- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999 COMMISSION FILE NUMBER 0-26092
C.P. CLARE CORPORATION
(Exact name of registrant as specified in its charter)
------------------------
MASSACHUSETTS 04-2561471
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
78 CHERRY HILL DRIVE
BEVERLY, MA 01915
(Address of principal executive offices) (Zip Code)
(978) 524-6700
(Registrant's telephone number, including area code)
------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(Title of each class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of June 10, 1999, was $10,923,034.
The number of shares of the Registrant's Common Stock, par value $.01 per
share, outstanding as of June 10, 1999, was 9,459,630.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Proxy Statement for the Registrant's Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days after the end of the year covered by this Form 10-K, are incorporated by
reference in Part III, Items 10, 11, 12 and 13, of this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
ITEM
PART I PAGE
1. Business 1
2. Properties 12
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Securityholders 12
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 13
6. Selected Financial Data 14
Management's Discussion and Analysis of Financial Condition and Results of
7. Operations 15
7a. Quantitative and Qualitative Information about Market Risk 21
8. Financial Statements and Supplementary Data 21
Changes in and Disagreements with Accountants on Accounting and Financial
9. Disclosure 21
PART III
10. Directors and Executive Officers of the Registrant 22
11. Executive Compensation 22
12. Security Ownership of Certain Beneficial Owners and Management 22
13. Certain Relationships and Related Transactions 22
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 23
(a) Financial Statement Schedule
(b) Reports on Form 8-K
(c) Exhibit Index
15. Signatures 60
i
THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1993, 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 SECTION ENTITLED
"CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS" ON PAGE 10 OF THIS FORM
10-K.
PART I
ITEM 1. BUSINESS
C.P. Clare Corporation (the "Company" or "C.P. Clare") is a leading provider
of high voltage analog semiconductor integrated packages and discrete
components, electromagnetic relays and switches, surge protection devices,
transformers and specialized electronic components to the world's foremost
manufacturers of electronic communications equipment. The Company's products
supply the interface between electrical power sources and electronic components
by providing the basic isolation and switching functions required by electronic
communications applications.
C.P. Clare is a technology leader in the semiconductor segment of the small
signal relay market. C.P. Clare's semiconductor products are capable of
integrating a number of functions previously provided by discrete components
into one package and have contributed to the development of a number of new
product applications such as 56K PC card modems, modem interfaces to the
Internet, cable set top boxes, and other computer telephony uses such as voice
mail systems. Semiconductor products represent the core of the Company's growth
strategy for communication applications and accounted for 48% and 45% of the
Company's net sales in fiscal 1999 and 1998, respectively.
C.P. Clare focuses on providing solutions for the telecommunications and
data communications industries due to its significant use of analog
semiconductor components and growing demand for highly integrated semiconductor
packages. The Company's customers include leading global OEMs such as Motorola,
Compaq, 3Com, ABB, Alcatel, Diamond Multimedia, LM Ericsson, GVC, Lucent
Technologies, Nokia, Samsung, Dialogic, Psion, and Daewoo.
C.P. Clare, founded in 1937 to design, manufacture and sell electromagnetic
products, was sold to General Instrument Corporation in 1967 and operated as a
division thereof. Theta-J Corporation, founded in 1975 to design, manufacture
and market semiconductor based electronic components, purchased the North
American, Taiwanese and European operations of the Clare Division of General
Instrument in 1989 and changed its name to C.P. Clare Corporation. This
transaction resulted in the formation of the Company in substantially its
present form. The Company is incorporated under the laws of Massachusetts and
its principal offices are located at 78 Cherry Hill Drive, Beverly,
Massachusetts, 01915.
BACKGROUND
The growth in the worldwide telecommunications and datacommunications
markets is being fueled by the convergence of several technological and market
trends which are leading to a broad and increasing array of communications,
networking, computer telephony and computing products. Advances in computer
hardware and software have accelerated the technological shift to distributed
processing over communications networks. Trends toward portability and
miniaturization and broader functionality have resulted in significant growth in
mobile communications and portable computing and network access products.
Analog semiconductor integrated packages and circuits and discrete
components provide the interface between voltages and currents for a broad range
of products in the telecommunications and data communications markets, as well
as for products in a wide array of other applications such as telemetering and
remote access, consumer electronics, appliances, computer peripherals, gaming
1
equipment, automotive, aerospace, automatic test equipment, industrial controls
and instrumentation. The Company's analog semiconductor integrated packages and
discrete components provide two basic functions required by virtually all
electronic and electrical products: isolation and switching. Isolation separates
the low current communication signal circuit from the higher power circuit,
while the switching function controls the flow of current.
Various types of integrated packages and components based on
electromechanical, electromagnetic and semiconductor technologies have been
developed to meet these isolation and switching requirements. C.P. Clare
designs, manufactures and sells electromagnetic and analog semiconductor
products for voltage, circuit and other applications such as surge protection
and AC power conditioning. These technologies and resulting products are
utilized for various communications applications based on a number of factors,
including performance, sensitivity, resistance, size, speed and cost.
DEVELOPMENTS IN FISCAL 1999
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 $16.0 million for the acquisition and direct cost, net of cash acquired.
See "Note 9 to Notes To Consolidated Financial Statements."
In fiscal 1999, the Company announced a restructuring of its operations, and
recorded a non-recurring pretax 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 whom were 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 was completed
in the fourth quarter of 1999.
STRATEGY
CP Clare's strategy for the past 5 years has been to become the preferred
supplier of unique mixed-signal interface integrated circuits to the
communications industry. As well as operating on the "network's edge" with
analog front ends for analog, ADSL, cable, HomePNA, and other solutions, the
Company is committed to the telecommunications voice, data and video interface
markets in central office or gateway applications. The Company's primary focus
is on the communications industry where the Company has good name recognition
and customer contacts worldwide. In addition, the Company will also endeavor to
supply mixed signal interface chips to other related market niches for
high-profit applications that will dominate and keep the technology breadth
alive. These complementary technical applications will provide
counter-cyclicality, but more importantly will enable the Company to pursue a
number of markets simultaneously creating strong growth.
C.P. Clare's product strategy is straightforward. First, the Company will
continue to develop and expand the solid state relay (SSR) business supplying
SSR's to the datacommunications market at falling commodity prices but with a
cost advantage over competition. At the same time, the Company will attempt to
expand SSR offerings into profitable niches in the instrumentation, industrial
controls, telecommunications and power markets. Second, the Company will
continue to invest in and grow the Application Specific Integrated Circuit
(ASIC) business. Third, from the ASIC business the Company will look to develop
standard products (also called ASSP's or Application Specific Standard Products)
for communications/networking applications as well as clearly defined and
isolated market niches that can be dominated with identical technologies. The
Company's extremely unique semiconductor fabrication facility will sell foundry
services for high margins and to acquire new processes. Finally, the reed switch
business will focus on the high growth portable phone hook switch and antenna
switch markets.
2
The Company's focus is on the continuing shift in technology. The ability to
receive and transmit large amounts of information--data, voice or video--is
becoming more critical than the ability to process that information. The power
of individual PC's is now adequate for most needs so that the bottleneck is in
the pipes that carry data between PC's and other devices. Pipes using a variety
of technologies but all growing dramatically through the ubiquitous reach of the
Internet. As the Internet has emerged in its third generation as a powerful,
all-reaching fabric for communications, it has become the heart and soul of the
end-to-end broadband network. Many companies are focused on these pipes. C.P.
Clare is unique in that we have technology, expertise and facilities to address
the interfaces of these pipes to the real world.
Key elements of this strategy are:
CAPITALIZE ON SEMICONDUCTOR OPPORTUNITIES. C.P. Clare is a leader in
semiconductor relay technology, offering a broad line of semiconductor products
in a wide variety of package types and specifications. The Company seeks to
significantly expand the application of its semiconductor technology into
existing and new markets such as communications and instrumentation through the
integration of more functions using fewer chips. From its 5-inch wafer
fabrication facility in Beverly, Massachusetts, C.P. Clare is developing new
process technologies in order to engineer high voltage analog integrated
circuits. The Company anticipates that new products and additional capacity from
the facility will better position it for increased product demand resulting from
technology advances in the communications market. During fiscal year 1999, the
Company introduced several new products, including, LiteLink-TM-, Cybergate-TM-,
and Digilite-TM-.
FOCUS ON COMMUNICATIONS INDUSTRY. The Company has focused primarily on
developing solutions for the computer telephony, data communications and
telecommunications industries due to their significant use of analog
semiconductor discrete components, electromagnetic switches and relays, and the
increased need for analog semiconductor integrated packages and circuits. The
Company's semiconductor products are an enabling technology in certain
applications such as modems, computer telephony, and communication interfaces.
C.P. Clare's electromagnetic products are integral components in other
applications such as cellular telephones and accessories. During the year,
product sales to the communications industry represented a significant portion
of the Company's total sales. The Company is qualifying processes and designs
which can capitalize on its core competencies of optical isolation, high voltage
analog semiconductor processes, experience with bonded wafer technology and
multi chip packaging for integrated circuits.
NEW PRODUCT DEVELOPMENT AND ADDITIONAL ANALOG ENGINEERS. The Company has
increased and intends to continue to increase its investment in new product
development and strengthen the functionality of existing products in an effort
to enter new markets and gain share in existing markets. Product development
also includes further integration of new and existing analog semiconductor
integrated packages and components into fewer circuits. Company sponsored
research and development expenses were $9.7 million (or 6.7% of total revenues)
and $8.9 million (or 5.7% of total revenues), for fiscal years 1999 and 1998,
respectively. The Company's core competencies in semiconductor design, multi
chip packaging, coil winding and ceramic to metal sealing have allowed it to
introduce new products to existing and prospective customers. During fiscal year
1999, in spite of workforce reductions, the Company continued to expand the
number of its analog engineers with the acquisition of Micronix.
LEVERAGE CUSTOMER RELATIONSHIPS AND PURSUE NEW MARKET OPPORTUNITIES. The
Company has established long-standing customer relationships due to its strong
worldwide brand recognition, broad product offerings, and quality customer
service and attention. The Company intends to further leverage its customer
relationships by offering complementary and new products to its existing
customer base and by pursuing new market opportunities. The Company is
capitalizing on its worldwide brand recognition to expand into new geographic
markets and new industries. The Company is seeking to
3
increase local as well as re-export sales to Japan, China, India and Southeast
Asia, where significant opportunities exist, in spite of the slow-down in Asia,
for sales of both semiconductor and electromagnetic products.
ACQUISITIONS The Company's strategy includes external growth in its
engineering resources and revenue from strategic partnerships and acquisitions.
Like the purchase of Micronix, such acquisitions may include fabless design
organizations, which provide additional engineering resources to accelerate
exiting projects for and the development of new products in the high voltage
analog semiconductor application.
CUSTOMERS
C.P. Clare has established a broad base of approximately 700 customers
representing a wide range of industries and applications. The communications
industry represents the Company's largest customers due to the industry's
pervasive use of analog semiconductor integrated packages and the need for more
highly integrated circuits. The Company seeks to sell multiple product solutions
to its customers in order to allow C.P. Clare to become more of a strategic
communications product supplier. Sales to customers outside the United States
comprised 44%, 42%, and 38%, of the Company's net sales for the fiscal years
1999, 1998, and 1997 respectively. For fiscal years ended March 31, 1999, 1998
and 1997, net sales to Motorola represented 13%, 14%, and 17%, of net sales,
respectively.
PRODUCT APPLICATIONS
The Company's products are used in a wide variety of applications, including
telephone network interfaces caller identification, high current MOSFET
switching, integrated package testers, high frequency communications, scanners,
and RF equipment. Set forth below is a representative sample of applications for
the Company's semiconductor and electromagnetic products.
COMMUNICATIONS
TELEPHONE NETWORK INTERFACES. The Company develops products for and sells
into interface and network applications for the communications industry. C.P.
Clare was the first to introduce semiconductor products in thin, small flat-pack
packages that integrate the functionality previously provided by a number of
discrete components including relays, surge protection devices and modem
isolation transformers. These products are referred to as the Data Access
Arrangement (DAA). The DAA is an arrangement of discrete components principally
used in analog data communications, which interface with telephone networks
applications. In certain DAA products such as the Cybergate -TM-2000 and 2100,
the complete DAA function is designed for both European markets and U.S. This
manufacturing capability has allowed C.P. Clare to become a leading worldwide
supplier of semiconductor analog integrated packages and components to the major
manufacturers of communication products such as PCMCIA card modems. PCMCIA cards
are thin, credit card size modems which insert into a designated slot in mobile
computer equipment, allowing the portable computer to transmit data over
telephone lines and function as a facsimile machine.
CELLULAR PHONES. Cellular telephones and accessories, which are becoming
commonplace, require a high degree of durability and reliability. The Company's
electromagnetic dry reed switches, an enabling component of the flip phone, are
surface-mountable switches which maintain switch orientation and provide
cost-effective, reliable and automated assembly in small package sizes for
wireless, modem and video switching requirements.
AUTOMATED PROCESS CONTROL/INSTRUMENTATION AND METERING
METERING AND REMOTE ACCESS. Water, gas, electricity meter reading systems
as well as vending machines and gas pumps have been developed to allow the
remote reading of such systems.
4
Semiconductor relays have been incorporated into these systems and provide a
high speed interface between low level power signals and the high power output
signals required to enhance metering functionality.
CONTROL INSTRUMENTATION. Operations such as power plants require multiple
processes to be monitored and controlled under a broad range of environmental
conditions. The Company's electromagnetic wetted reed relay, semiconductor and
surge protection products are used to provide isolation and surge protection. If
the relay does not function properly, false readings and equipment damage may
result. Thus, a high degree of reliability is required in these applications.
AUTOMATIC TEST EQUIPMENT
ELECTRICAL TESTERS. Semiconductor and printed circuit board testers require
precise measurement of smaller, complex products such as integrated circuits,
silicon wafers and printed circuit board assemblies. In each of these pieces of
equipment, placing a dry reed relay on each electrical path creates test points.
If the test path is functioning correctly, the dry reed relay is activated. C.P.
Clare's dry reed relays feature low capacitance, a critical feature for this
application which requires sensitivity and precision; and are offered in small
surface mount, high frequency signals up to 1 GHz.
SECURITY. The security industry requires low cost, high reliability relay
and switch products for use in proximity sensors, infrared detectors, smoke
detectors, carbon dioxide sensors and supervisory control panels. The Company's
electromagnetic dry reed switches provide a low cost, rugged and reliable switch
for use in proximity sensors which cause the switch to be activated by use of an
external magnet when a door or window is opened.
PRODUCTS
The Company manufactures several hundred standard products and also develops
and manufactures products for specific customer applications. The Company has
two major product families: analog and mixed signal semiconductor products,
which include application specific integrated circuits (ASIC) relays,
optocouplers, modem isolation transformers and integrated packages; and
electromagnetic products, which include reed relays, switches, magnetic
components and surge protection products which are often complementary to the
Company's semiconductor products. Each product line builds on one or more of the
Company's core competencies in the areas of semiconductor technology design and
processing, multi-chip packaging, coil winding, ceramic-to-metal sealing and
materials processing.
SEMICONDUCTOR PRODUCTS
The Company manufactures a wide variety of semiconductor products consisting
primarily of high voltage analog components, optocouplers and integrated
packages which are sold in a broad line of over 270 configurations. The
Company's semiconductor products are sold primarily to communications customers
and are also utilized in a number of applications in other industries such as
automated process control, data acquisition, aerospace and automotive.
Semiconductor products achieve the required isolation and switching functions
with no moving parts, eliminating the mechanical wear typically associated with
other types of electromagnetic relays, thus improving reliability with low
distortion. The Company has integrated several additional functions into one
small package, thereby further reducing board size requirements and providing
the user with lower component and assembly costs. The Cybergate -TM-2000 data
access arrangement series allows the Company to sell more of its components into
those analog data communications applications where multiple discrete components
are typically used.
