1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998
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 September 27, 1998, there were 9,391,455 shares of Common Stock, $.01
par value per share, outstanding.
================================================================================
2
C.P. CLARE CORPORATION
EXPLANATORY NOTE
This amendment amends the Form 10-Q filed with the Securities and
Exchange Commission on November 10, 1998. The cover page, Part I items 1 and 2,
Part II item 6 and the signatory page have been changed to reflect the new
guidance from the SEC in relation to in-process research and development
write-offs, which the Company had recorded in the second quarter of fiscal 1999
as part of the Micronix acquisition.
2
3
C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 27, 1998 March 31, 1998
------------------ --------------
ASSETS
Current assets:
Cash, cash equivalents and investments (Note 5)........................... $ 6,033 $ 26,364
Accounts receivable, less allowance for doubtful accounts................. 16,953 21,383
Inventories (Note 6)...................................................... 25,474 22,083
Other current assets...................................................... 5,926 3,122
-------- --------
Total current assets.............................................. 54,386 72,952
Property, plant and equipment, net.......................................... 41,639 38,777
Other assets................................................................ 12,895 2,457
-------- --------
$108,920 $114,186
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................... $ 924 $ 666
Accounts payable.......................................................... 9,880 12,464
Accrued expenses (Notes 7 and 8).......................................... 12,034 9,899
-------- --------
Total current liabilities......................................... 22,838 23,029
Long-term debt, net of current portion...................................... 389 --
-------- --------
Total liabilities................................................. 23,227 23,029
-------- --------
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: 9,391,455 shares and 9,356,452 shares
as of September 27, 1998 and March 31, 1998, respectively............... 94 94
Additional paid-in capital................................................ 95,980 95,653
Deferred compensation..................................................... (112) (154)
Accumulated deficit....................................................... (9,390) (3,390)
Cumulative translation adjustment......................................... (879) (1,046)
-------- --------
Total stockholders' equity........................................ 85,693 91,157
-------- --------
$108,920 $114,186
======== ========
The accompanying notes are an integral part of the Consolidated Condensed
Financial Statements.
3
4
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. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997
-------------- -------------- -------------- --------------
Net sales ............................................... $ 33,887 $ 39,204 $ 70,581 $ 73,871
Cost of sales ........................................... 24,713 27,024 50,227 50,534
---------- ---------- ---------- ----------
Gross profit ...................................... 9,174 12,180 20,354 23,337
Operating expenses:
Selling, general and administrative .................. 6,979 7,028 13,689 13,773
Research and development ............................. 2,342 2,006 4,366 4,334
Write-off of purchased in-process research
and development (Note 4) ........................... 5,000 -- 5,000 --
Restructuring costs (Note 8) ......................... 4,000 -- 4,000 --
---------- ---------- ---------- ----------
Operating income (loss) ................................. (9,147) 3,146 (6,701) 5,230
Interest income ......................................... 131 388 378 750
Interest expense ........................................ (57) (71) (80) (99)
Other (expense) income, net ............................. (148) (69) (137) 136
---------- ---------- ---------- ----------
Income (loss) before provision (benefit)
for income taxes ................................ (9,221) 3,394 (6,540) 6,017
Provision (benefit) for income taxes .................... (1,528) 1,255 (540) 2,226
---------- ---------- ---------- ----------
Net income (loss) ................................. $ (7,693) $ 2,139 $ (6,000) $ 3,791
========== ========== ========== ==========
Earnings (loss) per common and common share
equivalent (Note 3)
Basic earnings (loss) per share ................... $ (0.82) $ 0.23 $ (0.64) $ 0.41
========== ========== ========== ==========
Diluted earnings (loss) per share ................. $ (0.82) $ 0.21 $ (0.64) $ 0.38
========== ========== ========== ==========
Weighted average common and common share
equivalent shares outstanding:
Basic ............................................. 9,390,175 9,260,706 9,377,487 9,226,743
========== ========== ========== ==========
Diluted ........................................... 9,390,175 9,972,538 9,377,487 9,847,831
========== ========== ========== ==========
The accompanying notes are an integral part of the Consolidated Condensed
Financial Statements.
