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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-26092
C.P. CLARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2561471
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
78 CHERRY HILL DRIVE
BEVERLY, MASSACHUSETTS 01915
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (978) 524-6700
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 X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of October 22, 1999, there were 9,528,236 shares of Common Stock, $.01
par value per share, outstanding.
C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 26, 1999 MARCH 31, 1999
------------------ ----------------
ASSETS
Current assets:
Cash, cash equivalents and investments (Note 6)........... $ 39,016 $ 7,796
Accounts receivable, less allowance for doubtful accounts. 15,299 18,672
Inventories (Note 7)...................................... 11,430 23,842
Other current assets...................................... 1,445 2,932
Deferred income taxes..................................... 5,802 4,036
-------- --------
Total current assets................................. 72,992 57,278
Property, plant and equipment, net............................. 28,280 40,275
Other Assets:
Intangibles, net of accumulated amortization of $2,471 and
$1,526, respectively..................................... 10,299 11,244
Other...................................................... 1,023 418
-------- --------
$112,594 $109,215
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............. $ 179 $ 248
Accounts payable.......................................... 7,369 11,805
Accrued expenses (Notes 8 and 9).......................... 8,042 10,175
-------- --------
Total current liabilities............................ 15,590 22,228
Capital lease obligations, net of current portion.............. 210 282
Deferred income taxes.......................................... 510 510
-------- --------
Total liabilities.................................... 16,310 23,020
-------- --------
Stockholders' equity:
Preferred stock, $ .01 par value
Authorized: 2,500,000 shares
Issued and outstanding: None............................ -- --
Common stock, $ .01 par value
Authorized: 40,000,000 shares
Issued and outstanding: 9,511,852 shares and
9,454,339 shares as of September 26, 1999 and
March 31, 1999, respectively.......................... 95 95
Additional paid-in capital................................ 96,482 96,228
Deferred compensation..................................... -- (62)
Retained Earnings (deficit)............................... 856 (8,973)
Cumulative translation adjustment......................... (1,149) (1,093)
-------- --------
Total stockholders' equity........................... 96,284 86,195
-------- --------
$112,594 $109,215
-------- --------
-------- --------
The accompanying notes are an integral part of the Consolidated Condensed
Financial Statements.
2
C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
SEPT. 26, SEPT. 27, SEPT. 26, SEPT. 27,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net sales ............................................................. $ 28,934 $ 33,887 $ 64,972 $ 70,581
Cost of sales ......................................................... 24,212 24,713 51,724 50,227
----------- ----------- ----------- -----------
Gross profit ..................................................... 4,722 9,174 13,248 20,354
Operating expenses:
Selling, general and administrative .............................. 6,128 6,979 12,683 13,689
Research and development ......................................... 3,628 2,342 6,662 4,366
Write-off of purchased in-process research
and development (Note 4) ..................................... -- 5,000 -- 5,000
Gain on disposal of business activities, net of related
restructuring and other costs (Note 5)........................ (12,990) -- (12,990) --
Restructuring costs (credit) (Note 9) ............................ (875) 4,000 (875) 4,000
----------- ----------- ----------- -----------
Operating income (loss) ............................................... 8,831 (9,147) 7,768 (6,701)
Interest income ....................................................... 237 131 262 378
Interest expense ...................................................... (26) (57) (49) (80)
Other (expense) income, net ........................................... 116 (148) 145 (137)
----------- ----------- ----------- -----------
Income (loss) before benefit for income taxes ......................... 9,158 (9,221) 8,126 (6,540)
Benefit for income taxes .............................................. (1,348) (1,528) (1,702) (540)
----------- ----------- ----------- -----------
Net income (loss) ..................................................... $ 10,506 $ (7,693) $ 9,828 $ (6,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per common and common share Equivalent (Note 3)
Basic earnings (loss) per share ............................. $ 1.10 $ (0.82) $ 1.04 $ (0.64)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings (loss) per share ........................... $ 1.08 $ (0.82) $ 1.02 $ (0.64)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average common and common share Equivalent shares outstanding:
Basic ....................................................... 9,508,632 9,390,175 9,483,312 9,377,487
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted ..................................................... 9,705,008 9,390,175 9,621,303 9,377,487
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes are an integral part of the Consolidated Condensed
Financial Statements.
