UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended June 30, 2009
Commission file number 0-1388
ZAREBA SYSTEMS, INC.
State of Incorporation: Minnesota
IRS Employer Identification No. 41-0832194
13705 26th Avenue N., Suite 102, Minneapolis, MN 55441 (763) 551-1125
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share, registered on the Nasdaq Capital Market
Series A Preferred Stock Purchase Rights Pursuant to Rights Agreement
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes
o
No
þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes
o
No
þ
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulations 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). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold, as of the last day of
the Company’s most recently completed second fiscal quarter was $2,379,204.
The number of shares outstanding of the Company’s Common Stock on September 4, 2009 was 2,481,973.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instructions G(3), the responses to items 10, 11, 12, 13 and 14 of Part III of
this report are incorporated herein by reference to certain information contained in the Company’s
definitive proxy statement for its 2009 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before October 28, 2009.
2
PART I
Item 1. Business
A. Business Development
Zareba Systems, Inc. (“Zareba”, “Zareba Systems” or the “Company”) designs, manufactures and
markets electronic perimeter fence and access control systems, operating in one world-wide business
segment. Zareba has three subsidiaries, Zareba Systems Europe Limited, Zareba Security, Inc. and
Zareba Systems of Canada LTD.
The Company was incorporated in Minnesota in 1960, originally providing medical products to niche
markets. The Company has since expanded primarily through business acquisitions and evolved into
the leading supplier of electric fencing systems in North America and the UK.
On August 6, 2001, Zareba purchased all outstanding shares of North Central Plastics, Incorporated
(NCP) pursuant to a stock purchase agreement. The acquisition was partially funded with new bank
debt. Under the brand name Red Snap’r®, North Central Plastic’s products included insulators,
fence energizers, high tensile fencing, polypropylene (poly) wire, rope and tape and accessories.
The acquisition of NCP allowed Zareba to consolidate operations in NCP’s 64,000 square foot
facility located in Ellendale, Minnesota, and to further expand its distribution in the U.S.,
Canada, Mexico, Central and South America, Europe and New Zealand.
On September 27, 2004, through its newly formed subsidiary, Zareba Systems Europe Limited (Zareba
Systems Europe), Zareba acquired Rutland Electric Fencing Company Ltd. (Rutland), a manufacturer
and distributor of electronic fencing equipment located in Oakham, United Kingdom (UK) pursuant to
a stock purchase agreement. Under the brand names Rutland Electric Fencing, Electric Shepherd®,
and Induced Pulse® (IP), Zareba Systems Europe’s products include insulators, fence energizers,
high tensile fencing, polypropylene (poly) wire, rope and tape and security fencing. Zareba Systems
Europe continues the former Rutland operations in its existing Oakham, England and Brechin,
Scotland facilities. The acquisition of Rutland allowed Zareba to gain an entry into the UK,
Europe, and the Middle East markets, as well as expand distribution of Rutland Electric Fencing
products in the U.S.
On May 1, 2006, Zareba Security Inc. was established as a wholly-owned subsidiary of Zareba for the
purpose of separating the security product line from the Company’s other product lines.
On August 1, 2007, the Company completed the sale of the Company’s Waters Medical Systems, Inc.,
(WMS) subsidiary to a third party for $5 million in cash, resulting in approximately $3.3 million
cash proceeds net of tax and transaction costs. Cash proceeds from the sale were used to reduce
borrowing under the Company’s credit facility. The WMS subsidiary, a provider of medical products
was initially formed on June 30, 2005, when all the assets of the WMS division of Zareba were
transferred to the newly-formed subsidiary, and had operated in a separate business segment of the
Company.
In June 2008, Zareba discontinued its professional series automatic gate opener (PS AGO) product
line and commenced efforts to sell the related assets and eliminate personnel and support costs
associated with the product line. On October 22, 2008, the Company sold substantially all of the
assets of its PS AGO product line to a third party for $739,000, plus the assumption of certain
outstanding inventory purchase obligations of the Company. The purchase price was payable in cash
of $200,000 at the closing, with the balance evidenced by promissory notes receivable from the
buyer, payable in installments by December 2010.
Included in discontinued operations for all periods presented are Zareba’s PS AGO product line and
its WMS subsidiary. The Company now operates in one business segment. All references to the
business are based on results of operations from continuing operations.
At June 30, 2008, the Company recorded a non-cash goodwill impairment charge of $6.3 million
relating to all of the goodwill from the NCP and Rutland acquisitions, reducing net book value by
the same amount. The impairment resulted from the decrease in valuations of U.S. public companies
and corresponding increased costs of capital created by the weakness in the U.S. financial markets,
and was recorded as required by SFAS 142 in connection with the Company’s impairment test. The
revaluation had no impact on the Company’s tangible net book value, liquidity or debt covenant
measurements.
On September 10, 2009 the Company announced that its Board of Directors decided to explore
strategic alternatives to enhance shareholder value.
4
B. Business of Issuer
Zareba Systems designs, manufactures and sells electronic perimeter fence and access control
systems in both North America and the United Kingdom. These products are used for the control,
containment and deterrent of animals, including horses and livestock in agricultural applications,
and small animals in lawn and garden applications, including the hobby farm market. These products
are also used in perimeter security applications to deter, detect, delay, assess and respond to
intrusions or escapes in a wide range of applications including utilities, airports, correctional
facilities and other commercial and government properties. An electronic perimeter fence system
consists of an alternating current (also referred to as “AC”), direct current (also referred to as
“DC”) or solar energizer, insulators for the fence posts, poly wire, tape and rope, and a wide
range of hardware and accessories.
Zareba also offers a line of electronic automatic gate openers designed to open gates safely from a
distance, such as from a vehicle, marketed primarily for various agricultural, hobby farm and
residential applications. These products open gates from a distance using a radio frequency
transmitter signal and battery backed-up motors to swing open various styles of gates allowing
access to secured property. In addition, Zareba Systems offers the patented Guard Tower® perimeter
fence security system and the patented rapid pulse energizer system designed to deter, detect,
delay, assess and respond to intrusions or escapes in a wide range of security applications.
Potential applications include airports, oil refineries, remote utility sites, high value storage
sites, and correctional facilities, as well as other commercial or government properties.
In North America, Zareba Systems primarily sells to major retail merchandisers through direct sales
personnel and independent representatives under written agreements in the “Do It Yourself” (DIY)
hobby farm and hardware markets. Zareba Systems’ business is seasonal, with peak customer demand
occurring in the spring and summer months. In the United Kingdom, Zareba Systems sells directly to
dealers through direct sales personnel and delivers products with its factory owned tractor/trailer
system. Zareba’s perimeter security products are sold through system integrators and installers
throughout North America and the UK. Backlog is not significant in the operations since most
orders are filled within days after receipt of a purchase order.
The market for electronic perimeter fence systems is competitive, with several global manufacturers
vying for market share. By providing a fully integrated line of products, Zareba Systems considers
itself the largest supplier of electronic perimeter fence systems in North America and the United
Kingdom. In fiscal year 2009, one Zareba Systems customer accounted for sales of greater than 10%
of the Company’s total sales. Sales to this customer totaled $8.5 million.
Zareba Systems has made no significant electric fence system sales directly to governmental
agencies, and therefore no governmental contracts are subject to renegotiation. Raw materials used
in the production of electronic perimeter fence system products are generally available from a
number of suppliers.
Zareba Systems has several patents, including on its (i) Apparatus and Method for Control of
Electric Fence, issued August 4, 2003; (ii) Animal Containment System having a dynamically changing
perimeter which was filed in February 2002; (iii) combined front panel and mount for an electric
fence insulator filed in September 1992; (iv) direct capacitive discharge electric fence controller
filed in March 1997; (v) electric fence charger filed in September 1992; (vi) types of electric
fence insulators filed in October 1990, August 1989 and October 2001; (vii) fence post assembly,
portable fencing system and method filed in September 2000; (viii) fence post cap insulator filed
in December 1996; (ix) fence strand retainer clip for fence posts filed in September 1997; (x)
front panel for an electric fence insulator filed in April 1989; (xi) insulator for the backside of
a t-post filed in May 1998; and (xii) electric fence charger with switchable pulse frequency filed
in January 2009. Each of the patents has a 20 year duration from filing. Zareba has several other
patent applications pending related to its electric fencing systems. There is no assurance that
Zareba’s patents and rights to patents will afford the Company any competitive advantage.
Zareba Systems has the following trademarks registered in the United States: American Farmworks &
Design, Blitzer, Bulldozer, Captivator, Electric Shepherd, Electro-line, Ezee Corral, Garden
Protector, Guard Tower, Hol-dem, Horse Sense Electric Fence System, Hot Spark, International, One
Stop Fencing and Design, Pet Controller,
Red Snap’r & Design, Rutland Professional Products, Snap Fast, Super Charger, Tarantula, The Horse
Fence That Makes Sense, Zareba, Zareba Security, and Zareba Systems.
5
It has also registered the following trademarks in Australia, New Zealand, Canada and the European
Union: Horse Sense Electric Fence System, The Horse Fence That Makes Sense, and Red Snap’r. Zareba
also has a registered trademark for Zareba in the European Union.
During fiscal years 2009 and 2008, Zareba spent $0.9 million and $1.1 million for research and
development projects, respectively.
As of June 30, 2009, Zareba and its subsidiaries had a total of 124 employees, with 111 full-time
employees, as compared to a total of 134 employees, with 124 full-time employees the prior year.
Item 1A. Risk Factors
The Company’s operations are subject to a number of risks, which include but are not limited
to the following:
Our business is subject to seasonality that may cause our quarterly operating results to fluctuate
materially and cause the market price of our common stock to decline.
The vast majority of
Zareba’s business is seasonal, with peak customer demand occurring in the late spring, summer and
early autumn months. Therefore, the Company typically experiences peak revenues during the fourth
fiscal quarter and lowest sales levels during the second fiscal quarter. Additionally, consumer
demand for our products can be affected by weather patterns. Abnormally cold or wet spring or
autumn seasons may cause consumers to delay or cancel purchases. However, because the length and
severity of the season is difficult to anticipate, we cannot estimate the fluctuation of our sales
from quarter to quarter in a fiscal year or the seasonal impact year to year. If our operating
results are below financial analysts’ or investors’ expectations due to seasonal factors, the
market price of our common stock may decline.
Our operating results have been inconsistent and we have reported a loss from continuing operations
in two of the past four years.
The Company has made significant investments in development of new
products and market channels over the past few years, coinciding with integrating a significant
business acquisition. These initiatives combined with other market factors have adversely impacted
our profitability and caused us to report an operating loss in two of the past four years.
Continued fluctuation in our operating results could detrimentally affect the Company’s financial
condition and may cause the market price of our common stock to decline.
Changes in the economic climate in our major markets and the volatility of oil and natural gas
prices could adversely impact our business.
Our business is impacted by the current uncertainty in
the economic climates of the geographic areas in which we operate, primarily the US and UK markets.
A protracted downturn in the economy in one or both of these markets could reduce the amount of
funds our end customers have available for purchases of our products. Additionally, our product
costs, including materials and transportation costs, are adversely impacted by increased oil and
natural gas prices. Increased market prices of oil and natural gas could reduce our profits to the
extent that we are not able to fully and timely pass these costs through to our customers. The
current uncertainty surrounding the economic climate in the US and internationally and the
potential for increased prices for oil and natural gas throughout the world, if realized, may
detrimentally impact our business.
We are exposed to risks associated with acquisitions and investments.
We have made, and may in the
future make, acquisitions of, or significant investments in, businesses with complementary
products, services and/or technologies. Acquisitions and investments involve numerous risks,
including, but not limited to:
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difficulties and increased costs in connection with integration of the personnel,
operations, technologies and products of acquired businesses;
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•
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diversion of management’s attention from other operational matters;
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•
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the potential loss of key employees of acquired businesses;
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•
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lack of synergy, or the inability to realize expected synergies, resulting from the
acquisition;
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•
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failure to commercialize purchased technology; and
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•
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the impairment of acquired intangible assets and goodwill that could result in
significant charges to operating results in future periods.
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6
Additionally, such acquisitions or investments may result in immediate charges to operating
results. Mergers, acquisitions and investments are inherently risky and the inability to
effectively manage these risks could materially and adversely affect our business, financial
condition and results of operations.
Reliance on a significant customer.
In each of fiscal years 2009 and 2008, we had one significant
customer that accounted for approximately 26% and 21% of net sales, respectively. We anticipate,
but cannot assure, that this customer will continue to be significant in fiscal 2010. The loss of,
or a significant decrease in sales to, this customer could have a material adverse effect on the
Company’s financial condition and results of operation.
Requirements for availability of working capital.
We depend on our revolving credit facilities for
working capital. The lenders have security interests in substantially all of the Company’s assets.
Our ability to borrow under the credit facilities depends on maintaining a borrowing base of
eligible accounts receivable and, to a lesser extent, eligible inventory and complying with
financial covenants concerning debt service coverage, interest coverage and maximum capital
expenditures. If the Company is unable to generate a sufficient borrowing base and comply with the
financial covenants and other requirements of the credit facilities, it will limit or prevent
borrowing under the credit facilities and could have a serious adverse effect on the Company.
Substantial operations in foreign markets.
Zareba has foreign subsidiaries in Canada and the United
Kingdom and generated approximately 29% of its net sales from outside North America for fiscal year
2009. The ability to sell products in foreign markets may be affected by changes in economic,
political or market conditions in those foreign markets that are outside the Company’s control.
Additionally, managing geographically dispersed operations presents difficult challenges associated
with organizational alignment and infrastructure, communications and information technology,
inventory control, customer relationship management, terrorist threats and related security matters
and cultural diversities. If we are unsuccessful in managing such operations effectively, our
business and results of operations will be adversely affected.
Reliance on critical suppliers.
We use numerous vendors to supply raw materials, parts, components
and subassemblies for the manufacture of our products. It is not always possible to maintain
multiple qualified suppliers for all of our parts, components and subassemblies. As a result,
certain key items may be available only from a single supplier or a limited number of suppliers. In
addition, suppliers may cease manufacturing certain components that are difficult to replace
without significant reengineering of our products. Furthermore, some key items are sourced from
foreign suppliers with long lead time requirements for economical shipping. As a result,
unanticipated changes in inventory requirements may cause significant delays in receiving parts, or
require the Company to incur significant shipping costs to expedite delivery of the items. Our
results of operations may be materially and adversely impacted if we do not receive sufficient
parts to meet our requirements in a timely and cost effective manner.
We have experienced significant volatility in our stock price.
A variety of factors may cause the
price of our stock to be volatile. In recent years, the stock market in general, and the market for
shares of many small-capitalized companies, including ours, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of affected companies.
During the last two fiscal years the price of our common stock has ranged from $1.08 to $7.99. The
price of our stock may be more volatile than other companies due to, among other factors, the
unpredictable and seasonal nature of the markets we serve, our significant customer concentration
and our relatively low daily stock trading volume. The market price of our common stock is likely
to continue to fluctuate significantly in the future, including fluctuations related and unrelated
to our performance.