The Clare--Micronix Division specializes in the design and manufacture of
analog and mixed signal ASICs and ASSPs, utilizing CMOS, BiCMOS, and Bipolar
semiconductor technologies. Micronix
5
sells into the data and wireless communications, medical, industrial and
automated test equipment marketplaces.
ELECTROMAGNETIC AND SURGE PROTECTION PRODUCTS
The Company manufactures a broad range of electromagnetic products
consisting of dry reed switches and relays and magnetic components, used in
applications such as modems, caller identification, sensors and transformers.
The Company's electromagnetic products are sold primarily to the communications
industry and are also sold to other industries such as industrial and automated
process control, transportation, home security, aerospace and automotive. The
electromagnetic switch consists of two flat metal blades, which are encapsulated
in a glass tube and hermetically sealed in an inert atmosphere. Switches are
opened or closed by use of an external magnetic field. The switch is the basic
component of the electromagnetic relay, which is formed by winding a wire coil
around the switch. When an electrical signal is applied to the coil, it creates
an electromagnetic field, which causes the switch to open or close. The Company
has succeeded in offering a miniaturized, surface mount, high frequency products
to its customers.
DRY REED. The Company's dry reed switch, the DYAD-Registered Trademark-,
has electrical contacts, which have an extremely hard refractory metal applied
to the contacts. The DYAD-Registered Trademark- was the first commercially
available switch to have surface mount capabilities, which maintain orientation
between the pads and the switch. Surface mounting allows for the automated
placement of the switch onto circuit boards, thus lowering manufacturing costs.
The Company's DYAD-Registered Trademark- switch has a rugged design, which may
increase product life and has lower bounce, which provides less electronic noise
and is particularly important for applications with a high degree of
sensitivity. Dry reed products, which can be manufactured in high volumes at low
cost, can function through millions of operations and have low resistance, which
causes less heat generation and power consumption.
The communications industry, with products such as cellular phones, modems
and facsimile machines, represents the largest market for dry reed switches and
relays. Dry reed switches are also widely used in automatic test equipment
applications, due to their high sensitivity and low resistance, and alarm
sensors for residential and commercial security applications.
WETTED REED. The Company sources its wetted reed switches from a dedicated
supplier. The wetted reed high performance switch uses a liquid mercury film,
which is applied or wetted to the electrical contacts. This mercury-to-mercury
connection when the switch is closed provides the lowest contact resistance and
the least distortion of all switch technologies. Wetted reed products provide
advantages similar to those of dry reed products but are able to offer higher
performance characteristics. The Company's wetted reed products are primarily
used in telecommunications applications such as central office equipment,
telephone switching gear, telephone test systems and PBXs. Wetted reed products
are also used in process control applications and the instrumentation market in
precision measuring and wattmeter applications.
MAGNETIC COMPONENTS. The Company provides application-specific engineering,
design and manufacturing subcontracting services for magnetic components and
power conditioning, ranging from small coil windings that may be attached to
printed circuit boards and to magnetic subassemblies, such as solenoids used by
customers in the computer, automotive, power supply and lighting markets. The
Company has developed a standard telecommunications transformer designed to
replace isolation transformers currently used in large volumes in communications
applications, and offers a modem isolation transformer in the semiconductor DAA
product.
6
PRODUCT DEVELOPMENT
The Company intends to build upon its history of innovation in both the
semiconductor and the switching and sensors portion of the electromagnetic
markets. The Company's product development strategy is driven by two objectives:
meeting customer application requirements and extending the Company's technical
capabilities. The Company has focused on utilizing its relationships with key
OEMs and its applications engineering capability to enhance existing products
and develop new products.
SEMICONDUCTOR PRODUCTS. The Company has developed new semiconductor
integrated products, which offer increased, integrated functionality in one
package. The Company is also developing analog integrated circuits, designed to
be smaller and less expensive than other semiconductor relay chips and designed
to replace the electromechanical relay in certain applications. These new
products are targeted to data communications and portable telephone
applications. Also under development are products for certain data acquisition,
medical electronics and automated process control applications.
ELECTROMAGNETIC PRODUCTS. The Company is engaged in a number of product
development projects for both dry reed switches and relays. Dry reed switch
product development is focusing on further miniaturizing the product with a
design similar to that of the DYAD-Registered Trademark- in order to address the
market trend toward smaller products, especially in certain applications in the
security and automatic test equipment markets as well as for higher frequency
switching applications.
SALES AND DISTRIBUTION
C.P. Clare sells its products to its worldwide customers through a network
of direct salespeople, contract sales representatives and distributors in North
America, Europe, Japan and the Far East.
Sales through distributors represented 12% of the Company's overall sales in
fiscal 1999. In general, sales representatives and distributors have entered
into agreements that allow for termination by either party upon 30 days notice
and return by distributors of some of the Company's products. These agreements
generally allow representatives and distributors to market and sell products
competitively with those of the Company and generally permit representatives and
distributors to return a small portion of products purchased by them during the
term of such agreements and to return all products (other than obsolete
products) purchased by them upon termination of such agreements.
BACKLOG
The Company's backlog reporting method includes only those purchase orders
scheduled for shipment within 6 months following the order date. As of March 31,
1999, six-month order backlog was approximately $29.3 million compared with
six-month backlog of $34.3 million as of March 31, 1998. Although the Company's
contract terms may vary from customer to customer, purchasers of standard
products may generally cancel or reschedule orders without significant penalty.
Since backlog can be canceled or rescheduled, the Company's backlog at any time
is not necessarily indicative of future revenue.
MANUFACTURING
All the Company's Beverly, Guadalajara and St. Louis manufacturing and
assembly facilities are ISO 9001 certified. ISO 9001 certification is an
international certification for quality control systems, the receipt of which
emphasizes the Company's commitment to quality control and assists the Company
in becoming a qualified supplier for certain customers. During fiscal 1999, the
Company shifted production of its solid state relay products (SSR's) from its
Wakefield facility to the Beverly facility. As a result there were minor changes
in the characteristics of some of these SSR's produced in Beverly that caused
problems in the products in which they were incorporated. As a result the
Company lost
7
business. It has addressed these quality problems and hopes to recapture a
substantial portion of the lost market share.
SEMICONDUCTOR PRODUCTS. The manufacturing of semiconductor products
involves two general phases of production: the wafer fabrication (chip
manufacturing) process, and the assembly (chip packaging) process. The Company's
Massachusetts wafer fabrication facilities design, manufacture and test chips.
All fabricated chips are shipped for assembly to a subcontractor in the
Philippines. Certain assembled relays are returned to Massachusetts for testing,
packaging, and shipment to the customer.
ELECTROMAGNETIC PRODUCTS. The Company manufactures dry reed switches in St.
Louis, Missouri, and assembles relays in Guadalajara, Mexico. In January 1997
the Company sold the Tongeren Manufacturing Company (TMC) to Gunther, GmbH. This
allowed the exit from a high cost wetted reed-manufacturing environment, while
maintaining a strong European sale and marketing presence. Wetted reed switches
are purchased from the new owners of TMC in Tongeren, Belgium under a long-term
supply agreement. In March, 1998 the Company closed its dry reed relay assembly
operation in Chitu, Taiwan and shifted production to Guadalajara, Mexico.
Magnetic components are designed and assembled in Guadalajara, Mexico.
The Company's Mexican facilities perform assembly operations for all
non-semiconductor business units and account for a significant portion of the
Company's overall manufacturing output. These facilities were established and
are operated under the Maquiladora program. In general, a company that operates
under this program is required to export at least 80% of its production from
Mexico and is afforded certain duty and tax preferences and incentives on
products brought back into the United States.
COMPETITION
The markets in which the Company operates are highly competitive, and the
Company faces competition from a number of different manufacturers in each of
its product areas and geographic markets. The principal competitive factors
affecting the market for the Company's products include performance,
functionality, price, brand recognition, product size, customer service and
support and reliability.
Many of the Company's competitors have substantially greater financial,
marketing, technical, manufacturing and distribution resources than those of the
Company. While the Company believes that it's broad product offerings, worldwide
sales coverage, customer service and brand recognition enable the Company to
compete effectively, there can be no assurance that the Company will be able to
continue to do so.
EMPLOYEES
As of March 31, 1999, the Company had 1,476 total employees including 1,264
in manufacturing, 79 in sales and marketing, 67 in research and development and
66 in administration. While none of the Company's United States employees are
unionized, the Company's employees in Mexico and Taiwan are represented by
government mandated collective bargaining agreements. The Company believes that
its relations with its employees are generally good.
PROPRIETARY RIGHTS
The Company holds a number of United States and foreign patents and
trademarks. The Company has additional U.S. and foreign patent and trademark
applications pending. The Company intends to continue to seek patents on its
products, as appropriate. The Company believes that although these patents may
have value, given the rapidly changing nature of the industries in which the
Company competes, the Company depends primarily on the technical competence and
creativity of its technical
8
work force and its ability to continue to introduce product improvements
rapidly. The Company does not believe that the success of its business is
materially dependent on the existence, validity or duration of any patent,
license or trademark.
The Company attempts to protect its trade secrets and other proprietary
rights through formal agreements with employees, customers, suppliers and
consultants. Each employee of the Company is required to sign an agreement
regarding ownership of proprietary rights and trade secrets. Although the
Company intends to protect its intellectual property rights vigorously, there
can be no assurance that these and other security arrangements will be
successful. The process of seeking patent protection can be long and expensive,
and there can be no assurance that existing patents or any new patents that may
be issued will be of sufficient scope or strength to provide meaningful
protection or any commercial advantage to the Company. The Company may be
subject to or may initiate interference proceedings in the patent office, which
can demand significant financial and management resources. The Company has from
time to time received, and may in the future receive, communications from third
parties asserting patents on certain of the Company's products and technologies.
Although the Company has not been a party to any material intellectual property
litigation other than that described herein, in the event any third party were
to make a valid claim and a license were not available on commercially
reasonable terms, the Company's operating results could be materially and
adversely affected. Litigation, which could result in substantial cost to and
diversion of resources of the Company, may also be necessary to enforce patents
or other intellectual property rights of the Company or to defend the Company
against claimed infringement of the rights of others. The failure to obtain
necessary licenses or the occurrence of litigation relating to patent
infringement or other intellectual property matters could have a material
adverse affect on the Company's business and operating results.
ENVIRONMENTAL
The Company's facilities are regulated pursuant to foreign, state and
federal statutes, including those addressing hazardous waste, clean water and
clean air. The Comprehensive Environmental Response, Compensation and
Liabilities Act of 1980, as amended (the "Superfund Act"), imposes retroactive,
strict and, in certain cases, joint and several liability upon certain persons
in connection with the cleanup of sites at which there has been a release or
threatened release of hazardous substances into the environment. The Superfund
Act provides for immediate response and removal actions coordinated by the
Environmental Protection Agency to releases of hazardous substances into the
environment, and authorizes the government to respond to the release or
threatened release of hazardous substances or to order persons responsible for
any such release to perform any necessary cleanup. The statute imposes liability
for these responses and other related costs, including the cost of damages to
natural resources, to the parties involved in the generation, transportation and
disposal of such hazardous substances and to those who currently own or operate
or who previously owned or operated the property upon which such releases
occurred. Under the statute, and given the manufacturing processes used by the
Company, the Company may be deemed liable as a generator or transporter of a
hazardous substance which is released into the environment, or as the current or
former owner or operator of a facility from which there is a release of a
hazardous substance into the environment. The Company has not to date had any
action brought against it under the Superfund Act, but there can be no assurance
that there will be no action brought against the Company in the future. Local
sewer discharge requirements are applicable to certain of the Company's
facilities. The Company's facilities are subject to local siting, zoning and
land use restrictions. The Company believes it is in compliance with all
foreign, federal, state and local laws regulating its business. The Company
however has not undertaken a comprehensive review of its properties to determine
whether or not hazardous materials have been discharged at any time in the past,
whether by the Company or a previous occupant of the facility.
9
Any failure by the Company to control the use of, or to restrict adequately
the discharge of, hazardous materials under present or future regulations could
subject the Company to fines or substantial liability. In addition, the Company
could be held financially responsible for remedial measures if its properties
were found to be contaminated whether or not the Company was responsible for
such contamination.
An environmental site investigation commissioned in 1992, by the Company on
its West Pratt Avenue facility in Chicago, Illinois ("Site"), reported evidence
of contamination at the Facility. The Company voluntarily reported the discovery
to the Illinois Environmental Protection Agency ("IEPA"), and has since been
involved in discussions with IEPA and the U.S. Environmental Protection Agency
regarding the implications of the investigation and the need for further
investigation and remedial work. The Company and General Instrument have agreed
to share the costs of implementing the proposed cleanup plan at both the Site
and the adjacent properties. Pursuant to that agreement, General Instrument will
pay for 75% of the costs of the soil remediation and related environmental
cleanup costs, and the Company will bear 25% of such costs and the complete cost
of removing asbestos from the building structure and building demolition. The
agreement is subject to a reservation of both parties' rights to reallocate
these costs or litigate concerning final liability at the Site. If a final
accounting acceptable to C.P. Clare cannot be attained, C.P. Clare may commence
litigation against General Instrument to recover its fair share of such costs.
During fiscal 1997 and fiscal 1998, the Company completed remediation of the
Site to industrial / commercial standards. The Company has received a
no-further-remediation letter from the IEPA. On July 2, 1998 the Company
executed a purchase and sale agreement, as subsequently amended, to sell the
Site to Concord Development Corporation of Illinois ("Concord") for residential
development, contingent on Concord's obtaining certain permits and approvals for
such redevelopment. The Company anticipates closing on the sale of the Site in
the second quarter of fiscal year 2000. Concord intends to further clean up the
Site to residential standards at Concord's sole cost, and to release the Company
from any claims relating to known contamination at the Site. The Company agreed
to indemnify Concord with respect to contamination that migrated from the Site
onto adjacent properties. Pursuant to an agreement with Concord, the Company
agreed to acquire environmental insurance protecting Concord and the Company
from future environmental liability at the Site. See Note 8 of Notes to
Consolidated Financial Statements.
Further testing has confirmed that some of the contamination has migrated
onto two adjacent properties. The Company is working with those parties and
their environmental consultants to establish the procedures and costs for
remediating these properties. The Company has completed the remediation agreed
to by the parties on one of the adjacent sites and expects that such site will
receive a no further remediation letter with respect to the work done by the
Company.
The Company and General Instrument are continuing to address contamination
that has been found on adjacent sites. Management continues to analyze the
estimated environmental remediation liability and has recorded additional
amounts when known events have required revised estimates. However, given the
current stage of the remediation process and the magnitude of contamination
found at the Site and adjacent sites, the ultimate disposition of this
environmental matter could have a significant negative impact on the Company's
consolidated financial results for a future reporting period.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
The information contained in and incorporated by reference in this Form 10-K
contains forward-looking statements with 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
10
differ materially from those set forth in the forward-looking statements.
Factors that may affect future operating results include:
DEVELOPMENT OF NEW PRODUCTS. The markets for the Company's products are
characterized by technological change and new product introductions. 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 computer-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 its new products. Slower than expected
acceptance of these new products will have the effect of adversely affecting 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 performance. If the Company
is unable to develop such new capabilities or is unable to design, develop and
introduce competitive new products, its operating results would be adversely
affected.
CUSTOMER CONCENTRATION. In fiscal 1999, the Company's ten largest customers
accounted for 42% of total net sales as compared to 35% in fiscal 1998. 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 impact 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 companies across the world.
Certain of the Company's competitors may have greater manufacturing, engineering
or financial resources than the Company.
COMPLETION OF THE NEW WAFER FABRICATION FACILITY. The Company recently
completed construction of a larger, more advanced semiconductor facility in
Beverly, Massachusetts, to address current capacity constraints and operating
efficiencies in the production of its semiconductor products. The new facility
must be effectively and fully utilized in order for the Company's projected
efficiencies to be fully realized. The lack of effective utilization will have a
material, adverse effect on the Company's future 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 impact on future results.