4
5
C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For The Six Months Ended
------------------------------
Sept. 27, 1998 Sept. 28, 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................................................ $ (6,000) $ 3,791
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization ............................................................... 3,966 2,651
Provision for environmental remediation costs ............................................... -- 519
Write-off of purchased in-process research and development .................................. 5,000 --
Non-cash portion of restructuring charge .................................................... 1,134 --
Deferred income tax benefit ................................................................. -- (87)
Compensation expense associated with stock options .......................................... 42 140
Changes in assets and liabilities, net of acquisition of Micronix:
Accounts receivable ...................................................................... 4,618 (3,443)
Inventories .............................................................................. (2,645) (483)
Other current assets ..................................................................... (1,314) 832
Accounts payable ......................................................................... (3,830) (1,067)
Accrued expenses ......................................................................... 717 (3,852)
-------- --------
Net cash (used in) provided by operating activities ...................................... 1,688 (999)
-------- --------
Cash Flows From Investing Activities:
Purchase of property, plant and equipment, net ................................................... (6,237) (7,086)
Purchase of Micronix, net of cash acquired (Note 4) .............................................. (16,012) --
-------- --------
Net cash used in investing activities .................................................... (22,249) (7,086)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds from issuance of common stock ....................................................... 108 145
Proceeds from exercise of options and warrants ................................................... 208 663
Payments of principal on long-term debt .......................................................... (258) --
Tax benefit of disqualifying disposition of incentive stock Options .............................. 11 99
-------- --------
Net cash provided by financing activities ................................................ 69 907
-------- --------
Effect Of Exchange Rates On Cash, Cash Equivalents And Investments ............................... 161 (111)
-------- --------
NET DECREASE IN CASH, CASH EQUIVALENTS AND INVESTMENTS ........................................... (20,331) (7,289)
Cash, cash equivalents and investments, beginning of period ...................................... 26,364 37,430
-------- --------
Cash, cash equivalents and investments, end of period ............................................ $ 6,033 $ 30,141
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ................................................................................. $ 2 $ 22
======== ========
Income taxes ............................................................................. $ 1,430 $ 2,676
======== ========
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.
5
6
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 27, 1998
(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 27, 1998, and results of operations
for the six months ended September 27, 1998 and September 28, 1997. The results
for the interim periods presented are not necessarily indicative of results to
be expected for any future period. The 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, 1998 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 is 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. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997
-------------- -------------- -------------- --------------
Basic weighted average shares outstanding ............ 9,390,175 9,260,706 9,377,487 9,226,743
Weighted average common share equivalents ............ -- 711,832 -- 621,088
--------- --------- --------- ---------
Diluted weighted average shares outstanding(2)........ 9,390,175 9,972,538 9,377,487 9,847,831
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. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997
-------------- -------------- -------------- --------------
Options to purchase common stock(1) .................. 1,655,360 169,615 606,104 184,234
Other antidilutive options and warrants(2)............ 178,359 -- 342,442 --
--------- --------- --------- ---------
1,833,719 169,615 948,546 184,234
(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.
(2) - Other options to purchase common stock and warrants that are at or
below the average stock price for the period have been excluded, since their
inclusion would be antidilutive.
6
7
4. ACQUISITION
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 is comprised of 6 primary R&D programs.
These programs include 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 is 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 are based on the
weighted average cost of capital for Micronix. This discount rate is
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. 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 its
investments in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Investments at September 27, 1998 consisted
principally of overnight commercial paper and at March 31, 1998 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 27, 1998 and March 31, 1998, and they are
carried at cost which approximates market value.