Changes in securities laws and regulations have increased our costs.
Changing laws, regulations
and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley
Act of 2002, new SEC regulations and NASDAQ National Market rules, are creating challenges for all
publicly-held companies. We are committed to maintaining high standards of corporate governance and
public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards
have resulted in, and are likely to continue to result in, increased general and administrative
expenses and a diversion of management time and attention from revenue-generating activities to
compliance activities. In particular, our efforts to meet and maintain compliance with Section 404
of the Sarbanes-Oxley Act of 2002 and the related regulations regarding the required assessment of
our internal controls over financial reporting has required, and is expected to increasingly
require the commitment of significant financial and managerial resources. Further, our board
members, chief executive officer and chief financial officer could face an increased risk of
personal liability in connection with the performance of their duties.
7
As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which
could harm our business.
Our future growth will depend in part upon our ability to develop and achieve sales of new products
and successful entry into new markets.
Our growth strategy depends upon the successful development
and market introduction of the Company’s automatic gate opener products and security products and
niche products into our core DIY business. In addition, in the case of security products, we will
be entering new customer markets where we have no previous brand recognition or experience, and
with longer sales cycles. We cannot assure you that we will be successful in completing
development of any new products. Further, in developing new products, we will incur additional
research and development and marketing expenses. Revenues, if any, which we generate from new
products, may not be sufficient to recoup the expenses we will incur in the development and
introduction of new products. Customers may be slow to accept our new products, if at all, and
therefore, we cannot assure you that we will generate significant sales from any new products we
develop. If we cannot successfully develop new products and achieve sales of our new products, our
financial performance and results of operations will be adversely affected.
Fluctuation in foreign currency exchange rates may negatively affect our reported results.
Zareba’s subsidiary in the United Kingdom has generated approximately 25% to 29% of our net sales
over the past two years. The UK subsidiary’s sales, product costs and operating expenses are
transacted primarily in British pound sterling, then translated to US dollars in our consolidated
financial reports. Accordingly, fluctuations in exchange rates may cause our reported financial
results in US dollars to fluctuate to a greater degree from period to period than as transacted in
local currency. Additionally, the assets and liabilities of the foreign subsidiary may also
fluctuate from period to period as a result of differences in exchange rates.
Our financial results for fiscal year 2010 may be adversely impacted by subsequent events.
In
August 2009, we announced a proposed transaction to voluntarily terminate the registration of our
common stock under the federal securities laws, which proposed has been terminated prior to
consummation, and on September 10,2009, the Company announced that its Board of Directors decided
to explore strategic alternatives to enhance shareholder value. We incurred expenses in connection
with the proposed deregistration transaction, and we expect to incur additional expenses in
connection with the exploration of strategic alternatives. These expenses may adversely impact our
financial results for fiscal 2010.
Item 2. Properties
Zareba owns a 64,000 square foot facility in Ellendale, Minnesota that houses its
manufacturing and support functions. In connection with the Company’s credit facility, the
building and land are subject to a Negative Pledge Agreement in favor of JPMorgan Chase Bank, N.A.
The Company currently leases 6,895 square feet of office space in a Plymouth, Minnesota, office
complex for its corporate headquarters. The lease extends through March 31, 2011, and requires a
monthly payment of approximately $5,500.
Zareba Systems Europe leases certain facilities in the UK for its manufacturing and distribution
operations. The UK leases vary in term, with the principal facility lease commencing on September
22, 2004 and continuing for a twenty-five year period. The lease provides for an early termination
election every five years, upon six months written notice, the first of which occurs September 22,
2009. No early termination election was made in 2009. The combined monthly lease rate for the UK
facilities as of fiscal year end 2009 was approximately $28,000.
Zareba believes that its current facilities are adequate to meet its business needs and that
insurance coverage on its properties is adequate.
Item 3. Legal Proceedings
Zareba did not have any legal proceedings during fiscal years 2009 and 2008 that were, and
does not have any current pending legal proceedings that are, outside of routine litigation,
incidental to the business.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Zareba’s shareholders during the fourth quarter of
fiscal year 2009.
8
PART II
Item 5. Market for Common Equity and Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Zareba’s common stock is traded on the NASDAQ Capital Market under the symbol ZRBA.
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Stock Price
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High
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Low
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FY2009
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First Quarter
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$
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2.75
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$
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1.19
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Second Quarter
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$
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2.64
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$
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1.08
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Third Quarter
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$
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2.85
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$
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1.12
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Fourth Quarter
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$
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2.89
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$
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1.31
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FY2008
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First Quarter
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$
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7.99
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$
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5.33
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Second Quarter
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$
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6.70
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$
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4.23
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Third Quarter
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$
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5.93
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$
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3.76
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Fourth Quarter
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$
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4.45
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$
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2.20
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Shareholders
As of August 26, 2009 Zareba had approximately 424 shareholders of record.
Dividend Summary
Zareba elected to retain cash for investment in the Company’s growth and did not pay a
dividend in fiscal 2009 or 2008. The Board of Directors periodically reviews its dividend policy
to determine if changes are warranted.
Equity Compensation Plan Information
The following table sets forth certain information regarding outstanding options to purchase
Common Stock as of June 30, 2009:
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Number of
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securities
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remaining available
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Number of
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for future issuance
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securities to be
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under equity
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issued upon
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Weighted average
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compensation plans
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exercise of
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exercise price of
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(excluding
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outstanding
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outstanding
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securities
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options, warrants
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options, warrants
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reflected in column
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and rights
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and rights
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(a))
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Plan Category
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(a)
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(b)
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(c)
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Equity compensation
plans approved by
security holders:
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The 1995 Plan
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46,275
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$
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3.19
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—
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The 2004 Plan
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77,550
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$
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4.75
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472,450
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The ASP Plan
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—
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—
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175,048
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Equity compensation
plans not approved
by security
holders:
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None
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—
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—
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—
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123,825
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$
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4.17
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647,498
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9
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following discussion of the Company’s results of operations and financial condition should
be read together with the other financial information and Consolidated Financial Statements
included in this Annual Report on Form 10-K. The results of operations relate to continuing
operations unless noted. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those anticipated in the
forward-looking statements as a result of a variety of factors, including those discussed in Item
1A.
Risk Factors
, and elsewhere in this report.
Executive Summary
Zareba Systems, Inc. (“Zareba”, “Zareba Systems” or the “Company”) operating results for
fiscal years 2009 and 2008 reflect several events and factors that impacted its operations
throughout the year. These include:
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A decrease in net sales of 6.8% to $32.2 million in fiscal 2009 versus the previous
year, primarily due to:
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$1.9 million, or 5.5%, of the decrease in reported net sales resulted
from the change in the translation rate of sales denominated in British pound
sterling to US dollars for reporting purposes in fiscal 2009 versus 2008. Sales
denominated in British pound sterling for the periods were virtually flat.
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A decrease in net sales of $0.5 million, or 1.3%, resulted from
decreased electric fencing sales primarily in North America.
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Decreased selling, general and administrative expenses in fiscal 2009 reflecting the
impact of fiscal 2009 cost reduction initiatives and the fiscal 2008 charges related to
changes in executive management and non-cash charges for cancellation of non-vested
options.
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A non-cash goodwill impairment charge of $6.3 million (non-tax deductible), recorded in
the fourth quarter of fiscal 2008, resulting from the decrease in valuations of U.S. public
companies and corresponding increased costs of capital created by the weakness in the U.S.
financial markets, recorded as required by SFAS 142 during the step 2 process in
connection with the Company’s impairment test. The revaluation had no impact on the
Company’s tangible net book value, liquidity or debt covenant measurements.
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A gain on the sale of the professional series automatic gate opener (PS AGO) product
line in fiscal 2009 and losses associated with the discontinuance of the PS AGO product
line in fiscal 2008.
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A gain on the sale of the Company’s Waters Medical Systems, Inc. (WMS) subsidiary of
$2.5 million, net of tax for fiscal 2008.
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The reduction of $2.6 million of bank debt in fiscal 2009 from cash generated from
operations and proceeds from the sale of the PS AGO product line.
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Overview
Zareba Systems, Inc. designs, manufactures and markets electronic perimeter fence and access
control systems, operating in one world-wide business segment. Zareba has three subsidiaries,
Zareba Systems Europe Limited, Zareba Security, Inc. and Zareba Systems of Canada LTD.
Originally a medical products company serving small niche markets, the Company expanded primarily
through business acquisitions and evolved into the leading supplier of electric fencing systems in
North America and the UK. The acquisition of North Central Plastic, Incorporated (NCP) in fiscal
2002 enabled the Company to expand its electric fencing systems distribution and product offerings
in North America. The acquisition of Rutland Electric Fencing Company, Ltd. expanded the Company’s
presence into Europe and established the Company in the security products market.
The Company has also launched organic growth initiatives to leverage both its distribution channels
and electric fencing systems technology. In the first quarter of calendar year 2005, the Company
introduced two new product lines within the Zareba Systems division, perimeter security systems and
electric gate opener systems and accessories. The perimeter security system is designed to deter,
detect, delay, assess and respond to intrusions or escapes in a wide range of applications
including utilities, airports, correctional facilities and other commercial and government
properties. The Company completed initial systems deliveries of its Guard Tower® perimeter fence
security system in fiscal 2006 and initial deliveries if its patented rapid pulse energizer system
in fiscal 2007 The
Company continues to work to establish its non-lethal electric fencing and its patented Guard
Tower® product lines in targeted market applications, primarily through its US and UK sales
channels.
10
Products comprising the automatic gate opener systems and accessories targeting the Do-It-Yourself
(traditional) Zareba market are sold through existing retail channels in North America and the UK,
often to the same customer that purchased products of the traditional Zareba product line. During
the second half of fiscal 2007, the Company began shipping a new family of professional series
automatic gate openers (PS AGO) available to the professional installer distribution channels,
targeting market growth opportunities. In response to changing market and competitive conditions,
the Company discontinued the sales of the PS AGO products in June 2008 and sold substantially all
of the related assets to a third party in October 2008. This decision will allow the Company to
focus more on the Company’s core products and established distribution channels, while continuing
to evaluate and develop its perimeter security products initiative.
In August 2007, the Company completed the sale of the Company’s Waters Medical Systems, Inc. (WMS)
subsidiary, exiting the medical products market. In the years prior to the sale, WMS had
represented a diminishing portion of the Company’s total business and accounted for less than 10%
of the Company’s revenue. WMS was no longer compatible with the strategic direction of the Company
and the divestiture provided the Company cash while allowing the Company to focus on its single
core segment.
Zareba Systems’ business is seasonal, with peak customer demand occurring in the late spring,
summer and early autumn months. Backlog is not significant in either of the Company’s operating
units since most orders are filled within days after receipt of a customer’s order. As a result of
Zareba Systems seasonality, there is a resulting variability in sales, manufacturing fixed overhead
absorption and a further resulting impact on gross margin, working capital and cash flow during the
Company’s fiscal year.
Results of Continuing Operations
Net sales for fiscal year ended June 30, 2009, decreased 6.8%, to $32.2 million compared to
$34.6 million in fiscal year 2008. Of this decrease, $1.9 million, or 5.5%, resulted from the
unfavorable change in the translation rate of sales that were denominated in British pound sterling
and converted to US dollars for reporting purposes in fiscal 2009 versus 2008. Sales denominated
in British pound sterling for the periods were virtually flat. The remaining decrease in net sales
of $0.5 million, or 1.3%, resulted from decreased electric fencing sales primarily in North
America. The decrease in North American fencing systems sales resulted primarily from the impact
of the economic downturn in the US and the late spring in North America which delayed the buying
season for our fencing systems. In light of the current economic conditions in its primary markets
and the uncertainty of the exchange rate of the British pound sterling to the US dollar, the
Company does not anticipate significant changes in its revenue levels in fiscal year 2010 as
compared to 2009.
Fiscal year 2009 gross margins increased to 33.3% from 32.2% in fiscal year 2008. Fiscal year 2009
margins benefited from sales price increases near the end of fiscal 2008 and relaxed cost pressure
on certain materials, primarily petroleum based products and steel products in fiscal 2009 as
compared to the previous year. The Company expects gross margins for fiscal 2010 to be comparable
to fiscal 2009, with product cost reduction initiatives and competitive pressures having offsetting
impacts.
Selling, general and administrative expenses were $7.9 million, or 24% of sales, for fiscal year
2009, compared to $10.1 million, or 29%, of sales in fiscal year 2008. The decrease resulted from
costs saving initiatives originating in fiscal 2008, resulting in one-time charges in fiscal 2008
of $0.4 million in severance and $0.3 million for non-cash charges for the cancellation of stock
options. Additional savings year-to-year were $0.3 million in reduced salaries and approximately
$0.2 million in reduced freight and commissions resulting from shifts in customer mix. In
addition, $0.5 million of the decrease resulted from the lower exchange rate used to translate
expense of our UK operations from British pound sterling to US dollars. Other reductions in trade
show, travel and legal expenses comprised much on the remaining difference year-to-year.
Research and development expenses were $0.9 million for fiscal year 2009, compared to $1.1 million
in fiscal 2008, and were directed toward product enhancements and agency certification of electric
fencing systems and continued product development for perimeter security systems. The Company’s
long-term investments are designed to protect and enhance our future financial performance.
The Company recorded a non-cash goodwill impairment charge of $6.3 million (non-tax deductible) in
the fourth
quarter of fiscal 2008. The goodwill impairment resulted from the decrease in valuations of U.S.
public companies and corresponding increased cost of capital created by the weakness in the U.S.
financial markets, and was recorded
11
as required by SFAS 142 during the step 2 process in connection
with the Company’s impairment test. The revaluation had no impact on the Company’s tangible net
book value, liquidity or debt covenant measurements.
Interest expense was $238,000 for fiscal 2009, compared to $387,000 for fiscal year 2008.
Decreased debt levels created by the proceeds from the sale of the WMS subsidiary and favorable
interest rate movements in the market place were the primary contributors to the decrease in
interest expense.
Income from continuing operations was $0.9 million, or $0.35 per basic and diluted share, in fiscal
2009, compared to loss of $7.1 million, or $2.90 per basic and diluted share, in fiscal 2008. The
change in operating results for fiscal 2009 versus the prior year resulted primarily from the
goodwill impairment charge and higher selling, general and administrative expenses in fiscal 2008.
Results of Discontinued Operations and Gain from Sale of Subsidiary
Gain from the sale of discontinued product line, net of tax was $141,000, or $0.06 per share,
for fiscal 2009, reflecting net cash proceeds from the sale of the PS AGO product line. Loss from
discontinued operations, net of tax was $7,000, or $0.00 per basic and diluted share, for fiscal
2009, versus a loss of $603,000, or $0.25 per basic and diluted share for fiscal 2008, reflecting
the net results of WMS and the PS AGO product line prior to their respective sales. Gain from sale
of the WMS subsidiary, net of tax was $2.5 million, or $1.04 per basic and diluted share, in fiscal
2008.