3
C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
------------------------------
SEPT. 26, 1999 SEPT. 27, 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................ $ 9,828 $ (6,000)
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Gain on disposal of business activities..................................... (12,990) --
Depreciation and amortization............................................... 5,045 3,966
Write-off of purchased in-process research and development.................. -- 5,000
Non-cash portion of restructuring charge (credit)........................... (875) 1,134
Compensation expense associated with stock options.......................... 62 42
Changes in assets and liabilities, net of amounts divested through disposal
of business activities (Sept 26, 1999)
and acquisition of Micronix (Sept 27, 1998):
Accounts receivable.................................................... 4,075 4,618
Inventories............................................................ 2,577 (2,645)
Other current assets................................................... (215) (1,314)
Other assets........................................................... (96) --
Accounts payable....................................................... (4,435) (3,830)
Accrued expenses and other liabilities................................. (1,412) 717
---------- ---------
Net cash provided by operating activities.............................. 1,564 1,688
---------- ---------
Cash Flows From Investing Activities:
Purchase of property, plant and equipment, net................................... (3,666) (6,237)
Purchase of Micronix, net of cash acquired (Note 4).............................. -- (16,012)
Net proceeds from disposal of business activities................................ 33,115 --
--------- ---------
Net cash provided by (used in) investing activities.................... 29,449 (22,249)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds from issuance of common stock....................................... 238 108
Proceeds from exercise of options and warrants................................... 15 208
Payments of principal on capital lease obligations............................... (140) (258)
Tax benefit of disqualifying disposition of incentive stock options.............. -- 11
--------- ---------
Net cash provided by financing activities.............................. 113 69
--------- ---------
Effect Of Exchange Rates On Cash, Cash Equivalents And Investments............... 94 161
--------- ---------
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND INVESTMENTS................ 31,220 (20,331)
Cash, cash equivalents and investments, beginning of period...................... 7,796 26,364
--------- ---------
Cash, cash equivalents and investments, end of period............................ $ 39,016 $ 6,033
--------- ---------
--------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................................... $ 3 $ 2
--------- ---------
--------- ---------
Income taxes........................................................... $ 93 $ 1,430
--------- ---------
--------- ---------
Acquisition of Micronix:
Fair value of assets acquired.......................................... -- $ 20,825
Liabilities assumed.................................................... -- (4,525)
Cash acquired.......................................................... -- (288)
--------- ---------
--------- ---------
Cash paid for acquisition and direct costs net of cash acquired........ $ -- $ 16,012
--------- ---------
--------- ---------
The accompanying notes are an integral part of the Consolidated Condensed
Financial Statements.
4
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 26, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. FISCAL PERIODS
The Company's fiscal year is comprised of either 52 or 53 weeks and ends on
the Sunday closest to March 31 each year. Interim quarters are comprised of 13
weeks unless otherwise noted, and end on the Sunday closest to June 30,
September 30, December 31 and March 31.
2. INTERIM FINANCIAL STATEMENTS
The unaudited interim consolidated condensed financial statements
presented herein have been prepared in accordance with generally accepted
accounting principles for interim financial statements and with the
instructions to Form 10-Q and Regulation S-X pertaining to interim financial
statements. Accordingly, these interim financial statements do not include
all information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements
reflect all normal, recurring adjustments and accruals that management
considers necessary for a fair presentation of the Company's financial
position as of September 26, 1999, and results of operations for the three
and six months ended September 26, 1999 and September 27, 1998. The results
for the interim periods presented are not necessarily indicative of results
to be expected for any future period. These financial statements should be
read in conjunction with the summary of significant accounting policies and
notes to consolidated financial statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1999 as filed with
the Securities and Exchange Commission.
3. EARNINGS (LOSS) PER SHARE
The Company calculates earnings (loss) per share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". Basic earnings (loss) per share are calculated by dividing net (loss)
income by the weighted average number of common shares outstanding for the
period. Diluted earnings (loss) per share reflect the potential dilution of
stock options and warrants that could share in the earnings of the Company.
A reconciliation of basic and diluted shares outstanding, as required by
SFAS No. 128, is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------- -------------------------------
SEPT. 26, 1999 SEPT. 27, 1998 SEPT. 26, 1999 SEPT. 27, 1998
-------------- -------------- -------------- --------------
Basic weighted average shares outstanding ...... 9,508,632 9,390,175 9,483,312 9,377,487
Weighted average common share equivalents ...... 196,376 -- 137,991 --
--------- --------- --------- ---------
Diluted weighted average shares outstanding .... 9,705,008 9,390,175 9,621,303 9,377,487
The following securities were not included in computing diluted earnings per
share because their effect would be anti-dilutive.
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------- -------------------------------
SEPT. 26, 1999 SEPT. 27, 1998 SEPT. 26, 1999 SEPT. 27, 1998
-------------- -------------- -------------- --------------
Options to purchase common stock(1).......... 1,669,245 881,447 2,225,307 805,322
(1) - In accordance with SFAS No. 128, options to purchase common stock were
excluded from diluted weighted average shares, because the option price was
above the average stock price for the period or because there was a net loss
for the period.
4. ACQUISITION
5
On July 6, 1998, the Company acquired Micronix Integrated Systems, Inc.
