UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2008
[ ] 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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.
YES |X| 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 |_| Accelerated filer |_| Non-accelerated filer |_|
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).
YES |_| NO |X|
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 December 31, 2008
Common stock, par value $.01 11,938,131
1
CLEARFIELD, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION.................................................3
ITEM 1. FINANCIAL STATEMENTS UNAUDITED.....................................3
CONSOLIDATED BALANCE SHEETS.................................................3
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS.............................4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY.............................5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS.............................6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS........................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................11
ITEM 3. QUANTITAVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK..........14
ITEM 4. CONTROLS AND PROCEDURES............................................14
PART II. OTHER INFORMATION....................................................15
ITEM 1. LEGAL PROCEEDINGS..................................................15
ITEM 1A.RISK FACTORS.......................................................15
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS........15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................15
ITEM 5. OTHER INFORMATION..................................................15
ITEM 6. EXHIBITS...........................................................15
SIGNATURES....................................................................15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS UNAUDITED
CLEARFIELD, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
December 31, September 30,
2008 2008
----------------- -----------------
Assets
Current Assets
Cash and cash equivalents $ 7,609,966 $ 4,333,709
Accounts receivable, net 1,750,593 2,533,447
Inventories 1,900,233 2,088,769
Other current assets 182,632 115,344
----------------- -----------------
Total current assets 11,443,424 9,071,269
Property plant and equipment, net 1,531,825 1,604,202
Other Assets
Available for sale securities - 3,036,000
Goodwill 2,570,511 2,570,511
Other 288,032 284,309
Notes receivable 422,926 432,846
----------------- -----------------
Total other assets 3,281,469 6,323,666
----------------- -----------------
Total Assets $ 16,256,718 $ 16,999,137
================= =================
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long term debt $ 63,448 $ 62,126
Accounts payable 925,005 1,849,633
Accrued compensation 721,059 903,276
Accrued expenses 148,309 301,859
----------------- -----------------
Total current liabilities 1,857,821 3,116,894
Long term debt, net of current maturities 16,715 33,081
Deferred rent 89,700 89,641
Deferred income taxes 189,259 166,904
----------------- -----------------
Total Liabilities 2,153,495 3,406,520
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 shares issued and outstanding at December 31,
2008 and September 30, 2008 119,381 119,381
Additional paid-in capital 52,195,338 52,166,219
Accumulated deficit (38,211,496) (38,428,983)
Accumulated other comprehensive loss - (264,000)
----------------- -----------------
Total shareholders' equity 14,103,223 13,592,617
----------------- -----------------
Total Liabilities and Shareholders' Equity $ 16,256,718 $ 16,999,137
================= =================
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
CLEARFIELD, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
Three Months Ended
December 31,
2008 2007
----------------- -----------------
Revenues $ 5,933,287 $ 4,697,440
Cost of sales 3,919,079 3,247,969
----------------- -----------------
Gross profit 2,014,208 1,449,471
Operating expenses
Selling, general and administrative 1,804,978 1,422,459
----------------- -----------------
Income from operations 209,230 27,012
Interest income 31,750 87,806
Interest expense (1,906) (3,136)
Other income 13,644 13,417
----------------- -----------------
43,488 98,087
----------------- -----------------
Income before income taxes 252,718 125,099
Income tax expense 35,231 27,170
----------------- -----------------
Net income from continuing operations 217,487 97,929
Net income from discontinued operations - 342,390
Net loss on disposal of assets of
discontinued operations - (44,951)
----------------- -----------------
Total income from discontinued operations - 297,439
----------------- -----------------
Net income $ 217,487 $ 395,368
================= =================
Net income per share:
Continuing operations $0.02 $0.01
Discontinued operations $0.00 $0.02
----------------- -----------------
Basic and diluted $0.02 $0.03
================= =================
Weighted average shares outstanding:
----------------- -----------------
Basic and diluted 11,938,131 11,872,331
================= =================
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
CLEARFIELD, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
Three Months Ended December 31, 2008
Accumulated
Additional other Total
paid-in Accumulated comprehensive shareholders
Shares Amount Capital deficit loss equity
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 2008 11,938,131 $ 119,381 $ 52,166,219 $(38,428,983) $ (264,000) $ 13,592,617
Stock based compensation expense - - 29,119 - - 29,119
Other comprehensive loss - - - - 264,000 264,000
Net income - - - 217,487 - 217,487
------------
Comprehensive income - - - - - 481,487
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2008 11,938,131 $ 119,381 $ 52,195,338 $(38,211,496) $ - $ 14,103,223
============ ============ ============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
CLEARFIELD, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
Three Months Ended December 31,
2008 2007
----------------- -----------------
Cash flow from operating activities
Net income $ 217,487 $ 395,368
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 108,715 120,673
Deferred taxes 22,355 24,270
Loss on disposal of assets - 55,251
Stock based compensation 29,119 11,814
Lease termination accrual - (362,028)
Changes in operating assets and liabilities:
Accounts receivable, net 782,854 647,043
Inventories 188,536 29,937
Prepaid expenses and other (61,091) (64,429)
Accounts payable and accrued expenses (1,260,336) (493,575)
----------------- -----------------
Net cash provided by operating activities 27,639 364,324
Cash flow from investing activities
Purchases of property and equipment (36,338) (1,719,951)
Proceeds from sale of assets - 1,451,624
Purchase of available for sale securities - (3,675,000)
Sale of available for sale securities 3,300,000 1,450,000
----------------- -----------------
Net cash provided by (used in) investing activities 3,263,662 (2,493,327)
Cash flow from financing activities
Repayment of long-term debt (15,044) (17,525)
----------------- -----------------
Net cash used in financing activities (15,044) (17,525)
----------------- -----------------
Increase (decrease) in cash and cash equivalents 3,276,257 (2,146,528)
Cash and cash equivalents at beginning of period 4,333,709 3,304,645
----------------- -----------------
Cash and cash equivalents at end of period 7,609,966 $ 1,158,117
================= =================
Supplemental cash flow information: Cash paid during the period for:
Interest $ 1,906 $ 3,136
Income taxes 12,875 2,900
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 1,002,700 and 794,700 shares
of common stock with a weighted average exercise price of $1.13 and $2.12 were
outstanding at December 31, 2008 and 2007, respectively, but were excluded from
calculating diluted net income per share because they were antidilutive. There
were no dilutive shares at December 31, 2008 and 2007.