7
8
6. 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 27, 1998 and March 31, 1998:
September 27, 1998 March 31, 1998
------------------ --------------
Raw Material.......................... $10,628 $ 9,568
Work in process....................... 8,104 4,835
Finished goods........................ 6,742 7,680
------- -------
$25,474 $22,083
======= =======
7. ACCRUED EXPENSES
Accrued expenses consist of the following at September 27, 1998 and March
31, 1998:
September 27, 1998 March 31, 1998
------------------ --------------
Payroll and benefit................... $ 3,876 $5,793
Restructuring (Note 8)................ 2,866 --
Environmental remediation (Note 9).... 1,038 1,172
Other................................. 4,254 2,934
------- ------
$12,034 $9,899
======= ======
8. RESTRUCTURING COSTS
In the second quarter of fiscal 1999, the Company announced a restructuring
of its operations, and recorded a non-recurring pretax charge of $4,000 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 1999.
The components of the restructuring at September 27, 1998 are as follows:
Employee severance, benefits and related costs............... $2,394
Write-off and write-down of assets to be disposed............ 1,134
Lease termination and relocation costs....................... 410
Other........................................................ 62
------
$4,000
======
The total cash impact of the restructuring is $2,866 which the Company
anticipates to be paid by the end of the fourth quarter of fiscal 2000.
9. CONTINGENCIES
Environmental Matter
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.
8
9
10. 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 27, 1998,
the Company had three outstanding Belgian franc ("BF") forward contracts
amounting to 57,100 BF or $1,530 with a gross deferred gain of $112 from the
rollover of such contracts to the planned settlement date. At September 27,
1998, the Company had no outstanding Mexican peso ("MXP") forward contracts. At
March 31, 1998, the Company had thirteen outstanding BF forward contracts
amounting to 215,740 BF or $5,908 with a gross deferred loss of $163 from the
rollover of such contracts to the planned settlement date. Also, at March 31,
1998, the Company had one outstanding MXP forward contract amounting to 2,160
MXP or $255. The Mexican peso forward contract had no deferred gain or loss. The
forward contracts hedge currency transactional exposure resulting from
intercompany trade transactions.
11. NEW ACCOUNTING STANDARDS
In June 1997, SFAS No. 131 "Disclosure about Segments of an Enterprise and
Related Information" was issued, which establishes standards for the way public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosure about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. Financial statement disclosure for prior periods are required to be
restated. The Company is in the process of evaluating the disclosure
requirements and the Company will adopt this statement for the fiscal year ended
March 31, 1999. The adoption of SFAS No. 131 is not expected to have a material
effect on the Company's results of operations, financial position or cash flows.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," was issued, which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes of the benefit
obligations for the fair market values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer as
useful as they were when SFAS No. 87, "Employers' Accounting for Pensions," SFAS
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," were
issued. SFAS No. 132 suggests combined formats for presentation of pension and
other postretirement benefit disclosures. This statement is effective for the
fiscal years beginning after December 15, 1997 and is not expected to have a
material effect on the Company's results of operations, financial position and
cash flows.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair market
value. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Adoption of the statement is not expected to have
a material impact on the Company's consolidated financial position or results of
operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5). SOP 98-5 requires all costs associated with the pre-opening,
pre-operating and organization activities to be expensed as incurred. The
Company will adopt SOP 98-5 beginning April 1, 2000. Adoption of the statement
is not expected to have a material impact on the Company's consolidated
financial position or results of operations.
9
10
12. COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130 "Reporting Comprehensive Income," effective
April 1, 1998. SFAS No. 130 establishes standards for reporting and displays of
comprehensive income and its components in the financial statements. The
components of the Company's comprehensive income (loss) are as follows:
Three Months Ended Six Months Ended
------------------------------ ------------------------------
Sept. 27, 1998 Sept. 28, 1997 Sept. 27, 1998 Sept. 28, 1997
-------------- -------------- -------------- --------------
Net income (loss) ....................................... $(7,693) $ 2,139 $(6,000) $ 3,791
Foreign currency translation adjustments, net of taxes... 88 (24) (105) (60)
------- ------- ------- -------
Comprehensive income (loss) ............................. $(7,605) $ 2,115 $(6,105) $ 3,731
======= ======= ======= =======
13. SUBSEQUENT EVENT
Subsequent to quarter end, the Company entered into a new operating lease
line from a new lessor, which could provide up to $5,000 of financing, primarily
for production equipment.