("Micronix"), a designer and manufacturer of analog and mixed-signal application
specific integrated circuits, located in Aliso Viejo, California. The Company
paid $16,012 for the acquisition and direct cost, net of cash acquired. The
acquisition was accounted for as a purchase in accordance with Accounting
Principles Board ("APB") Opinion No. 16, and accordingly, Micronix's operating
results since the date of acquisition are included in the accompanying
consolidated condensed financial statements. In accordance with APB Opinion No.
16, the Company allocated the aggregate purchase price of $20,825 including $500
of acquisition costs, based on the fair value of the tangible and intangible
assets acquired. An independent appraisal, using proven valuation procedures and
techniques, was used to determine the fair value of the purchased intangible
assets.
Acquired intangibles include existing technologies and goodwill. These
intangibles are being amortized over their estimated useful lives of 4 to 8
years. The aggregate purchase price is made up of the following:
Current Assets...................... $ 1,268
Property, plant and equipment....... 1,118
Acquired existing technology........ 2,456
Other assets........................ 644
Goodwill............................ 10,339
In-process R&D...................... 5,000
-------
$20,825
-------
-------
Intangibles include $5,000 for purchased in-process research and development
("in-process R&D") for projects that did not have future alternative uses. This
allocation represents the estimated fair value based on risk-adjusted cash flows
related to the in-process R&D projects. The development of these projects had
not yet reached technological feasibility, and the R&D in process had no
alternative uses. Accordingly, these costs were expensed as of the acquisition
date.
Micronix's in-process R&D value was comprised of 6 primary R&D programs.
These programs included the introduction of certain new technologies. At the
acquisition date, these programs ranged in completion from 10% to 85%. The
Company currently believes it will provide a substantial amount of funding to
complete each acquired program. There is no assurance that each project will
meet with either technological or commercial success. The substantial delay
or outright failure of the in-process R&D would materially impact the
Company's financial condition.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from
the projects and discounting the net cash flows to their present value. The
revenue projection used to value the in-process research and development was
based on estimates of relevant market sizes and growth factors, expected
trends in technology and the nature and expected timing of new products. The
rates utilized to discount the net cash flows to their present value were
based on the weighted average cost of capital for Micronix. This discount
rate was commensurate with Micronix's corporate maturity and the
uncertainties in the economic estimates described above.
The forecasts used by the Company in valuing in-process R&D were based upon
assumptions the Company believes to be reasonable but which are inherently
uncertain and unpredictable. The Company's assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances are likely to occur. For
these reasons, actual results may vary significantly from the projected results.
5. DIVESTITURE
On July 2, 1999, the Company entered into an Agreement to sell all of the
issued and outstanding shares of common stock of Clare EMG, Inc. ("EMG") a
wholly-owned subsidiary of C.P. Clare to Sumida Electric Co., Ltd.
("Sumida"), for $37,629 in cash. EMG includes the Company's advanced magnetic
winding, reed relay, and surge arrestor product lines together with the
second tier affiliate Clare Mexicana S.A. de C.V. The transaction is
currently under review and is subject to a post closing adjustment based on
the net asset value of EMG as of the closing date, August 20, 1999.
The gain on the sale of EMG is calculated as follows.
6
Cash received................................... $36,426
Plus: Estimated receivable
based on final asset valuation.................. 1,203
Less: Net assets divested.. .................... 20,829
-------
Gain on sale before expenses ................... $16,800
-------
-------
Gain on sale before expenses ................... $16,800
Less: Direct expenses .......................... (3,310)
Less: Deferred gain subject to final asset
valuation.................. .................... (500)
-------
Net gain on sale................................ $12,990
-------
-------
6. CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investment instruments with
maturities of six months or less to be cash equivalents. Short-term
investments are instruments with maturities of less than one year. The
Company accounts for its investments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Investments at September 26, 1999 consisted principally of overnight
commercial paper and other short-term fixed income investments. Investments
at March 31, 1999 consisted principally of overnight and short-term tax
exempt commercial paper and tax exempt variable rate municipal bonds. The
Company had the option to require the issuers of the tax exempt variable rate
municipal bonds to purchase these investments upon 7 days notice. The Company
deemed these investments to be available for sale at September 26, 1999 and
March 31, 1999, and they are carried at cost which approximates market value.
