)
|
18