Net Income (Loss)
Net income for fiscal 2009 was $1.0 million, or $0.41 per basic and diluted share, versus a
net loss of $5.2 million, or $2.11 per basic and diluted share, for fiscal 2008. The difference
resulted primarily from the operational improvements in fiscal 2009 and the net impact of the
goodwill impairment charge, gain from the sale of WMS, lower gross margins and operating costs
associated with management changes in fiscal 2008.
Liquidity and Capital Resources
The Company’s cash and working capital balances at June 30, 2009 were $0.3 million and $6.9
million, respectively, as compared to $0.6 million and $7.3 million at June 30, 2008. Use of cash
from operations to retire long-term debt was the primary contributor to the decrease in working
capital at fiscal year-end 2009 versus 2008.
Accounts receivable were $7.3 million at June 30, 2009 versus $8.0 million in the prior year,
reflecting the timing of shipments and customer payments in the fourth quarter of the respective
years. Inventories were $4.9 million at June 30, 2009, versus $6.1 million in the prior year,
reflecting the results of management’s efforts to reduce inventory levels.
Capital equipment placed into service totaled $0.6 million for fiscal 2009 versus $0.3 million in
fiscal 2008, and was used primarily for manufacturing and computer equipment and purchases of new
product tooling. Capital expenditures are expected to approximate $0.5 million in fiscal 2010.
On August 1, 2007, the Company completed the sale of the WMS subsidiary, receiving $5 million cash,
which was used to reduce the outstanding debt with Wells Fargo Business Credit (WF).
On August 29, 2007, the Company entered into a secured revolving credit facility with JPMorgan
Chase Bank, N.A. (Chase), subsequently terminating the Wells Fargo Business Credit (WF) facility
and paying in full all outstanding balances under the WF facility, totaling approximately $1.1
million on August 30, 2007. The Chase facility, as amended, provides for a $6.0 million secured
revolving credit facility (the “Credit Facility”), with the option to increase borrowings in
additional $500,000 increments with the consent of the Lender, up to a total of $7.5 million.
Amounts under the facility may be borrowed, repaid and re-borrowed from time to time until its
maturity on August 29, 2010. Loans under the 2007 Credit Facility will bear interest at either a
base rate plus 0% to 0.5%, based upon financial performance, or a Eurocurrency rate equal to the
London Inter-Bank Offered Rate (“LIBOR”) for the relevant term plus 1.5% to 3.0%, based upon
financial performance. The outstanding balance under the Chase revolving credit facility at June
30, 2009 was $1.8 million at an effective interest rate of 3.5%, as compared to $3.4
million outstanding at an effective rate of 4.0% at June 30, 2008. The average effective interest
rate for fiscal year 2009 was 3.86% as compared to 5.59% for fiscal year 2008. Unused availability
under the Credit Facility at June 30, 2009 totaled $3.4 million.
12
Additionally, in September 2004, Zareba Systems Europe secured a £2,214,000 term loan
(approximately $4.0 million) from the Bank of Scotland (BoS) in the United Kingdom for the Rutland
acquisition. Under the terms of the BoS credit facility agreement, interest is charged on
outstanding balances at the rate of two and one eighth percent (or 2.125%) above the base rate with
a five-year term. On June 30, 2009 and 2008, the effective interest rate was 2.68% and 7.62%,
respectively and the average effective interest rate for fiscal year 2009 was 4.85%, versus 7.26%
for the prior year. The BoS term loan matures on September 27, 2009, with monthly principal and
interest payments of £49,355 (approximately $80,000). The balance outstanding under this facility
at June 30, 2009 and 2008 was £0.1 million, or approximately $0.2 million, and £0.7 million, or
approximately $1.3 million, respectively.
Both the Chase and the BoS credit facilities are collateralized by substantially all of the assets
of the Company and Zareba Systems Europe, in their respective localities. Line of credit
borrowings are limited to eligible accounts receivable and inventory.
On September 10, 2009 the Company announced that its Board of Directors decided to explore
strategic alternatives to enhance shareholder value.
The Company believes that its existing funds, additional cash generated from operations, and
borrowings under the Company’s bank debt facility will be adequate to meet the Company’s
foreseeable operating activities and outlays for the Transaction and capital expenditures for at
least the next twelve months.
Critical Accounting Policies
The Company’s critical accounting policies are discussed below.
Revenue Recognition
The Company recognizes revenue in accordance with the Securities and Exchange Commission’s
Staff Accounting Bulletin No. 104 (SAB104) Revenue, which requires that four basic criteria be met
before revenue can be recognized: (i) persuasive evidence of a customer arrangement exists; (ii)
the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product
delivery has occurred or services have been rendered. Sales are not conditional based on customer
acceptance provisions or installation obligations. The Company primarily utilizes independent
manufacturers’ representatives to facilitate sales orders (with no right of return or other Company
obligation), as well as having direct sales for key accounts or product lines. The Company
recognizes revenue as products are shipped based on FOB shipping point terms when title passes to
the customer. Customer rebate programs are offered based upon purchasing volume, on a percentage
of sales basis. The Company accounts for customer rebates as a reduction to net sales on the
accrual basis, in the period of the corresponding sale, when they are probable and can be
estimated. The Company estimates and accrues for sales returns based upon historical experience.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. If the financial condition of the
Company’s customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
The allowance for doubtful accounts is an estimate based on specifically identified accounts. The
Company evaluates specific accounts where information that the customer may have an inability to
meet its financial obligations is known. In these cases, management uses its judgment, based on the
best available facts and circumstances, and records a specific reserve for that customer against
amounts due to reduce the receivable to the amount that is expected to be collected. These specific
reserves are re-evaluated and adjusted as additional information is received that impacts the
amount reserved. If circumstances change, the Company’s estimates of the recoverability of amounts
due could be reduced or increased by a material amount. Such a change in estimated recoverability
would be accounted for in the period in which the facts that give rise to the change become known.
Valuation of Inventories
Our inventories are stated at the lower of cost or market and include materials, labor and
overhead. Cost is determined by the first-in, first-out (“FIFO”) method. Provisions to reduce
inventories to the lower of cost or market are made based on a review of excess and obsolete
inventories through an examination of historical component consumption, current market demands and
shifting product technology. Significant assumptions with respect to market trends are utilized to
formulate our provision methods. Sudden or downward changes in markets we serve may cause us to
record additional inventory revaluation charges in future periods.
13
Amortization of Intangible Assets
Customer relationships and non-compete agreements are amortized on a straight-line basis over
seven and five years, respectively. Intangible assets are amortized on a basis that corresponds to
the Company’s projections of future cash flows directly related to these intangible assets. The
estimates that are included in its projection of future cash flows are based on the best available
information at the time of the determination of useful life and amortization method. A change in
circumstances could result in a determination that the related assets are impaired and impairment
charges to reduce the carrying value of intangible assets may be necessary.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of long-lived assets, including identifiable
intangibles, for impairment annually, or when events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If impairment indicators are present and the
estimated future undiscounted cash flows are less than the carrying value of the assets, the
carrying value is reduced to the estimated fair value as measured by the associated discounted cash
flows.
Under SFAS No. 142, the Company evaluates goodwill and indefinite lived intangible assets
(trademarks) for impairment using a two-step test based upon a fair value approach. The first step
is used to identify a potential impairment through an estimate of the fair value of certain
reporting units (as defined by SFAS No. 142), while the second step calculates the amount of
impairment, if any.
At June 30, 2008, the Company evaluated goodwill for impairment using the method described in the
preceding paragraphs and determined the fair value of its reporting units by application of a
discounted cash flow analysis. The Company made estimates that are included in its discounted cash
flow analyses based upon the best available information at the time of the fair value
determination. After completing step one of the annual impairment test as of June 30, 2008, the
Company determined that the estimated fair value of the Company was less than the net book value,
requiring the completion of the second step of the impairment test. Based on the step two of the
analysis prepared as of June 30, 2008, the Company determined that the entire amount of goodwill
was impaired. Accordingly, the Company reduced goodwill to zero in the fourth quarter of fiscal
2008. See footnote 4 to the consolidated financial statements for additional information.
Contingencies
We are subject to the possibility of various loss contingencies, including legal claims, in
the normal course of business. We accrue for loss contingencies when a loss is probable and can be
estimated. See footnote 7 to the consolidated financial statements for additional information.
Recently Issued Accounting Standards
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 161, “Disclosures about Derivative Instruments and Hedging
Activities” (SFAS 161). SFAS No. 161 is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable investors to better
understand their effects of an entity’s financial position, financial performance and cash flows.
SFAS No. 161 also improves transparency about the location and amounts of derivative instruments in
an entity’s financial statements; how derivative instruments and related hedged items are accounted
for under SFAS No. 133; and how derivative instruments and related hedged items affect its
financial position, financial performance and cash flows. SFAS No. 161 was effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The adoption of SFAS No. 161 did not have a material effect on our
results of operations or financial position.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS 165). SFAS No. 165 requires
all public entities to evaluate subsequent events through the date that the financial statements
are available to be issued and disclose in the notes the date through which the Company has
evaluated subsequent events and whether the financial statements were issued or were available to
be issued on the disclosed date. SFAS No. 165 defines two types of subsequent events, as follows:
the first type consists of events or transactions that provide additional evidence about conditions
that existed at the date of the balance sheet and the second type consists of events that provide
evidence about conditions that did not exist at the date of the balance sheet but arose after that
date. SFAS No. 165 was effective for interim and annual periods ending after June 15, 2009 and must
be applied prospectively. The adoption of SFAS No. 165 did not have a material effect on our
results of operations or financial position.
14
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an
amendment to SFAS No. 140” (SFAS 166). SFAS No. 166 eliminates the concept of a “qualified
special-purpose entity,” changes the requirements for derecognizing financial assets and requires
additional disclosures in order to enhance information reported to users of financial statements by
providing greater transparency about transfers of financial assets, including securitization
transactions, and an entity’s continuing involvement in and exposure to the risks related to
transferred financial assets. SFAS No. 166 is effective for fiscal years beginning after November
15, 2009. We do not expect SFAS No. 166 to have a material impact on the preparation of our
consolidated financial statements.
In June 2009, the FASB also published SFAS No. 167, “Consolidation of Variable Interest Entities an
amendment to FIN 46(R)” (SFAS 167). SFAS No. 167 addresses the effects of eliminating the qualified
special purpose entity concept from SFAS No. 140 and responds to concerns about the application of
certain key provisions of FIN 46(R), including concerns over the transparency of enterprises’
involvement with Variable Interest Entities (VIEs). SFAS No. 167 is effective for fiscal years
beginning after November 15, 2009. We do not expect SFAS No. 167 to have a material impact on the
preparation of our consolidated financial statements.
Forward-Looking Statements and Risk Factors
Certain statements in this Report are forward-looking statements that involve a number of
risks and uncertainties that may cause the Company’s future operations and results of operations to
differ materially from those anticipated. Specifically, these include statements relating to (a)
the sufficiency and adequacy of capital, including existing funds, additional cash generated from
operations, and borrowings under the Company’s bank debt facilities, which depends on the Company
successfully maintaining adequate levels of bank financing, the Company meeting its expenses and
revenue projections and the success of the Company’s new products, which further depend on the
management’s ability to realize desired sales synergies, the impact new Zareba Systems’ products
have on the traditional seasonality of sales, as well as general competitive, market and economic
conditions; (b) the Company’s anticipation that its revenue levels in fiscal year 2010 will not be
significantly changed as compared to 2009, which depends on the cost and success of the Company’s
development efforts and new products, customer acceptance of new products, the effectiveness of its
sales strategies, the success of the Zareba Systems Europe subsidiary, the actual development of
the perimeter security system market, the extent to which weather and UK farm subsidies affect
sales and timing, the Company’s ability to finalize distribution agreements with key distributors
on acceptable terms, the success of new distribution channels, the actual costs of supplies and raw
materials, the effect of consolidation within the agricultural retail industry, as well as actual
competition, market and economic conditions; (c) the Company’s expectation that gross margins for
fiscal 2010 to be comparable to fiscal 2009, which depends on the Company’s ability to control
costs and realize cost savings, the prices of the Company’s products, and competitive pressures;
(d) the Company’s expectation that its capital expenditures will approximate $0.5 million in fiscal
2010, which depends on the Company’s development efforts, demand for the Company’s products, and
the availability of funds for capital expenditures; and (e) exploring strategic alternatives, which
depends on the Company’s ability to identify a desirable strategic alternative and implement it,
and general economic conditions.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company and its subsidiaries are included at the
end of this report.
Item 9. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure
Not applicable.
Item 9A(T). Controls and Procedures
Disclosure Controls
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are
designed to ensure that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the
Company’s management, including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
15
In connection with the filing of this Form 10-K, management evaluated, under the supervision and
with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the
effectiveness of the design and operation of the Company’s disclosure controls and procedures as
of June 30, 2009. Based upon that evaluation, the Company’s Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and procedures were effective
as of June 30, 2009.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control — Integrated
Framework, our management concluded that our internal control over financial reporting was
effective as of June 30, 2009.
This annual report does not include an attestation report of the Company’s independent registered
public accounting firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to
provide only management’s report in this annual report.
Limitations on Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls or our internal control over financial reporting will prevent
or detect all errors and all fraud. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control system’s objectives will be met.
Internal control over financial reporting is a process that involves human diligence and compliance
and is subject to lapses in judgment and breakdowns resulting from human failures. In addition, the
design of any system of controls is based in part on certain assumptions about the likelihood of
future events, and controls may become inadequate if conditions change. There can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions.
Change in Internal Controls
There have been no changes in the Company’s internal control over financial reporting during
the period covered by this report that have materially affected, or are reasonably likely to
materially affect internal control over financial reporting.
Item 9B. Other Information
On September 25, 2009, the Company entered into Executive Severance Agreements (the “Agreements”)
with Dale A. Nordquist, President and Chief Executive Officer, Jeffrey S. Mathiesen, Chief
Financial Officer, and Donald J. Dalland, Vice President, Engineering and Operations (each, an
“Executive”). Each of the Agreements provides that in the event of the termination of the
Executive without cause by the Company or for good reason by the Executive within twelve (12)
months following a change in control, the Executive will receive a continuation of base pay and
health insurance benefits for an eighteen (18) month period following termination. No continuation
of payments will occur if the termination is for cause. The Agreements also include
non-solicitation covenants and non-competition provisions that prevent each Executive from having
certain relationships with the Company’s competitors for a period of 12 months following
termination of employment. The provisions of the Agreement with Mr. Nordquist (the “Nordquist
Agreement”) supersede any similar provisions contained in Mr. Nordquist’s employment agreement in
the event of a change of control, and such employment agreement is deemed amended to give effect to
the provisions of the Nordquist Agreement. The foregoing description of the Agreements is not
complete and is qualified by the provisions of the Agreements, which are attached hereto as
Exhibits 10.27, 10.28 and 10.29 and incorporated by reference herein.
16
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Reference is made to the sections entitled “Corporate Governance”, “Setting the Number of
Directors and Election of Directors”, “Executive Officers” and “Compliance with Section 16(a) of
the Exchange Act” included in the Company’s definitive proxy statement to be filed with the
Securities and Exchange Commission in October 2009.