Due to non-recurring charges recorded in the second quarter, the Company is
in technical violation of one covenant of its existing, unused credit facility.
As a result, the Company is currently negotiating with its commercial banks
regarding the adjustment of certain terms in this credit facility to reflect
current business conditions.
10
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, 1998,
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 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Net sales....................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................................... 72.9 68.9 71.2 68.4
------ ----- ----- -----
Gross profit................................................. 27.1 31.1 28.8 31.6
Operating expenses:
Selling, general and administrative.......................... 20.6 17.9 19.4 18.6
Research and development..................................... 6.9 5.1 6.2 5.9
Write-off of purchased in-process research and development... 14.8 -- 7.1 --
Restructuring costs.......................................... 11.8 -- 5.6 --
------ ----- ----- ----
Operating income (loss)......................................... (27.0) 8.1 (9.5) 7.1
Interest income................................................. 0.4 1.0 0.5 1.0
Interest expense................................................ (0.2) (0.2) (0.1) (0.1)
Other (expense) income, net..................................... (0.4) (0.2) (0.2) 0.2
------ ----- ----- -----
Income (loss) before income taxes............................... (27.2) 8.7 (9.3) 8.2
Provision (benefit) for income taxes............................ (4.5) 3.2 (0.8) 3.0
------ ----- ----- -----
Net income (loss)............................................ (22.7)% 5.5% (8.5)% 5.2%
====== ===== ===== =====
Net Sales. In the second quarter of fiscal 1999 revenues of $33.9 million
compared with $39.2 million for the same period in fiscal 1998, a decrease of
13.6%. Revenues for the Company's semiconductor products are consistent between
fiscal 1999 and 1998. However, second quarter fiscal 1999 revenues for
semiconductor products included $2.5 million of revenue for Clare-Micronix.
Excluding those revenues, semiconductor revenues were 15% lower than the second
quarter of the previous year. Electromagnetic and other product revenues
decreased 24% in the second quarter of fiscal 1999 compared with the same period
in the prior year. Lower revenues for the quarter ended September 27, 1998 were
attributed to lower demand for all of the Company's products and lower average
selling prices, principally on the Company's low end semiconductor products.
For the six months ended September 27, 1998, revenues of $70.6 million
compared with $73.9 million for the same period in fiscal 1998, a decrease of
4.5%. Sales of the Company's semiconductor products were 2.4% higher for the six
months of fiscal 1999 compared to fiscal 1998. However, as stated previously,
second quarter revenues for semiconductor products included $2.5 million of
revenue for Clare-Micronix. Excluding those revenues, semiconductor revenues
were 5.4% lower than the six-month period of the previous fiscal year.
Electromagnetic and other product revenues decreased 9.8% in the six months
ended September 27, 1998 compared with the same period in the prior year. Lower
revenues for the six months ended September 27, 1998 were principally due to the
reasons affecting the Company's second quarter revenues.
11
12
Net sales by major product category are as follows:
Three Months Ended Six Months Ended
------------------------------- ------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
(In Millions)
Semiconductor products....................................... $ 17.2 $ 17.3 $ 33.3 $ 32.5
Electromagnetic and other products........................... 16.7 21.9 37.3 41.4
The Company's semiconductor products are primarily used in data
communication applications such as modems and sales have grown significantly
over the last few years as Internet usage has expanded. The Company's revenues
for the second quarter and six months ended September 27, 1998 were impacted by
lower demand for the 56K modems and customer inventory reductions.
The Company's electromagnetic products 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 dry reed switch business and the Company has expanded
production capacity for these products. The Company believes growth is dependent
on the market acceptance of new digital cellular phones, in which the Company's
customers utilize the reed switches. During the second quarter, the dry reed
switch business and the Remtech products group had lower demand and revenues
than the previous quarter, based on customer inventory reductions and slower
growth in demand for switches from the cellular phone manufacturers.