NEW SYSTEMS. The Company is in the process of completing the implementation
of an Oracle Enterprise Resource Planning system for all applications and
locations. The vendor has informed the Company that this new system is compliant
with year 2000 issues and internal testing of year 2000 compliance is nearing
completion. As a result of the systems transition, the Company may experience
disruptions, which may have material, adverse impact on the Company's results of
operations.
ACQUISITION. On July 6, 1998, the Company acquired Micronix Integrated
Systems, Inc., 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.
11
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.
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. This expansion 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 a large part on its
ability to manage these changes and effectively manage its remote offices and
facilities.
ITEM 2. PROPERTIES
C.P. Clare, headquartered in Beverly, Massachusetts, operates the following
manufacturing facilities worldwide:
LOCATION SQUARE FOOTAGE INTEREST PRODUCTS MANUFACTURED
- ----------------------------------------- -------------- --------- --------------------------------------------
Beverly, Massachusetts................... 83,000 Leased Corporate Headquarters Semiconductor
Products
St. Louis, Missouri (1).................. 20,000 Leased Dry Reed Products and Surge Arresters
Guadalajara, Mexico (1).................. 193,000 Leased All products except Semiconductor
Aliso Viejo, California.................. 27,000 Leased ASIC design and manufacture
- ------------------------
(1) Multiple locations.
The Company also leases additional sales offices in Illinois, Florida and
California in the United States, and also in Belgium, Canada, France, Germany,
Japan, and Taiwan. The Company believes its office facilities are adequate for
its current needs.
The Company also has a site located at 3101 West Pratt Avenue, Chicago,
Illinois, which is not in use and is under agreement to be sold. See
"Business--Environmental".
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the Nasdaq National Market
System (the "Nasdaq") on June 21, 1995, under the symbol "CPCL". The following
table sets forth the quarterly high and low closing sales prices per share
reported on the Nasdaq.
PERIOD OR QUARTER ENDED HIGH LOW
- ---------------------------------------- -------------------- -----------
April 1, 1997--June 30, 1997............ $ 15 3/4 $ 8 1/8
July 1, 1997--September 30, 1997........ 19 7/8 13 1/2
October 1, 1997--December 31, 1997...... 20 12 3/8
January 1, 1998--March 31, 1998......... 16 5/8 12 1/8
April 1, 1998--June 30, 1998............ $ 14 1/2 $ 8 5/8
July 1, 1998--September 30, 1998........ 9 1/2 5 3/16
October 1, 1998--December 31, 1998...... 7 3/4 3 7/8
January 1, 1999--March 31, 1999......... 7 3/4 3 5/8
On June 10, 1999, the last reported sale price of the Common Stock on the
Nasdaq was $3.75 per share. On June 10, 1999, there were 163 holders of record
of the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings to finance the growth and development of
its business and does not anticipate paying cash dividends in the foreseeable
future. Any payment of cash dividends in the future will depend upon the
financial condition, capital requirements and earnings of the Company, as well
as other factors the Board of Directors may deem relevant. In addition, the
Company is currently restricted under the terms of certain credit agreements
from paying dividends in certain circumstances to stockholders.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and other
information on a consolidated historical basis for the Company and its
subsidiaries as of and for each of the years in the five-year period ended March
31, 1999. This table should be read in conjunction with the Consolidated
Financial Statements of the Company and the Notes thereto included elsewhere in
this Form 10-K.
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................................. $ 95,992 $ 127,928 $ 128,161 $ 156,271 $ 143,913
Cost of sales............................................. 69,546 86,464 85,603 107,427 102,876
--------- --------- --------- --------- ---------
Gross profit............................................ 26,446 41,464 42,558 48,844 41,037
Operating expenses:
Selling, general and administrative..................... 17,143 23,857 28,330 28,157 28,191
Research and development (R&D).......................... 3,532 4,447 6,543 8,869 9,678
In-process R&D write-off(1)............................. -- -- -- -- 5,000
Restructuring costs (2)................................. 727 -- 14,250 -- 3,700
--------- --------- --------- --------- ---------
Operating income (loss)................................. 5,044 13,160 (6,565) 11,818 (5,532)
Interest income......................................... -- 1,052 1,578 1,454 571
Interest expense........................................ (2,841) (1,300) (452) (215) (232)
Other income (expense), net............................. 476 (20) (8) 135 390
--------- --------- --------- --------- ---------
Income (loss) before provision for income taxes and
extraordinary gain.................................... 2,679 12,892 (5,447) 13,192 (5,583)
Provision for income taxes.............................. 1,342 5,158 1,464 4,880 --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary gain................. 1,337 7,734 (6,911) 8,312 (5,583)
Extraordinary gain on early retirement of debt............ 1,742 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss)................................... $ 3,079 $ 7,734 $ (6,911) $ 8,312 $ (5,583)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic and diluted earnings (loss) per share
Basic earnings (loss) per share:
Income (loss) before extraordinary gain................. $ 0.45 $ 1.22 $ (0.77) $ 0.90 $ (0.59)
Extraordinary gain...................................... 0.59 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss)....................................... $ 1.04 $ 1.22 $ (0.77) $ 0.90 $ (0.59)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings (loss) per share
Income (loss) before extraordinary gain................. $ 0.26 $ 0.95 $ (0.77) $ 0.83 $ (0.59)
Extraordinary gain...................................... 0.35 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss)....................................... $ 0.61 $ 0.95 $ (0.77) $ 0.83 $ (0.59)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of common shares outstanding:
Basic..................................................... 2,948 6,316 8,992 9,280 9,398
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted................................................... 5,081 8,176 8,992 9,967 9,398
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................................. $ 55,271 $ 115,208 $ 111,170 $ 114,186 $ 109,215
Long-term debt and capital lese obligations, net of
current portion......................................... 15,969 4,034 550 -- 282
- ------------------------
(1) See Note 9 of the Notes to Consolidated Financial Statements for information
on the in-process R&D write-off in fiscal 1999.
(2) See Note 10 of the Notes to Consolidated Financial Statements for more
information on restructuring costs.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
C.P. Clare is a leading provider of high voltage analog and mixed-signal
semiconductor integrated packages and discrete components, electromagnetic
relays and switches, surge protection devices, transformers, and specialized
electronic components to the world's foremost manufacturers of electronic
communications equipment.
RESULTS OF OPERATIONS
The following table sets forth the relative percentages that certain income
and expense items bear to net sales for the periods indicated:
FISCAL YEAR ENDED MARCH 31,
----------------------------------
1997 1998 1999
----- ----------------- -----
Net sales.......................... 100.0% 100.0% 100.0%
Cost of sales...................... 66.8 68.7 71.5
----- ----- -----
Gross profit................... 33.2 31.3 28.5
Operating expenses:
Selling, general and
administrative................. 22.1 18.0 19.6
Research and development......... 5.1 5.7 6.7
In-process research and
development.................... -- -- 3.5
Restructuring costs.............. 11.1 -- 2.5
----- ----- -----
Operating income (loss)............ (5.1) 7.6 (3.8)
Interest income.................... 1.2 0.9 0.4
Interest expense................... (0.4) (0.1) (0.2)
Other income (expense), net........ -- -- (0.3)
----- ----- -----
Income (loss) before provision for
income taxes..................... (4.3) 8.4 (3.9)
Provision for income taxes......... 1.1 3.1 --
----- ----- -----
Net (loss) income.............. (5.4)% 5.3% (3.9)%
FISCAL YEAR 1999 COMPARED WITH FISCAL YEAR 1998
NET SALES. In fiscal 1999, net sales totaled $143.9 million compared with
$156.3 million in fiscal 1998, a decrease of 8%. Sales of semiconductor products
were essentially flat, while electromagnetic and other products decreased 14%.
The Company's semiconductor products are primarily used in data
communication applications such as modems. The overall downturn in the
electronic components market significantly impacted fiscal 1999 demand for solid
state relays; however, sales of application specific integrated circuits by
Clare-Micronix offset these shortfalls.
The Company's electromagnetic products are primarily used in
telecommunication applications such as telephone switching gear and cellular
phones. Demand for both dry reed and wetted reed relays was significantly lower
in fiscal 1999 versus the prior year and accounted for the majority of the
variance. Sales of application specific design and manufacturing services for
magnetic components were also lower in the year.
15
Net sales by segment were as follows:
FISCAL YEAR ENDED
MARCH 31,
--------------------
1998 1999
--------- ---------
(IN MILLIONS)
Semiconductor products....................................................... $ 69.7 $ 69.4
Electromagnetic and other products........................................... 86.6 74.5
Net sales to customers located outside the United States (primarily Europe
and Asia) decreased 3% in fiscal 1999 to $64.7 million from $66.4 million in
fiscal 1998, with decreased demand in all regions except Japan. The Company
expects that foreign sales in the current year will continue to account for a
substantial portion of product sales. Continued economic and currency related
uncertainties in a number of foreign countries, especially in Asia, could reduce
the Company's sales to these markets. 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 28.5% in fiscal 1999 from 31.3% in fiscal 1998. The decrease in
gross profit was primarily due to competitive pricing pressures and
under-utilization of semiconductor wafer fabrication and sensor assembly
facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (SG&A). SG&A expenses of $28.2
million in fiscal 1999 were flat compared with fiscal 1998, and represented
19.6% and 18.0% of sales in fiscal years 1999 and 1998, respectively. The
Company anticipates that as a result of the cost reduction program and
restructuring initiated in the second quarter of fiscal 1999, SG&A expenses will
remain flat or lower in fiscal 2000, despite the addition of Clare-Micronix.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased in fiscal 1999 to $9.7 million from $8.9 million in fiscal 1998 and
increased as a percentage of net sales to 6.7% in fiscal 1999 from 5.7% in
fiscal 1998. Higher year over year spending was principally attributable to
Clare-Micronix. The Company expects to maintain its current rate of research and
development spending as current R&D programs are continued, especially at
Clare-Micronix and the Company's semiconductor facility in Beverly,
Massachusetts.
IN-PROCESS RESEARCH AND DEVELOPMENT. In fiscal 1999, the Company acquired
Micronix Integrated Systems, Inc., a designer and manufacturer of analog and
mixed-signal application specific integrated circuits. $5.0 million of the
acquisition cost was allocated as in-process research and development. This
represents the appraised fair value of projects that did not have future
alternative uses.
RESTRUCTURING COSTS. In fiscal 1999, the Company recorded a restructuring
charge of $3.7 million, or $0.24 per share after income taxes, as a result of a
worldwide reduction in personnel and the closing of the wafer fabrication
facility in Wakefield, Massachussetts. See Note 10 of Notes to Consolidated
Financial Statements.
INTEREST INCOME. Interest income decreased in fiscal 1999 to $0.6 million
from $1.5 million in fiscal 1998 on lower cash balances, primarily as the result
of the acquisition of Clare-Micronix. Interest income was derived from the
short-term investment of the Company's cash in both commercial paper and tax
exempt variable rate municipal bonds.
INTEREST EXPENSE. Interest expense of $0.2 million in fiscal 1999 was flat
as compared to fiscal 1998.
16
OTHER INCOME (EXPENSE), NET. Other income in fiscal 1999 was primarily
comprised of net foreign currency exchange transaction gains offset by other
expenses. In fiscal 1998, other expense was primarily comprised of net foreign
currency exchange transaction losses offset by other income.
INCOME TAXES. The Company recorded no provision for income taxes due to the
net operating loss position, partially offset by non-deductible in-process
research and development and goodwill amortization associated with the
acquisition of Clare-Micronix. The provision for income taxes in fiscal 1998
totaled, $4.9 million, a 37% effective rate. The Company's effective income tax
rate in 1998 is less than the combined federal, state and foreign tax rates due
primarily to utilization of state tax credits and investment income derived from
tax exempt securities. See Note 13 of Notes to Consolidated Financial
Statements.
At March 31, 1999, the Company had net operating loss carryforwards in the
United States and Taiwan of approximately $4.0 million. The Company also had
capital loss carryforwards of approximately $25.0 million in the United States.
The Company's ability to use its United States net operating loss carryforwards
against taxable income is subject to limitations under Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"), due to the change in
ownership of the Company in 1989. The Company's ability to use its capital loss
carryforwards is subject to its ability to generate future capital gains to
offset these losses. Accordingly, the Company has not benefited all of its net
operating and capital loss carryforwards. See Note 13 of Notes to Consolidated
Financial Statements.
FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997
NET SALES. In fiscal 1998, net sales increased to $156.3 million compared
to $128.2 million in fiscal 1997, an increase of 21.9%. Sales volume of the
Company's semiconductor products increased by 16.2%. Electromagnetic and other
products increased 27%.
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 believes
that the delay in adoption of a standard for 56 Kbps modem technology by the
International Telecommunications Union has slowed the potential growth of the
modem market place as customers postponed buying decisions awaiting a
finalization of the standard.
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 is currently
expanding capacity in this operation. Another area of growth in the
electromagnetic products have been in the C.P. Clare Remtech Division which
provides application specific design and manufacturing services for magnetic
components to various industries.
Net sales by segment were as follows:
FISCAL YEAR ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
(IN MILLIONS)
Semiconductor products....................................................... $ 60.0 $ 69.7
Electromagnetic and other products........................................... 68.2 86.6
Net sales to customers located outside the United States (primarily Europe
and Asia) increased 36.3% in fiscal 1998 to $66.4 million from $48.7 million in
fiscal 1997, primarily due to increased demand in the Far East and Europe. Net
sales to customers in Europe represented 29.6% of the Company's net sales for
fiscal 1998 and increased 46.7% in local currencies and 28.1% in U.S. dollars
17
compared to the prior year and was impacted by a significant shifting of
production by a key customer from the U.S. to Europe. Net sales to customers in
Asia represented 12.8% of the Company's net sales for fiscal 1998 and increased
39.8% in local currencies and 61.5% in U.S. dollars compared to the prior year.
The Company expects that foreign sales in the current year will continue to
account for a substantial portion of product sales. Continued economic and
currency related uncertainties in a number of foreign countries, especially in
Asia, could reduce the Company's sales to these markets. 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 31.3% in fiscal 1998 from 33.2% in fiscal 1997. The decrease in
gross profit was primarily due to start-up costs related to the new
semiconductor wafer fabrication facility and the impact of the strengthening
U.S. dollar on the Company's international sales, mostly in Europe.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (SG&A). SG&A expenses of $28.3
million in fiscal 1998 were flat as compared to fiscal 1997, and decreased as a
percentage of net sales to 18% in fiscal 1998 from 22.1% in fiscal 1997. The
largest single component of the fiscal 1997 expense was a non-recurring,
environmental charge of $2.1 million. Excluding this non-recurring charge, SG&A
expense would have increased to $28.3 million in fiscal 1998 from $26.2 million,
and decreased as a percentage of net sales to 18% in fiscal 1998 from 20.4% in
fiscal 1997. After excluding this charge, the dollar increase in SG&A spending
of $2.1 million in fiscal 1998 primarily relates to increase selling and
marketing costs associated with increased sales volume.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased in fiscal 1998 to $8.9 million from $6.5 million in fiscal 1997 and
increased as a percentage of net sales to 5.7% in fiscal 1998 from 5.1% in
fiscal 1997, as a result of increased investments in new product development
programs, primarily for semiconductor products. The Company expects to maintain
its current rate of research and development spending as current R&D programs
are continued, especially at the Company's new semiconductor facility in
Beverly, Massachusetts.