Item 11. Executive Compensation
Reference is made to the sections entitled “Executive Compensation”, “Employment Agreements”,
“Severance Arrangements” and “Compensation of Directors” included in the Company’s definitive proxy
statement to be filed with the Securities and Exchange Commission in October 2009.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Reference is made to the sections entitled “Principal Shareholders”, “Management
Shareholdings” and “Executive Compensation” included in the Company’s definitive proxy statement to
be filed with the Securities and Exchange Commission in October 2009. Reference is also
made to the information set forth in Part II, Item 5 in this Form 10-K under “Equity Compensation
Information.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
Reference is made to the sections entitled “Certain Relationships and Related Transactions”
and “Corporate Governance” included in the Company’s definitive proxy statement to be filed with
the Securities and Exchange Commission in October 2009.
Item 14. Principal Accountant Fees and Services
Reference is made to the section entitled “Ratification of Independent Registered Public
Accounting Firm” included in the Company’s definitive proxy statement to be filed with the
Securities and Exchange Commission in October 2009.
17
PART IV
Item 15. Exhibits and Financial Statement Schedules
Financial Statements
The following Consolidated Financial Statements of Zareba Systems Inc. and subsidiaries are
submitted in a separate financial statement of this report.
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|
|
|
|
|
|
|
|
|
29
|
|
Financial Statement Schedules
All financial statement schedules have been omitted because they are not applicable, are not
required, or the information is included in the financial statements or notes thereto.
Exhibits
|
|
|
|
|
Number
|
|
Description and Reference
|
|
3.1
|
|
Restated Articles of Incorporation, as amended to
date, incorporated by reference to Exhibit 3.1 to the
Company’s quarterly report on Form 10-QSB for the fiscal
quarter ended September 30, 2005.
|
|
|
|
|
|
3.2
|
|
Amended and Restated Bylaws, as amended to date,
incorporated by reference to Exhibit 3.1 to the Company’s
quarterly report on Form 8-K dated May 10, 2007.
|
|
|
|
|
|
3.3
|
|
Certificate of Designation of Series A Preferred
Stock of Waters Instruments, Inc., incorporated by
reference as part of Exhibit 4.1 of the Company’s
Registration Statement on Form 8-A filed on March 16,
2005.
|
|
|
|
|
|
4.1
|
|
Rights Agreement dated as of March 15, 2005 between
Waters Instruments, Inc. and Wells Fargo Bank, N.A. as
Rights Agent, together with the following exhibits
thereto: (A) Certificate of Designation of Series A
Preferred Stock of Waters Instruments, Inc.; (B) Summary
of Rights to Purchase Shares of Series A Preferred Stock;
(C) Form of Right Certificate (pursuant to the Rights
Agreement, Right Certificates will not be delivered until
as soon as practicable after the Distribution Date),
incorporated by reference to Exhibit 4.1 of the Company’s
Registration Statement on Form 8-A filed on March 16,
2005.
|
|
|
|
|
|
10.1
|
|
1995 Stock Option Plan and forms of incentive stock
option agreement and nonqualified stock option agreement
used under the Company’s 1995 Stock Option Plan,
incorporated by reference to Exhibit (d)(i) to the
Company’s Schedule 13E-3 filed August 12, 2009.**
|
|
|
|
|
|
10.2
|
|
1997 Associates Stock Purchase Plan, incorporated by
reference to Exhibit 10.7 to the Company’s Annual Report
on Form 10-KSB for the fiscal year ended June 30,
1998.**
|
|
|
|
|
|
10.3
|
|
Amendment No. 1 to 1995 Stock Option Plan,
incorporated by reference to Exhibit 10.8 to the
Company’s Annual Report on Form 10-KSB for fiscal year
ended June 30, 2000.**
|
|
|
|
|
|
10.4
|
|
Lease dated January 13, 2004 by and between 1620
Industrial Drive LLC and Waters Instruments, Inc.,
incorporated by reference to Exhibit 10.3 to the
Company’s Annual Report on Form 10-KSB/A-1 for the fiscal
year ended December 31, 2003.
|
18
|
|
|
|
|
Number
|
|
Description and Reference
|
|
10.5
|
|
Credit Facility Letter by and between Zareba Systems
Europe Limited, a wholly-owned subsidiary of Waters
Instruments, Inc., and Bank of Scotland dated September
27, 2004, incorporated by reference to Exhibit 10.2 to
the Company’s quarterly report on Form 10-QSB for the
fiscal quarter ended September 30, 2004.
|
|
|
|
|
|
10.6
|
|
Stock Purchase Agreement dated September 27, 2004
among Zareba Systems Europe Limited, a wholly-owned
subsidiary of Waters Instruments, Inc., and certain
individuals, incorporated by reference to Exhibit 2.1 of
Form 8-K filed October 1, 2004.
|
|
|
|
|
|
10.7
|
|
2004 Equity Incentive Plan, incorporated by
reference to Exhibit 10.1 to the Company’s quarterly
report on Form 10-QSB for the fiscal quarter ended
December 31, 2004.**
|
|
|
|
|
|
10.8
|
|
Form of incentive stock option agreement and nonqualified stock option agreement currently used
under the 2004 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 to the Company’s
quarterly report on Form 10-QSB for the fiscal quarter ended
March 31, 2005.**
|
|
|
|
|
|
10.9
|
|
Form of restricted stock agreement currently used under the 2004 Equity Incentive Plan,
incorporated by reference to Exhibit 10.2 to the Company’s quarterly report on Form 10-QSB for the
fiscal quarter ended March 31, 2005.**
|
|
|
|
|
|
10.10
|
|
Form of stock appreciation rights agreement currently used under the 2004 Equity Incentive Plan,
incorporated by reference to Exhibit 10.3 to the Company’s quarterly report on Form 10-QSB for the
fiscal quarter ended March 31, 2005.**
|
|
|
|
|
|
10.11
|
|
Letter agreement dated October 17, 2005 with Jeff Mathiesen, incorporated by reference to Exhibit 10.1
to the Company’s quarterly report on Form 10-QSB for the
quarter ended December 31, 2005.**
|
|
|
|
|
|
10.12
|
|
Stock Purchase Agreement for the Purchase and Sale of All Outstanding Shares of Capital Stock of Waters
Medical Systems, Inc. dated as of July 24, 2007 between the Company and Holding GC, Inc., incorporated
by reference to Exhibit 10.1 to Current Report on Form 8-K
dated July 24, 2007
|
|
|
|
|
|
10.13
|
|
Revolving Credit Agreement dated as of August 29, 2007 by and between the Company, Zareba Security,
Inc. and JPMorgan Chase Bank, N.A., incorporated by reference to Exhibit 10.1 to Current Report on Form
8-K dated August 29, 2007
|
|
|
|
|
|
10.14
|
|
Security Agreement dated as of August 29, 2007 by and between the Company and JPMorgan Chase Bank,
N.A., incorporated by reference to Exhibit 10.2 to Current
Report on Form 8-K dated August 29, 2007
|
|
|
|
|
|
10.15
|
|
Security Agreement dated as of August 29, 2007 by and between Zareba Security, Inc. and JPMorgan Chase
Bank, N.A., incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K dated August 29,
2007
|
|
|
|
|
|
10.16
|
|
Revolving Notes dated as of August 29, 2007 by Zareba Systems, Inc and Zareba Securities, Inc. as
Borrower and JPMorgan Chase Bank, N.A., as Lender, incorporated by reference to Exhibit 10.4 to Current
Report on Form 8-K dated August 29, 2007
|
|
|
|
|
|
10.17
|
|
Stock Pledge Agreement effective August 29, 2007 by and between the Company and JPMorgan Chase Bank,
N.A., incorporated by reference to Exhibit 10.5 to Current
Report on Form 8-K dated August 29, 2007
|
|
|
|
|
|
10.18
|
|
Negative Pledge Agreement dated August 29, 2007 by Zareba Systems, Inc. in favor of JPMorgan Chase
Bank, N.A., incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K dated August 29,
2007
|
19
|
|
|
|
|
Number
|
|
Description and Reference
|
|
10.19
|
|
Third Amendment to Lease between Plymouth Properties Realty LLC and Zareba Systems, Inc., dated
February 5, 2008, incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form
10-K for the fiscal year ended June 30, 2008
|
|
|
|
|
|
10.20
|
|
Resignation Agreement and Release between the Company and Gerald W. Grabowski, dated June 2, 2008,
incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal
year ended June 30, 2008**
|
|
|
|
|
|
10.21
|
|
Resignation Agreement and Release between the Company and W. John Frederick, dated June 27, 2008,
incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal
year ended June 30, 2008**
|
|
|
|
|
|
10.22
|
|
Employment Agreement between the Company and Dale A. Nordquist, dated June 30, 2008, incorporated by
reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended June
30, 2008**
|
|
|
|
|
|
10.23
|
|
Voluntary Cancellation Agreement of Incentive Stock Option Agreement between the Company and Jeffrey S.
Mathiesen, dated June 30, 2008, incorporated by reference to Exhibit 10.23 to the Company’s Annual
Report on Form 10-K for the fiscal year ended June 30, 2008**
|
|
|
|
|
|
10.24
|
|
Voluntary Cancellation Agreement of Incentive Stock Option Agreement between the Company and Donald G.
Dalland, dated June 30, 2008, incorporated by reference to Exhibit 10.24 to the Company’s Annual Report
on Form 10-K for the fiscal year ended June 30, 2008**
|
|
|
|
|
|
10.25
|
|
First Amendment to Revolving Credit Agreement, dated as of September 30, 2008, by and among Zareba
Systems, Inc., Zareba Security Inc. and JPMorgan Chase Bank, N.A., incorporated by reference to Exhibit
10.1 to Current Report on Form 8-K dated October 8, 2008.
|
|
|
|
|
|
10.26
|
|
Second Amendment to Revolving Credit Agreement, dated as of October 22, 2008, by and among Zareba
Systems, Inc., Zareba Security Inc. and JPMorgan Chase Bank, N.A., incorporated by reference to Exhibit
10.1 to Current Report on Form 8-K dated October 22, 2008.
|
|
|
|
|
|
10.27*
|
|
Executive Severance Agreement between the Company and Dale A.
Nordquist, dated September 25, 2009**
|
|
|
|
|
|
10.28*
|
|
Executive Severance Agreement between the Company and Jeffrey S.
Mathiesen, dated September 25, 2009**
|
|
|
|
|
|
10.29*
|
|
Executive Severance Agreement between the Company and Donald G.
Dalland, dated September 25, 2009**
|
|
|
|
|
|
21.1*
|
|
List of Subsidiaries.
|
|
|
|
|
|
23.1*
|
|
Consent of Independent Registered Public Accounting Firm — Baker Tilly Virchow Krause, LLP.
|
|
|
|
|
|
24.1*
|
|
Power of Attorney for Dale A. Nordquist, Jeffrey S. Mathiesen, William R. Franta, John A.
Grimstad, Eugene W. Courtney and Michael Bochert (included on the signature page of this Form 10-K).
|
|
|
|
|
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
31.2*
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32.1*
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32.2*
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
**
|
|
Management contract or compensatory plan.
|
|
|
|
*
|
|
Filed herewith.
|
20
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized, in Minneapolis, Minnesota, on September 28, 2009.
|
|
|
|
|
|
|
|
Zareba Systems, Inc.
|
|
|
|
By:
|
/s/ Dale A. Nordquist
|
|
|
|
|
Dale A. Nordquist
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by
the following persons on behalf of the Company in the capacities and on the dates indicated.
Power of Attorney
Each person whose signature appears below constitutes and appoints Dale A. Nordquist,
President, Chief Executive Officer, and Director, and Jeffrey S. Mathiesen, Chief Financial Officer
as his true and lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming said attorneys-in-fact and agents, acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
President, Chief Executive Officer
|
|
September 28, 2009
|
|
Dale A. Nordquist
|
|
(Principal Executive Officer) and Director
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer (Principal Financial Officer
|
|
September 28, 2009
|
|
Jeffrey S. Mathiesen
|
|
and Principal Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
September 28, 2009
|
|
William R. Franta
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director and Secretary
|
|
September 28, 2009
|
|
John A. Grimstad
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
September 28, 2009
|
|
Eugene W. Courtney
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
September 28, 2009
|
|
Michael L. Bochert
|
|
|
|
|
21
Annual report on Form 10-K
Item 8, Item 15(a)(1) and (2)
List of Financial Statements
Years Ended June 30, 2009 and 2008
Zareba Systems, Inc.
Minneapolis, Minnesota
22
Form 10-K — Item 15(a)(1) and (2)
ZAREBA SYSTEMS, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS
The following Consolidated Financial Statements of Zareba Systems, Inc. and subsidiaries are
included in Item 8:
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Audit Committee and Board of Directors
Zareba Systems, Inc.
Plymouth, Minnesota
We have audited the accompanying consolidated balance sheets of Zareba Systems, Inc. and
subsidiaries as of June 30, 2009 and 2008, and the related consolidated statements of
operations, stockholders’ equity and comprehensive income (loss) and cash flows for the
years then ended. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free
of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits included
consideration of its internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Zareba Systems, Inc. and subsidiaries as of
June 30, 2009 and 2008 and the results of their operations and cash flows for the
years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Baker Tilly Virchow, Krause, LLP
Minneapolis, Minnesota
September 28, 2009
24
ZAREBA SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
(Dollars in thousands, except per share amounts)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
272
|
|
|
$
|
633
|
|
|
Accounts receivable, net
|
|
|
7,256
|
|
|
|
8,031
|
|
|
Inventories
|
|
|
4,911
|
|
|
|
6,083
|
|
|
Other current assets
|
|
|
519
|
|
|
|
586
|
|
|
Deferred tax assets
|
|
|
409
|
|
|
|
526
|
|
|
Current assets of discontinued operations
|
|
|
—
|
|
|
|
257
|
|
|
|
|
Total current assets
|
|
|
13,367
|
|
|
|
16,116
|
|
|
|
|
Property, plant and equipment, net
|
|
|
2,698
|
|
|
|
2,628
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
2,576
|
|
|
|
2,681
|
|
|
Customer relationships, net
|
|
|
628
|
|
|
|
1,098
|
|
|
Other, net
|
|
|
118
|
|
|
|
525
|
|
|
|
|
Total other assets
|
|
|
3,322
|
|
|
|
4,304
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
19,387
|
|
|
$
|
23,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,768
|
|
|
$
|
4,282
|
|
|
Accrued salaries, wages, and other compensation
|
|
|
699
|
|
|
|
930
|
|
|
Accrued product warranties
|
|
|
546
|
|
|
|
529
|
|
|
Accrued customer rebates
|
|
|
395
|
|
|
|
376
|
|
|
Other accrued liabilities
|
|
|
644
|
|
|
|
782
|
|
|
Income taxes payable
|
|
|
198
|
|
|
|
676
|
|
|
Current maturities of long-term debt
|
|
|
213
|
|
|
|
1,121
|
|
|
Current liabilities of discontinued operations
|
|
|
—
|
|
|
|
172
|
|
|
|
|
Total current liabilities
|
|
|
6,463
|
|
|
|
8,868
|
|
|
|
|
Deferred income taxes
|
|
|
512
|
|
|
|
685
|
|
|
Other long-term liability
|
|
|
271
|
|
|
|
175
|
|
|
Long-term debt, less current maturities
|
|
|
1,840
|
|
|
|
3,570
|
|
|
|
|
Total liabilities
|
|
|
9,086
|
|
|
|
13,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Undesignated shares as of June 30, 2009 and June 30, 2008, $0.01 par
value, 39,950,000 shares authorized, none issued or outstanding;
|
|
|
—
|
|
|
|
—
|
|
|
Series A Preferred Stock as of June 30, 2009 and June 30, 2008, $0.01
par value per share, 50,000 shares authorized, none issued or outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Common stock as of June 30, 2009 and June 30, 2008, par value $.01
per share; authorized: 20,000,000 shares; issued
and outstanding 2,481,973 and 2,465,696 shares, respectively
|
|
|
25
|
|
|
|
25
|
|
|
Additional paid-in capital
|
|
|
2,720
|
|
|
|
2,635
|
|
|
Accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(157
|
)
|
|
|
389
|
|
|
Retained earnings
|
|
|
7,713
|
|
|
|
6,701
|
|
|
|
|
Total stockholders’ equity
|
|
|
10,301
|
|
|
|
9,750
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
19,387
|
|
|
$
|
23,048
|
|
|
|
See notes to the consolidated financial statements.