7. INVENTORIES
Inventories include materials, labor and manufacturing overhead, and are
stated at the lower of cost (first-in, first-out) or market and consist of the
following at September 26, 1999 and March 31, 1999:
SEPTEMBER 26, MARCH 31,
1999 1999
------------- ----------
Raw Material............ $ 3,328 $10,259
Work in process......... 6,081 8,227
Finished goods.......... 2,021 5,356
------- --------
$11,430 $23,842
------- --------
------- --------
8. ACCRUED EXPENSES
Accrued expenses consist of the following at September 26, 1999 and March
31, 1999:
SEPTEMBER 26, 1999 MARCH 31,1999
------------------ -------------
Payroll and benefits................ $2,987 $ 3,881
Restructuring (Note 9).............. 695 2,152
Environmental remediation (Note 10). 909 922
Other............................... 3,451 3,220
------ -------
$8,042 $10,175
------ -------
------ -------
9. RESTRUCTURING COSTS
In fiscal 1999, the Company announced a restructuring of its operations,
and recorded a non-recurring pretax charge of $3,700 in accordance with
Emerging Issues Task Force Issue ("EITF") 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The non-recurring
charge includes severance-related costs associated with a workforce reduction
of approximately 60 persons on a worldwide basis, half of which are in
manufacturing and the remainder in sales, general and administrative. The
balance of this charge includes a write-down of assets, associated with the
closure of the Company's Wakefield, MA production facility, which will be
completed by the fourth quarter of calendar 1999. During the quarter ended
September 26, 1999, the Company reversed $875 of restructuring to reflect its
change in estimate regarding the proceeds from the sale of some of the assets
from its abandoned Wakefield facility and cash paid for severance costs.
The components of the restructuring were as follows:
7
March 31, 1999 September 26, 1999
-------------- ------------------
Employee severance, benefits and related costs ...... $ 2,094 $ 1,604
Write-off and write-down of assets to be disposed ... 1,134 880
Lease termination and relocation costs .............. 410 279
Other................................................ 62 62
------- -------
$ 3,700 $ 2,825
------- -------
------- -------
The total cash impact of the restructuring is $1,945, which the Company
anticipates to be paid by the end of the fourth quarter of fiscal 2000.
10. CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company accrues for estimated costs associated with known environmental
matters when such costs are probable and can be reasonably estimated. The actual
costs to be incurred for environmental remediation may vary from estimates,
given the inherent uncertainties in evaluating and estimating environmental
liabilities, including the possible effects of changing laws and regulations,
the stage of the remediation process and the magnitude of contamination found as
the remediation progresses. Management believes the ultimate disposition of
known environmental matters will not have a material adverse effect upon the
liquidity, capital resources, business or consolidated financial position of the
Company. However, one or more environmental matters could have a significant
negative impact on the Company's consolidated financial results for a particular
reporting period.
11. DERIVATIVE FINANCIAL INSTRUMENTS
SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments," requires disclosure of any significant
derivative or other financial instruments. The Company hedged its net
intercompany trade balance (Belgian francs) which relates to trade sales to
third party customers in the ordinary course of business. At September 26,
1999, the Company had no outstanding Belgian franc ("BF") forward contracts.
At March 31, 1999, the Company had one outstanding BF forward contract
amounting to 23,000 BF or $625 with a gross deferred loss of $4 from the
rollover of such contracts to the planned settlement date. The forward
contracts hedge currency transactional exposure resulting from intercompany
trade transactions.
8
12. COMPREHENSIVE INCOME (LOSS)
The components of the Company's comprehensive income (loss) are as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
SEPT. 26, SEPT. 27, SEPT. 26, SEPT. 27,
1999 1998 1999 1998
-------- --------- -------- ---------
Net income (loss).................................... $10,506 $(7,693) $ 9,828 $(6,000)
Foreign currency translation adjustments,
net of taxes...................................... 6 88 7 (105)
------- ------- -------- -------
Comprehensive income (loss).......................... $10,512 $(7,605) $ 9,835 $(6,105)
------- ------- -------- -------
------- ------- -------- -------
13. FINANCIAL INFORMATION BY SEGMENT
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," during the fourth quarter of 1999. SFAS No.
131 established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services, and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision making group is composed of the Chief Executive
Officer, members of Senior Management and the Board of Directors.
The Company's reportable operating segments are Semiconductor and
Electromechanical products.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on gross profit. Revenues are attributed to geographic areas
based on where the customer is located. The Company does not measure transfers
of sales between Company segments. Segment information for quarters ended
September 26, 1999 and September 27, 1998 is as follows.