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 lease to itself. 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.
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.
7
Prior Year
- ----------
The Company did not have discontinued operations for the three month period
ended December 31, 2008. For the comparable period ended December 31, 2007, 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 December 31, 2008
the balance due is $102,277 and is included in the accrued compensation as it is
all short term.
Note 5. Cash Equivalents and Long-Term Investments
The Company invests its excess cash in money market accounts backed by U.S.
Treasuries with a term of not more than 90 days.
The Company no longer holds $3.3 million of Auction Rate Securities (ARS)
at September 30, 2008 because they were sold back to Credit Suisse at par value
in October 2008. 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. The sale
of these assets and the related mark up to par value is reflected in the
financial statements as of 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 three month period ended December 31, 2008 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 $.42 per share. Senior executives and officers were granted 392,000
incentive 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 $.42
per share.
The Company recorded $29,119 and $11,814 of compensation expense related to
current and past option grants for the three month periods ended December 31,
2008 and 2007, respectively. This expense is included in selling, general and
administrative expense. There was no tax benefit from recording this non-cash
expense. As of December 31, 2008, $303,595 of total unrecognized compensation
expense related to non-vested awards is expected to be recognized over a
weighted average period of approximately 2.93 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.
8
Note 7. Inventories
Inventories consist of the following as of:
December 31, 2008 September 30, 2008
----------------- ------------------
Raw materials $ 1,397,606 $ 1,815,777
Work-in-progress 7,560 14,483
Finished goods 495,607 258,511
----------------- ------------------
$ 1,900,233 $ 2,088,769
================= ==================
Note 8. Major Customer Concentration
Two customers comprised approximately 35% of total sales for the three
months ended December 31, 2008 and two customers one of which was part of the
sales concentration comprised 32% of accounts receivable. One customer comprised
13% of total sales for three months ended December 31, 2007 and another customer
accounted for 12% of accounts receivable.
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, subsequent to September 30, 2008, we have conducted an interim
review of our carrying value with the market capitalization of our stock for a
reasonable period and applied limited variables such as control premium and have
concluded that goodwill is not impaired at December 31, 2008. 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 $35,000 and $27,000, for the
quarter ended December 31, 2008 and 2007. Our tax provision includes estimated
federal and state alternative minimum taxes, but is primarily related to
deferred tax expense related to book and income tax basis difference in goodwill
on prior year 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.
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 December 31, 2008 the Company has
not recorded any unrecognized tax benefits. Because we are using net operating
loss carryforwards generated in prior tax years to off-set taxable income in
current periods, there are no periods that have been cleared by the taxing
authorities.
9
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.
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 adoption of FASB 162 is not expected to have a material impact on the
Company's financial position
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
non-financial assets and non-financial 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 non-financial assets and non-financial
liabilities as noted in proposed FSP FAS 157-2, on October 1, 2008. As such, the
Company is required to adopt this provision in the current period. Adoption of
the applicable portions of SFAS No. 157 did not have a significant effect on the
Company's financial statements because the Company did not have any applicable
financial assets or liabilities. The Company believes the adoption of SFAS No.
157, as it applies to non-financial assets and non-financial liabilities could
have a material impact on financial statement disclosures.
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. 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. As such, the Company is required to adopt
this provision in the current period. 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.
10
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.
Current economic conditions provide a degree of uncertainty. Should the
economy continue 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 not
respond, it is possible that this may trigger an impairment of goodwill. While
it is counterintuitive to believe that increased shareholder value would
increase and the market not recognize this change, we believe it is important to
disclose the potential for such an occurrence.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2008 VS. THREE MONTHS ENDED DECEMBER 31, 2007
Revenues for the first quarter ended December 31, 2008 of fiscal year 2009
increased 26% to $5,933,000 from revenue of $4,697,000 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 to broadband service providers and commercial data networks
amounted to $4,786,000 or 81% of revenue for 2009 compared to $3,494,000 or 74%
of sales in 2008. Sales to OEMs, consisting primarily of fiber optic and copper
cable assemblies produced to customer design specifications, were 19% of revenue
or $1,147,000 for 2009 compared to $1,203,000 or 26% of sales in 2008.