25
ZAREBA SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
(Dollars in thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
|
|
Net sales
|
|
$
|
32,216
|
|
|
$
|
34,565
|
|
|
Cost of goods sold
|
|
|
21,494
|
|
|
|
23,420
|
|
|
|
|
Gross profit
|
|
|
10,722
|
|
|
|
11,145
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
7,858
|
|
|
|
10,081
|
|
|
Research and development
|
|
|
908
|
|
|
|
1,138
|
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
6,264
|
|
|
|
|
Total operating expenses
|
|
|
8,766
|
|
|
|
17,483
|
|
|
|
|
Income (loss) from operations
|
|
|
1,956
|
|
|
|
(6,338
|
)
|
|
|
|
Interest income
|
|
|
8
|
|
|
|
31
|
|
|
Interest expense
|
|
|
(238
|
)
|
|
|
(387
|
)
|
|
Other income (expense), net
|
|
|
(354
|
)
|
|
|
(283
|
)
|
|
|
|
Income (loss) before income taxes
|
|
|
1,372
|
|
|
|
(6,977
|
)
|
|
Income tax provision (benefit)
|
|
|
494
|
|
|
|
165
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
878
|
|
|
|
(7,142
|
)
|
|
Gain from sale of discontinued product line, net of tax
|
|
|
141
|
|
|
|
—
|
|
|
Gain (loss) from discontinued operations, net of tax
|
|
|
(7
|
)
|
|
|
(603
|
)
|
|
Gain from sale of subsidiary, net of tax
|
|
|
—
|
|
|
|
2,546
|
|
|
|
|
Net income
(loss)
|
|
$
|
1,012
|
|
|
$
|
(5,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
per common and common equivalent share:
|
|
|
|
|
|
|
|
|
|
basic
|
|
$
|
0.35
|
|
|
$
|
(2.90
|
)
|
|
diluted
|
|
$
|
0.35
|
|
|
$
|
(2.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gain from sale of discontinued product line, net of tax
per common and common equivalent share:
|
|
|
|
|
|
|
|
|
|
basic
|
|
$
|
0.06
|
|
|
$
|
—
|
|
|
diluted
|
|
$
|
0.06
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations, net of tax
per common and common equivalent share:
|
|
|
|
|
|
|
|
|
|
basic
|
|
$
|
—
|
|
|
$
|
(0.25
|
)
|
|
diluted
|
|
$
|
—
|
|
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gain from sale of subsidiary, net of tax
per common and common equivalent share:
|
|
|
|
|
|
|
|
|
|
basic
|
|
$
|
—
|
|
|
$
|
1.04
|
|
|
diluted
|
|
$
|
—
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common and common equivalent share:
|
|
|
|
|
|
|
|
|
|
basic
|
|
$
|
0.41
|
|
|
$
|
(2.11
|
)
|
|
diluted
|
|
$
|
0.41
|
|
|
$
|
(2.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
basic
|
|
|
2,473,768
|
|
|
|
2,458,588
|
|
|
diluted
|
|
|
2,474,173
|
|
|
|
2,458,588
|
|
See notes to the consolidated financial statements.
26
ZAREBA SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Foreign Currency
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
Additional Paid
|
|
Translation
|
|
Retained
|
|
Stockholders’
|
|
(In thousands)
|
|
Shares
|
|
Amount
|
|
In Capital
|
|
Adjustment
|
|
Earnings
|
|
Equity
|
|
|
|
Balance June 30, 2007
|
|
|
2,452
|
|
|
$
|
25
|
|
|
$
|
2,133
|
|
|
$
|
488
|
|
|
$
|
12,075
|
|
|
$
|
14,721
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,199
|
)
|
|
|
(5,199
|
)
|
|
Reclassification of foreign
exchange gains related to
goodwill impairment, net of
tax effect of $98,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(227
|
)
|
|
|
|
|
|
|
(227
|
)
|
|
Reclassification of deferred income
tax related to realized foreign
currency exchange gains for tax
purposes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
96
|
|
|
Foreign currency translation
adjustment, net of tax effect
of $18,000
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32
|
|
|
|
—
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
449
|
|
|
|
—
|
|
|
|
—
|
|
|
|
449
|
|
|
Adoption of FIN 48
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(175
|
)
|
|
|
(175
|
)
|
|
Issuance of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan
|
|
|
9
|
|
|
|
—
|
|
|
|
36
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36
|
|
|
Exercise of stock options
|
|
|
5
|
|
|
|
—
|
|
|
|
17
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
|
|
|
Balance June 30, 2008
|
|
|
2,466
|
|
|
|
25
|
|
|
|
2,635
|
|
|
|
389
|
|
|
|
6,701
|
|
|
|
9,750
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,012
|
|
|
|
1,012
|
|
|
Foreign currency translation
adjustment, net of tax effect
of $294,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(546
|
)
|
|
|
|
|
|
|
(546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
466
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
Adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan
|
|
|
16
|
|
|
|
—
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
Exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
Balance June 30, 2009
|
|
|
2,482
|
|
|
$
|
25
|
|
|
$
|
2,720
|
|
|
$
|
(157
|
)
|
|
$
|
7,713
|
|
|
$
|
10,301
|
|
|
|
See notes to the consolidated financial statements.
27
ZAREBA SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net income (loss) to net cash provided by (used in) operations
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,012
|
|
|
$
|
(5,199
|
)
|
|
Adjustments to reconcile net income (loss) to cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
803
|
|
|
|
1,126
|
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
6,264
|
|
|
Gain on sale of subsidiary, net of tax
|
|
|
—
|
|
|
|
(2,546
|
)
|
|
Gain on sale of discontinued product line, net of tax
|
|
|
(141
|
)
|
|
|
|
|
|
Valuation adjustment of discontinued operations
|
|
|
—
|
|
|
|
400
|
|
|
(Gain)/Loss on disposal of plant and equipment
|
|
|
(33
|
)
|
|
|
26
|
|
|
Stock based compensation expense
|
|
|
64
|
|
|
|
150
|
|
|
Stock based compensation expense related to cancellation of stock options
|
|
|
—
|
|
|
|
299
|
|
|
Allowance for doubtful accounts
|
|
|
(40
|
)
|
|
|
32
|
|
|
Deferred income taxes
|
|
|
126
|
|
|
|
(253
|
)
|
|
Changes in assets and liabilities, net of effects of acquisition:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
460
|
|
|
|
(443
|
)
|
|
Inventories
|
|
|
743
|
|
|
|
(10
|
)
|
|
Other assets
|
|
|
52
|
|
|
|
(431
|
)
|
|
Accounts payable, accrued expenses and other long-term liability
|
|
|
(1,012
|
)
|
|
|
(1,294
|
)
|
|
|
|
Net cash provided by (used in) operations
|
|
|
2,034
|
|
|
|
(1,879
|
)
|
|
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(246
|
)
|
|
|
(261
|
)
|
|
Proceeds from sale of discontinued product line
|
|
|
338
|
|
|
|
—
|
|
|
Proceeds from sale of subsidiary
|
|
|
—
|
|
|
|
5,000
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
92
|
|
|
|
4,739
|
|
|
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
Net proceeds from long-term debt — revolving credit facility
|
|
|
(1,521
|
)
|
|
|
3,360
|
|
|
Proceeds from the sale of common stock
|
|
|
21
|
|
|
|
53
|
|
|
Payments of debt issue costs
|
|
|
(11
|
)
|
|
|
(40
|
)
|
|
Payments on long-term debt
|
|
|
(869
|
)
|
|
|
(7,252
|
)
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(2,380
|
)
|
|
|
(3,879
|
)
|
|
Effect of exchange rate changes in cash
|
|
|
(107
|
)
|
|
|
38
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(361
|
)
|
|
|
(981
|
)
|
|
Cash and cash equivalents — beginning of period
|
|
|
633
|
|
|
|
1,614
|
|
|
|
|
CASH AND CASH EQUIVALENTS — END OF PERIOD
|
|
$
|
272
|
|
|
$
|
633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
Equipment placed into service that was purchased in the previous period
|
|
$
|
346
|
|
|
$
|
—
|
|
|
Long-term liability recorded for adoption of FIN 48 (See Note 6)
|
|
|
—
|
|
|
|
175
|
|
|
Change in foreign exchange gains related to goodwill impairment, net of tax,
related to other comprehensive income
|
|
|
—
|
|
|
|
(227
|
)
|
|
Change in deferred income taxes for realized foreign exchange gains for tax
purposes related to other comprehensive income
|
|
|
—
|
|
|
|
96
|
|
See notes to the consolidated financial statements.
28
ZAREBA SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
Note 1 — Nature of Business and Significant Accounting Policies
Nature of Business:
Zareba Systems, Inc. (Zareba) designs, manufactures and markets
electronic perimeter fence and access control systems, operating in one world-wide business
segment. Zareba has three subsidiaries, Zareba Systems Europe Limited, Zareba Security, Inc. and
Zareba Systems of Canada LTD. The sales of products from the business units occur principally
within North America and the United Kingdom. Zareba’s electronic perimeter fence systems include
energizers, high tensile fence systems, insulators, poly wire, tape and rope, automatic gate
openers and perimeter security fence systems for human and animal control, containment, detection
and deterrence.
Basis of Presentation:
The accompanying consolidated financial statements include the accounts of
Zareba Systems, Inc. and its wholly-owned subsidiaries, Zareba Systems Europe Limited, Zareba
Security, Inc., Zareba Systems of Canada, Ltd. and the discontinued operations of Waters Medical
Systems, Inc. (collectively, “Zareba” or the “Company”). All inter-company accounts and
transactions between consolidated entities have been eliminated.
Use of Estimates:
The preparation of financial statements, in conformity with accounting principles
generally accepted in the United States, requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Discontinued Operations:
Included in discontinued operations are Zareba’s professional series
automatic gate opener (PS AGO) product line and its Waters Medical Systems, Inc. (WMS) subsidiary.
In June 2008, Zareba discontinued the PS AGO product line and commenced efforts to sell the related
assets and eliminate personnel and support costs associated with the product line. The Company
completed the sale of the PS AGO product line on October 22, 2008. Additionally, the sale of the
Zareba’s WMS subsidiary to a third party was completed on August 1, 2007 pursuant to the terms of a
Stock Purchase Agreement dated July 24, 2007. The transaction involved the sale of 100% of the
stock of WMS. The Company had substantially completed negotiation of the sale in the quarter ended
June 30, 2007.
The events met the requirements of Statement of Accounting Financial Standards (SFAS) No. 144,
“Accounting for Impairment or Disposal of Long-Lived Assets” as being held for sale at June 30,
2008 with respect to the PS AGO product line and at June 30, 2007 with respect to WMS.
Accordingly, the Company has restated the previously reported financial results of PS AGO and WMS
to report the net results as a separate line in the consolidated statements of operations as “Gain
(loss) from discontinued operations, net of tax” for all periods presented, and the assets and
liabilities of PS AGO and WMS on consolidated balance sheets have separately classified as
“Assets/Liabilities of discontinued operations”. In accordance with Emerging Issues Task Force
(EITF) 87-24, “Allocation of Interest to Discontinued Operations”, the Company elected to not
allocate consolidated interest expense to the discontinued operations where the debt is not
directly attributed to or related to the discontinued operations. All of the financial information
in the consolidated financial statements and notes to the consolidated financial statements has
been revised to reflect only the results of continuing operations (see Note 9).
Cash and Cash Equivalents:
All highly liquid investments with maturities at date of purchase of
three months or less are considered to be cash equivalents. Generally, the Company’s cash
equivalents consist primarily of tax-exempt money market instruments. These investments are
denominated in US dollars. The carrying amount of cash equivalents approximates fair value due to
the short maturity of these instruments. The Company deposits its cash in high credit quality
financial institutions. The balance, at times, may exceed federally insured limits.
29
Accounts Receivable:
The Company generally requires no collateral from its customer with respect
to trade accounts receivable. The Company reviews customers’ credit history before extending
unsecured credit and establishes an allowance for uncollectible accounts based upon factors
surrounding the credit risk of specific customers, historical experience and the expected ability
to collect all accounts receivable. Credit risk on accounts receivable is minimized as a result of
the large and diverse nature of the Company’s customer base. Invoices are generally due 30 days
after presentation. Accounts receivable over 30 days are considered past due. The Company does not
accrue interest on past due accounts receivable. Receivables are written off only after all
collection attempts have failed and are based on individual credit evaluation and specific
circumstances of the customer.
Inventories:
Our inventories are stated at the lower of cost or market and include materials,
labor and overhead. Cost is determined by the first-in, first-out (“FIFO”) method. Provisions to
reduce inventories to the lower of cost or market are made based on a review of excess and obsolete
inventories through an examination of historical component consumption, current market demands and
shifting product technology. Significant assumptions with respect to market trends are utilized to
formulate our provision methods. Sudden or downward changes in markets we serve may cause us to
record additional inventory revaluation charges in future periods.
Property, Plant and Equipment:
Property, plant and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over estimated useful lives of
40 years for buildings, 5 to 15 years for improvements, and 3 to 10 years for machinery, equipment,
and office furniture. Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or the estimated useful life of the assets. Maintenance and repairs are
charged to expense as incurred. Major betterments and improvements, which extend the useful life of
the item, are capitalized and depreciated. The cost and accumulated depreciation of property, plant
and equipment retired or otherwise disposed of are removed from the related accounts, and any
residual values are charged or credited to expenses.