RESTRUCTURING COSTS. In fiscal 1997, the Company recorded a restructuring
charge of $14.3 million, or $1.42 per share after income taxes, to restructure
operations primarily in the Company's reed relay business. Restructuring costs
include costs associated with the sale of the Tongeren Manufacturing Company
(TMC), workforce reductions and worldwide facilities realignments. The sale of
TMC was consummated in January 1997. The costs associated with the sale of TMC
were primarily the write-down of the Company's investment in its foreign
subsidiary and included other Company costs associated with transfer of the
facility. Workforce reduction costs include severance costs related to
involuntary terminations. See Note 10 of Notes to Consolidated Financial
Statements.
INTEREST INCOME. Interest income decreased in fiscal 1998 to $1.5 million
from $1.6 million in fiscal 1997 due to a lower cash balance. Interest income
was derived from the short-term investment of the Company's cash in both
commercial paper and tax exempt variable rate municipal bonds.
INTEREST EXPENSE. Interest expense decreased in fiscal 1998 to $0.2 million
from $0.5 million in fiscal 1997. This decrease was primarily the result of the
Company's further paydown of its remaining long-term debt during fiscal 1998.
OTHER INCOME (EXPENSE), NET. Other income in fiscal 1998 was primarily
comprised of net foreign currency exchange transaction gains offset by other
expenses. In fiscal 1997, other expense was primarily comprised of net foreign
currency exchange transaction losses offset by other income.
18
INCOME TAXES. Income tax expense increased to $4.9 million in fiscal 1998,
a 37% effective tax rate, from $1.5 million in fiscal 1997, a 26.9% effective
tax rate. The Company's effective income tax rate in 1998 is less than the
combined federal, state and foreign tax rates due primarily to utilization of
state tax credit and investment income derived from tax-exempt securities. In
fiscal 1997, the Company incurred a net operating loss before income taxes.
However, the Company did not record a benefit for income taxes in fiscal 1997
because the Company anticipated it would not be able to fully utilize the losses
associated with the restructuring. See Note 13 of Notes to Consolidated
Financial Statements.
At March 31, 1998, the Company had net operating loss carry forwards in the
United States and Taiwan of approximately $9.2 million. The Company also had
capital loss carry forwards of approximately $25.0 million in the United States.
The Company's ability to use its United States net operating loss carry forwards
against taxable income is subject to limitations under Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"), due to the change in
ownership of the Company in 1989. The Company's ability to use its capital loss
carry forwards is subject to its ability to generate future capital gains to
offset these losses. Accordingly, the Company has not benefited all of its net
operating and capital loss carry forwards. See Note 12 of Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1999, as well as fiscal 1998, the Company funded its operations
from cash flows generated from operations, and from the use of cash, cash
equivalents and investments.
During the year ended March 31, 1999, the Company's cash, cash equivalents
and investments decreased by $18.6 million, as a result of costs generated from
the acquisition of Clare-Micronix ($16.0 million) and capital expenditures
($10.8 million), operations of $8.8 million. Financing activities used $0.5
million of cash during this period, primarily through employee purchases of
stock and proceeds from exercise of options and warrants, offset by $0.8 million
of payments of long-term debt and capital lease obligations.
The Company maintains a $15.0 million unsecured committed revolving credit
facility. Interest on loans is based on either the bank's base rate or the
London Interbank Offered Rate (LIBOR) plus a spread ranging from 0.50% to 1.50%,
based on Company performance. Although the Company has had no borrowings under
this credit facility, the interest rate on borrowings would have been 5.94% at
March 31, 1999.
The Company also maintains a $10.0 million operating lease line, to be used
primarily for the financing of production and MIS equipment. As of March 31,
1999, outstanding lease obligations against this line totaled $3.0 million.
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 as needed. There
can be no assurance that this policy will eliminate all currency exposure.
During the year ended March 31, 1999 and 1998, the Company entered into several
forward contracts to cover its exposure under trade transactions.
The Company believes that cash generated from operations, cash, cash
equivalents and investments and amounts available under its credit agreement and
operating lease facility will be sufficient to satisfy its working capital needs
and planned capital expenditures for the foreseeable future. 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.
19
CURRENT EVENT
The Company has retained Needham & Company, Inc. as its investment bankers
to explore a potential sale of its Electromagnetic Group operations, principally
located in Mexico. The Company recently executed an exclusivity agreement with
one party interested in a potential purchase of such operations.
EFFECT OF INFLATION
The Company does not believe that inflation has had any material effect on
the Company's business over the past three years.
YEAR 2000 ISSUE
COMPANY'S INTERNAL SYSTEMS: 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 at its FY1999 fiscal year end.
The Company has implemented 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 Year 2000 compliant. To date,
approximately 2,500 hours of employee time has been devoted to, and
approximately $3.0 million has been expended on systems upgrades directly
relating to the implementation. Worldwide Customer Service (order entry,
shipping and finished goods inventory), financials (accounts payable and general
ledger), and circuits manufacturing (planning, purchasing and inventory) have
been transitioned to the new system.
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 final steps of C.P. Clare's ERP
projects are the transition of the manufacturing planning systems in its Mexican
facilities to the Manufacturing Information System's MISys applications and
Computer Associate's CA-Accpac product. 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. Additionally, the Company's
own Y2K testing of the ERP system will be completed by July 1, 1999.
THIRD PARTY RELATIONSHIPS: 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
taken several steps in this review, including: evaluating all systems and
equipment by site; sending letters to all major vendors assessing their Year
2000 compliance status; and is in the process of making upgrades to systems or
equipment, where applicable. The Company is continuing this effort across all
Company locations. To date, the Company has received written assurances from
over 80% of our significant vendors that they are Year 2000 compliant.
COMPANY PRODUCTS. The Company's products will not be impacted by the Year
2000 problem, since they are not date-sensitive devices. 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,
20
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. The Company believes the most reasonably likely worst
case scenario would occur if a shutdown of the Company's operations at
individual facilities occurred 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 2000. 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 within the meaning
of the Year 2000 Information and Readiness Disclosure Act of 1998.
NEW ACCOUNTING STANDARDS
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
will not have a material impact on the Company's consolidated financial position
or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized in
earnings currently, unless specific hedge accounting criteria are met. Special
accounting or qualifying hedges allows derivative gains and losses to offset
related results on the hedged item in the income statement, and require that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
SFAS No. 133 is effective for the fiscal years beginning after June 15,
1999. A Company may also implement the SFAS No. 133 as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must
be applied to (a) derivative instruments and certain derivative instruments
embedded in hybrid contracts that were issued, acquired or substantially
modified after December 31, 1997 (and, at the Company's election, before January
1, 1998). The Company believes that the adoption of SFAS No. 133 will not have a
material effect on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PRIMARY MARKET RISK EXPOSURES. The Company's primary market risk exposures
are in the areas of interest rate risk and foreign currency exchange rate risk.
The Company's primary interest rate risk would be related to borrowings under
its Revolving Credit Agreement. The interest rate on those borrowings fluctuates
with changes in short-term borrowing rates. There were no borrowings from the
Company's Revolving Credit Facility during FY99 and the line is currently
unused.
The Company is also exposed to currency exchange rate fluctuations as they
pertain to its operations in Europe. Operations in Europe were denominated in
Belgium Francs through March 31, 1999. The Company hedged its currency exposure
by entering in forward exchange contracts. The Company has denominated its
Europe operations in Euro, effective April 1, 1999. The exchange rate between
the U.S. dollar and Euro has fluctuated since the Euro's inception January 1,
1999. The Company has not engaged in currency hedging activities since April 1,
1999 and attempts to minimize exchange risk by converting excess Euro funds to
U.S. dollars as often as practicable.
21
The Company's does operate a maquiladora in Guadalajara, Mexico. Some of the
expenses of this facility are denominated in Mexican pesos. Expenses denominated
in Mexican pesos include local salaries, rents, utilities and some operating
supplies. The Company has not engaged in currency hedging activities related to
the Mexican peso and attempts to minimize exchange risk by funding the
operational expenses on a weekly basis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth at the end of this Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Incorporated herein by reference to the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the end of the year covered by this Form 10-K with respect to its
Annual Meeting of Stockholders to be held on September 22, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the end of the year covered by this Form 10-K with respect to its
Annual Meeting of Stockholders to be held on September 22, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the end of the year covered by this Form 10-K with respect to its
Annual Meeting of Stockholders to be held on September 22, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the end of the year covered by this Form 10-K with respect to its
Annual Meeting of Stockholders to be held on September 22, 1999.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statement and Financial Statement Schedule.
The combined financial statements and financial statement schedule of the
Company and its subsidiaries are set forth at the end of this Form 10-K.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
EXHIBIT NO. TITLE
- ----------- -----------------------------------------------------------------------------------------------------
2.1 Certificate of Ownership and Merger merging Clare Overseas Europe I, Inc. into C.P. Clare Corporation
(7)
2.2 Certificate of Ownership and Merger merging Clare Overseas Europe II, Inc. into C.P. Clare
Corporation (7)
2.3 Certificate of Ownership and Merger merging Clare Overseas Europe III, Inc. into C.P. Clare
Corporation (7)
2.4 Certificate of Ownership and Merger merging Clare Overseas America, Inc. into C.P. Clare Corporation
(7).
2.5 Agreement and Plan of Merger by and among C.P. Clare Corporation, Clare Micronix Integrated Systems,
Inc., Micronix Integrated Systems, Inc., Dennis Cocco and the Principal Stockholders of the Company
(as such term is defined therein) dated as of July 6, 1998(9).
3.1 Amended and Restated Articles of Organization of the Registrant (2).
3.2 Certificate of Vote of Directors Establishing a Series of A Class of Stock (7)
3.3 Amended and Restated By-laws of the Registrant (1)
4.1 Specimen Certificate for shares of Common Stock, $.01 par value, of the Registrant (1)
4.2 Shareholder Rights Agreement, dated April 29, 1996, between C.P. Clare Corporation and State Street
Bank and Trust Company, as Rights Agent (3)
10.1 Termination Agreement dated April 1, 1995(1)
10.2 Amended and Restated Multicurrency Credit Agreement by and among the Registrant, C.P. Clare N.V.,
Bank of America National Trust and Savings Association, as Agent and the Other Financial Institutions
Party thereto dated March 6, 1998*
10.3 Revolving Note in the amount of $20,000,000 made by the Registrant and C.P. Clare N.V. in favor of
the Bank of America National Trust and Savings Association dated March 6, 1998 pursuant to that
certain Amended and Restated Multicurrency Credit Agreement of even date*
10.4 Revolving Note in the amount of $20,000,000 made by the Registrant and C.P. Clare N.V. in favor
BankBoston, N.A. dated March 6, 1998 pursuant to that certain Amended and Restated Multicurrency
Credit Agreement of even date*
10.6 Negative Pledge Agreement by certain subsidiaries to Bank of America National Trust and Savings
Association dated September 11, 1995 pursuant to that certain Multicurrency Credit Agreement of even
date(2)
23
EXHIBIT NO. TITLE
- ----------- -----------------------------------------------------------------------------------------------------
10.7 Reaffirmation of guaranties and Negative Pledge Agreements by certain subsidiaries to Bank of America
National Trust and Savings Association dated March 6, 1998, pursuant to that certain Amended and
Restated Multicurrency Credit Agreement of even date*
10.8 C.P. Clare Corporation Voluntary Deferred Compensation Plan for Key Employees effective as of April
1, 1998*
10.12 Lease Agreement by and between Fleet Credit Corporation and Registrant dated July 18, 1995, as
amended October 10, 1995(2)
10.13 Distributor Agreement between the Registrant and Bell Industries, Inc. dated July 17, 1978(1)
10.14 Authorized Distributor Agreement between the Registrant and Future Electronics, Inc. dated October 6,
1989(1)
10.15 Authorized Distributor Agreement between the Registrant and Marshall Industries dated September 15,
1989(1)
10.16 Authorized Distributor Agreement between the Registrant and Newark Electronics dated July 14, 1989(1)
10.17 Authorized Distributor Agreement between the Registrant and Pioneer Technologies Group dated November
16, 1989(1)
10.18 Authorized Distributor Agreement between the Registrant and Powell Electronics, Inc. dated June 28,
1989(1)
10.19 Agreement between the Registrant and American Telephone & Telegraph Company dated November 1, 1994(1)
10.20 Amendment and Reaffirmation of Subordination Agreement by and among AT&T Microelectronics, the
Registrant and C.P. Clare International N.V. dated September 5, 1995(2)
10.23 Supply Agreement between the Registrant and M/A-COM, Inc. dated March 1, 1994 as amended by Amendment
dated February 3, 1995(1)
10.24 Agreement between the Registrant and Sumitomo Sitix Silicon, Inc. effective April 1, 1995(1)
10.25 Purchase Order between the Registrant and Buckbee Mears dated December 21, 1994(1)
10.26 Purchase Order between the Registrant and Engelhard Corporation dated October 12, 1994(1)
10.27 Purchase Order dated February 23, 1995, Purchase Requisition dated February 16, 1995 and Purchase
Order Addenda dated January 16, 1995 and February 16, 1995 all between the Registrant and Products
Engineering Corporation(1)
10.28 Purchase Order, Requisition Order and Addendum between the Registrant and A Square Systems, Inc. all
dated June 16, 1995(1)
10.29 Purchase Orders between the Registrant and TKC Corporation dated January 31, 1995 and May 19, 1995
with Supplemental Brochure Requisitions or Addenda(1)
10.30 Supply Agreement between the Registrant and Sipex Corporation dated December 21, 1992(1)
10.31 Purchase Order between the Registrant and Becton-Dickinson & Co. dated October 21, 1994(1)
24
EXHIBIT NO. TITLE
- ----------- -----------------------------------------------------------------------------------------------------
10.32 Technology and Equipment Transfer and Supply Agreement between the Registrant, Clare Europe, N.V. and
American Telephone and Telegraph Company dated January 23, 1989 as supplemented by Supplemental
Agreement effective June 1, 1990, Second Supplemental Agreement effective January 23, 1991, Technical
Assistance Agreement effective January 23, 1989, Supply Contract between the Registrant and AT&T
Technologies, Inc. effective June 1, 1989, as amended by revised Attachment A dated March 1, 1993,
and Subordination Agreement between the Registrant, American Telephone and Telegraph Company,
Continental Bank N.A., Massachusetts Mutual Life Insurance Company, MassMutual Corporate Investors
and MassMutual Participation Investors effective May 26, 1989(1)
10.32.1 Letter of Assignment and Promissory Note dated as of January 17, 1997 with respect to that certain
Technology and Equipment Transfer and Supply Agreement between the Registrant, Clare Europe, N.V. and
American Telephone and Telegraph Company dated January 23, 1989(6)
10.34 Asset Purchase Agreement between C.P. Clare International N.V. and Hamlin, Incorporated dated
November 14, 1994(1)
10.35 Commercial Lease between the Registrant and Rosner and Associates for 45 Progress Parkway, St. Louis,
Missouri dated September 23, 1991, as amended November 25, 1992(1)
10.36 Standard Industrial Lease between General Instrument Corporation and Davis Properties for 48 Progress
Parkway, St. Louis, Missouri dated December 15, 1987(1)
10.37 Lease between the Registrant and the Trustees of Elandzee Trust for 430 Bedford Street, Lexington, MA
dated December 1, 1994(1)
10.37.1 First Amendment to Lease between the Registrant and the Trustees of Elandzee Trust for 430 Bedford
Street, Lexington, MA dated July 18, 1995 (2)
10.38 Subordination, Nondisturbance and Attornment Agreement between the Registrant, Mortimer B. Zuckerman
and Edward H. Linde, Trustees of the Elandzee Trust and The Sakura Bank, Limited, New York Branch
dated December 1, 1994(1)
10.40 Office Lease between the Registrant and Great Lakes REIT, Inc. for 601 Campus Drive, Suite B,
Arlington Heights, Illinois dated December 27, 1993(1)
10.41 First Amendment to Lease Agreement between the Registrant and Great Lakes REIT, Inc. for 601 Campus
Drive, Suite B, Arlington Heights, Illinois dated August 3, 1995(2)
10.42 Lease Agreement between C.P. Clare Mexicana S.A. de C.V. and Jose Maria Gonzalez Martin for 1610
Tlaquepaque Boulevard, Guadalajara, Mexico dated August 25, 1990 (in Spanish with English summary)(1)
10.47 Cleanup Agreement between the Registrant and General Instrument Corporation dated May 1, 1995(1)
10.49 Employment Agreement between the Registrant and Arthur R. Buckland dated September 15, 1993, as
amended by Amendment dated March 20, 1995(1)
10.54 Amended and Restated Employment Agreement between the Company and Michael J. Ferrantino dated as of
January 31, 1997(6)
10.56 Amended and Restated Employment Agreement between the Company and Harsh Koppula dated as of January
31, 1997(6)
10.58 Termination Agreement between the Registrant and Andrew S. Kariotis dated April 26, 1995(1)
25
EXHIBIT NO. TITLE
- ----------- -----------------------------------------------------------------------------------------------------
10.59 1995 Stock Option and Incentive Plan, as amended and restated as of September 29, 1996(2)
10.60 1995 Employee Stock Purchase Plan, as amended and restated as of October 23, 1995(2)
10.61 C.P. Clare Corporation Key Employee Incentive Plan effective April 1, 1995, as amended and restated
as of October 2, 1995(2)
10.62 Amended and Restated Registration Agreement dated April 21, 1995(1) 10.63The C.P. Clare Corporation
Savings Plan (1)
10.64 Lease Agreement between C.P. Clare Mexicana S.A. de C.V. and Sra. Ma. Teresa Aranguren dated
November, 1995(7)
10.65 Form of Letter Agreement by and between the Registrant and James Shiring dated October 25, 1995
10.66 Lease Agreement dated as of October 31, 1995, by and between Thomas J. Flatley, d/b/a The Flatley
Company and C.P. Clare Corporation (4)
10.67 Employment Agreement between the Company and Richard Morgan dated as of April 8, 1996(6)
10.68 Employment Agreement between the Company and William Reed dated as of August 26, 1996(6)
10.69 Stock Purchase Agreement dated as of December 19, 1996, among the Company, Gunther GmbH, Tongeren
Manufacturing Company, and W. Gunther, GmbH**(6)
10.70 Supply Agreement dated as of January 17, 1997 among the Company, Gunther GmbH, W. Gunther GmbH, and
Robert Romano**(6)
10.71 Amended and Restated Employment Agreement between the Company and Thomas B. Sager, dated September
16, 1997(8).