Net sales to customers located outside of the United States decreased 15.2%
in the second quarter of fiscal 1999 to $13.7 million from $16.2 million in the
same period in fiscal 1998. Net sales to customers in Europe represents 28.2%
and 28.8% of the Company's net sales for the second quarter and six months ended
September 27, 1998, respectively. The net sales decreased 14.2% and 0.9% in
local currencies, and decreased 12.5% and 2.0%, in U.S. dollars for the second
quarter and six months ended September 27, 1998, respectively and were impacted
by lower demand from European customers in the second quarter.
Net sales to customers in Asia represent 12.2% and 12.7% of the Company's
net sales for the second quarter and six months ended September 27, 1998, and
decreased 16.6% and 1.8%, respectively, in U.S. dollars for the periods compared
with the prior year. During the second quarter of fiscal 1999, several Asian
countries experienced continuing economic problems. The Company believes that
this issue may have impacted the financial results for the second quarter of
fiscal 1999. The Company believes that these issues may have a future impact on
operating results, as opportunity for customer product demand declines in the
Asian markets, credit terms tighten, and Asian competitors with weak currencies
increase downward pressure on average selling prices for various products.
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. Due to the inherent uncertainty of
foreign exchange markets the Company cannot predict future events in this area.
The Company will continue to focus on new markets and expansion of certain
existing international markets.
Gross Profit. The Company's gross profit as a percentage of net sales
decreased to 27.1% in the second quarter of fiscal 1999 from 31.1% in the same
period of fiscal 1998, principally due to lower sales volume. The lower gross
profit was also related to higher fixed manufacturing costs associated with the
Company's recent capacity expansion in semiconductors and reed switches and the
transitional costs for the dry reed relay production line moved to Mexico
earlier this year. The Company's gross profit as a percentage of net sales
decreased to 28.8% in the six months ended September 27, 1998 from 31.6% in the
same period of fiscal 1998, principally due to the same reasons affecting the
Company's second quarter gross margins.
Selling, General and Administrative Expense. Selling, general and
administrative ("S,G&A") expenses were flat at $7.0 million in the second
quarter of fiscal 1999 and the same period in the prior fiscal year. Included in
the second quarter of fiscal 1999 results are $0.5 million of goodwill
amortization expense, related to the Micronix acquisition. S,G&A expenses were
lower on a dollar basis, due to lower commissions and reduced spending for the
lower levels of business.
S,G&A expenses were 20.6% of net sales for the second quarter of fiscal 1999
as compared with 17.9% for the same period in the prior fiscal year, due to the
lower revenues experienced in the second quarter. S,G&A expenses decreased less
than 1% to $13.7 million for the six months of fiscal 1999 as compared with
$13.8 million for the same period in the prior fiscal year. S,G&A expenses were
19.4% as a percentage of net sales for the six months of fiscal 1999 compared
with 18.6% for the same period in the prior year principally due to the same
reasons affecting the Company's second quarter S,G&A expenses.
12
13
Research and Development Expense. Research and development (R&D) expense
increased to $2.3 million for the second quarter of fiscal 1999 from $2.0
million for the same period in fiscal 1998, due to additional new projects
beginning in the second quarter of fiscal 1999 and additional R&D spending,
related to the Micronix acquisition. R&D expense was flat at $4.3 million for
the six months ended September 30, 1998 compared with the same period in fiscal
1998.
Write-off of purchased in-process research and development. The intangible
assets acquired as part of Micronix include $5.0 million 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. See Note 4 of the Consolidated Condensed
Financial Statements.
Restructuring costs. In the second quarter of fiscal 1999, the Company
announced a restructuring of its operations, and recorded a non-recurring charge
of $4.0 million. 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 write-down of assets
associated with the closure of the Company's Wakefield, Massachusetts production
facility. See Note 8 of the Consolidated Condensed Financial Statements.
