10-Q 1 c51192e10vq.htm 10-Q e10vq
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ   No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o   No o
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o    Accelerated filer o    Non-accelerated filer   o
(Do not check if a smaller reporting company)
  Smaller reporting company þ 
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 number of shares outstanding of the Company’s Common Stock on May 4, 2009 was 2,481,973.
 
 

 


 


 

PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
ZAREBA SYSTEMS, INC.
Condensed Consolidated Balance Sheets
                 
    March 31,     June 30,  
(In thousands, except share amounts)   2009     2008  
    (Unaudited)          
Current assets
               
Cash and cash equivalents
  $  122     $ 633  
Accounts receivable, net
    4,275       8,031  
Inventories
    5,639       6,083  
Other current assets
    1,209       1,112  
Current assets of discontinued operations
          257  
 
Total current assets
    11,245       16,116  
 
Property, plant and equipment, net
    2,711       2,628  
 
Other assets
               
Trademarks
    2,510       2,681  
Customer relationships, net
     607       1,098  
Other, net
    115       525  
 
Total other assets
    3,232       4,304  
 
TOTAL ASSETS
  $ 17,188     $ 23,048  
 
 
               
Current liabilities
               
Accounts payable
  $ 2,480     $ 4,282  
Accrued liabilities
    1,643       2,617  
Income taxes payable
          676  
Current maturities of long-term debt
     379       1,121  
Current liabilities of discontinued operations
    6       172  
 
Total current liabilities
    4,508       8,868  
 
Deferred income taxes
     334       685  
Other long-term liability
     187       175  
Long-term debt, less current maturities
    3,428       3,570  
 
Total liabilities
    8,457       13,298  
 
 
               
Stockholders’ equity
               
Undesignated shares as of March 31, 2009 and June 30, 2008, $0.01 par value, 39,950,000 shares authorized, none issued or outstanding
           
Series A Preferred Stock as of March 31, 2009 and June 30, 2008, $0.01 par value per share, 50,000 shares authorized, none issued or outstanding
           
Common stock as of March 31, 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
    2,710       2,635  
Accumulated other comprehensive income (loss):
               
Foreign currency translation adjustment
    (455 )     389  
Retained earnings
    6,451       6,701  
 
Total stockholders’ equity
    8,731       9,750  
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 17,188     $ 23,048  
 
See notes to the condensed consolidated financial statements.
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 3

 


 

ZAREBA SYSTEMS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
                                 
    Three months   Nine months
    ended March 31,   ended March 31,
(In thousands, except per share data)   2009     2008     2009     2008
Net sales
  $ 6,709     $ 7,029     $ 20,530     $ 22,407  
Cost of goods sold
    4,752       4,916       14,248       15,847  
 
Gross profit
    1,957       2,113       6,282       6,560  
Operating expenses
                               
Selling, general and administrative
    1,717       2,249       5,702       6,795  
Research and development
    213       246       692       773  
 
Total operating expenses
    1,930       2,495       6,394       7,568  
 
Gain (loss) from operations
    27       (382 )     (112 )     (1,008 )
 
Other income (expense), net
                               
Interest income
          6       8       28  
Interest expense
    (49 )     (86 )     (185 )     (297 )
Other income (expense), net
    (97 )     (101 )     (279 )     (162 )
 
Loss before income taxes
    (119 )     (563 )     (568 )     (1,439 )
Income tax benefit
    (86 )     (187 )     (214 )     (480 )
 
Loss from continuing operations
    (33 )     (376 )     (354 )     (959 )
Loss from discontinued operations, net of tax
          (113 )     (7 )     (283 )
Gain from sale of discontinued product line, net of tax
    111             111        
Gain from sale of subsidiary, net of tax
                      2,546  
 
Net income (loss)
  $ 78     $ (489 )   $ (250 )   $ 1,304  
 
 
                               
Income from continuing operations per common and common equivalent share:
                               
basic
  $ (0.01 )   $ (0.15 )   $ (0.14 )   $ (0.39 )
diluted
  $ (0.01 )   $ (0.15 )   $ (0.14 )   $ (0.39 )
 