9
ELECTRO-
SEMICONDUCTOR MECHANICAL CORPORATE TOTAL
------------- ---------- --------- ----------
THREE MONTHS ENDED - SEPTEMBER 26, 1999
Net product sales from external customers ......................... $ 14,760 $ 14,174 -- $ 28,934
Gross Profit ...................................................... 3,604 1,118 -- 4,722
Expenses .......................................................... -- -- 9,756 9,756
Other items
Gain on disposal of business activities, net of restructuring
and other related costs ....................................... -- 12,990 -- 12,990
Restructuring credit ............................................ -- -- (875) (875)
Total assets ...................................................... 112,594 -- -- 112,594
SIX MONTHS ENDED - SEPTEMBER 26, 1999
Net product sales from external customers ......................... $ 29,560 $ 35,412 -- $ 64,972
Gross Profit ...................................................... 7,695 5,553 -- 13,248
Expenses .......................................................... -- -- 19,345 19,345
Other items
Gain on disposal of business activities, net of restructuring
and other related costs ....................................... -- 12,990 -- 12,990
Restructuring credit ............................................ -- -- (875) (875)
Total assets ...................................................... 112,594 -- -- 112,594
THREE MONTHS ENDED - SEPTEMBER 27, 1998
Net product sales from external customers ......................... $ 17,233 $ 16,654 -- $ 33,887
Gross Profit ...................................................... 5,858 3,316 -- 9,174
Expenses .......................................................... -- -- 9,321 9,321
Other items
Charge for in-process research and development .................. -- -- 5,000 5,000
Restructuring costs.............................................. -- -- 4,000 4,000
Total assets ...................................................... 56,638 52,282 -- 108,920
SIX MONTHS ENDED - SEPTEMBER 27, 1998
Net product sales from external customers ......................... $ 33,265 $ 37,316 -- $ 70,581
Gross Profit ...................................................... 11,415 8,939 -- 20,354
Expenses .......................................................... -- -- 18,055 18,055
Other items
Charge for in-process research and development .................. -- -- 5,000 5,000
Restructuring costs ............................................. -- -- 4,000 4,000
Total assets ...................................................... 56,638 52,282 -- 108,920
Interest income and expense, in-process research and development, gain
on disposal of business activities, restructuring, and income taxes are
considered corporate level activities and are therefore, not allocated to
segments. Management believes transfers between geographic areas are accounted
for on an arm's length basis.
10
Long-lived tangible assets by geographic area were as follows:
GEOGRAPHIC AREA SEPTEMBER 26, 1999 MARCH 31, 1999
- --------------- ------------------ --------------
LONG-LIVED TANGIBLE ASSETS
--------------------------
United States............................................... $28,051 $26,100
Belgium..................................................... 201 296
France...................................................... 13 8
Germany..................................................... 15 14
Mexico...................................................... - 13,857
-------- -------
28,280 $40,275
-------- -------
-------- -------
Revenues by geographic area for the quarter ended September 26, 1999 is
as follows:
GEOGRAPHIC AREA THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
- --------------- ------------------ ------------------ ---------------- ------------------
SEPTEMBER 26, 1999 SEPTEMBER 27, 1998 SEPTEMBER 26, 1999 SEPTEMBER 27, 1998
------------------- ------------------ ------------------ ------------------
REVENUE
-------
United States ................ $12,640 $20,264 $34,591 $42,207
France ....................... 794 1,451 2,013 3,023
Germany ...................... 1,155 1,580 2,628 3,290
Ireland ...................... 263 472 663 982
Italy ........................ 340 632 1,188 1,316
Netherlands .................. 199 336 495 702
Sweden ....................... 956 865 1,871 1,801
United Kingdom ............... 2,286 2,923 4,828 6,087
Other ........................ 10,301 5,364 16,695 11,173
------- ------- ------- -------
$28,934 $33,887 $64,972 $70,581
------- ------- ------- -------
------- ------- ------- -------
14. INCOME TAXES
In accordance with generally accepted accounting principles, the
Company provides for income taxes at interim periods by utilizing its
expected effective income tax rate for the entire fiscal year. Despite
reporting income before income taxes, the Company is providing an income tax
benefit in the three and six months ended September 26, 1999 because the
Company believes that the gain from the sale of EMG will be offset by
utilization of existing capital loss carryforwards. The remaining net
operating losses generated during fiscal 2000 are anticipated to be
realizable.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference are discussed in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999,
as filed with the Securities and Exchange Commission. See "Trends and
Uncertainties" in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
RESULTS OF OPERATIONS
The following table sets forth the relative percentage that certain income
and expense items bear to net sales for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- ------------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net sales ......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ..................................... 83.7 72.9 79.6 71.2
----- ----- ----- -----
Gross profit ................................. 16.3 27.1 20.4 28.8
Operating expenses:
Selling, general and administrative .......... 21.2 20.6 19.5 19.4
Research and development ..................... 12.5 6.9 10.3 6.2
Write-off of purchased in-process research and
development ................................ -- 14.8 -- 7.1
Gain on disposal of business activities,
net of related restructuring
and other costs............................. (44.9) -- -- (20.0)
Restructuring costs (credit).................. (3.0) 11.8 (1.4) 5.6
----- ----- ----- -----
Operating income (loss) ........................... 30.5 (27.0) 12.0 (9.5)
Interest income ................................... 0.8 0.4 0.4 0.5
Interest expense .................................. (0.1) (0.2) (0.1) (0.1)
Other (expense) income, net ....................... 0.4 (0.4) 0.2 (0.2)
----- ----- ----- -----
Income (loss) before income taxes ................. 31.6 (27.2) 12.5 (9.3)
Benefit for income taxes .......................... (4.7) (4.5) (2.6) (0.8)
----- ----- ----- -----
Net income (loss) ............................ 36.3% (22.7)% 15.1% (8.5)%
----- ----- ----- -----
----- ----- ----- -----
Net Sales. In the second quarter of fiscal 2000, revenues totaled $28.9
million as compared with $33.9 million for the same period in fiscal 1999, a
decrease of 15%. Second quarter revenues for the Company's semiconductor
products were 14% lower primarily because of lower prices and unit shipments
for solid state relays. Second quarter revenues for electromagnetic and other
products were 15% lower primarily because of the sale of the advanced
magnetic winding, reed relay, and surge arrestor product in August 1999.