Interest Income. Interest income decreased to $0.1 million for the second
quarter of fiscal 1999 from $0.4 million for the same period in fiscal 1998 due
to lower cash balances. The decrease in cash was primarily due to cash used for
the acquisition of Micronix in July, 1998. Interest income is derived from
investments of the Company's cash in both commercial paper and short term tax
exempt municipal bonds.
Interest Expense. Interest expense for the second quarter of fiscal 1999
was the same as in the second quarter of fiscal 1998.
Other (Expense) Income. In the second quarters of fiscal 1999 and 1998,
other (expense) income consists principally of net foreign currency
transactional losses. During the six months ended September 27, 1998, other
(expense) income consists principally of net foreign currency transactional
losses, while in the same period in fiscal 1998, other (expense) income
consisted principally of a one time royalty payment received and net foreign
currency transactional gains.
Income Taxes. In accordance with generally accepted accounting principles,
the Company has provided for income taxes at its estimated annual effective tax
rate. In the second quarter of fiscal 1999, the Company increased its effective
tax rate from 37% to 39%, as a result of non-deductible goodwill and technology
amortization expense related to the Micronix acquisition. In fiscal 1998, the
effective rate was 37%, as a result of the favorable treatment of the Company's
foreign sales corporation, utilization of net operating loss carryforward, and
investment in variable rate tax exempt municipal bonds.
TRENDS AND UNCERTAINTIES
Acquisition. 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 for approximately $16 million, excluding acquisition costs and
assumed liabilities. The Company has limited experience in integrating acquired
companies or technologies into its operations. Therefore, there can be no
assurance the Company will operate the acquired business effectively and that
the resulting profitability will be at anticipated levels. Also, there can be no
assurance that the Company will be able to retain key personnel, the loss of
which could have a material adverse effect on the Company's operating 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 affect 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. With
the addition of Micronix, the Company will need to develop and bring to market
the acquired technology and new products in the areas of high-voltage analog and
mixed-signal application specific integrated circuits. Development of all these
capabilities is expected to require significant additional capital expenditures.
The Company is currently
13
14
limited by its existing capital availability and may need to use its existing or
new lines of credit, in order to fund the capital expenditures required to
develop new products. 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.
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 Micronix products, will require significant additional capital
investment to be able to 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.
Liquidity. The Company's cash balance was significantly reduced, primarily
by the acquisition of Micronix, during the second quarter of fiscal 1999 to
approximately $6 million. Due to the non-recurring charges recorded in the
second quarter, the Company is in technical violation of certain covenant of the
existing credit facility. The Company is currently negotiating with its
commercial banks regarding the adjustment of certain terms in this credit
facility to reflect current business conditions. There are no assurances that
the existing $40 million credit facility will not be significantly altered, or
become unavailable as a result of these negotiations.
Customer Concentration. In the second quarter of fiscal 1999, the Company's
ten largest customers accounted for 44% 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.
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.
Competition. C.P. Clare competes with various global companies. Certain
competitors of the Company have greater manufacturing, engineering or financial
resources.
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.
Restructuring. On September 21, 1998, the Company announced a restructuring
of its operations, in order to reduce costs, primarily in general and
administrative and manufacturing. The restructuring involves workforce
reductions and a facility closure. The Company's future results are dependent on
the successful implementation and completion of the announced restructuring.
Delays in such implementation or the inability to complete the restructuring in
a timely manner would have a material adverse effect on the Company's future
operating results. As a result of the restructuring, there can be no assurance
that the Company will be able to retain key personnel that were not identified
as part of the restructuring. The loss of additional personnel could have a
material adverse effect on the Company's operating results.
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 the
Company's needs effectively and on a timely basis and any such disruption could
have a material adverse effect on future results.