                               
Loss from discontinued operations per common and common equivalent share:
                               
basic
  $     $ (0.05 )   $     $ (0.12 )
diluted
  $     $ (0.05 )   $     $ (0.12 )
 
                               
Gain from sale of discontinued product line per common and common equivalent share:
                               
basic
  $ 0.04     $     $ 0.04     $  
diluted
  $ 0.04     $     $ 0.04     $  
 
                               
Gain from sale of subsidiary per common and common equivalent share:
                               
basic
  $     $     $     $ 1.04  
diluted
  $     $     $     $ 1.04  
 
                               
Net income per common and common equivalent share:
                               
basic
  $ 0.03     $ (0.20 )   $ (0.10 )   $ 0.53  
diluted
  $ 0.03     $ (0.20 )   $ (0.10 )   $ 0.53  
 
                               
Weighted average number of shares outstanding
                               
basic
    2,481,973       2,464,212       2,471,042       2,456,236  
diluted
    2,481,973       2,464,212       2,471,042       2,456,236  
     See notes to the condensed consolidated financial statements.
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 4

 


 

ZAREBA SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
                 
    For the nine months  
    ended March 31,  
(In thousands)   2009     2008  
 
Cash flows provided by (used in) operations:
               
Reconciliation of net income (loss) to net cash provided by operations
               
Net income (loss)
  $ (250 )   $ 1,304  
Adjustments to reconcile net income to cash flows from operating activities:
               
Depreciation and amortization
     619        843  
Gain on sale of discontinued product line
    (111 )      
Gain on sale of subsidiary
          (2,546 )
(Gain) loss on disposal of plant and equipment
    (28 )     9  
Stock-based compensation expense
    54        134  
Deferred income taxes
    (62 )     (216 )
Changes in assets and liabilities:
               
Accounts receivable, net
    3,286       3,490  
Inventories
    (263 )     (1,197 )
Other assets
     132       (461 )
Accounts payable and accrued expenses
    (3,349 )     (3,056 )
Other long-term liability
    12        
 
Net cash provided by (used in) operations
    40       (1,696 )
 
Cash flows provided by (used in) investing activities:
               
Purchases of property and equipment
    (194 )     (167 )
Proceeds from sale of discontinued product line
     289        
Proceeds from sale of subsidiary
          5,000  
 
Net cash provided by (used in) investing activities
    95       4,833  
 
Cash flows provided by (used in) financing activities:
               
Net proceeds from (payments on) long-term debt – revolving credit facility
    67       2,748  
Proceeds from sale of common stock
    21       53  
Payments of debt issue costs
    (11 )     (40 )
Payments on long-term debt
    (659 )     (6,987 )
 
Net cash provided by (used in) financing activities
    (582 )     (4,226 )
Effect of exchange rate changes in cash
    (64 )     6  
 
Net increase (decrease) in cash and cash equivalents
    (511 )     (1,083 )
Cash and cash equivalents — beginning of period
    633       1,614  
 
CASH AND CASH EQUIVALENTS — END OF PERIOD
  $ 122     $ 531  
 
 
               
Supplemental Schedule of Non-Cash Activities
               
Long-term liability recorded for adoption of FIN 48 (See Note 8)
  $     $ 175  
Change in deferred income taxes and income taxes payable related to other comprehensive income
          96  
Equipment placed into service that was purchased in previous period
    346        
See notes to the condensed consolidated financial statements.
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 5

 


 

ZAREBA SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)
Zareba Systems, Inc., (the Company) prepared the condensed consolidated financial statements without audit and pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in the consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary in order to make the consolidated financial statements not misleading. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes included in the Company’s Form 10-K for the year ended June 30, 2008, and the Fiscal Year 2008 Annual Report.
The results of operations for the three and nine months ended March 31, 2009 are not necessarily indicative of the operating results to be expected for the full fiscal year.
Preparation of the Company’s condensed consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and related net sales and expenses. Actual results could differ from those estimates.
1. Net Income (loss) per Share
The following table sets forth the computation of basic and diluted income and income per share:
                                 
    Three months     Nine months  
    ended March 31,     ended March 31,  
(Dollars in thousands, except per share amounts)   2009     2008     2009     2008  
 