Intangible Assets:
In accordance with SFAS 142, “Goodwill and Other Intangible Assets”, the
trademarks acquired with the purchase of North Central Plastics (NCP) and Rutland Electric Fencing
(Rutland)) are not being amortized, but are subject to periodic impairment testing. The trademarks
are considered an indefinite lived intangible and therefore, not subject to amortization but rather
periodic impairment tests. The Rutland customer relationships are being amortized on a
straight-line basis over seven years.
Impairment of Long-lived Assets:
The Company evaluates the carrying value of long-lived assets,
including identifiable intangibles, for impairment annually, or when events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment
indicators are present and the estimated future undiscounted cash flows are less than the carrying
value of the assets, the carrying value is reduced to the estimated fair value as measured by the
associated discounted cash flows.
Under SFAS No. 142, the Company evaluates goodwill and indefinite lived intangible assets
(trademarks) for impairment using a two-step test based upon a fair value approach. The first step
is used to identify a potential impairment through an estimate of the fair value of certain
reporting units (as defined by SFAS No. 142), while the second step calculates the amount of
impairment, if any. The Company evaluated goodwill for impairment using the method described in the
preceding paragraph and determined the fair value of its reporting units by application of a
discounted cash flow analysis. The Company makes estimates that are included in its discounted cash
flow analyses based upon the best available information at the time of the fair value
determination. If circumstances change, the estimates of fair value will also change and could
necessitate additional impairment charges that reduce the carrying value of indefinite lived
intangible assets.
At June 30, 2007, the Company completed its annual impairment tests for acquired goodwill and
indefinite lived intangible assets using methodologies consistent with those applied for its
transitional impairment tests performed as of July 1, 2002. Such testing resulted in no impairment
charge. After completing step one of the annual impairment test as of June 30, 2008, the Company
determined that the estimated fair value of the Company was less than the net book value, requiring
the completion of the second step of the impairment test. Based on the step two of the analysis
prepared as of June 30, 2008, the Company determined that the entire amount of goodwill was
impaired. Accordingly, the Company reduced goodwill to zero in the fourth quarter of fiscal 2008.
(See Note 4)
Fair Value of Financial Instruments:
The fair value of cash and cash equivalents, accounts
receivable, accounts payable, and short-term borrowings approximate the carrying amount because of
the short maturity of those
30
instruments. The fair value of the Company’s long-term debt is estimated based on the quoted market
prices for the same or similar issues or the current rates offered to the Company for debt with the
same or similar remaining maturities and terms. At June 30, 2009, the fair value of the Company’s
long-term debt approximated their carrying value.
Revenue Recognition:
The Company recognizes revenue in accordance with the Securities and Exchange
Commission’s Staff Accounting Bulletin No. 104 (SAB104) Revenue, which requires that four basic
criteria be met before revenue can be recognized: (i) persuasive evidence of a customer arrangement
exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and
(iv) product delivery has occurred or services have been rendered. Sales are not conditional based
on customer acceptance provisions or installation obligations. The Company primarily utilizes
independent manufacturers’ representatives to facilitate sales orders (with no right of return or
other Company obligation), as well as having direct sales for key accounts or product lines. The
Company recognizes revenue as products are shipped based on FOB shipping point terms when title
passes to the customer. Customer rebate programs are offered based upon purchasing volume, on a
percentage of sales basis. The Company accounts for customer rebates as a reduction to net sales
on the accrual basis, in the period of the corresponding sale, when they are probable and can be
estimated. The Company estimates and accrues for sales returns based upon historical experience.
Product Warranty:
The Company offers a warranty on various products and services. The Company
estimates the costs that may be incurred under its warranties and records a liability in the amount
of such costs at the time the product is sold. Factors that affect the Company’s warranty liability
include the number of units sold, historical and anticipated rates of warranty claims and cost per
claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary. The amount of charges to the warranty reserve is equal to the
costs to repair or otherwise satisfy the claim.
Foreign Currency Translations and Transactions:
Foreign assets and liabilities are translated
using the year-end exchange rates. Results of operations are translated using the average rates
throughout the year. The translation gains or losses are accumulated as a separate component of
stockholders’ equity.
Comprehensive Income (Loss):
The components of comprehensive income (loss) include net income
(loss) and the effects of foreign currency translation adjustments.
Shipping and Handling:
In accordance with the EITF issue 00-10, “Accounting for Shipping and
Handling Fees and Costs,” the Company includes shipping and handling revenues in net sales and
shipping and handling costs in operating expenses. Shipping and handling costs included in
operating expenses were $1.0 million and $1.3 million for each of the years ended June 30, 2009 and
2008, respectively.
Stock-Based Compensation:
Commencing July 1, 2006, we adopted SFAS No. 123(R),
Share Based Payment
(SFAS 123(R)), and SEC Staff Accounting Bulletin No. 107,
Share Based Payment,
(“SAB 107”)
requiring all share-based payments, including grants of stock options, to be recognized in the
income statement as an operating expense, based on their fair value over the requisite service
period. We have applied the modified prospective method in adopting SFAS 123(R). Under the
modified prospective approach, SFAS 123R applies to new awards and to awards that were outstanding
on July 1, 2006 that are subsequently modified, repurchased, cancelled or vested. Under the
modified prospective approach, compensation cost recognized in fiscal years 2009 and 2008 includes
compensation cost for all share-based payments granted prior to, but not yet vested on, July 1,
2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R,
and compensation cost for all shared-based payments granted subsequent to July 1, 2006, based on
the grant-date fair value estimated in accordance with the provisions of SFAS 123R. See Note 3.
Employee Benefits:
The Company has a calendar year-end 401(k) deferred savings plan for all United
States employees (associates) who have completed six months of service. The Company may make
matching and discretionary contributions. During fiscal years ended June 30, 2009 and 2008 the
Company expensed $70,000 and $81,000 in matching contributions, respectively.
The Company offers medical insurance to its US associates. During fiscal 2009, the Company
converted this coverage from a self-insured plan to a traditional medical insurance plan, with a
deductible supplemented by a Health Savings Account (HSA) for each participant. Under this plan,
the Company pays a portion of the monthly
31
premium and makes a contribution to the individual employee HSA accounts. During fiscal 2009, the
Company’s expense for premium and HSA contributions was $397,000. The Company’s previous plan
self-insured up to $35,000 per individual and $1,000,000 in aggregate. During the fiscal year 2008,
the Company’s expenses under this plan were $545,000.
Advertising Costs:
The Company follows the policy of charging production costs of advertising to
expense as incurred. Advertising expenses for fiscal years ended June 30, 2009 and 2008 were
$667,000 and $959,000, respectively.
Income Taxes:
Deferred income taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax credit carry
forwards. Deferred tax liabilities are recognized for taxable temporary differences, which are the
differences between the reported amounts of assets and liabilities and their tax basis. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. The Company has not recognized a deferred tax liability relating to its
operations in the United Kingdom. To date, the United Kingdom does not have any material
undistributed earnings. If any undistributed earnings are remitted to the Company in the future,
income taxes, if any, after the application of foreign tax credits will be provided at that time.
Earnings or Loss per Share:
Basic income or loss per share is determined based on the weighted
average common shares outstanding, while the diluted income per share also gives effect to the
common shares dilutive potential. A reconciliation of the denominator in the basic and diluted
income or loss per share calculation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
(In thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,012
|
|
|
$
|
(5,199
|
)
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share,
weighted average shares
|
|
|
2,474
|
|
|
|
2,459
|
|
|
Dilutive potential shares — employee stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Denominator for diluted earnings (loss) per share,
weighted average shares
|
|
|
2,474
|
|
|
|
2,459
|
|
|
|
|
Net income (loss) per share-basic
|
|
$
|
0.41
|
|
|
$
|
(2.11
|
)
|
|
Net income (loss) per share-diluted
|
|
$
|
0.41
|
|
|
$
|
(2.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential shares excluded because the effect would be antidilutive:
|
|
|
|
|
|
|
|
|
|
In-the-money stock options
|
|
|
—
|
|
|
|
127,300
|
|
|
Stock options with exercise prices greater than the average
market price of the common shares for those periods
|
|
|
118,800
|
|
|
|
32,525
|
|
New Accounting Pronouncements:
In March 2008, the Financial Accounting Standards Board
(
FASB
)
issued Statement of Financial Accounting Standards
(
SFAS
)
No. 161,
"
Disclosures about Derivative
Instruments and Hedging Activities
”
(SFAS 161). SFAS No. 161 is intended to improve financial
reporting about derivative instruments and hedging activities by requiring enhanced disclosures to
enable investors to better understand their effects of an entity’s financial position, financial
performance and cash flows. SFAS No. 161 also improves transparency about the location and amounts
of derivative instruments in an entity’s financial statements; how derivative instruments and
related hedged items are accounted for under SFAS No. 133; and how derivative instruments and
related hedged items affect its financial position, financial performance and cash flows. SFAS No.
161 was effective for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged. The adoption of SFAS No. 161 did not
have a material effect on our results of operations or financial position.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS 165). SFAS No. 165 requires
all public entities to evaluate subsequent events through the date that the financial statements
are available to be issued and disclose in the notes the date through which the Company has
evaluated subsequent events and whether the financial statements were issued or were available to
be issued on the disclosed date. SFAS No. 165 defines two types of subsequent events, as follows:
the first type consists of events or transactions that provide additional evidence about conditions
that existed at the date of the balance sheet and the second type consists of events that provide
evidence
32
about conditions that did not exist at the date of the balance sheet but arose after that date.
SFAS No. 165 was effective for interim and annual periods ending after June 15, 2009 and must be
applied prospectively. The adoption of SFAS No. 165 did not have a material effect on our results
of operations or financial position.
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an
amendment to SFAS No. 140” (SFAS 166). SFAS No. 166 eliminates the concept of a “qualified
special-purpose entity,” changes the requirements for derecognizing financial assets and requires
additional disclosures in order to enhance information reported to users of financial statements by
providing greater transparency about transfers of financial assets, including securitization
transactions, and an entity’s continuing involvement in and exposure to the risks related to
transferred financial assets. SFAS No. 166 is effective for fiscal years beginning after November
15, 2009. We do not expect SFAS No. 166 to have a material impact on the preparation of our
consolidated financial statements.
In June 2009, the FASB also published SFAS No. 167, “Consolidation of Variable Interest Entities an
amendment to FIN 46(R)” (SFAS 167)
.
SFAS No. 167 addresses the effects of eliminating the qualified
special purpose entity concept from SFAS No. 140 and responds to concerns about the application of
certain key provisions of FIN 46(R), including concerns over the transparency of enterprises’
involvement with Variable Interest Entities (VIEs). SFAS No. 167 is effective for fiscal years
beginning after November 15, 2009. We do not expect SFAS No. 167 to have a material impact on the
preparation of our consolidated financial statements. In May 2008, the Financial Accounting
Standards Board (FASB) issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles” (SFAS 162). SFAS 162 is intended to improve financial reporting by identifying a
consistent framework, or hierarchy, for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities.
SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the
Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting Principles. We are currently
evaluating the impact, if any, of SFAS 162 on our consolidated financial statements.
Note 2 — Balance Sheet Information
The allowance for doubtful accounts was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Beginning balance
|
|
$
|
49
|
|
|
$
|
17
|
|
|
Provision for doubtful accounts
|
|
|
(6
|
)
|
|
|
40
|
|
|
Write-offs/recoveries, net
|
|
|
(34
|
)
|
|
|
(8
|
)
|
|
|
|
Ending balance
|
|
$
|
9
|
|
|
$
|
49
|
|
|
|
Components of inventories were:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Raw materials
|
|
$
|
1,815
|
|
|
$
|
2,311
|
|
|
Finished goods
|
|
|
3,096
|
|
|
|
3,772
|
|
|
|
|
Totals
|
|
$
|
4,911
|
|
|
$
|
6,083
|
|
|
|
Property, plant and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Land
|
|
$
|
205
|
|
|
$
|
205
|
|
|
Building and improvement
|
|
|
1,893
|
|
|
|
1,861
|
|
|
Machinery and equipment
|
|
|
2,774
|
|
|
|
3,102
|
|
|
Office furniture
|
|
|
1,057
|
|
|
|
1,072
|
|
|
Vehicles
|
|
|
130
|
|
|
|
151
|
|
|
Jigs, dies and fixtures
|
|
|
2,481
|
|
|
|
2,179
|
|
|
|
|
Total depreciable assets
|
|
|
8,540
|
|
|
|
8,570
|
|
|
Less accumulated depreciation
|
|
|
5,842
|
|
|
|
5,942
|
|
|
|
|
Net fixed assets
|
|
$
|
2,698
|
|
|
$
|
2,628
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Depreciation & amortization expense for continuing operations (in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Depreciation expense
|
|
$
|
451
|
|
|
$
|
662
|
|
|
Amortization expense
|
|
|
352
|
|
|
|
433
|
|
|
|
|
Total depreciation & amortization expense
|
|
$
|
803
|
|
|
$
|
1,095
|
|
|
|
Amortization expense relates to intangible assets, patents and debt issuance costs.
Accrued severance expense, included in accrued salaries, wages and other compensation was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Beginning balance
|
|
$
|
377
|
|
|
$
|
—
|
|
|
Severance accrual
|
|
|
32
|
|
|
|
402
|
|
|
Severance payments
|
|
|
(409
|
)
|
|
|
(25
|
)
|
|
|
|
Ending balance
|
|
$
|
—
|
|
|
$
|
377
|
|
|
|
The warranty reserve was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Beginning balance
|
|
$
|
529
|
|
|
$
|
519
|
|
|
Warranty expense
|
|
|
640
|
|
|
|
690
|
|
|
Processed warranty claims
|
|
|
(623
|
)
|
|
|
(680
|
)
|
|
|
|
Ending balance
|
|
$
|
546
|
|
|
$
|
529
|
|
|
|
Note 3 — Stock-based Compensation and Stock Options
Stock-based Compensation
Commencing July 1, 2006, the Company adopted SFAS No. 123(R),
Share Based Payment
(SFAS
123(R)), and SEC Staff Accounting Bulletin No. 107,
Share Based Payment,
(“SAB 107”) requiring all
share-based payments, including grants of stock options and compensatory employee stock purchase
plans, to be recognized in the income statement as an operating expense, based on their fair value
over the requisite service period. We recorded $64,000 of related compensation expense to general
and administrative expense for the fiscal year 2009. We recorded a total of $449,000 of related
compensation expense, of which $96,000 was recorded to the gain from sale of subsidiary and
$353,000 charged to general and administrative expense for fiscal year 2008, including $299,000
related to the cancellation of certain stock options. As of June 30, 2009, a total of $68,000 of
unrecognized compensation costs related to non-vested stock option awards was outstanding and is
expected to be recognized within the next three fiscal years, as follows: 2010 — $25,000; 2011 —
$24,000; and, 2012 — $19,000.