New Systems. The Company is in the process of implementing an Oracle
Enterprise Resource Planning ("ERP") system for certain applications and
locations. The vendor has informed the Company that this new system is compliant
with year 2000 issues. This effort is consuming significant resources of the
Company and implementation of various applications is scheduled throughout
fiscal year 1999. 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.
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. The Company has increased the scope and geographic area of its
operations. 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
14
15
facilities.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended September 27, 1998, the Company's cash, cash
equivalents and investments decreased by $20.3 million. Operations provided $1.7
million of cash during this period, mainly as a result of non cash adjustments
offset by the net loss for the period and a decrease in net assets and
liabilities. The Company used $22.3 million for investing activities, including
$16.0 million paid when the Company acquired Micronix Integrated Systems, Inc.,
(see Note 4 of the Notes to Consolidated Condensed Financial Statements), and
$6.2 million in capital expenditures. Financing activities provided $0.1 million
of cash during the period, primarily from the proceeds from exercises of stock
options and warrants.
At September 27, 1998, the Company had $1.3 million of outstanding debt, of
which $0.6 of capital leases were assumed when the Company acquired Micronix
Integrated Systems, Inc. In fiscal 1998, the Company entered into a $40 million
unsecured, committed revolving multicurrency credit facility ("credit
facility"). To date, no borrowings have been made against this credit facility.
The credit facility requires the Company to maintain certain financial ratios.
Based on the non-recurring charges during the second quarter of fiscal 1999, the
Company was not in compliance with one of the covenants. The Company is
currently negotiating with its commercial banks regarding the adjustment of
certain terms in this credit facility to reflect current business conditions.
There can be no assurances that the existing $40 million credit facility will
not be significantly altered, or become unavailable, as a result of these
negotiations.
Subsequent to quarter end, the Company entered into a new operating lease
line from a new lessor, which could provide up to $5,000 of financing, primarily
for production equipment. See Note 13 of the Consolidated Condensed Financial
Statements.
The Company manages its foreign exchange exposure by monitoring its net
monetary position using natural hedges of its 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.
Prior to that time, the Company intends to negotiate credit terms with its
existing lenders or enter into a new credit facility to reflect current business
conditions. 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.
YEAR 2000 ISSUE
The Company has begun 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 expects to finish the
assessment process by its 1999 fiscal year end.
To date, the Company is in the process of implementing an Oracle Enterprise
Resource Planning ("ERP") system, Version 10.7 Smart Client, for many
applications and sites, including: order entry, manufacturing and financial
systems. The software vendor has informed the Company that the new system is
compliant with Year 2000 issues. To date, approximately 2,000 hours of employee
time has been devoted to, and approximately $2.5 million has been expended on
systems upgrades directly relating to the implementation.
In addition, the Company's other facilities, including Guadalajara and St.
Louis have other manufacturing and financial systems software. These systems are
being evaluated to assess compliance. The Company presently believes that with
modification to existing software and conversion to the new ERP system, the Year
2000 problem will not pose significant operational problems. However, the
Company is conducting further testing and may conduct an external audit
following the conclusion of its internal assessment.
The Company's potential exposure extends beyond financial applications to
include suppliers, customers, facilities, manufacturing equipment and other
communication equipment. The Company has established a cross-functional team,
which is in the process of reviewing these issues and developing effective
strategies to minimize risk. The Company has begun to undertake several steps in
this review. One step includes a survey of its semiconductor products suppliers'
Year 2000 compliance status. The Company has received
15
16
responses from approximately 50% of those surveyed, a majority of whom have
certified they are compliant. The Company is continuing this effort across all
Company purchasing locations.
Further, the Company has begun to confer with significant customers to
assure that various systems used for data and information exchanges between them
will be compatible following December 31, 1999.
Based on its initial 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. At present, the Company has not developed
complete contingency plans but intends to determine whether to develop any such
plan early in fiscal year 1999. 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.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27.0 Financial Data Schedule (Edgar)
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K on July 16, 1998
disclosing the acquisition on July 6, 1998 of Micronix Integrated Systems, Inc.
16
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: February 8, 1999
17