10.71.1 Employment Agreement between the Company and Dennis Cocco dated July 6, 1998(9).
10.72 Non-Competition Agreement between the Company and Dennis Cocco dated July 6, 1998(9).
10.73 C.P. Clare Non-Qualified Stock Option Plan, pursuant to which options were granted to Dennis Cocco,
dated July 6, 1998(9).
10.74 Employment Agreement between the Company and Dave Adams dated July 6, 1998(9).
10.75 Non-Competition Agreement between the Company and Dave Adams dated July 6, 1998(9).
10.76 First Amendment to Amended and Restated Employment Agreement between the Company and Thomas B. Sager
dated November 23, 1998.*
10.77 First Amendment to Employment Agreement between the Company and Richard Morgan dated November 23,
1998.*
10.78 Employment Agreement between the Company and Harry Andersen dated December 22, 1998.*
10.79 Loan Agreement between the Company and Bank Boston, N.A dated March 1, 1999.*
10.80 Form of Revolving Credit Note, Principal Amount $15,000,000 by the Company to Bank Boston, N.A. dated
March 1, 1999.*
10.81 Pledge Agreement between the Company and Bank Boston, N.A. dated March 1, 1999.*
21 Subsidiaries of the Registrant*
26
EXHIBIT NO. TITLE
- ----------- -----------------------------------------------------------------------------------------------------
23 Consent of Arthur Andersen LLP.*
27 Financial Data Schedule (Edgar)*
- ------------------------
* Filed herewith
** Confidential treatment requested for portions of these documents
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(File No. 33-91972) and incorporated herein by reference thereto.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(File No. 33-98646) and incorporated herein by reference thereto.
(3) Incorporated by reference to Current Report on Form 8-K filed with the
Commission on April 30, 1996.
(4) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended December 31, 1995 and incorporated herein by
reference thereto.
(5) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended September 29, 1996 and incorporated herein by
reference thereto.
(6) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended December 29, 1996 and incorporated herein by
reference thereto.
(7) Filed as an exhibit to the Registrants Annual Report on Form 10-K for the
year ended March 31, 1997 and incorporated by reference thereto.
(8) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended September 28, 1997 and incorporated herein by
reference thereto.
(9) Filed as an exhibit to the Registrant's Report on Form 8-K filed with the
Commission on July 16, 1998 and incorporated by reference thereto.
27
C.P. CLARE CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS SCHEDULE
FORM 10-K
PAGE NO.
---------------
Report of Independent Public Accountants.............................................................. 29
Consolidated Balance Sheets--March 31, 1998 and 1999.................................................. 30
Consolidated Statements of Operations for the years ended March 31, 1997, 1998 and 1999............... 31
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1997, 1998 and 1999..... 32
Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1998 and 1999............... 33
Notes to Consolidated Financial Statements............................................................ 34
Report of Independent Public Accountants on Schedule II............................................... 58
Schedule II--Valuation and Qualifying Accounts........................................................ 59
28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To C.P. Clare Corporation:
We have audited the accompanying consolidated balance sheets of C.P. Clare
Corporation (a Massachusetts corporation) and subsidiaries as of March 31, 1998
and 1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of C.P. Clare Corporation and
subsidiaries as of March 31, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 29, 1999
29
C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
MARCH 31,
--------------------
1998 1999
--------- ---------
ASSETS
Current assets:
Cash, cash equivalents and investments..................................................... $ 26,364 $ 7,796
Accounts receivable, less allowance of $1,177 and $1,365, respectively..................... 21,383 18,672
Inventories................................................................................ 22,083 23,842
Other current assets....................................................................... 422 2,932
Deferred income taxes...................................................................... 2,700 4,036
--------- ---------
Total current assets..................................................................... 72,952 57,278
Property, plant and equipment, net........................................................... 38,777 40,275
Other assets:
Intangibles, net of accumulated amortization of $517 and $1,526, respectively.............. 128 11,244
Deferred income taxes...................................................................... 869 --
Other...................................................................................... 1,460 418
--------- ---------
$ 114,186 $ 109,215
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations............................ $ 666 $ 248
Accounts payable........................................................................... 12,464 11,805
Accrued liabilities........................................................................ 9,899 10,175
--------- ---------
Total current liabilities................................................................ 23,029 22,228
Long-term capital lease obligations, net of current portion.................................. -- 282
Deferred income taxes........................................................................ -- 510
--------- ---------
Total liabilities........................................................................ 23,029 23,020
Commitments and contingencies (Note 8)
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: 9,356,452 shares and 9,454,339 shares, respectively.............. 94 95
Additional paid-in capital................................................................. 95,653 96,228
Deferred compensation...................................................................... (154) (62)
Accumulated deficit........................................................................ (3,390) (8,973)
Accumulated other comprehensive income (loss).............................................. (1,046) (1,093)
--------- ---------
Total stockholders' equity............................................................... 91,157 86,195
--------- ---------
$ 114,186 $ 109,215
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
30
C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED MARCH 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
Net sales............................................................... $ 128,161 $ 156,271 $ 143,913
Cost of sales........................................................... 85,603 107,427 102,876
------------ ------------ ------------
Gross profit.......................................................... 42,558 48,844 41,037
Operating expenses:
Selling, general and administrative................................... 28,330 28,157 28,191
Research and development.............................................. 6,543 8,869 9,678
In-Process research & development..................................... -- -- 5,000
Restructuring costs................................................... 14,250 -- 3,700
------------ ------------ ------------
Operating (loss) income................................................. (6,565) 11,818 (5,532)
Interest income......................................................... 1,578 1,454 571
Interest expense........................................................ (452) (215) (232)
Other (expense) income, net............................................. (8) 135 (390)
------------ ------------ ------------
(Loss) income before provision for income taxes......................... (5,447) 13,192 (5,583)
Provision for income taxes.............................................. 1,464 4,880 --
------------ ------------ ------------
Net (loss) income..................................................... $ (6,911) $ 8,312 $ (5,583)
------------ ------------ ------------
------------ ------------ ------------
Basic (loss) earnings per share......................................... $ (0.77) $ 0.90 $ (0.59)
------------ ------------ ------------
------------ ------------ ------------
Diluted (loss) earnings per share....................................... $ (0.77) $ 0.83 $ (0.59)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of common shares outstanding:
------------ ------------ ------------
------------ ------------ ------------
Basic................................................................... 8,991,520 9,280,424 9,398,144
------------ ------------ ------------
------------ ------------ ------------
Diluted................................................................. 8,991,520 9,967,366 9,398,144
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
31
C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1998, 1999
(DOLLARS IN THOUSANDS)
COMMON STOCK
----------------
NUMBER $.01 ADDITIONAL
OF PAR PAID-IN DEFERRED ACCUMULATED
SHARES VALUE CAPITAL COMPENSATION DEFICIT
--------- ----- ---------- ------------ -----------
Balance, March 31, 1996.......................................... 8,707,399 87 91,540 (607) (4,791)
Exercise of stock options........................................ 369,829 4 1,336 -- --
Issuance of common stock under the Employee Stock Purchase
Plan........................................................... 32,276 -- 468 -- --
Exercise of warrants............................................. 67,153 1 44 -- --
Tax benefit of disqualifying disposition of incentive stock
options........................................................ -- -- 727 -- --
Net loss......................................................... -- -- -- -- (6,911)
Translation adjustment........................................... -- -- -- -- --
Amortization of deferred compensation............................ -- -- -- 198 --
Comprehensive net loss...........................................
--------- ----- ---------- --- -----------
Balance, March 31, 1997.......................................... 9,176,657 92 94,115 (409) (11,702)
Exercise of stock options........................................ 132,599 2 904 -- --
Common stock issued for services rendered........................ 2,000 -- 50 -- --
Issuance of common stock under the Employee Stock Purchase
Plan........................................................... 30,837 -- 290 -- --
Exercise of warrants............................................. 14,359 -- 27 -- --
Tax benefit of disqualifying disposition of incentive stock
options........................................................ -- -- 267 -- --
Net income....................................................... -- -- -- -- 8,312
Translation adjustment........................................... -- -- -- -- --
Amortization of deferred compensation............................ -- -- -- 255 --
Comprehensive net income.........................................
--------- ----- ---------- --- -----------
Balance, March 31, 1998.......................................... 9,356,452 94 95,653 (154) (3,390)
Exercise of stock options........................................ 27,250 129 -- --
Common stock issued for services rendered........................ 28,214 -- 207 -- --
Issuance of common stock under the Employee Stock Purchase
Plan........................................................... 41,123 1 226 -- --
Exercise of warrants............................................. 1,300 -- 2 -- --
Tax benefit of disqualifying disposition of incentive stock
options........................................................ -- -- 11 -- --
Net loss......................................................... -- -- -- -- (5,583)
Translation adjustment........................................... -- -- -- -- --
Amortization of deferred compensation............................ -- -- -- 92 --
Comprehensive net loss...........................................
--------- ----- ---------- --- -----------
Balance, March 31, 1999.......................................... 9,454,339 $95 $96,228 $(62) $(8,973)
--------- ----- ---------- --- -----------
--------- ----- ---------- --- -----------
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
INCOME STOCKHOLDERS' COMPREHENSIVE
(LOSS) EQUITY INCOME (LOSS)
---------- ------------- -------------
Balance, March 31, 1996.......................................... 383 86,612
Exercise of stock options........................................ -- 1,340
Issuance of common stock under the Employee Stock Purchase
Plan........................................................... -- 468
Exercise of warrants............................................. -- 45
Tax benefit of disqualifying disposition of incentive stock
options........................................................ -- 727
Net loss......................................................... -- (6,911) (6,911)
Translation adjustment........................................... (1,213) (1,213) (1,213)
Amortization of deferred compensation............................ -- 198
------
Comprehensive net loss........................................... (8,124)
---------- ------------- ------
Balance, March 31, 1997.......................................... (830) 81,266
Exercise of stock options........................................ -- 906
Common stock issued for services rendered........................ -- 50
Issuance of common stock under the Employee Stock Purchase
Plan........................................................... -- 290
Exercise of warrants............................................. -- 27
Tax benefit of disqualifying disposition of incentive stock
options........................................................ -- 267
Net income....................................................... -- 8,312 8,312
Translation adjustment........................................... (216) (216) (216)
Amortization of deferred compensation............................ -- 255
------
Comprehensive net income......................................... 8,096
---------- ------------- ------
Balance, March 31, 1998.......................................... (1,046) 91,157
Exercise of stock options........................................ -- 129
Common stock issued for services rendered........................ -- 207
Issuance of common stock under the Employee Stock Purchase
Plan........................................................... -- 227
Exercise of warrants............................................. -- 2
Tax benefit of disqualifying disposition of incentive stock
options........................................................ -- 11
Net loss......................................................... -- (5,583) (5,583)
Translation adjustment........................................... (47) (47) (47)
Amortization of deferred compensation............................ -- 92
------
Comprehensive net loss........................................... (5,630)
---------- ------------- ------
Balance, March 31, 1999.......................................... $(1,093) $86,195
---------- -------------
---------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
32
C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED MARCH 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................................................... $ (6,911) $ 8,312 $ (5,583)
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Loss on sale of European manufacturing operation.................................. 5,069 -- --
Depreciation and amortization..................................................... 4,805 5,341 9,488
Non-cash portion of restructuring charge.......................................... -- -- 1,015
Write-off of acquired in-process R&D.............................................. -- -- 5,000
(Benefit) provision for deferred income taxes..................................... (1,587) 356 (915)
Compensation expense associated with stock options................................ 198 255 92
Common stock issued for services rendered......................................... -- 50 207
Provision for environmental costs................................................. 2,050 925 --
Writedown of property, plant and equipment........................................ -- -- 400
Changes in assets and liabilities, net of effect from acquisition in 1999 and
disposition in 1997:
Accounts receivable............................................................. 2,059 (4,239) 1,829
Inventories..................................................................... (4,872) (2,083) (1,702)
Other current assets............................................................ 750 1,373 (835)
Accounts payable................................................................ 5,617 10 (661)
Accrued expenses and income taxes payable....................................... (3,150) (7,505) 440
--------- --------- ---------
Net cash provided by operating activities..................................... 4,028 2,795 8,775
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment........................................... (15,047) (15,262) (10,837)
Purchase of Micronix, net of cash acquired.......................................... -- -- (16,012)
--------- --------- ---------
Net cash used in investing activities......................................... (15,047) (15,262) (26,849)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on lines of credit..................................................... (1,199) -- --
Net proceeds from issuance of common stock.......................................... 468 290 227
Proceeds from exercise of options and warrants...................................... 1,385 933 131
Payments of principal on long-term debt............................................. (2,040) (371) (666)
Payments on capital lease obligations............................................... -- -- (154)
Tax benefit of disqualifying disposition of incentive stock options................. 727 267 11
--------- --------- ---------
Net cash (used in) provided by financing activities........................... (659) 1,119 (451)
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND INVESTMENTS.................. 26 282 (43)
--------- --------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS AND INVESTMENTS........................... (11,652) (11,066) (18,568)
Cash, cash equivalents and investments, beginning of year........................... 49,082 37,430 26,364
--------- --------- ---------
Cash, cash equivalents and investments, end of year................................. $ 37,430 $ 26,364 $ 7,796
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO ACQUISITIONS:
During fiscal 1999, the Company acquired Micronix Integrated Systems, Inc. as
described in Note 9. This acquisition is summarized as follows:
Fair value of assets acquired, excluding cash....................................... $ -- $ -- $ 20,825
Payments in connection with the acquisition, net of cash acquired................... -- -- (16,012)
--------- --------- ---------
Liabilities assumed................................................................. $ -- $ -- $ 4,813
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
33
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1. SUMMARY OF OPERATIONS
C.P. Clare (the "Company") is a leading provider of high voltage
mixed-signal and analog semiconductor integrated packages and discrete
components, electromagnetic relays and switches, surge protection devices,
transformers and specialized electronic components to the world's foremost
manufacturers of electronic communications equipment.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of the following significant accounting policies:
(a) FISCAL PERIODS
The Company's fiscal year is comprised of either 52 or 53 weeks and ends on
the Sunday closest to March 31st each year. Fiscal years 1997, 1998 and 1999
were each 52 weeks. For convenience, the Company's fiscal year end has been
presented as March 31.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(c) CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investment instruments with
maturities of three months or less to be cash equivalents. Short-term
investments are instruments with maturities less than one year. The Company
carries its investments in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Investments at March 31, 1998 and 1999 principally consist
of overnight demand notes and short-term tax exempt commercial paper and tax
exempt variable rate municipal bonds. The Company has the option to require the
issuers of the tax exempt variable rate municipal bonds to purchase these
investments upon 7 day's notice. The Company has deemed these investments to be
available-for-sale at both March 31, 1998 and 1999 and they are carried at cost,
which approximates market value.