On June 30, 2008, certain management personnel and the Company entered into agreements to cancel
non-vested performance-based vesting stock options totaling 75,000 shares, with previously
unrecognized pre-tax and net compensation expense totaling $299,000, or $0.12 per share. Prior to
June 30, 2008, management’s best estimate was that these options were not likely to vest and would
expire prior to vesting, and accordingly were not expensed. In consideration of changes to the
executive management team in late fiscal 2008 and the projected business performance at that time,
the Company and three executives determined that the performance measurements, vesting criteria and
exercise prices of the performance-based vesting stock options were no longer appropriate to
provide the intended incentive to the option holders and were therefore cancelled. No
consideration was paid or received by the Company or the option holders related to these
cancellations.
The Company uses the Black-Scholes option pricing model to determine the weighted average fair
value of options. The volatility factor used in the Black-Scholes option pricing model is based on
historical stock price fluctuations. The current forfeiture rate is based on a reasonable estimate
by management. Expected dividend yield is based upon the Company’s historical and projected
dividend activity and the risk free interest rate is based upon US Treasury rates appropriate for
the expected term of the options. The expected term is based on estimates regarding projected
employee stock option exercise behavior. The assumptions the Company used to determine fair value
were as follows:
34
|
|
|
|
|
|
|
|
|
|
|
|
|
FY2009
|
|
|
FY2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Expected stock price volatility
|
|
|
103.76
|
%
|
|
|
84.06
|
%
|
|
Risk-free interest rate
|
|
|
4.00
|
%
|
|
|
3.88
|
%
|
|
Expected life of options
|
|
7.5 years
|
|
|
10 years
|
|
Stock Options
The Board of Directors adopted the 1995 Stock Option Plan (the “1995 Plan”) in May 1995 and
the shareholders of the Company approved the 1995 Plan at the Company’s annual meeting in October
1995. Following an increase in the authorized number of shares approved by the board in October
1999 and by shareholders in March 2000, the 1995 Plan provided for the grant of both incentive
stock options and non-qualified stock options and reserves 562,500 shares of the Company’s Common
Stock for issuance under the 1995 Plan and any previous plans of the Company, to be granted on a
one-for-one basis.
The Board of Directors adopted the 2004 Equity Incentive Plan (the “2004 Plan”) in August 2004 and
the shareholders of the Company approved the 2004 Plan at the Company’s annual meeting in November
2004. The 2004 Plan provides for the grant of incentive or nonqualified stock options, restricted
stock, stock appreciation rights, performance shares and performance units to officers, employees,
directors, consultants or advisors of the Company (including its subsidiaries and affiliates).
There are 550,000 shares of the Company’s Common Stock reserved for issuance under the 2004 Plan,
and no additional options will be granted under the 1995 Plan.
The Company’s stock options generally vest over five years of service and have a contractual life
of 10 years. Certain stock option grants to executive management in fiscal years 2006 and 2007,
however, had performance-based vesting upon achieving specific revenue and income objectives,
otherwise vesting on the fifth anniversary of the grant date. All performance-based vesting
options were subsequently forfeited or cancelled and no performance-based vesting stock options
remained outstanding at June 30, 2008. Options to purchase 5,025 and 40,000 shares were granted in
fiscal years ended June 30, 2009 and 2008, respectively. A summary of the status of the stock
option plans at June 30, 2009 and 2008, and changes during the years ended on those dates are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
Outstanding, beginning of year
|
|
|
159,825
|
|
|
$
|
3.99
|
|
|
|
362,100
|
|
|
$
|
6.48
|
|
|
Granted
|
|
|
5,025
|
|
|
$
|
1.72
|
|
|
|
40,000
|
|
|
$
|
2.45
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
(4,500
|
)
|
|
$
|
3.83
|
|
|
Cancelled
|
|
|
—
|
|
|
$
|
—
|
|
|
|
(75,000
|
)
|
|
$
|
8.33
|
|
|
Expired or forfeited
|
|
|
(41,025
|
)
|
|
$
|
3.20
|
|
|
|
(162,775
|
)
|
|
$
|
7.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
123,825
|
|
|
$
|
4.17
|
|
|
|
159,825
|
|
|
$
|
3.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
90,825
|
|
|
$
|
4.64
|
|
|
|
115,325
|
|
|
$
|
4.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value per share of
options granted during the year
|
|
|
|
|
|
$
|
1.48
|
|
|
|
|
|
|
$
|
2.07
|
|
|
|
|
Aggregate intrinsic value of options
outstanding
at end of year
|
|
|
|
|
|
$
|
1,407
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of options
exercisable
at end of year
|
|
|
|
|
|
$
|
1,407
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
As of June 30, 2009, the options outstanding have a weighted average remaining contractual life of
5.54 years, and exercise prices and unexercised options as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
|
|
|
|
|
|
|
Options outstanding
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Exercise
|
|
Outstanding
|
|
Average
|
|
Average
|
|
Number
|
|
Exercisable
|
|
|
Price
|
|
Shares
|
|
Contractual Life
|
|
Exercise Price
|
|
Exercisable
|
|
Price
|
|
|
|
|
$
|
4.00
|
|
|
|
11,250
|
|
|
0.6 years
|
|
$
|
4.00
|
|
|
|
11,250
|
|
|
$
|
4.00
|
|
|
|
$
|
2.67
|
|
|
|
30,000
|
|
|
1.7 years
|
|
$
|
2.67
|
|
|
|
30,000
|
|
|
$
|
2.67
|
|
|
|
$
|
4.52
|
|
|
|
5,025
|
|
|
4.3 years
|
|
$
|
4.52
|
|
|
|
5,025
|
|
|
$
|
4.52
|
|
|
|
$
|
8.47
|
|
|
|
5,025
|
|
|
5.3 years
|
|
$
|
8.47
|
|
|
|
5,025
|
|
|
$
|
8.47
|
|
|
|
$
|
8.38
|
|
|
|
20,000
|
|
|
6.3 years
|
|
$
|
8.38
|
|
|
|
20,000
|
|
|
$
|
8.38
|
|
|
|
$
|
6.83
|
|
|
|
7,500
|
|
|
6.8 years
|
|
$
|
6.83
|
|
|
|
4,500
|
|
|
$
|
6.83
|
|
|
|
$
|
2.45
|
|
|
|
40,000
|
|
|
8.9 years
|
|
$
|
2.45
|
|
|
|
10,000
|
|
|
$
|
2.45
|
|
|
|
$
|
1.72
|
|
|
|
5,025
|
|
|
9.2 years
|
|
$
|
1.72
|
|
|
|
5,025
|
|
|
$
|
1.72
|
|
|
|
|
|
$
|
1.72 to $8.47
|
|
|
|
123,825
|
|
|
5.5 years
|
|
$
|
4.17
|
|
|
|
90,825
|
|
|
$
|
4.64
|
|
In December 1996, the Board of Directors adopted the Associates Stock Purchase Plan (the “ASP
Plan”), which was approved by shareholders at the 1997 Annual Meeting. The ASP Plan is available to
associates who have worked at least six months with the Company and are regularly scheduled to work
at least 20 hours a week. The ASP Plan is carried out in 12-month phases commencing on January 1,
1997. Company stock bought under the ASP Plan is purchased at the lesser of 85% of the stock price
at the beginning or end of the phase. The total shares issued under this plan for the fiscal years
ended June 30, 2009 and 2008 were 16,277 and 8,905, respectively.
Note 4 — Goodwill and Other Intangible Assets
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill and indefinite lived intangible assets for the
years ended June 30, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Ind. Life
|
|
|
|
|
|
Ind. Life
|
|
(In thousands)
|
|
Goodwill
|
|
Intangibles
|
|
Goodwill
|
|
Intangibles
|
|
|
|
Beginning balance
|
|
$
|
—
|
|
|
$
|
2,681
|
|
|
$
|
6,616
|
|
|
$
|
2,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
—
|
|
|
|
(105
|
)
|
|
|
(27
|
)
|
|
|
(5
|
)
|
|
Reclassification of currency
translation adjustment for
goodwill impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
(325
|
)
|
|
|
—
|
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,264
|
)
|
|
|
—
|
|
|
|
|
Ending balance
|
|
$
|
—
|
|
|
$
|
2,576
|
|
|
$
|
—
|
|
|
$
|
2,681
|
|
|
|
Effective July 1, 2002, the Company adopted SFAS No. 142 (SFAS 142), “Goodwill and Other Intangible
Assets,” which established standards related to how acquired goodwill and indefinite-lived
intangible assets are to be recorded upon their acquisition as well as how they are to be accounted
for after they have been initially recognized in the financial statements. Goodwill and indefinite
lived intangible assets shall be tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of an entity below its
carrying value. The Company evaluated goodwill for impairment and determined the fair value of its
reporting units by application of a discounted cash flow analysis. The Company makes estimates
that are included in its discounted cash flow analyses based upon the best available information at
the time of the fair value determination.
After completing step one of the annual impairment test as of June 30, 2008, the Company determined
that the estimated fair value of the Company was less than the net book value, requiring the
completion of the second step of the impairment test. To measure the amount of the impairment, SFAS
142 prescribes that the Company determine the implied fair value of goodwill in the same manner as
if the Company was acquired at the measurement date. Specifically, the fair value of the Company
must be allocated to all of the assets of the Company, including any unrecognized intangible
assets, in a hypothetical calculation that would yield the implied fair value of goodwill. The
impairment loss is measured as the difference between the book value of the goodwill and the
implied fair value of the goodwill computed in step two. Based on the step two of the analysis
prepared as of June 30, 2008, the Company determined that the entire amount of goodwill was
impaired.
Accordingly, the Company reduced goodwill to zero in the fourth quarter of fiscal 2008. In
accordance with SFAS 142 and SFAS No. 130,
Reporting Comprehensive Income
, the Company recorded a
$6,264,000 goodwill impairment charge to operations to reverse the original amount recorded to
goodwill at the respective transaction dates. This amount includes a reclassification of $325,000
from accumulated other comprehensive income to
36
reverse previously recorded foreign currency
translation gains to goodwill, in accordance with View B of Emerging Issues Task Force (EITF) Issue
No. 01-5.
Intangible assets subject to amortization were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Customer
|
|
|
|
|
|
Customer
|
|
(In thousands)
|
|
Non-compete
|
|
Relationships
|
|
Non-compete
|
|
Relationships
|
|
|
|
Gross carrying amount
|
|
$
|
1,250
|
|
|
$
|
1,954
|
|
|
$
|
1,250
|
|
|
$
|
2,365
|
|
|
Accumulated amortization
|
|
|
1,250
|
|
|
|
1,326
|
|
|
|
1,250
|
|
|
|
1,267
|
|
|
|
|
Net carrying amount
|
|
$
|
—
|
|
|
$
|
628
|
|
|
$
|
—
|
|
|
$
|
1,098
|
|
|
|
Intangible assets are amortized on a straight-line basis over the estimated periods benefited; a
seven-year useful life has been assigned to the acquired customer relationships and five-year
useful life for the non-compete.
Amortization expenses related to definite lived intangible assets for 2009 and 2008 were $274,000
and $331,000, respectively. Estimated future annual amortization expense for identified intangible
assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
(In thousands)
|
|
Year
|
|
Amount
|
|
|
|
|
|
|
2010
|
|
|
$
|
279
|
|
|
|
|
|
2011
|
|
|
|
279
|
|
|
|
|
|
2012
|
|
|
|
70
|
|
|
|
|
|
|
Total
|
|
$
|
628
|
|
|
|
Note 5 — Financing
On August 1, 2007, the Company completed the sale of the WMS subsidiary, receiving $5 million
cash, which was used to reduce the outstanding debt with Wells Fargo Business Credit (WF).
On August 29, 2007, the Company entered into a secured revolving credit facility with JPMorgan
Chase Bank, N.A. (Chase), subsequently terminating the Wells Fargo Business Credit (WF) facility
and paying in full all outstanding balances under the WF facility, totaling approximately $1.1
million on August 30, 2007. The Chase facility, as amended, provides for a $6.0 million secured
revolving credit facility (the “Credit Facility”), with the option to increase borrowings in
additional $500,000 increments with the consent of the Lender, up to a total of $7.5 million.
Amounts under the facility may be borrowed, repaid and re-borrowed from time to time until its
maturity on August 29, 2010. Loans under the 2007 Credit Facility will bear interest at either a
base rate plus 0% to 0.5%, based upon financial performance, or a Eurocurrency rate equal to the
London Inter-Bank Offered Rate (“LIBOR”) for the relevant term plus 1.5% to 3.0%, based upon
financial performance. The outstanding balance under the Chase revolving credit facility at June
30, 2009 was $1.8 million at an effective interest rate of 3.5%, as compared to $3.4 million
outstanding at an effective rate of 4.0% at June 30, 2008. The average effective interest rate for
fiscal year 2009 was 3.86% as compared to 5.59% for fiscal year 2008. Unused availability under
the Credit Facility at June 30, 2009 totaled $3.4 million.
Additionally, in September 2004, Zareba Systems Europe secured a £2,214,000 term loan
(approximately $4.0 million) from the Bank of Scotland (BoS) in the United Kingdom for the Rutland
acquisition. Under the terms of the BoS credit facility agreement, interest is charged on
outstanding balances at the rate of two and one eighth percent (or 2.125%) above the base rate with
a five-year term. On June 30, 2009 and 2008, the effective interest rate was 2.68% and 7.62%,
respectively and the average effective interest rate for fiscal year 2009 was 4.85%, versus 7.26%
for the prior year. The BoS term loan matures on September 27, 2009, with monthly principal and
interest payments of £49,355 (approximately $80,000). The balance outstanding under this facility at June 30, 2009
and 2008 was £0.1 million, or approximately $0.2 million, and £0.7 million, or approximately $1.3
million, respectively.
Both the Chase and the BoS credit facilities are collateralized by substantially all of the assets
of the Company and Zareba Systems Europe, in their respective localities and are subject to certain
restrictive covenants. Line of credit borrowings are limited to eligible accounts receivable and
inventory.
In addition to bank and non-compete debt, the Company has “Other” low interest notes payable as an
incentive from a local utility to make upgrades in its operations to reduce future electrical peak
usage. The note payable was
37
comprised of $1,000 and $1,000 of current maturities and $1,000 and
$2,000 long-term as of June 30, 2009 and 2008, respectively.
Interest expense paid by the Company totaled $171,000 and $330,000 in fiscal years 2009 and 2008,
respectively.