Gross margin increased from 31% of revenues in fiscal 2008 to 34% of
revenues in fiscal 2009 resulting in a gross profit of $2,014,000 in 2009 as
compared to $1,449,000 in 2008, an increase of $565,000 or 39%. 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 sub assembly manufacturing and
new product introduction, specifically our Fieldsmart product line.
11
Selling, general and administrative expenses increased 27% or $382,000 from
$1,422,000 for 2008 to $1,804,000 for 2009. This increase is composed of
increased sales commissions directly related to increased sales,
performance-based compensation programs 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 $209,000 compared to $27,000 for 2008,
an improvement of $182,000 or 675%. This improvement is attributable to
increased revenue and improved gross margin.
Interest income in 2009 declined 64% from $88,000 in 2008 to $32,000 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. In 2008 the
Company held $3.3 million in Auction Rate Securities that were paying rates of
approximately 5% as compared to U.S. Treasuries which returned approximately 1%.
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 $13,000 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 $35,000 and $27,000 for 2009 and 2008, respectively.
Taxes related to goodwill were $22,000 and $24,000 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 was $217,000 or $0.02 per
diluted share compared to a $98,000 or $0.01 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 $217,000 or $0.02 per diluted share for the
quarter ended December 31, 2008 compared to $395,000 or $0.03 per share for the
comparable period in the prior year. This is a net decrease of $178,000. This
decrease was the result of factors explained above in discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of December 31, 2008, our principal source of liquidity was our cash and
cash equivalents. Those sources total $7,610,000, compared to $4,334,000 at
September 30, 2008, respectively. Our non operating cash is invested in money
market accounts composed of U.S. Treasuries. These accounts are liquid on a
daily basis and are generally considered low-risk investments. 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. Cash in excess of operating capital is
invested in money market accounts and is readily accessible should the need
arise or economic conditions change significantly.
Operating Activities
--------------------
Net cash generated for the three months ended December 31, 2008 totaled
$28,000. This was primarily due to our net income of $217,000, depreciation of
$109,000, deferred taxes of $22,000, stock based compensation of $29,000, and an
increase in accounts receivable of $783,000 and inventory of $189,000. This was
offset by a decrease in accounts payable of $1,260,000 and $61,000 in prepaid
expenses.
Net cash generated for the three months ended December 31, 2007 totaled
$364,000. This was primarily due to our net income of $395,000 and depreciation
of $120,000, deferred taxes of $24,000, stock based compensation of $12,000 and
an increase in accounts receivable of $647,000 and inventory of $30,000. This
was offset by a decrease in accounts payable of $493,000 and $64,000 in prepaid
expenses.
12
Investing Activities
--------------------
For the three months ended December 31, 2008 we sold our Auction Rate
Securities at par for $3,300,000 and purchased equipment, consuming cash of
$36,000.
For the three months ended December 31, 2007 we purchased $1,720,000 of
property, plant and equipment; of that approximately $1,500,000 was for the
purchase of the Blaine building 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 $1,452,000.
During the same period we purchased $3,675,000 and sold $1,450,000 of available
for sale securities which were Auction Rate Securities. The net result is a net
decrease in cash from investing activities of $2,493,000.
Financing Activities
--------------------
For the three months ended December 31, 2008 we used a net of $15,000 to
make scheduled debt principal payments principally associated with the financing
of our IT systems.
For the three months ended December 31, 2007 we used a net of $17,000 to
make scheduled debt principal payments.
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.
13
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-QSB 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 transition 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.
ITEM 3. QUANTITAVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
Not Required
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company conducted an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
its disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of the end of the period covered by this report. There
are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Due to the material weaknesses
described in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2008, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were not
effective as of the end of the period covered by this report in alerting them on
a timely basis to material information relating to the Company required to be
included in the Company's reports filed or submitted under the Exchange Act. The
Chief Executive Officer and Chief Financial Officer believe that the Company is
currently in process of remediating these deficiencies.
Changes in Internal Control
Management, with oversight from the Audit Committee, has been aggressively
addressing the material weaknesses disclosed in its Annual Report on Form 10-K
for the fiscal year ended September 30, 2008 and is committed to effectively
remediating known weaknesses as expeditiously as possible. Although the
Company's remediation efforts are well underway, control weaknesses will not be
considered remediated until new internal controls over financial reporting are
implemented and operational for a period of time and are tested, and management
concludes that these controls are operating effectively. Due to the timing of
this process, there were no changes in the Company's internal control over
financial reporting that occurred during the first quarter ended December 31,
2008 that have materially affected, or are reasonably likely to materially
affect its internal control over financial reporting.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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
SIGNATURES
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.
February 9, 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)
15