(d) REVENUE RECOGNITION
Revenues from product sales are recognized when the products are shipped.
Certain shipments to distributors are subject to limited right-of-return
provisions. The Company provides for estimated returns when material.
(e) EARNINGS (LOSS) PER COMMON AND COMMON SHARE EQUIVALENT
Basic earnings per share is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution of stock options and warrants
that could share in the earnings of the Company.
34
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The reconciliation of amounts used in the computation of basic and diluted
earnings (loss) per share consist of the following at March 31, 1997, 1998 and
1999:
1997 1998 1999
--------- --------- ---------
Basic weighted average shares outstanding................... 8,991,520 9,280,424 9,398,144
Weighted average common equivalent shares................... -- 686,942 --
--------- --------- ---------
Diluted weighted average shares outstanding................. 8,991,520 9,967,366 9,398,144
--------- --------- ---------
--------- --------- ---------
Securities that were not included in computing diluted earnings per share
because their effect would be antidilutive consist of the following at March 31,
1997, 1998 and 1999:
1997 1998 1999
--------- --------- ---------
Options and warrants to purchase common stock................. 1,777,626 434,750 2,468,511
--------- --------- ---------
--------- --------- ---------
(f) FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company translates the assets and liabilities of its foreign
subsidiaries at the exchange rates in effect at fiscal year-end in accordance
with SFAS No. 52, "Foreign Currency Translation". Revenues and expenses are
translated using exchange rates in effect during each period. Because Mexico and
Taiwan are considered extensions of domestic operations, the translation losses
of ($49), ($139) and ($10) recognized in fiscal years 1997, 1998 and 1999,
respectively, have been included in the accompanying consolidated statements of
operations and, accordingly, are classified as other income (expense) (see Note
14). The cumulative translation adjustment component of stockholders' equity
relates primarily to the Company's European operations.
(g) RESEARCH AND DEVELOPMENT EXPENSE
Expenditures for research and development of products and manufacturing
processes are expensed as incurred.
(h) DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF 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 hedges its net
intercompany trade balance (Belgian francs) which relates to trade sales to
third party customers in the ordinary course of business. At March 31, 1999, the
Company had one outstanding Belgian franc ("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. At March 31, 1998, the Company had
thirteen outstanding 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. At March 31, 1998, the Company also had one outstanding Mexican
peso ("MXP") forward contract amounting to 2,160 MXP or $255. The Mexican peso
forward contract had no deferred gain or loss.
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments",
requires disclosure of an estimate of the fair value of certain financial
instruments. The fair value of financial instruments pursuant to SFAS No. 107
approximated their carrying values at March 31, 1998 and 1999. Fair values have
been determined through information obtained from market sources and management
estimates.
35
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and cash equivalents, short-term
investments and trade accounts receivable. The Company places its temporary cash
investments in financial institutions. The Company has not experienced
significant losses related to receivables from individual customers or groups of
customers in any specific industry or by geographic area. Due to these factors,
no additional credit risk beyond amounts provided for collection losses is
believed by management to be inherent in the Company's account receivable.
During fiscal years 1997, 1998 and 1999, one customer accounted for 17%, 14% and
13%, respectively, of the Company's net sales. During fiscal years 1998 and
1999, one customer accounted for 10% and 17%, respectively, of the Company's
accounts receivable.
(j) STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees". SFAS No. 123, establishes a fair value method of accounting for
stock-based compensation plans. The Company has adopted the disclosure only
alternative under SFAS No. 123, which requires disclosures of the pro forma
effects on earnings and earnings per share as if SFAS No. 123 had been adopted
as well as certain other information (see Note 11).
(k) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(l) NEW ACCOUNTING STANDARDS
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.
(m) COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. Comprehensive income
consists entirely of the net loss plus the Company's translation adjustment
accounts and is disclosed in the accompanying statements of stockholders'
equity.
In June 1998, the FASB issued SFAS No. 133, "Accounting For Derivative
Instruments and Hedging Activities". The statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be
36
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recorded in the balance sheet as either an asset or liability measured at fair
value. The statement requires that changes in the derivative's fair value be
recognized in earnings currently, unless specific hedge accounting criteria are
met. Special accounting or qualifying hedges allows derivative gains and losses
to offset related results on the hedged item in the income statement, and
require that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal quarters of fiscal years beginning
after June 15, 2000; the Financial Accounting Standards Board is currently
contemplating postponement of the implementation date by one year. A Company may
also implement the SFAS No. 133 as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS
No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a)
derivative instruments and certain derivative instruments embedded in hybrid
contracts that were issued, acquired or substantially modified after December
31, 1997 (and, at the Company's election, before January 1, 1998). The Company
believes that the adoption of SFAS No. 133 will not have a material effect on
its financial statements.
NOTE 3. 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 March 31, 1998 and 1999:
1998 1999
--------- ---------
Raw materials............................................................... $ 9,568 $ 10,259
Work in process............................................................. 4,835 8,227
Finished goods.............................................................. 7,680 5,356
--------- ---------
$ 22,083 $ 23,842
--------- ---------
--------- ---------
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and consist of the
following at March 31, 1998 and 1999:
ESTIMATED USEFUL
DESCRIPTION 1998 1999 LIFE
- ------------------------------------------------------ --------- --------- --------------------
Machinery and equipment............................... $ 35,800 $ 50,698 3 to 7 years
Furniture and fixtures................................ 3,000 2,820 5 to 10 years
Leasehold improvements................................ 13,271 13,951 Life of lease
Projects in process................................... 10,829 4,978
Property held for sale (Note 8)....................... 1,500 1,348
--------- ---------
64,400 73,795
Less: Accumulated depreciation and amortization....... 25,623 33,520
--------- ---------
$ 38,777 $ 40,275
--------- ---------
--------- ---------
37
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
The Company provides for depreciation and amortization using the
straight-line method by charges to operations in amounts that allocate the cost
of property, plant and equipment over their estimated useful lives as noted
above.
NOTE 5. OTHER ASSETS
The Company assesses the realizability of its intangible and other
long-lived assets in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Intangible assets consist of goodwill acquired in connection with the
acquisition of the Clare Division from General Instrument Corporation in 1989,
as well as goodwill and existing technology relating to the acquisition of
Micronix in 1998. Goodwill and existing technology are amortized on a
straight-line basis over periods ranging from 4 to 30 years.
Other assets consist of the following at March 31, 1998 and 1999:
1998 1999
--------- ---------
Existing Technology--Micronix Acquisition................................ $ -- $ 2,456
Goodwill--Micronix Acquisition........................................... -- 10,308
Less: Accumulated Amortization -- (1,520)
Other.................................................................... 1,588 418
--------- ---------
$ 1,588 $ 11,662
--------- ---------
--------- ---------
NOTE 6. ACCRUED EXPENSES
Accrued expenses consist of the following at March 31, 1998 and 1999:
1998 1999
--------- ---------
Payroll and benefits..................................................... $ 5,793 $ 3,881
Restructuring (Note 10).................................................. -- 2,152
Environmental remediation (Note 8)....................................... 1,172 922
Other.................................................................... 2,934 3,220
--------- ---------
$ 9,899 $ 10,175
--------- ---------
--------- ---------
NOTE 7. BORROWINGS AND CREDIT FACILITIES
(a) CREDIT FACILITY
The Company has a $15.0 million unsecured committed revolving credit
facility (the "Credit Facility"). Interest on 30 day loans is based on either
LIBOR plus a spread ranging from 0.50% to 1.50%, based on Company performance
(5.94% at March 31, 1999); or the higher of the latest Federal Funds rate plus
0.50% or the bank's reference rate (7.75% at March 31, 1999). There have been no
borrowings since the inception of the Credit Facility in March 1999.
38
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 7. BORROWINGS AND CREDIT FACILITIES (CONTINUED)
The Credit Facility contains certain financial covenants that require the
Company to maintain minimum tangible net worth and working capital, maintain an
interest coverage ratio, maintain a ratio of total funded debt to Earnings
before Interest, Taxes, Depreciation and Amortization, and limit the payment of
cash dividends. The Credit Facility also contains certain non-financial
covenants. The Credit Facility expires on June 30, 2001. The Company is in
compliance with all covenants as of March 31, 1999.
(b) LONG-TERM OBLIGATIONS
During fiscal year 1999 all obligations were repaid. At March 31, 1998,
long-term obligations consisted of the following:
1998
---------
Non-interest bearing note payable due to Lucent Technologies in annual principal and
interest payments of $480 through 1998 and a final payment of $720 in 1999 with
interest imputed at 12%............................................................. $ 626
Other................................................................................. 40
---------
666
Less: Current portion................................................................. 666
---------
$ --
---------
---------
(c) CAPITAL LEASES
The Company leases certain equipment under capital leases. Future minimum
lease payments under these leases as March 31, 1999 are as follows:
MARCH 31, AMOUNT
- ------------------------------------------------------------------------------------- -----------
2000................................................................................. $ 302
2001................................................................................. 171
2002................................................................................. 115
2003................................................................................. 45
2004................................................................................. 1
-----
Total Minimum lease payments......................................................... 634
Less: Amount representing interest................................................... 104
-----
Capital Lease Obligation............................................................. 530
Less: Current portion of capital lease obligations................................... 248
-----
Total................................................................................ $ 282
-----
-----
39
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 8. COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASES
The Company leases certain office and production facilities and various
equipment under operating leases expiring at various dates through September
2011.
Future minimum rent payments under these leases are as follows as of March
31, 1999:
MARCH 31, AMOUNT
- ----------------------------------------------------------------------------------- ---------
2000............................................................................... $ 4,059
2001............................................................................... 3,060
2002............................................................................... 2,629
2003............................................................................... 1,132
2004............................................................................... 940
Thereafter......................................................................... 6,121
---------
Total.............................................................................. $ 17,941
---------
---------
Total rent expense for fiscal years 1997, 1998 and 1999 was $3,401, $4,663
and $5,514, respectively.
(b) 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.
(i) UNITED STATES
In connection with the acquisition of the Clare Division of General
Instrument Corporation in 1989, the Company purchased a manufacturing facility
located in Chicago. From the acquisition date until January 1994, the Company
used this facility primarily as office space. During fiscal 1993, the Company
discovered environmental contamination at this facility and voluntarily reported
this discovery to the Illinois Environmental Protection Agency ("IEPA") and has
since been involved in discussions with the IEPA and the U.S. Environmental
Protection Agency regarding the need for remediation. The Company believes that
any environmental contamination predates the Company's acquisition of the
facility from General Instrument. The Company and General Instrument jointly
retained an independent environmental consulting firm to assess the remediation
requirements and develop a plan to voluntarily remediate this property in
accordance with federal and state law such that the property could be used for
residential purposes. Prior to commencing such voluntary remediation, the
Company
40
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
and General Instrument entered into a cost-sharing agreement; however, both
parties have reserved their rights to litigate concerning the final cost-sharing
arrangement.
During fiscal 1997, the Company and General Instrument began the remediation
at the site. The approved clean-up method produced conditions that were not
acceptable to the community. As a result, the Company determined the most likely
scenario was to remediate the property to make it useable as
industrial/commercial, rather than residential property, as originally assessed.
During the year ended March 31, 1997, the Company incurred $2,567 of
remediation costs and related expenses including a write-down of the facility to
net realizable value of $1,500, which is included on the accompanying balance
sheet as property held for sale.
During the year ended March 31, 1998, the Company incurred $301 of
remediation costs. By the end of the fiscal 1998-year, the Company completed its
industrial/commercial remediation for the Chicago facility and has subsequently
received a no further remediation letter from the IEPA.
During the year ended March 31, 1999, the Company incurred $544 of
remediation costs including an additional write-down of the facility by $400.
This resulted in a net realizable value of the facility of $939.
The Company and General Instrument continue to address contamination that
has been found on adjacent sites. Management continues to analyze the estimated
environmental remediation liability and has recorded additional amounts when
known events require.
(ii) BELGIUM
During fiscal 1997, the Company retained an independent environmental
consulting firm to assess the environmental condition of its facility located in
Tongeren, Belgium. The scope of their work was to assess potential contamination
in light of newly adopted Belgium legal requirements and develop a plan to
remediate the property if necessary. Preliminary results show certain
groundwater contamination that may have resulted from the Company's past
operations or from neighboring manufacturing companies.
In January 1997, the Company completed the sale of the Tongeren
Manufacturing Company ("TMC"). Upon the sale of TMC, the Company agreed to
indemnify Gunther GmbH (the "buyer") for up to $350 for established
environmental remediation costs, subject to certain condition and limitations.
The Company recorded this environmental remediation indemnification during
fiscal 1998.
(c) LEGAL PROCEEDINGS
In the ordinary course of business, the Company is party to various types of
litigation. The Company believes it has meritorious defenses to all claims, and
in its opinion, all litigation currently pending or threatened will not have a
material effect on the Company's financial position or results of operations.
41
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 9. ACQUISITION
On July 6, 1998, the Company acquired Micronix Integrated Systems, Inc.
("Clare-Micronix"), a designer and manufacturer of analog and mixed-signal
application specific integrated circuits. The Company paid $16,012 for the
acquisition and direct costs, net of cash acquired and assumed liabilities of
$4,813 for a total purchase price of $20,825. The acquisition was accounted for
as a purchase in accordance with Accounting Principles Board ("APB") Opinion No.
16 "Business Combinations", and accordingly, Clare-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 to the assets acquired based on
their fair values. An independent appraisal, using proven valuation procedures
and techniques, was used to determine the fair value of the purchased intangible
assets.
Acquired intangible assets include existing technologies and goodwill. These
intangible assets are being amortized over their estimated useful lives of 4 to
8 years. The purchase price allocation is as follows:
Current assets.................................................. $ 1,268
Property, plant and equipment................................... 1,118
Existing technology............................................. 2,456
Other assets.................................................... 644
Goodwill........................................................ 10,339
In-process R&D.................................................. 5,000
Liabilities assumed............................................. (4,813)
---------
$ 16,012
---------
---------
The $5,000 allocated to purchased in-process research and development
("in-process R&D") represents the appraised fair value of 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 research and
development projects. The development of these projects had not yet reached
technological feasibility, and the research and development in-process had no
alternative uses. Accordingly, these costs were expensed as of the acquisition
date.
In-process research and development value is comprised of 6 primary research
and development programs. These programs include the introduction of certain new
technologies. At the acquisition date, these programs ranged in completion from
10% to 85%. The research and development investment in the Micronix technology
made by the Company from the date of acquisition through March 31, 1999 was
$873. The Company believes it will incur additional 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 research and development 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
42
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 9. ACQUISITION (CONTINUED)
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 Clare-Micronix. This discount rate is commensurate with Clare-Micronix's
corporate maturity and the uncertainties in the economic estimates described
above.