The following table summarizes the debt outstanding:
United States Bank Debt as of June 30,
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
2008
|
|
|
|
Note payable to bank
|
|
$
|
1,839
|
|
|
$
|
3,360
|
|
|
Other
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
1,841
|
|
|
|
3,363
|
|
|
Less current maturities and short-term borrowings
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
Total
|
|
$
|
1,840
|
|
|
$
|
3,362
|
|
|
|
United Kingdom Bank Debt as of June 30,
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
2008
|
|
|
|
Note payable to bank
|
|
$
|
212
|
|
|
$
|
1,328
|
|
|
Less current maturities and short-term borrowings
|
|
|
(212
|
)
|
|
|
(1,120
|
)
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
208
|
|
|
|
Principal requirements on long-term debt for years ending after June 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
(In thousands)
|
|
Year
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
213
|
|
|
|
|
|
2011
|
|
|
|
1,840
|
|
|
|
|
|
|
Total
|
|
$
|
2,053
|
|
|
|
On August 1, 2007, the Company completed the sale of the WMS subsidiary, receiving $5 million cash,
which was used to reduce the outstanding debt with WF Business Credit. (See Note 9)
Note 6 — Income Taxes
Domestic and foreign income before provision for income taxes from continuing operations
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
2008
|
|
|
|
Domestic
|
|
$
|
1,610
|
|
|
$
|
(3,411
|
)
|
|
Foreign
|
|
|
(238
|
)
|
|
|
(3,566
|
)
|
|
|
|
Total
|
|
$
|
1,372
|
|
|
$
|
(6,977
|
)
|
|
|
The income tax provision charged to continuing operations for the years ended June 30, 2009 and
2008 includes the following components:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
2008
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
US federal
|
|
$
|
317
|
|
|
$
|
158
|
|
|
State
|
|
|
32
|
|
|
|
9
|
|
|
Foreign
|
|
|
97
|
|
|
|
107
|
|
|
|
|
Total current
|
|
|
446
|
|
|
|
274
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
US federal and state
|
|
|
188
|
|
|
|
40
|
|
|
Foreign
|
|
|
(140
|
)
|
|
|
(149
|
)
|
|
|
|
Total deferred
|
|
|
48
|
|
|
|
(109
|
)
|
|
|
|
Total provision
|
|
$
|
494
|
|
|
$
|
165
|
|
|
|
38
The reconciliation of income tax benefit or expense to the statutory rate was as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Income tax expense at statutory rates:
|
|
|
|
|
|
|
|
|
|
US Federal
|
|
$
|
547
|
|
|
$
|
(1,160
|
)
|
|
Foreign
|
|
|
(67
|
)
|
|
|
(1,070
|
)
|
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal tax benefits
|
|
|
38
|
|
|
|
6
|
|
|
Research and development tax credits
|
|
|
(44
|
)
|
|
|
38
|
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
2,118
|
|
|
Permanent differences and other
|
|
|
20
|
|
|
|
233
|
|
|
|
|
Total
|
|
$
|
494
|
|
|
$
|
165
|
|
|
|
Net deferred tax assets consist of the following components as of June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
60
|
|
|
$
|
85
|
|
|
Inventory and receivable allowances
|
|
|
32
|
|
|
|
52
|
|
|
Warranty and contingency reserves
|
|
|
303
|
|
|
|
244
|
|
|
Foreign currency translation adjustments included in
Accumulated other comprehensive income
|
|
|
152
|
|
|
|
—
|
|
|
Non compete payable
|
|
|
213
|
|
|
|
243
|
|
|
Discontinued operations asset
|
|
|
66
|
|
|
|
144
|
|
|
|
|
Total deferred tax assets
|
|
|
826
|
|
|
|
768
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
|
52
|
|
|
|
—
|
|
|
Property and equipment
|
|
|
698
|
|
|
|
549
|
|
|
Foreign currency translation adjustments included in
Accumulated other comprehensive income
|
|
|
—
|
|
|
|
30
|
|
|
Basis difference in costs recorded in the
|
|
|
|
|
|
|
|
|
|
Rutland acquisition
|
|
|
179
|
|
|
|
348
|
|
|
|
|
Total deferred tax liabilities
|
|
|
929
|
|
|
|
927
|
|
|
|
|
Net deferred tax assets (liability)
|
|
$
|
(103
|
)
|
|
$
|
(159
|
)
|
|
|
The components giving rise to the net deferred tax assets (liability) described above have
been included in the Company’s Balance Sheets as of June 30, 2009 and 2008 as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Current assets
|
|
$
|
409
|
|
|
$
|
526
|
|
|
Non-current liabilities
|
|
|
(512
|
)
|
|
|
(685
|
)
|
|
|
|
Net deferred tax assets (liability)
|
|
$
|
(103
|
)
|
|
$
|
(159
|
)
|
|
|
The cash tax payments for fiscal years ended June 30, 2009 and 2008 were $846,000 and
$1,023,000, respectively.
The Company adopted the provisions of FASB Interpretation 48,
Accounting for Uncertainty in Income
Taxes
(Interpretation 48), on July 1, 2007. Previously, the Company had accounted for tax
contingencies in accordance with Statement of Financial Accounting Standards 5,
Accounting for
Contingencies
. As required by Interpretation 48, which clarifies Statement 109,
Accounting for
Income Taxes
, the Company recognizes the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain the position
following an audit. For tax positions meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the relevant tax authority. At the
adoption date, the Company applied Interpretation 48 to all tax positions for which the statute of
limitations remained open. As a result of the implementation of Interpretation 48, the Company
recognized an increase of approximately $175,000 in the liability for unrecognized income tax
benefits, which was accounted for as a reduction to the July 1, 2007 balance of retained earnings.
Upon adoption, the increase in the liability for unrecognized income tax benefits is the result of
the Company’s de-recognition of certain positions taken in prior years that management no longer
believes are more likely than not of being sustained upon examination. At June 30, 2009, the
balance of unrecognized tax benefits was $271,000, reflecting the reduction of unrecognized tax
benefits as a result of a lapse of applicable statute of limitations of approximately $50,000 and
increased unrecognized tax benefits as a result of tax positions taken during the current
39
year
totaling approximately $146,000, both inclusive of related interest and penalties. The Company
expects the balance of unrecognized tax benefits to fluctuate in future periods with the lapse of
the statute of limitations on some periods and the addition of provisions for future periods;
however, the net fluctuation, if any, cannot be reasonably predicted. The June 30, 2009, balance
of unrecognized tax benefits, if ultimately recognized, will reduce the Company’s annual effective
tax rate.
The Company is subject to income taxes in the US Federal jurisdiction, Minnesota, and the United
Kingdom. Tax regulations within each jurisdiction are subject to the interpretation of the related
tax laws and regulations and require significant judgment to apply. With few exceptions, the
Company is no longer subject to US federal, state or local income tax examinations by tax
authorities for the fiscal years ended before June 30, 2006.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in
income tax expense for all periods presented. The Company accrued approximately $12,000 for the
payment of interest and penalties as of July 1, 2007, the date of adoption, and accrued interest
and penalties at both June 30, 2009 and 2008 totaled approximately $28,000.
Note 7 — Commitments and Contingencies
The Company leases equipment and office, manufacturing and warehouse space under various
non-cancelable operating leases that expire at various times through September 22, 2029. Rent
expense related to operating leases was approximately $414,000 and $451,000, for the years ended
June 30, 2009 and 2008, respectively. Future minimum lease payments are approximately as follows.
|
|
|
|
|
|
|
(In thousands)
|
|
Annual Lease
|
|
|
|
|
2010
|
|
|
361
|
|
|
2011
|
|
|
345
|
|
|
2012
|
|
|
277
|
|
|
2013
|
|
|
250
|
|
|
2014
|
|
|
247
|
|
|
Thereafter
|
|
|
3,144
|
|
|
|
|
Total
|
|
$
|
4,624
|
|
|
|
The Company has an employment agreement with the Company’s chief executive officer who also
serves on the board and change in control agreements with all Company officers. The Agreements provide for severance payments subject to certain conditions
and events.
Note 8 — Concentrations
Based upon the Company’s organizational structure and manner in which performance is assessed
and operating decisions are made, the Company operates in one worldwide business segment — the
sale of electronic perimeter fence and access control systems.
The Company markets its products throughout the world. The following summarizes net sales and
long-lived assets for the geographic areas in which the Company has operations:
|
|
|
|
|
|
|
|
|
|
|
Geographic information:
|
|
|
|
|
|
|
|
(In thousands)
|
|
FY2009
|
|
|
FY2008
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
22,924
|
|
|
$
|
23,314
|
|
|
United Kingdom
|
|
|
8,145
|
|
|
|
9,950
|
|
|
Other regions
|
|
|
1,147
|
|
|
|
1,301
|
|
|
|
|
Total net sales
|
|
$
|
32,216
|
|
|
$
|
34,565
|
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,606
|
|
|
$
|
2,697
|
|
|
United Kingdom
|
|
|
210
|
|
|
|
456
|
|
|
|
|
Total long-lived assets
|
|
$
|
2,816
|
|
|
$
|
3,153
|
|
|
|
In fiscal years ended June 30, 2009 and 2008, sales to one Zareba Systems customer were $8.5
million and $7.4 million, respectively. Accounts receivable from this customer totaled $2.9
million and $2.4 million at June 30, 2009 and 2008, respectively. Sales of the Company’s line of
security products totaled $0.7 million for fiscal 2009
40
compared to $1.2 million for fiscal 2008.
The balance of sales was for the Company’s electric fencing systems and access control products
through its established retail and distributor customer base.
Note 9 — Discontinued Operations
Professional Series Automatic Gate Opener Product Line
In June 2008, Zareba discontinued its professional series automatic gate opener (PS AGO)
product line and commenced efforts to sell the related assets and eliminate personnel and support
costs associated with the product line. In conjunction with the decision to discontinue the PS AGO
product line, the Company recorded a $400,000 valuation adjustment related to the inventory and
fixed assets and purchase commitments of the PS AGO product line. Accordingly, all results of
operations and assets and liabilities of the PS AGO product line for all periods presented prior to
the decision date have been restated and classified as discontinued operations.
On October 22, 2008, the Company sold substantially all of the assets of its professional series
automatic gate operator product line to Amazing Gates of America, LLC (Buyer) for $739,000, plus
the assumption of certain outstanding inventory purchase obligations of the Company. The purchase
price was payable in cash of $200,000 at the closing, with the balance to be paid in installments
by December 2010. The purchase price is evidenced by promissory notes receivable from the Buyer
which are secured by the assets sold to Buyer. The payment at closing was directly applied as the
purchase price of the assets transferred to Buyer at that date. The Company retained possession of
the remaining assets and will deliver them to the Buyer as the Buyer makes the required installment
payments under the notes receivable. Valuation reserves were established for 100% of the balance
of the notes receivable by the Company at the transaction date and, accordingly, no gain on the
transaction was recorded at Closing.
During fiscal 2009, the Company received $0.3 million through payments by the Buyer against the
promissory notes and assumption of all remaining inventory purchase obligations, in accordance with
the terms of the purchase agreement. The Company recorded a corresponding gain on sale of
$141,000, net of tax of $80,000, to reflect these transactions. Further payments by the Buyer on
the notes receivable along with valuation assessments by Company management each quarter may result
in additional gain on the sale of the product line being realized in future periods.
Assets and liabilities of PS AGO product line at June 30, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Accounts receivable, net
|
|
$
|
—
|
|
|
$
|
39
|
|
|
Inventories, net
|
|
|
—
|
|
|
|
218
|
|
|
Other current assets
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Current assets of discontinued operations
|
|
|
—
|
|
|
|
257
|
|
|
|
|
Property and equipment, net
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Other assets of discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Accounts payable
|
|
|
—
|
|
|
|
—
|
|
|
Accrued compensation and other liabilities
|
|
|
—
|
|
|
|
172
|
|
|
|
|
Current liabilities of discontinued operations
|
|
|
—
|
|
|
$
|
172
|
|
|
|
Condensed consolidated statements of operations for PS AGO product line for fiscal years ended
June 30, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Net sales
|
|
$
|
2
|
|
|
$
|
477
|
|
|
Gross profit
|
|
|
(11
|
)
|
|
|
(238
|
)
|
|
Selling, general and administrative
|
|
|
—
|
|
|
|
459
|
|
|
Research and development
|
|
|
—
|
|
|
|
202
|
|
|
Impairment of long-lived assets
|
|
|
—
|
|
|
|
64
|
|
|
Income tax provision (benefit)
|
|
|
(4
|
)
|
|
|
(347
|
)
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(7
|
)
|
|
$
|
(616
|
)
|
Depreciation expense for the PS AGO product line was $-0- and $36,000 fiscal years 2009 and
2008, respectively.
Waters Medical Systems, Inc.
41
On July 24, 2007, the Company entered in to a Stock Purchase Agreement for the sale of the
Company’s Waters Medical Systems, Inc., (WMS) subsidiary to a third party. The WMS subsidiary, a
provider of medical products was initially formed on June 30, 2005, when all the assets of the WMS
division of Zareba were transferred to the newly-formed subsidiary, and has operated in a separate
business segment of the Company. Accordingly, all results of operations and assets and liabilities
of WMS for all periods presented prior to the transaction date have been restated and classified as
discontinued operations.
The sale of WMS was completed on August 1, 2007. The transaction involved the sale of 100% of the
stock of WMS, including all assets and liabilities of WMS at close, for $5 million cash.
The gain on the sale of WMS is calculated as follows:
|
|
|
|
|
|
|
Cash received
|
|
$
|
5,000
|
|
|
Less: investment in WMS
|
|
|
(665
|
)
|
|
transaction costs
|
|
|
(228
|
)
|
|
|
|
|
|
|
Gain on sale before tax
|
|
|
4,107
|
|
|
Income tax (rate of 38%)
|
|
|
(1,561
|
)
|
|
|
|
|
|
|
Gain on sale, net of tax
|
|
$
|
2,546
|
|
|
|
|
|
|
Condensed consolidated statements of operations for WMS for fiscal years ended June 30, 2009
and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Net sales
|
|
$
|
—
|
|
|
$
|
142
|
|
|
Gross profit
|
|
|
—
|
|
|
|
79
|
|
|
Selling, general and administrative
|
|
|
—
|
|
|
|
47
|
|
|
Research and development
|
|
|
—
|
|
|
|
11
|
|
|
Income tax provision
|
|
|
—
|
|
|
|
8
|
|
|
Gain from discontinued operations, net of tax
|
|
$
|
—
|
|
|
$
|
13
|
|
Depreciation expense for WMS was $-0- and $3,000 fiscal years 2009 and 2008, respectively.
Note 10 — Subsequent Events
The Company has evaluated subsequent events occurring through September 28, 2009, the date on
which this Annual Report on Form 10-K was issued.
On September 10, 2009, the Company announced that its Board of Directors decided to explore
strategic alternatives to enhance shareholder value.
On September 25, 2009, the Company entered into Executive Severance Agreements (the “Agreements”)
with Dale A. Nordquist, President and Chief Executive Officer, Jeffrey S. Mathiesen, Chief
Financial Officer, and Donald J. Dalland, Vice President, Engineering and Operations (each, an
“Executive”). Each of the Agreements provides that in the event of the termination of the
Executive without cause by the Company or for good reason by the Executive within twelve (12)
months following a change in control, the Executive will receive a continuation of base pay and
health insurance benefits for an eighteen (18) month period following termination. No continuation
of payments will occur if the termination is for cause. The Agreements also include
non-solicitation covenants and non-competition provisions that prevent each Executive from having
certain relationships with the Company’s competitors for a period of 12 months following
termination of employment. The provisions of the Agreement with Mr. Nordquist (the “Nordquist
Agreement”) supersede any similar provisions contained in Mr. Nordquist’s employment agreement in
the event of a change of control, and such employment agreement is deemed amended to give effect to
the provisions of the Nordquist Agreement.
42
Zareba Systems (MM) (NASDAQ:ZRBA)
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