For the six months ended September 26, 1999, revenues were $65.0 million
compared with $70.6 million for the same period in the prior year, a decrease of
8%. Sales of semiconductor products were down 11% and sales of electromagnetic
and other products were down 5%.
12
Net sales by major product category were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- ------------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(IN MILLIONS)
Semiconductor products.................... $ 14.7 $ 17.2 $ 29.5 $ 33.3
Electromagnetic and other products........ 14.2 16.7 35.5 37.3
The Company's semiconductor products are primarily used in data
communication applications such as modems. The Clare Micronix division designs
and manufactures application specific integrated circuits for a wide variety of
applications.
The Company's electromagnetic products remaining after the divestiture are
primarily used in telecommunication applications such as telephone switching
gear and cellular phones. The continued increased usage of cellular phones has
been a growth driver for the Company's sensor business.
Net sales to customers located outside of the United States decreased 3% in
the second quarter of fiscal 2000 to $13.3 million from $13.7 million in the
same period in fiscal 1999. Net sales to customers in Europe represented 25% and
28% of the Company's net sales for the second quarter and six months ended
September 26, 1999, respectively. Net sales to customers in Asia represented 18%
and 16% of the Company's net sales for the second quarter and six months ended
September 26, 1999. The Company monitors its currency exposure and international
economic developments and takes actions to reduce the Company's risk from
exposures to fluctuations in foreign currency markets. Because of the inherent
uncertainty of foreign exchange markets, future events cannot be predicted and
the Company will continue to focus on international markets.
Gross Profit. The Company's gross profit as a percentage of net sales
decreased to 16.3% in the second quarter of fiscal 2000 from 27.1% in the same
period of fiscal 1999. This decrease was principally due to lower selling
prices, particularly for semiconductors; underutilized plant capacity in
semiconductors; and yield and delivery issues on certain sensor products.
Although margins were down for most products, the more significant declines were
in the divested electromagnetic products. Gross profit as a percentage of net
sales decreased to 20.4% for the six months ended September 26, 1999 from 28.8%
for the comparable period of fiscal 1999.
Selling, General and Administrative Expense. Selling, general, and
administrative ("S,G&A") expenses decreased $0.9 million, or more than 12%, to
$6.1 million in the second quarter of fiscal 2000 from $7.0 million in the same
period in the prior fiscal year. The decrease was primarily attributable to
reduced employment and lower sales commissions. On a year-to-date basis, S,G&A
expense totaled $12.7 million, down $1.0 million from the prior year.
Research and Development Expense. Research and development ("R&D") expense
increased to $3.6 million for the second quarter of fiscal 2000 from $2.3
million for the same period in fiscal 1999. Higher expense was the result of
technology licensing fees and new process development projects. On a
year-to-date basis, R&D expense totaled $6.7 million, $2.3 million higher than
the prior year.
Gain on Disposal of Business Activities. Gain on disposal of business
activities totaled $13.0 million during the second fiscal quarter of 2000 and
represented the gain on the sale of the reed relay, advanced magnetic winding,
and surge arrestor product lines to Sumida Electric Company of Tokyo, Japan. The
amount consists of the difference between the gross proceeds, less related
selling and restructuring costs, and the value of the assets sold. See Note 5 of
the Consolidated Condensed Financial Statements.
Restructuring Costs (Credit). In fiscal 1999, the Company announced a
restructuring of its operations, and recorded a non-recurring charge of $3.7
million. The non-recurring charge included severance-related costs associated
with a workforce reduction of approximately 60 persons on a worldwide basis,
half of which are in manufacturing and the remainder in sales, general and
administrative areas. The balance of this charge included a write-down of
assets associated with the closure of the Company's Wakefield, Massachusetts
production facility. During the second quarter of fiscal 2000, $0.9 million
of this charge was reversed to reflect its change in estimate regarding the
proceeds from the sale of some of the Wakefield assets and cash paid for
severance costs. See Note 9 of the Consolidated Condensed Financial
Statements.
13
Write-off of Purchased In-process Research and Development. Intangible
assets acquired during the second quarter of fiscal 1999 as part of the
acquisition of Micronix Integrated Systems, Inc. included $5.0 million for
purchased in-process research and development ("in-process R&D") for projects
that had no future alternative uses. This amount represented the estimated fair
value based on risk-adjusted cash flows related to the in-process R&D projects.
The development of these projects had not yet reached technological feasibility,
and the R&D in process had no alternative uses. Accordingly, these costs were
expensed as of the acquisition date.
Interest Income. Interest income totaled $0.2 million for the second quarter
of fiscal 2000, $0.1 million higher than for the same period in fiscal 1999. The
increase was the result of higher average cash balances associated with the
proceeds from sale of business activities discussed above. Interest income is
derived from investments in both commercial paper and short-term tax exempt
municipal bonds.
Interest Expense. Interest expense for the second quarter of fiscal 2000
and on a year-to-date basis was consistent with comparable prior-year periods.
Other (Expense) Income. Other (expense) income consisted principally of net
foreign currency transactional gains and
losses.
Income Taxes. In accordance with generally accepted accounting
principles, the Company has provided for income taxes at its estimated annual
effective tax rate. Despite reporting income before income taxes, the Company
is providing an income tax benefit in the three and six months ended
September 26, 1999 because the Company believes that the gain from the sale
of EMG will be offset by utilization of the existing capital loss
carryforwards. For the first six months of fiscal 2000, the Company recorded
a tax benefit at an effective rate of 37% based on the anticipated benefit to
be ultimately realized as a result of other net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended September 26, 1999, the Company's cash, cash
equivalents and investments increased by $31.2 million, more than accounted for
by $36.4 million in proceeds received from the sale of its Mexico operations.
Capital expenditures aggregated $3.7 million during the period.
At September 26, 1999, the Company had $0.4 million of outstanding debt that
represented capital leases assumed when the Company acquired Clare-Micronix. The
Company maintains a $15.0 million unsecured committed revolving credit facility.
No borrowings have been made against this credit facility. The credit agreement
requires that the Company maintains certain financial ratios and, as of
September 26, 1999, the Company was in compliance with these covenants.
The Company manages foreign exchange exposure by monitoring net monetary
position using natural hedges of assets and liabilities denominated in local
currencies and entering into forward contract hedges with financial institutions
for trade transactions. There can be no assurance that this policy will
eliminate all currency exposure.
The Company believes that cash generated from operations, cash, cash
equivalents and investments and amounts available under its credit agreement and
operating lease facilities will be sufficient to satisfy its working capital
needs and planned capital expenditures for the balance of this fiscal year.
However, there can be no assurance that events in the future will not require
the Company to seek additional capital sooner or, if so required, that adequate
capital will be available on terms acceptable to the Company.
TRENDS AND UNCERTAINTIES
Competition. The Company competes with various global companies. Certain
competitors have greater manufacturing, engineering or financial resources.
Customer Concentration. In the second quarter of fiscal 2000, the Company's
ten largest customers accounted for 46.0% of total net sales. The Company is
highly reliant upon continued revenues from its largest customers and any
material delay, cancellation or reduction of orders from these customers could
have a material adverse effect on the Company's future results.
Development of New Products. Technological change and new product
introductions characterize the markets for the Company's products. In
particular, the Company is dependent on the communications industry, which is
characterized by intense competition and rapid technological change. The Company
expects sales to the communications industry to continue to represent a
significant portion of its sales for the foreseeable future. A decline in demand
for communications related equipment such as facsimile machines, modems and
cellular telephones would cause a significant decline in demand for the
Company's products. The Company has invested heavily over the past several years
in the capital expenditures necessary to develop new products. Slower than
expected acceptance of new products will adversely effect the Company's
operating results. To remain competitive, the Company must continue to develop
new process and manufacturing capabilities to meet customer needs and introduce
new products that reduce size and increase functionality and performance. If the
Company is unable to access adequate sources of capital or is unable to design,
develop and introduce competitive new products, its operating results will be
adversely affected.
Fluctuations in Operating Results. The Company has experienced fluctuation
in its operating results in the past and its operating results may fluctuate in
the future. In addition, based on the recent capital expansions, the Company has
increased its operational fixed costs. This expansion also has resulted in new
and increased responsibilities for management personnel and has placed pressures
on the Company's operating systems. These operating systems are in the process
of being updated and centralized, while the existing operating systems are
phased out. The Company's future success will depend to a large part on its
ability to manage these changes and manage effectively its remote offices and
facilities.
Full Utilization of the New Wafer Fabrication Facility. The Company
completed construction of a larger, more advanced semiconductor facility in
Beverly, Massachusetts to address capacity constraints and operating
efficiencies in the production of its semiconductor products. To date, lower
demand in semiconductor products has not allowed the Company to fully utilize
the facility and has contributed to a decline in the Company's overall gross
margin rate. In addition, it is not expected that the new facility will be fully
utilized in the short term, as certain planned new semiconductor products,
including the Clare-Micronix products, will require
14
significant additional capital investment to be able to be produced in the
fabrication facility. Currently, these wafers and products are made utilizing
outside foundries. A delay or lack of capital investment in the new
manufacturing fabrication facility would have a material adverse effect on
future operating results.
International Operations. The Company's international operations are subject
to several risks including, but not limited to, fluctuations in the value of
foreign currencies, changes to import and export duties or regulations, greater
difficulty in collecting accounts receivable and labor unrest. While, to date,
these factors have not had a material effect on the Company's results, there can
be no assurance that there will not be such an impact in the future.
Liquidity. Cash balances increased to $39.0 million during the quarter,
primarily as the result of the sale of the Company's Mexico operations. The
Company maintains a $10.0 million lease line and $15 million credit facility.
Markets. The Company continues to evaluate its operations and product
offerings, in order to invest in or potentially divest of certain business or
market opportunities.
New Systems. The Company is in the process of implementing an Oracle
Enterprise Resource Planning system for certain applications and locations. As a
result of the systems transition, the Company may experience business
disruptions or compliance issues, which may have a material adverse effect on
the Company's results of operations.
Reliance on Key Suppliers. The Company relies on certain suppliers of raw
materials and services for sole source supply of critical items. There can be no
assurance that in the future the Company's suppliers will be able to meet
demands in an effective and timely basis. Also, the suppliers could experience
their own business disruption, which could have a material adverse effect on the
Company's future results.
YEAR 2000 ISSUE
The Company began an internal assessment of its operations, from information
and financial systems to each aspect of its manufacturing processes and
facilities, in order to determine the extent to which the Company may be
adversely affected by Year 2000 issues. The Company completed this activity by
1999 fiscal year end.
The Company is in the process of implementing an Oracle Enterprise Resource
Planning system, Version 10.7 Smart Client, for many applications and sites,
including: order entry, manufacturing and financial systems. The software vendor
has informed the
15
Company that the new system is compliant with Year 2000 issues. The Company
believes that the Year 2000 problem will not pose significant operational
problems. Our historical costs to address Year 2000 have been negligible. We are
currently not able to estimate the final aggregate cost of addressing the Year
2000 issue because funds may be required for future findings. We do not expect
these costs to have an adverse effect on our business and financial results.
The Company's potential exposure extends beyond financial applications to
include suppliers, customers, facilities, manufacturing equipment and other
communication equipment. The Company has taken several steps to minimize this
risk including: evaluating all systems and equipment by site; sending letters to
vendors assessing Year 2000 compliance status; and upgrading systems or
equipment. The Company has received written assurances from all significant
vendors that they are Year 2000 compliant.
Since the Company's products are not date sensitive devices, they will not
be impacted by the Year 2000 problem. Further, the Company has begun to confer
with significant customers to assure that various systems used for data and
information exchanges will be compatible following December 31, 1999.
Based on assessments to date, the Company believes it will not experience
any material disruption as a result of Year 2000 issues in internal
manufacturing processes, information processing, interface with key customers,
or with processing orders and billing. However, further assessments could find
certain critical third party providers, such as those supplying electricity,
water, telephone service, and certain raw materials or services may experience
difficulties resulting in disruption of service or supplies to the Company. A
shutdown of the Company's operations at individual facilities could occur for
the duration of the disruption. There can be no assurance that Year 2000 issues
will not have a material adverse effect on the Company's business, results of
operation and financial condition. C.P. Clare supports the exchange of
information regarding the Year 2000 matters and designates the foregoing as Year
2000 Readiness Disclosures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to routine litigation incident to the conduct of its
business. None of such proceedings is considered material to the business or
financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On October 26, 1999, the Company's Board of Directors authorized a share
repurchase program to buy up to one million shares of the Company's common stock
over the next year.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NO. DESCRIPTION
------- ---------------------
27.0 Financial Data (Edgar)
Schedule
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K on August 20, 1999
disclosing the divestiture on August 20, 1999 of Clare EMG, Inc., and a Form
8-K/A on November 3, 1999 introducing the pro forma financial statements
relating to the same divestiture.
17
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.
C.P. CLARE CORPORATION
By: /S/ HARRY ANDERSEN
--------------------------------------
Harry Andersen
Senior Vice President and Chief
Financial Officer
Date: November 10, 1999
18