The forecasts used by the Company in valuing in process research and
development 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.
The Company has not included pro forma information, as the results of
Micronix operations are not material to the Company.
NOTE 10. RESTRUCTURING
In fiscal 1997, the Company announced a restructuring of its operations (the
1997 restructuring), primarily in the Company's reed relay business, and
recorded a restructuring charge of $14,250. The 1997 restructuring met the
criteria set forth in Emerging Issues Task Force (EITF) Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs in a Restructuring)". The 1997
restructuring charge included costs associated with the sale of the TMC,
workforce reductions and worldwide facilities realignments. The components of
the 1997 restructuring are as follows:
Loss on disposition of assets, including TMC.................... $ 7,600
Severance benefits and associated legal costs................... 4,550
Lease termination and relocation costs.......................... 1,100
Other........................................................... 1,000
---------
Total......................................................... $ 14,250
---------
---------
The sale of TMC was consummated in January 1997. The Company sold for
nominal value all of the stock of TMC. Pro forma information reflecting the sale
of TMC has not been presented, as TMC was not material. The costs associated
with the sale of TMC were primarily the write-down of the Company's investment
in its foreign subsidiary and other Company costs associated with the transfer
of the facility. As part of the sale, the Company entered into a long-term
supply agreement with the newly formed Gunther Belgium N.V. Workforce reduction
costs include severance costs related to involuntary terminations of
approximately 75 persons on a worldwide basis, primarily in manufacturing. The
Company completed its restructuring as of March 31, 1998.
In fiscal 1999, the Company announced another restructuring of its
operations, and recorded a pretax charge of $3,700 in accordance with the
criteria set forth in EITF 94-3. The 1999 restructuring charge includes
severance-related costs associated with 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 the 1999
restructuring includes a write-down of assets associated
43
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 10. RESTRUCTURING (CONTINUED)
with the closure of the Company's Wakefield, MA production facility, which was
substantially completed in the fourth quarter of 1999. The Company expects all
1999 restructuring expenses to be paid by September 1999.
The components of the 1999 restructuring expenses are as follows:
Employee severance, benefits and related costs.................. $ 2,084
Write-off and write-down of assets to be disposed............... 1,034
Lease termination and relocation costs.......................... 420
Other........................................................... 162
---------
Total......................................................... $ 3,700
---------
---------
NOTE 11. STOCKHOLDERS' EQUITY
(a) SHARES RESERVED
As of March 31, 1999, shares of common stock reserved for issuance were as
follows:
Exercise of stock options....................................... 3,136,953
Employee Stock Purchase Plan.................................... 186,679
---------
3,323,632
---------
---------
(b) STOCK OPTIONS
The Company maintains an equity incentive plan, the C. P. Clare Corporation
Amended and Restated 1995 Stock Option and Incentive Plan (the "1995 Plan"). The
1995 Plan provides for the issuance of options to purchase up to 4,680,000
shares of the Company's common stock. The 1995 Plan permits the issuance of both
incentive stock options and non-qualified stock options. All options, grants,
pricing, expiration periods and vesting periods are determined by the Board of
Directors, or pursuant to delegated authority, by the President of the Company,
and options must be granted at a price not less than 100% of the fair market
value at the date of grant in the case of incentive stock options or at 85% of
the fair market value in the case of non-qualified stock options. The Company
recognizes the difference, if any, between the fair market value of the
Company's stock on the date of grant and the exercise price of the options, as
deferred compensation and recognizes any compensation expense over the
applicable vesting periods.
In fiscal 1996, the Company recorded $651 of deferred compensation related
to the issuance of 605,600 options during the period. The Company is amortizing
the deferred compensation over the vesting period of the related options of one
to five years. During fiscal years 1997, 1998 and 1999, the Company recognized
$198, $255, and $92 respectively, of compensation expense in the consolidated
statements of operations related to the grant of these options.
The 1995 Plan also provides for an automatic grant of non-qualified stock
options to purchase 10,000 shares of common stock to each independent director
as of June 20, 1995. Each new director elected after June 20, 1995 was granted a
non-qualified stock option to purchase 10,000 shares of
44
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 11. STOCKHOLDERS' EQUITY (CONTINUED)
common stock. Currently, each independent director serving as a Director five
days after the Company's annual stockholders meeting shall automatically be
granted a non-qualified stock option to purchase 5,000 shares of common stock.
The 1995 Plan also provides for stock appreciation awards, stock awards,
performance share awards and dividend equivalent rights. The stock appreciation
rights may be granted in tandem with or independent of stock options. The
Company has not granted any stock appreciation rights or dividend equivalent
rights as of March 31, 1999.
The Company issued options to purchase 20,000 shares of common stock through
the 1995 Stock Plan and recognized compensation expense of $197,650.
As of March 31, 1999, there are 668,442 shares available for future grant under
the 1995 plan.
The following table summarizes incentive and non-qualified stock option
activity under the 1995 Plan for the fiscal years ended March 31, 1997, 1998 and
1999:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE PRICE PER
OPTIONS PER SHARE SHARE
---------- --------------- -----------
Outstanding at March 31, 1996....................... 1,501,871 $ 0.50--25.88 $ 8.74
Granted............................................. 1,065,100 8.13--24.75 9.94
Exercised........................................... (369,829) 0.50-- 8.97 2.48
Canceled............................................ (500,360) 0.50--25.88 14.81
---------- --------------- -----------
Outstanding at March 31, 1997....................... 1,696,782 0.50--24.63 9.06
Granted............................................. 337,144 8.12--19.00 15.38
Exercised........................................... (132,599) 0.50--13.62 7.03
Canceled............................................ (57,128) 0.50--24.63 8.47
---------- --------------- -----------
Outstanding at March 31, 1998....................... 1,844,199 0.50--24.63 10.36
Granted............................................. 1,089,714 4.38--13.19 7.73
Exercised........................................... (55,464) 0.50--13.19 6.05
Canceled............................................ (409,938) 0.50--17.25 9.13
---------- --------------- -----------
Outstanding at March 31, 1999....................... 2,468,511 $ 0.50--$24.63 $ 9.34
---------- --------------- -----------
---------- --------------- -----------
Exercisable at March 31, 1999....................... 603,001 $ 0.50--$24.63 $ 10.07
---------- --------------- -----------
---------- --------------- -----------
45
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 11. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at March 31, 1999:
OUTSTANDING OPTIONS
--------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ------------------------
YEARS WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACT EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE RANGE OPTIONS LIFE PRICE OPTIONS PRICE
- ------------------------------------------------------- ---------- ------------- ----------- ----------- -----------
$ 0.50................................................. 116,221 4.60 $ 0.50 109,821 $ 0.50
$ 4.38--$ 6.25......................................... 485,500 9.63 $ 6.20 -- --
$ 6.87--$10.25......................................... 1,338,840 8.09 $ 8.82 262,630 8.66
$10.50--$15.50......................................... 288,450 8.16 $ 13.32 82,850 12.67
$15.88--$19.00......................................... 229,500 7.39 $ 17.81 137,700 17.77
$24.63................................................. 10,000 6.30 $ 24.63 10,000 $ 24.63
---------- -----------
2,468,511 603,001
---------- -----------
---------- -----------
Options granted in 1997, 1998 and 1999 have been valued using the
Black-Scholes option-pricing model prescribed by SFAS No. 123. The
weighted-average assumptions used for fiscal years 1997, 1998 and 1999 are as
follows:
1997 1998 1999
----------- ----------- -----------
Risk free interest rate..................... 6.2% 6.0% 5.0%
Expected dividend yield..................... -- -- --
Expected lives.............................. 6 years 6 years 6 years
Expected volatility......................... 80% 80% 80%
Weighted average grant-date fair value per
share of options granted at fair market
value during the period................... $ 4.75 $ 9.14 $ 9.27
Weighted average exercise price of options
granted at fair market value during the
Period.................................... $ 9.94 $ 15.38 $ 7.73
Weighted average remaining contractual life
of options outstanding.................... 8.2 years 7.6 years 8.2 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
46
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 11. STOCKHOLDERS' EQUITY (CONTINUED)
Had compensation cost been determined consistent with SFAS No. 123, the
Company's net (loss) income and pro forma net (loss) income per common share
outstanding on a basic and diluted basis for fiscal years 1997, 1998 and 1999
would have been as follows:
1997 1998 1999
--------- --------- ---------
Net income (loss):
As Reported.................................................. $ (6,911) $ 8,312 $ (5,583)
--------- --------- ---------
--------- --------- ---------
Pro Forma.................................................... $ (8,169) $ 6,491 $ (8,556)
--------- --------- ---------
--------- --------- ---------
Basic earnings (loss) per share:
As Reported.................................................. $ (0.77) $ 0.90 $ (0.59)
--------- --------- ---------
--------- --------- ---------
Pro Forma.................................................... $ (0.91) $ 0.70 $ (0.91)
--------- --------- ---------
--------- --------- ---------
Diluted earnings (loss) per share:
As Reported.................................................. $ (0.77) $ 0.83 $ (0.59)
--------- --------- ---------
--------- --------- ---------
Pro Forma.................................................... $ (0.91) $ 0.65 $ (0.91)
--------- --------- ---------
--------- --------- ---------
(c) WARRANTS
In fiscal 1989 and fiscal 1991, the Company issued warrants to employees and
others to purchase up to 626,617 shares of common stock at $1.87 per share. All
warrants had been exercised or expired as of December 31, 1998.
(d) EMPLOYEE STOCK PURCHASE PLAN
Under the C.P. Clare Corporation 1995 Employee Stock Purchase Plan (the
"Purchase Plan"), all U.S., Belgian and Mexican employees (including officers)
of the Company, as defined, are eligible to purchase the Company's common stock
at an exercise price equal to 85% of the fair market value of the common stock.
The Purchase Plan provides for up to 300,000 shares for issuance under the
Purchase Plan. As of March 31, 1999, 113,321 shares have been issued under this
Purchase Plan, and rights to purchase 186,679 shares are available for purchase.
(e) SHAREHOLDER RIGHTS PLAN
On April 29, 1996, the Directors of the Company adopted a Shareholder Rights
Agreement (the "Rights Agreement"). Pursuant to the terms of the Rights
Agreement, the Board of Directors declared a dividend distribution of one
Preferred Stock Purchase Right (a "Right") for each outstanding share of common
stock of the Company to stockholders of record as of the close of business on
May 15, 1996 (the "Record Date"). In addition, one Right will automatically
attach to each share of common stock issued subsequent to the Record Date, until
April 29, 2006. Each Right entitles the registered holder to purchase from the
Company, upon the occurrence of certain events, a unit consisting of one
one-thousandth of a share (a "Unit") of Series A Junior Participating Cumulative
Preferred Stock, par value $0.01 per share (the "Preferred Stock"), at a cash
exercise price of $100 per Unit (the "Exercise
47
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 11. STOCKHOLDERS' EQUITY (CONTINUED)
Price"), subject to adjustment. The Company has reserved 150,000 shares of the
Preferred Stock for issuance upon exercise of the Rights.
The Rights currently are not exercisable and are attached to and trade with
the outstanding shares of common stock. Under the Rights Agreement, the Rights
become exercisable (i) if a person as defined in the rights plan becomes an
"acquiring person" by acquiring 15% or more of the outstanding shares of common
stock (ii) if a person who owns 10% or more of the common stock is determined to
be an "adverse person" by the Board of Directors, or (iii) if a person commences
a tender offer that would result in that person owning 15% or more of the common
stock. Upon the occurrence of any one of these events, each holder of a Right
(other than the acquiring person or the adverse person) would be entitled to
acquire such number of shares of the Company's preferred stock which are
equivalent to such number of shares of common stock having a value of twice the
then current exercise price of the Right. If the Company is acquired in a merger
or other business combination transaction after any such event, each holder of a
Right would then be entitled to purchase, at the then current exercise price,
shares of the acquiring company's common stock having a value of twice the
exercise price of the Right.
Until a Right is exercised, the holder will have no rights as a stockholder
of the Company (beyond those as an existing stockholder), including the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to stockholders or to the Company, stockholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exercisable for Units, other securities of the Company, other consideration or
for common stock of an acquiring company.
NOTE 12. EMPLOYEE BENEFIT PLANS
(a) 401(k) BENEFIT PLAN
U.S. employees of the Company may participate in a supplemental retirement
program (the "401(k) Plan") established under Section 401(k) of the Internal
Revenue Code of 1986, as amended. The Company matches 75% of individual
contributions, up to 3% of base pay, as defined. Employee contributions vest
immediately, while Company matching contributions fully vest after two years of
service, as defined. For fiscal years 1997, 1998 and 1999, the Company
contributed $262, $245, and $329, respectively, under the 401(k) Plan.
(b) POSTRETIREMENT HEALTH CARE BENEFITS
The Company provides certain employees with postretirement health benefits,
accounted for under SFAS 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions". Subsequent to March 31, 1995, the Company curtailed the
plan and initially recorded a liability of $463. This represented the
unrecognized prior service costs associated with the remaining eligible plan
participants. At March 31, 1997, the Company's liability was $460. During fiscal
1998, the plan was remeasured. Based on a decrease in the number of plan
participants and a change in medical carriers, the liability was reduced by $200
resulting in a liability of $260 at March 31, 1998. This liability remains $260
as of March 31, 1999.
48
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 12. EMPLOYEE BENEFIT PLANS (CONTINUED)
(c) FOREIGN RETIREMENT INSURANCE BENEFITS
The Company also provides certain defined retirement annuity payments on
behalf of its employees in Europe and Mexico. For fiscal years 1997, 1998 and
1999, the Company contributed $219, $129, and $88, respectively, for the annuity
premium payments.
(d) DEFINED BENEFIT PLAN
All employees of the Company located in Taiwan are entitled to retirement
benefits under regulatory requirements. The actuarial present value of these
benefits has been recorded in the accompanying consolidated financial statements
in accordance with SFAS No. 87, "Employers' Accounting for Pensions."
The components of the net periodic pension cost for fiscal years 1997, 1998
and 1999 are as follows:
1997 1998 1999
--------- ---------- ---------
Service cost--benefit earned during the period.............. $ 84 $ 78 $ 23
Interest cost on projected benefit obligation............... 153 140 29
Expected return on assets................................... (20) (19) (21)
--------- ---------- ---------
Net periodic pension cost................................... $ 217 $ 199 $ 31
--------- ---------- ---------
--------- ---------- ---------
The funded status of the plan at March 31, 1997, 1998 and 1999 was as
follows:
1997 1998 1999
--------- ---------- ---------
Actuarial present value of accumulated plan benefits:
Vested.................................................... $ -- $ 109 $ 109
Non-vested................................................ 1,212 61 61
--------- ---------- ---------
1,212 170 170
Additional amounts related to projected salary increases.... 968 239 239
--------- ---------- ---------
Actuarial present value of projected benefit obligation..... 2,180 409 409
Plan assets at fair value................................... 290 287 287
--------- ---------- ---------
Projected benefit obligation in excess of plan assets....... $ 1,890 $ 122 $ 122
--------- ---------- ---------
--------- ---------- ---------
1997 1998 1999
--------- ---------- ---------
Assumptions:
Rate of return on plan assets............................... 7% 7% 7%
Discount rate for projected benefit obligations............. 7% 7% 7%
Rate of increase in future compensation levels
Indirect labor............................................ 6% 7% 7%
Direct labor.............................................. 4% -- --
49
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 12. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company closed the manufacturing operations located in Taiwan and the
number of participants in the pension plan was reduced from the 156 employees in
fiscal 1997 to 12 employees in fiscal 1998. The number of participants remains
at 12 through fiscal 1999.