Numerator:
                               
Net income
  $ 78     $ (489 )   $ (250 )   $ 1,304  
Denominator:
                               
Weighted average common shares outstanding-basic
    2,481,973       2,464,212       2,471,042       2,456,236  
Dilution associated with the company’s stock-based compensation plans
                       
 
Weighted average common shares outstanding-diluted
    2,481,973       2,464,212       2,471,042       2,456,236  
 
                               
Net income (loss) per common share-basic
  $ 0.03     $ (0.20 )   $ (0.10 )   $ 0.53  
Net income (loss) per common share-diluted
  $ 0.03     $ (0.20 )   $ (0.10 )   $ 0.53  
 
                               
Dilutive potential shares excluded because the effect would be antidilutive:
                               
In-the-money stock options
    5,025       87,300       5,025       87,300  
Stock options with exercise prices greater than the average market price of the common shares for those periods
    118,800       222,525       118,800       222,525  
2. Comprehensive Income (loss)
The components of comprehensive income (loss), net of related tax, for the three and nine months ended March 31, 2009 and 2008 were as follows:
                                 
    Three months     Nine months  
    ended March 31,     ended March 31,  
(In thousands)   2009     2008     2009     2008  
Net income (loss)
  $ 78     $ (489 )   $ (250 )   $ 1,304  
Foreign currency translation adjustment, net of tax
    (31 )     (90 )     (844 )     (138 )
 
Comprehensive income (loss)
  $ 47     $ (579 )   $ (1,094 )   $ 1,166  
 
3. Stock-Based Compensation
Commencing July 1, 2006, we adopted Statement of Financial Accounting Standard 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 recorded $96,000 of related compensation expense, or $60,000 net of tax or $0.02 per basic and diluted share, to the gain on sale of subsidiary during the first quarter of fiscal 2008 as a result of
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 6

 


 

accelerated vesting of certain options upon closing of the transaction. We also recorded $10,000 and $38,000 of related compensation expense, all to general and administrative expense, for the three and nine month periods ended March 31, 2009, respectively, as compared to $13,000 and $38,000 for the respective comparable periods in the prior year. The related tax benefit from recording this non-cash general and administrative expense was $4,000 and $14,000, and the net compensation expense to operations was $6,000, or $0.00 per basic and diluted share, and $24,000, or $0.01 per basic and diluted share, for the three and nine month periods ended March 31, 2009, respectively. The related tax benefit from recording this non-cash general and administrative expense was $5,000 and $14,000 and the net compensation expense to operations was $8,000, or $0.00 per basic and diluted share, and $24,000, or $0.01 per basic and diluted share, for the three and nine months ended March 31, 2008, respectively. Remaining stock-based compensation for both periods is related to the Company’s employee stock purchase plan. As of March 31, 2009, a total of $76,000 of unrecognized compensation costs related to non-vested stock option awards was outstanding and is expected to be recognized within the next four years.
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. Options for 5,025 shares were granted during the nine months ended March 31, 2009, and the weighted average fair value of these options was $1.48, determined using an expected dividend yield of 0.00%, an expected stock price volatility of 103.78%, a risk-free interest rate of 4.00% and expected option lives of 7.5 years. There were no options granted in the three months ended March 31, 2009.
The Company’s stock options generally vest over four to five years of service and have a contractual life of 10 years. We have 550,000 shares authorized for grant under the 2004 Equity Incentive Plan.
Option activity under both plans during the nine months ended March 31, 2009 was as follows:
                         
            Weighted Avg.     Aggregate  
    Number     Exercise Price     Intrinsic  
    of Options     Per Share     Value  
 
Options outstanding, June 30, 2008
    159,825     $ 3.99          
Granted
    5,025       1.72          
Exercised
                   
Forfeited
    41,025     $ 3.20          
 
Options outstanding, March 31, 2009
    123,825     $ 4.17     $  
 
Exercisable, March 31, 2009
    79,325     $ 4.88     $  
 
As of March 31, 2009, the options outstanding have a weighted average remaining contractual life of 5.8 years, and exercise prices and unexercised options as follows:
                                         
Options outstanding   Options exercisable
            Weighted   Weighted           Weighted
Exercise   Outstanding   Average   Average   Number   Average
Price   Shares   Contractual Life   Exercise Price   Exercisable   Exercise Price
 
$1.72 to $3.63
    75,025     6.3 years   $ 2.49       35,025     $ 2.53  
$4.00 to $4.52
    16,275     2.0 years   $ 4.16       16,275     $ 4.16  
$6.83 to $8.47
    32,525     6.6 years   $ 8.04       28,025     $ 8.23  
 
$1.72 to $8.47
    123,825     5.8 years   $ 4.17       79,325     $ 4.88  
4. Balance Sheet Information
Accrued severance expense, included in accrued liabilities was as follows:
         
    March 31,  
(In thousands)   2009  
    (Unaudited)  
Beginning balance, June 30, 2008
  $ 377  
Severance accrual
     
Severance payments
    (319 )
 
Ending balance, March 31, 2009
  $ 58  
 
Inventories consisted of the following.
                 
    March 31,     June 30,  
(In thousands)   2009     2008  
    (Unaudited)          
Raw materials
  $ 1,929     $ 2,311  
Finished goods
    3,710       3,772  
 
TOTALS
  $ 5,639     $ 6,083  
 
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 7

 


 

5. Goodwill and Intangible Assets
Effective July 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which established new 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.
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 the three and nine months ended March 31, 2009 were $69,000 and $208,000, respectively, compared to $83,000 and $256,000 in the respective comparable periods ended March 31, 2008.
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. 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 reverse previously recorded foreign currency translation gains to goodwill, in accordance with View B of Emerging Issues Task Force (EITF) Issue No. 01-5.
6. Bank Debt Disclosure
On August 29, 2007, the Company entered into a secured revolving credit facility with JPMorgan Chase Bank, N.A. (Chase) (the “2007 Credit Facility”), 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 2007 Credit Facility provides for a $6 million secured revolving 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 reborrowed from time to time until its maturity on August 29, 2010. Loans under the 2007 Credit Facility, as amended, will bear interest at either a base rate minus 1.0 percent to 0 percent (amended to base rate plus 0 percent to plus 0.50 percent), based upon financial performance, or a Eurocurrency rate equal to the London Inter-Bank Offered Rate (“LIBOR”) for the relevant term plus 1.5 percent to 2.5 percent (amended to plus 1.5 percent to plus 3.0 percent), based upon financial performance. The outstanding balance under this revolving credit facility at March 31, 2009 was $3.4 million. The effective interest rate at March 31, 2009 was 3.50 percent, and the average effective interest rate for the three and nine months then ended was 3.63 and 3.98 percent, respectively, versus 5.22 and 6.23 percent for the respective periods in the prior year. The Company and Chase entered into amendments to the 2007 Credit Facility on September 30, 2008 and October 22, 2008.
Also, 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 percent) above
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 8

 


 

the base rate with a five-year term. On March 31, 2009, the effective interest rate was 2.76 percent and the average effective interest rate for the three and nine months then ended was 3.49 percent and 5.58 percent, respectively, versus 7.51 percent and 7.74 percent for the respective periods in the prior year. The BoS term loan matures on September 27, 2009, with monthly principal and interest payments of £49,355 (approximately $71,000). The balance outstanding under this facility at March 31, 2009 was £0.3 million, or approximately $0.4 million.
The following table summarizes the debt outstanding:
United States Bank Debt as of
                 
    March 31,     June 30,  
(In thousands)   2009     2008  
 
Note payable to bank
  $ 3,426     $ 3,360  
Other
    3       3  
 
 
    3,429       3,363  
Less current maturities and short-term borrowings
    (1 )     (1 )
 
Total
  $ 3,428     $ 3,362  
 
United Kingdom Bank Debt as of
                 
    March 31,     June 30,  
(In thousands)   2009     2008  
 
Note payable to bank
  $ 378     $ 1,328  
Less current maturities and short-term borrowings
    (378 )     (1,120 )
 
Total
  $     $ 208  
 
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.
7. Discontinued Operations, Sale of Professional Series Automatic Gate Opener Product Line and Sale of Waters Medical Systems, Inc.
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 the third quarter of fiscal 2009, the Company received $0.2 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 $111,000, net of tax, 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.
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 9

 


 

Assets and liabilities of PS AGO product line at March 31, 2009 and June 30, 2008 were as follows:
                 
    March 31,     June 30,  
(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
    6       172  
 
Current liabilities of discontinued operations
  $ 6     $ 172  
 
Condensed consolidated statements of operations for PS AGO product line for the three and nine months ended March 31, 2009 and 2008 are as follows:
                                 
    Three months ended     Nine months ended  
    March 31,     March 31,  
(In thousands)   2009     2008     2009     2008  
 
Net sales
  $     $ 45     $ 2     $  363  
Gross profit
          (2 )     (11 )     71  
Selling, general and administrative
          117              367  
Research and development
          57              166  
Income tax provision (benefit)
          (63 )     (4 )     (166 )
Loss from discontinued operations, net of tax
  $     $ (113 )   $ (7 )   $ (296 )
Waters Medical Systems, Inc.
On July 24, 2007 the Company entered into 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 percent 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 recorded in the first quarter of fiscal 2008 was calculated as follows:
         
Cash received
  $ 5,000  
Less: investment in WMS
    (665 )
transaction costs
    (228 )
 
     
Gain on sale before tax
    4,107  
Income tax (estimated rate of 38%)
    (1,561 )
 
     
Gain on sale, net of tax
  $ 2,546  
 
     
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 10

 


 

Condensed consolidated statements of operations for WMS for three and nine months ended March 31, 2009 and 2008 are as follows:
                                 
    Three months ended     Nine months ended  
    March 31,     March 31,  
(In thousands)   2009     2008     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  
8. Income Taxes
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 percent 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 March 31, 2009, the balance of unrecognized tax benefits is $187,000. The March 31, 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 U.S. 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 U.S. 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 March 31, 2009 and June 30, 2008 totaled approximately $24,000 and $28,000, respectively.
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 11

 


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of the Company’s results of operations and financial condition should be read together with the other financial information and Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended June 30, 2008. 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 Part I, Item 1A Risk Factors, on our Annual Report on Form 10-K for the year ended June 30, 2008.
Executive Summary
Zareba Systems, Inc. (“Zareba”, “Zareba Systems” or the “Company”) net sales were $6.7 million and $20.5 million for the three and nine months ended March 31, 2009, respectively, versus net sales of $7.0 million and $22.4 million for the comparable periods in the prior year. Sales in British pound sterling by our UK subsidiary for the three and nine month periods ended March 31, 2009 were relatively flat as compared to the prior year periods. However, the strengthening of the US dollar against the British pound sterling caused sales by our UK subsidiary to be translated at lower rates in US dollars, resulting in lower reported sales in US dollars for our UK operation for the third quarter and nine month periods versus the prior year. Third quarter fiscal 2009 sales in North America improved marginally over the prior year, but year-to-date sales remained below prior year levels.
Loss from continuing operations was $33,000, or $0.01 per basic and diluted share and $354,000, or $0.14 per basic and diluted share for the third quarter and nine months ended March 31, 2009, respectively. This compares to loss from continuing operations of $376,000, or $0.15 per basic and diluted share and $959,000, or $0.39 per basic and diluted share in the respective comparable periods of the prior year. The decrease in loss from operations from the prior year resulted primarily from lower operating and interest expense in the current year. Additionally, a large percentage of the product costs and operating expenses of our UK subsidiary are paid in British pound sterling. Similar to the impact on sales, the current exchange rate causes these expenses to be translated at lower rates into US dollars, thereby reducing reported expenses and providing a natural hedge for the UK operations.
Net income was $78,000, or $0.03 per basic and diluted share and net loss was $250,000, or $0.10 per basic and diluted share for the three and nine months ended March 31, 2009, respectively, and included a gain on sale of discontinued product line of $111,000, net of tax. Net loss was $489,000, or $0.20 per basic and diluted share and net income was $1.3 million, or $0.53 per basic and diluted share for the third quarter and first nine months of the prior fiscal year, respectively. The gain on sale of subsidiary in the first quarter of the prior year generated the net income for the corresponding nine month period.
On July 24, 2007, the Company entered into a Stock Purchase Agreement to sell 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 for $5 million cash, resulting in a gain, net of tax, of approximately $2.5 million. Cash proceeds from the sale were used to reduce borrowing under the Company’s prior Wells Fargo credit facility.
On August 29, 2007, the Company entered into a $6 million secured revolving credit facility with JPMorgan Chase Bank, N.A. Proceeds from the facility will be used for general working capital purposes and were used to repay the prior Wells Fargo Business Credit facility, totaling approximately $1.1 million.
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 assets sold to Buyer. Payment activity on the notes and the assumption by the Buyer of all remaining inventory purchase obligations, along with valuation assessments by Company management resulted in a gain on sale, net of tax of $0.1 million in the third quarter of fiscal 2009. Future payment activity and valuation assessments by Company management may result in an additional gain on the sale of the product line being realized in future periods.
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 12

 


 

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 of its patent-pending 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 UK sales channel.
Products comprising the automatic gate opener systems and accessories targeting the Do-It-Yourself market are sold through existing retail channels in North America and the UK, often to the same customers that purchase the Zareba electric fencing products. 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 commenced efforts to sell the product line. This decision has allowed 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. On October 22, 2008, the Company sold substantially all of the assets of its professional series automatic gate operator product line.
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 the three and nine months ended March 31, 2009 were $6.7 million and $20.5 million, respectively, compared to $7.0 million and $22.4 million for the comparable periods in the prior year. The decrease in sales year-to-year for the third quarter and first nine months resulted primarily from the combination of the following factors:
    Sales in the United Kingdom in British pound sterling were relatively flat for both the three and nine month periods ended March 31, 2009 versus the prior year. However, when we translate those sales into US dollars, the strengthening of the US dollar compared to the British pound sterling resulted in a decrease in net sales of approximately $0.6 million for the quarter and $1.2 million through the first nine months.
 
    Sales to our North American electric fencing customers increased in the third quarter of fiscal 2009 versus the prior year by $0.3 million, but were below prior year-to-date sales by $0.9 million.
The Company expects that the continued strength of the US dollar versus the British pound sterling, if it remains at recent levels, will adversely affect year to year net sales comparisons through the remainder of fiscal 2009 and into fiscal 2010.
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 13

 


 

However, a large portion of the product costs and operating expenses of the UK subsidiary are also incurred in British pound sterling, thereby creating a natural currency hedge for our UK subsidiary operations. Sales in the UK accounted for nearly 30% of the Company’s net sales in fiscal 2008.
Additionally, the Company continues to monitor the current economic climate in its primary markets. A protracted downturn in the economy may adversely impact sales and inhibit the Company’s sales growth and profitability though the remainder of the current fiscal year.
Gross margins for the three and nine months ended March 31, 2009 were 29.2% and 30.6%, respectively, compared to 30.1% and 29.3% for the comparable prior year periods. Margins in the current year periods benefited from sales price increases implemented beginning in late fiscal 2008 and third quarter margins also reflected customer mix differences year-to year.
Selling, general and administrative expenses were $1.7 million and $5.7 million for the three and nine months ended March 31, 2009, respectively, compared to $2.2 million and $6.8 million for the comparable periods in the prior year. The year-to-year decrease for the third quarter resulted from cost reduction initiatives implemented late in fiscal 2008 and during fiscal 2009, as well as the impact of the translation of expense of our UK operations at lower rates from British pound sterling to US dollar. The year-to-date decrease for fiscal 2009 also resulted from reduced direct selling expenses associated with lower sales revenue. The Company will continue to scrutinize expenses and implement expense reduction initiatives as they are identified.
Research and development expenses were $213,000 and $692,000 for the three and nine months ended March 31, 2009, respectively, versus $246,000 and $773,000 for the comparable periods in the prior year. Prior year amounts included agency registration costs for products under development that have since been completed. Current year expenditures are directed toward cost reduction initiatives and product enhancements of existing electric fencing systems products. The Company’s investments in research and development are designed to protect and enhance our future financial performance.
Interest expense, principally related to the Company’s debt to finance the Rutland acquisition, was $49,000 and $185,000 for the three months and nine months ended March 31, 2009, respectively, compared to $86,000 and $297,000 for the comparable periods in the prior year. The decrease in current year expense resulted from the decrease in outstanding debt following repayment of debt from the proceeds of the sale of WMS, and lower interest rates in the current year.
Loss from continuing operations was $33,000, or $0.01 per basic and diluted share and $354,000, or $0.14 per basic and diluted share for the third quarter and nine months ended March 31, 2009, respectively. This compares to loss from continuing operations of $376,000, or $0.15 per basic and diluted share and $959,000, or $0.39 per basic and diluted share for the respective comparable periods in the prior year. Lower operating and interest expenses offset the impact of the decreased gross profit from lower sales in the current year periods as compared to fiscal 2008.
Results of Discontinued Operations, Gain from the Sale of Subsidiary and Net Income
Loss from discontinued operations, net of tax was $7,000, or $0.00 per basic and diluted share for the nine months ended March 31, 2009, versus a loss of $113,000 and $283,000, or $0.05 and $0.12 per basic and diluted share for the three and nine months ended March 31, 2008, respectively, reflecting the net results of the PS AGO operations in the current year and the results of the WMS and PS AGO operations for the prior year.
Gain from sale of discontinued product line, net of tax was $111,000, or $0.04 per basic and diluted share for the three and nine months ended March 31, 2009. The gain resulted from the receipt of cash payments and assumption of previous purchase obligations of the Company by the Buyer during the quarter in accordance with the October 22, 2008 asset purchase agreement.
Gain from sale of subsidiary, net of tax was $2.5 million, or $1.04 per basic and diluted share for the nine months ended March 31, 2008, reflecting the sale of the WMS subsidiary on August 1, 2007.
Net income for the third quarter of fiscal 2009 was $78,000, or $0.03 per basic and diluted share versus a net loss of $489,000, or $0.20 per basic and diluted share, respectively, for the third quarter fiscal 2008. Net loss was $250,000, or $0.10 per basic and diluted share for the nine months ended March 31, 2009, versus net income of $1.3 million, or $0.53 per basic and diluted share for the nine months ended March 31, 2008, reflecting the differences in results from continuing and discontinued operations and the gains from the sale of WMS and the PS AGO product line.
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 14

 


 

Liquidity and Capital Resources
The Company’s cash and working capital balances at March 31, 2009 were $0.1 million and $6.7 million, respectively, as compared to $0.6 million and $7.2 million at June 30, 2008. The decrease in working capital resulted primarily from use of cash proceeds from operations to reduce long-term debt during the first nine months of fiscal 2009.
Accounts receivable decreased to $4.3 million at March 31, 2009 from $8.0 million at June 30, 2008 reflecting the seasonality of our sales. Inventories decreased to $5.6 million at March 31, 2009, versus $6.1 million at June 30, 2008, reflecting the projected seasonal inventory requirements at the respective period ends.
Capital expenditures were $0.2 million in each of the first nine months of fiscal 2009 and 2008, and were used primarily for manufacturing and computer equipment and purchases of new product tooling. The Company expects total capital expenditures for fiscal 2009 to be less than $0.5 million.
On October 22, 2008, the Company closed on the sale of the PS AGO product line, receiving an initial payment of $0.2 million at closing, and receiving $0.2 million in the third quarter of fiscal 2009 through the combination of cash payments on the notes receivable and assumption of purchase obligations. 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) (the “2007 Credit Facility”), 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 provides for a $6 million secured revolving 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 reborrowed from time to time until its maturity on August 29, 2010. Loans under the 2007 Credit Facility, as amended, will bear interest at either a base rate minus 1.0 percent to 0 percent (amended to base rate plus 0 percent to plus 0.50 percent), based upon financial performance, or a Eurocurrency rate equal to the London Inter-Bank Offered Rate (“LIBOR”) for the relevant term plus 1.5 percent to 2.5 percent (amended to plus 1.5 percent to plus 3.0 percent), based upon financial performance. The outstanding balance under this revolving credit facility at March 31, 2009 was $3.4 million. The effective interest rate at March 31, 2009 was 3.50 percent, and the average effective interest rate for the three and nine months then ended was 3.63 and 3.98 percent, respectively, versus 5.22 and 6.23 percent for the respective periods in the prior year. The Company and Chase entered into amendments to the 2007 Credit Facility on September 30, 2008 and October 22, 2008.
Also, 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 percent) above the base rate with a five-year term. On March 31, 2009, the effective interest rate was 2.76 percent and the average effective interest rate for the three and nine months then ended was 3.49 percent and 5.58 percent, respectively, versus 7.51 percent and 7.74 percent for the respective periods in the prior year. The BoS term loan matures on September 27, 2009, with monthly principal and interest payments of £49,355 (approximately $71,000). The balance outstanding under this facility at March 31, 2009 was £0.3 million, or approximately $0.4 million.
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.
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 capital expenditures for at least the next twelve months.
Critical Accounting Policies
The Company’s critical accounting polices are discussed below.
Revenue Recognition
The Company recognizes revenue in accordance with the Securities 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
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 15

 


 

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.
Amortization of Intangible Assets
Customer relationships agreements are amortized on a straight-line basis over seven years. 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 currently 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. Additionally, goodwill shall be tested for impairment between annual tests if an event occurs or circumstances change that would reduce the fair value of an entity below its carrying value.
The Company evaluates goodwill for impairment using the method described in the preceding paragraph and determines 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.
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 16

 


 

Stock-based Compensation
Effective July 1, 2006, the Company adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on fair values. Management’s determination of fair value of share-based payment awards is based on the date of grant using an option-pricing model which incorporates a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the two year period prior to the grant date of the awards and estimates regarding projected employee stock option exercise behaviors and forfeitures. The Company recognizes the expense related to the fair value of the award straight-line over the vesting period.
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.
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 expectation that its capital expenditures will be less than $0.5 million in fiscal 2009, which depends on the Company’s development efforts, demand for the Company’s products, and the availability of funds for capital expenditures; (c) the Company’s expectation that the continued strength of the US dollar versus the British pound sterling, if it remains at recent levels, will adversely affect year to year net sales comparisons through the remainder of fiscal 2009 and into fiscal 2010, which depends upon the actual exchange rates during such periods; (d) the potential gain on the sale of the professional series automatic gate operator product line being realized in future periods, which depends upon the Company actually receiving payments under the notes issued by Amazing Gates of America, LLC for the purchase of this line and management’s valuation assessments relating to the line; and (e) the Company’s expectation that a protracted downturn in the economy may adversely impact sales and inhibit the Company’s sales growth and profitability though the remainder of the current fiscal year, which depends upon conditions in the economy generally and those affecting the Company’s customers specifically, as well as demand for the Company’s products.
Item 4. 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) 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.
In connection with the filing of this Form 10-Q, 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 March 31, 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 March 31, 2009.
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.
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 17

 


 

PART II: OTHER INFORMATION
Item 1A. Risk Factors
In addition to the other information set forth elsewhere in this report, you should carefully consider the “Risk Factors” discussed in Part I, Item 1A (Risk Factors) of the Company’s Form 10-K for the period ended June 30, 2008. Those factors, if they were to occur, could cause our actual results to differ materially from those expressed in our forward-looking statements in this report, and materially adversely affect our financial condition or future results. Although we are not aware of any other factors that we currently anticipate will cause our forward-looking statements to differ materially from our future actual results, or materially affect the Company’s financial condition or future results, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial might materially adversely affect our actual business, financial condition and/or operating results.
Item 6. Exhibits
     
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.
 
*   Filed herewith
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 18

 


 

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
May 8, 2009
         
  Zareba Systems, Inc.
 
 
  By:   /s/ Dale A. Nordquist    
    Dale A. Nordquist   
    President and Chief Executive Officer
(Principal executive officer) 
 
 
     
  By:   /s/ Jeffrey S. Mathiesen    
    Jeffrey S. Mathiesen   
    Chief Financial Officer (Principal financial officer and principal accounting officer)   
 
         
Zareba Systems, Inc.   Form 10-Q, March 31, 2009   page 19