(e) BONUS PLAN
Under the 1995 Key Employee Incentive Plan (the "Bonus Plan"), the Company
has the discretion to determine certain employees of the Company who are
eligible for a bonus if certain milestones established for the Company and each
individual are achieved, as defined. Participants may elect to defer payment of
their bonus to a later date and will be entitled to interest on deferred
amounts. The Company also has the discretion to pay the bonus in cash, or
partially or fully in stock, options or discount options under the 1995 Stock
Plan. During fiscal years 1997, 1998 and 1999, the Company incurred $310, $1,629
and $80, respectively, related to the Bonus Plan.
NOTE 13. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." The statement requires that deferred income tax
accounts reflect the tax consequences on future years of differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts for income tax purposes. In addition, SFAS No. 109 requires the
recognition of future tax benefits, such as net operating loss carryforwards
("NOL"), to the extent that realization of such benefits is more likely than
not.
The components of domestic and foreign income (loss) before the provision
for income taxes for fiscal years ended March 31, 1997, 1998 and 1999 are as
follows:
1997 1998 1999
--------- ---------- ---------
Domestic.................................................... $ (5,991) $ 9,214 $ (6,907)
Foreign..................................................... 544 3,978 1,324
--------- ---------- ---------
--------- ---------- ---------
$ (5,447) $ 13,192 $ (5,583)
--------- ---------- ---------
--------- ---------- ---------
The components of current and deferred provision for income taxes for fiscal
years ended March 31, 1997, 1998 and 1999 are as follows:
1997 1998 1999
--------- ---------- ---------
Current:
Federal................................................... $ 2,131 $ 2,631 $ (444)
State..................................................... 383 522 (41)
Foreign................................................... 322 1,371 1,400
--------- ---------- ---------
Total current........................................... 2,836 4,524 915
--------- ---------- ---------
Deferred:
Federal................................................... (1,074) 801 (510)
State..................................................... (222) (370) (341)
Foreign................................................... (76) (75) (64)
--------- ---------- ---------
Total deferred.......................................... (1,372) 356 (915)
--------- ---------- ---------
--------- ---------- ---------
Provision for Income Taxes.................................. $ 1,464 $ 4,880 $ --
--------- ---------- ---------
--------- ---------- ---------
50
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 13. INCOME TAXES (CONTINUED)
The income tax provision is different from that, which would be computed by
applying the U.S. federal income tax rate to income before taxes for fiscal
years ended March 31, 1997, 1998 and 1999, as follows:
1997 1998 1999
--------- ---------- ---------
Federal statutory tax rate.................................. (34.0)% 34.0% (34.0)%
State income taxes, net of federal income tax benefit....... 4.6 0.2 (3.8)
Tax exempt interest......................................... (8.3) (2.4) (1.3)
Foreign Sales Corporation benefits.......................... (1.4) (0.5) --
Non-deductible in-process research and development.......... -- -- 30.4
Non-deductible goodwill amortization........................ -- -- 6.4
Capital loss carryforward valuation allowance............... 62.8 -- --
Non-deductible foreign expenses............................. -- 4.4 --
Difference in foreign provision versus statutory U.S.
rate...................................................... 1.1 (0.5) 5.3
Decrease in valuation allowance relating to net
operating loss carryforwards.............................. (1.9) (0.8) (1.9)
Deemed repatriation of foreign earnings..................... 2.3 -- --
Other....................................................... 1.7 2.6 (1.1)
--------- ---------- ---------
--------- ---------- ---------
26.9% 37.0% 0.0%
--------- ---------- ---------
--------- ---------- ---------
Significant components of deferred income tax assets and liabilities at
March 31, 1998 and 1999 are as follows:
1998 1999
---------- ----------
Current deferred income tax assets:
Net operating loss carryforwards.................................... $ 106 $ 106
Inventory reserves.................................................. 1,013 1,293
Accrued environmental remediation costs............................. 265 223
Accrued restructuring............................................... -- 839
Accrued payroll related costs....................................... 1,611 1,801
Other temporary differences......................................... 275 597
Less: Valuation allowance........................................... (570) (823)
---------- ----------
Net current deferred income tax assets............................ $ 2,700 $ 4,036
---------- ----------
---------- ----------
Long-term deferred income tax assets:
Net operating loss carryforwards.................................... $ 2,725 $ 2,336
Net capital loss carryforwards...................................... 9,581 9,581
State tax credits................................................... 310 486
Less: Valuation allowance........................................... (11,690) (11,066)
---------- ----------
Net long-term deferred income tax assets.......................... 926 1,337
---------- ----------
Long-term deferred income tax liabilities:
Depreciation........................................................ (57) (1,068)
Acquired Intangible Assets.......................................... -- (779)
---------- ----------
---------- ----------
Net long-term income tax liabilities.............................. (57) (1,847)
---------- ----------
Long-term deferred income tax asset (liability), net.................. $ 869 $ (510)
---------- ----------
---------- ----------
51
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 13. INCOME TAXES (CONTINUED)
The Internal Revenue Code (the "Code") limits the amount of net operating
loss and tax credit carryforwards that companies may utilize in any one year in
the event of cumulative changes in ownership over a three-year period in excess
of 50%. In connection with the acquisition of the Clare Division of General
Instrument in 1989 and the simultaneous issuance of common stock and warrants,
the Company incurred a cumulative change in ownership in excess of 50% as
defined in the Code. This change in ownership has limited the Company's ability
to utilize, in any one year, the net operating loss and credit carryforwards
incurred prior to this change in ownership. The Company estimates that the total
NOL through January 1989 subject to this limitation is $7,492. The use of the
available NOL is limited to $311 in each year subsequent to this change in
ownership. In Taiwan, the Company has NOL carryforwards of $1,575 at March 31,
1999, which begin to expire in fiscal 1999.
In January 1997, the Company completed the sale of TMC to Gunther GmbH. As a
result of this transaction, the Company incurred a capital loss of approximately
$25.0 million, which the Company may carry forward for a period of five (5)
years. The Company's ability to utilize this capital loss carryforward is
limited to the amount of capital gains that the Company generates in the
carryforward period. The Company has provided a full valuation allowance against
the capital loss carryforward as the Company believes that it is more likely
than not that the Company will be able to utilize such a carryforward.
The remainder of the valuation allowance relates to the limited use of
certain net operating loss carryforwards. Taxes have not been provided on
foreign subsidiaries' undistributed earnings of $1,308 at March 31, 1999, which
are deemed indefinitely invested.
NOTE 14. OTHER INCOME (EXPENSE)
Other income (expense) consists of the following for fiscal years 1997, 1998
and 1999:
1997 1998 1999
---------- ---------- ----------
Net gain (loss) from foreign currency exchange............ $ (40) $ 378 $ (227)
Other..................................................... 32 (243) (163)
---------- ---------- ----------
$ (8) $ 135 $ (390)
---------- ---------- ----------
---------- ---------- ----------
NOTE 15. CASH FLOWS
(a) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow information consists of the following
for fiscal years 1997, 1998 and 1999:
1997 1998 1999
---------- ---------- ----------
Interest paid............................................. $ 224 $ 143 $ 98
Income taxes paid......................................... $ 2,160 $ 5,283 $ 2,479
52
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 16. SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)
Quarterly financial information for the fiscal years 1998 and 1999 is as
follows:
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ----------
1998
Net sales................................................. $ 34,667 $ 39,204 $ 40,683 $ 41,717 $ 156,271
Gross profit.............................................. 11,157 12,181 12,613 12,893 48,844
Net income................................................ 1,652 2,141 2,228 2,291 8,312
Basic earnings per share.................................. 0.18 0.23 0.24 0.25 0.90
Diluted earnings per share................................ $ 0.17 $ 0.21 $ 0.22 $ 0.23 $ 0.83
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ----------
1999
Net sales................................................. $ 36,694 $ 33,887 $ 37,248 $ 36,084 $ 143,913
Gross profit.............................................. 11,180 9,174 10,074 10,609 41,037
Net income (loss)......................................... 1,693 (7,693) 91 326 (5,583)
Basic earnings (loss) per share........................... 0.18 (0.82) 0.01 0.03 (0.59)
Diluted earnings (loss) per share......................... $ 0.17 $ (0.82) $ 0.01 $ 0.03 $ (0.59)
NOTE 17. 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 the years March 31,
1997, 1998 and 1999 is as follows.
53
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 17. FINANCIAL INFORMATION BY SEGMENT (CONTINUED)
ELECTRO-
SEMICONDUCTOR MECHANICAL CORPORATE TOTAL
------------- ----------- ----------- ----------
1997
Net product sales from external customers..................... 59,952 68,209 -- 128,161
Intersegment net sales........................................ -- -- -- --
Total net revenue....................................... 59,952 68,209 -- 128,161
Gross Profit.................................................. 22,137 20,421 -- 42,558
Depreciation and amortization................................. 1,530 3,275 -- 4,805
Interest income
External.................................................... -- -- 1,578 1,578
Intersegment................................................ -- -- -- --
Total interest income................................... -- -- 1,578 1,578
Interest expense (external)
External.................................................... -- -- 452 452
Intersegment................................................ -- -- -- --
Total interest expense.................................. -- -- 452 452
Other items
Charge for in-process research and development.............. -- -- -- --
Restructuring............................................... -- -- 14,250 14,250
Income taxes.................................................. -- -- 1,464 1,464
Property, plant and equipment................................. 9,272 19,704 -- 28,976
1998
Net product sales from external customers..................... 69,676 86,595 -- 156,271
Intersegment net sales........................................ -- -- -- --
Total net revenue....................................... 69,676 86,595 -- 156,271
Gross Profit.................................................. 24,783 24,061 -- 48,844
Depreciation and amortization................................. 1,701 3,640 -- 5,341
Interest income
External.................................................... -- -- 1,454 1,454
Intersegment................................................ -- -- -- --
Total interest income................................... -- -- 1,454 1,454
Interest expense (external)
External.................................................... -- -- 215 215
Intersegment................................................ -- -- -- --
Total interest expense.................................. -- -- 215 215
Other items
Charge for in-process research and development.............. -- -- -- --
Restructuring............................................... -- -- -- --
Income taxes.................................................. -- -- 4,880 4,880
Property, plant and equipment................................. 12,409 26,368 -- 38,777
54
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 17. FINANCIAL INFORMATION BY SEGMENT (CONTINUED)
ELECTRO-
SEMICONDUCTOR MECHANICAL CORPORATE TOTAL
------------- ----------- ----------- ----------
1999
Net product sales from external customers..................... $ 69,365 $ 74,548 $ -- $ 143,913
Intersegment net sales........................................ -- -- -- --
Total net revenue....................................... 69,365 74,548 -- 143,913
Gross Profit.................................................. 25,935 15,102 -- 41,037
Depreciation and amortization................................. 4,926 4,562 -- 9,488
Interest Income
External.................................................... -- -- 571 571
Intersegment................................................ -- -- -- --
Total interest income................................... -- -- 571 571
Interest expense (external)
External.................................................... -- -- 232 232
Intersegment................................................ -- -- -- --
Total interest expense.................................. -- -- 232 232
Other items
Charge for in-process research and development.............. 5,000 -- -- 5,000
Restructuring............................................... -- -- 3,700 3,700
Income taxes.................................................. -- -- -- --
Property, plant and equipment................................. 20,943 19,332 -- 40,275
Interest income and expense, 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
arms' length basis.
55
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 17. FINANCIAL INFORMATION BY SEGMENT (CONTINUED)
Long-lived tangible assets by geographic area were as follows:
LONG-LIVED TANGIBLE
ASSETS
--------------------
GEOGRAPHIC AREA 1998 1999
- ------------------------------------------------------------------------ --------- ---------
United States........................................................... $ 25,982 $ 26,100
Belgium................................................................. 397 296
France.................................................................. 9 8
Germany................................................................. 9 14
Mexico.................................................................. 12,380 13,857
--------- ---------
$ 38,777 $ 40,275
--------- ---------
--------- ---------
Revenues by geographic area for the years ended March 31, 1997, 1998 and
1999 were as follows:
REVENUE
----------------------------------
GEOGRAPHIC AREA 1997 1998 1999
- --------------------------------------------------------- ---------- ---------- ----------
United States............................................ $ 73,718 $ 93,369 $ 86,059
France................................................... 4,850 7,910 6,164
Germany.................................................. 5,692 5,804 6,708
Ireland.................................................. 252 5,664 2,003
Italy.................................................... 2,541 2,394 2,683
Netherlands.............................................. 2,413 1,968 1,429
Sweden................................................... 1,722 2,635 3,673
United Kingdom........................................... 4,928 10,921 12,412
Other.................................................... 32,045 25,606 22,782
---------- ---------- ----------
$ 128,161 $ 156,271 $ 143,913
---------- ---------- ----------
---------- ---------- ----------
56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II
To C.P. Clare Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of C.P. Clare Corporation and subsidiaries
included in this Form 10-K and have issued our report thereon dated April 29,
1999. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14 is the
responsibility of the Company's management and is presented for the purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. The schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 29, 1999
58
SCHEDULE II
C.P. CLARE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
RECOVERIES
BALANCE AS OF FOR ACCOUNTS UNCOLLECTIBLE BALANCE AT
ACCOUNTS RECEIVABLE BEGINNING PREVIOUSLY ACCOUNTS END OF
ALLOWANCE OF PERIOD PROVISION WRITTEN OFF WRITTEN OFF PERIOD
- ------------------------------------------------ ------------- ----------- ------------ ------------ -----------
Year Ended March 31, 1999....................... $ 1,177 $ 461 -- $ 273 $ 1,365
Year Ended March 31, 1998....................... 675 579 66 143 1,177
Year Ended March 31, 1997....................... 535 273 -- 133 675
BALANCE AS OF BALANCE AT
BEGINNING END OF
RESTRUCTURING RESERVE OF PERIOD PROVISION CASH PAID PERIOD
- -------------------------------------------------------------- ------------- ----------- ------------ -----------
Year Ended March 31, 1999..................................... $ -- $ 2,684 $ (532) $ 2,152
Year Ended March 31, 1998..................................... 5,082 -- (5,082) --
Year Ended March 31, 1997..................................... -- 7,499 (2,417) 5,082
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, C.P. Clare Corporation certifies that it has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in Beverly, Massachusetts on June 24, 1998.
C.P. CLARE CORPORATION
Date: June 24, 1998 By: /s/ ARTHUR R. BUCKLAND
-----------------------------------------
Arthur R. Buckland,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURES TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ ARTHUR R. BUCKLAND President, Chief Executive
- ------------------------------ Officer and Chairman June 24, 1998
Arthur R. Buckland
/s/ HARRY ANDERSEN Senior Vice President and
- ------------------------------ Chief Financial Officer June 24, 1998
Harry Andersen
/s/ WINSTON R. HINDLE, JR. Director
- ------------------------------ June 24, 1998
Winston R. Hindle, Jr.
/s/ CLEMENTE C. TIAMPO Director
- ------------------------------ June 24, 1998
Clemente C. Tiampo
/s/ JOHN G. TURNER Director
- ------------------------------ June 24, 1998
John G. Turner
/s/ JAMES K. SIMS Director
- ------------------------------ June 24, 1998
James K. Sims
60
EXHIBIT INDEX
EXHIBIT NO. TITLE
- ------------- -----------------------------------------------------------------------------------------------------
10.76 First Amendment to Amended and Restated Employment Agreement between the Company and Thomas B. Sager
dated November 23, 1998.
10.77 First Amendment to Employment Agreement between the Company and Richard Morgan dated November 23,
1998.
10.78 Employment Agreement between the Company and Harry Andersen dated December 22, 1998.
10.79 Loan Agreement between the Company and Bank Boston, N.A. dated March 1, 1999.
10.80 Form of Revolving Credit Note, Principal Amount $15,000,000 by the Company to Bank Boston, N.A. dated
March 1, 1999.
10.81 Pledge Agreement between the Company and Bank Boston, N.A. dated March 1, 1999.
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule