<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file no. 0-26092
C.P. CLARE CORPORATION
(Exact Name Of Registrant As Specified In Its Charter)
MASSACHUSETTS 04-2561471
State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
78 CHERRY HILL DRIVE
BEVERLY, MASSACHUSETTS 01915
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 524-6700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of December 27, 1998, there were 9,395,081 shares of Common Stock, $.01
par value per share, outstanding.
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C.P. CLARE CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements............................................
Consolidated Condensed Balance Sheets........................... 1
Consolidated Condensed Statements of Operations................. 2
Consolidated Condensed Statements of Cash Flows................. 3
Notes to Consolidated Condensed Financial Statements............ 4-8
Item 2. Management's Discussion and Analysis of Financial
Condition And Results of Operations............................. 9-14
Item 3. Quantitative and Qualitative Disclosure About Market Risk....... 14
PART II OTHER INFORMATION:
Item 1. Legal Proceedings............................................... 14
Item 2. Changes in Securities and Use of Proceeds....................... 14
Item 3. Default Upon Senior Securities.................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............. 14
Item 5. Other Information............................................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 14
Signatures............................................................... 15
<PAGE> 3
C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 27, 1998 MARCH 31, 1998
----------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and investments (Note 5) ......................... $ 4,153 $ 26,364
Accounts receivable, less allowance for doubtful accounts ............... 19,896 21,383
Inventories (Note 6) .................................................... 23,107 22,083
Other current assets .................................................... 6,671 3,122
-------- --------
Total current assets ............................................ 53,827 72,952
Property, plant and equipment, net ........................................ 41,205 38,777
Other assets (Note 4) ..................................................... 12,400 2,457
-------- --------
$107,432 $114,186
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ....................................... $ 982 $ 666
Accounts payable ........................................................ 8,311 12,464
Accrued expenses (Notes 7 and 8) ........................................ 12,033 9,899
-------- --------
Total current liabilities ....................................... 21,326 23,029
Long-term debt, net of current portion .................................... 318 --
-------- --------
Total liabilities ............................................... 21,644 23,029
-------- --------
Stockholders' equity:
Preferred stock, $ .01 par value-
Authorized: 2,500,000 shares
Issued and outstanding: None ............................................ -- --
Common stock, $ .01 par value-
Authorized: 40,000,000 shares
Issued and outstanding: 9,395,081 shares and 9,356,452 shares
as of December 27, 1998 and March 31, 1998, respectively .............. 94 94
Additional paid-in capital .............................................. 95,996 95,653
Deferred compensation ................................................... (87) (154)
Accumulated deficit ..................................................... (9,299) (3,390)
Cumulative translation adjustment ....................................... (916) (1,046)
-------- --------
Total stockholders' equity ...................................... 85,788 91,157
-------- --------
$107,432 $114,186
======== ========
</TABLE>
The accompanying notes are an integral part of the Consolidated Condensed
Financial Statements.
1
<PAGE> 4
C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars In Thousands, Except Per Share Data)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
DEC. 27, 1998 DEC. 28, 1997 DEC. 27, 1998 DEC. 28, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales .......................................... $ 37,248 $ 40,684 $ 107,829 $ 114,555
Cost of sales ...................................... 27,174 28,071 77,401 78,605
---------- ---------- ---------- ----------
Gross profit ................................. 10,074 12,613 30,428 35,950
Operating expenses:
Selling, general and administrative ............. 7,498 7,265 21,187 21,038
Research and development ........................ 2,292 2,164 6,658 6,498
Write-off of purchased in-process research
and development (Note 4) ...................... -- -- 5,000 --
Restructuring costs (Note 8) .................... -- -- 4,000 --
---------- ---------- ---------- ----------
Operating income (loss) ............................ 284 3,184 (6,417) 8,414
Interest income .................................... 62 412 440 1,162
Interest expense ................................... (77) (74) (157) (173)
Other (expense) income, net ........................ (118) 16 (255) 152
---------- ---------- ---------- ----------
Income (loss) before provision(benefit)
for income taxes ........................... 151 3,538 (6,389) 9,555
Provision (benefit) for income taxes ............... 60 1,309 (480) 3,535
---------- ---------- ---------- ----------
Net income (loss) ............................ $ 91 $ 2,229 $ (5,909) $ 6,020
========== ========== ========== ==========
Earnings (loss) per common and common share
equivalent (Note 3)
Basic earnings (loss) per share .............. $ 0.01 $ 0.24 $ (0.63) $ 0.65
========== ========== ========== ==========
Diluted earnings (loss) per share ............ $ 0.01 $ 0.22 $ (0.63) $ 0.61
========== ========== ========== ==========
Weighted average common and common share
equivalent shares outstanding:
Basic ........................................ 9,394,942 9,318,452 9,382,806 9,257,446
========== ========== ========== ==========
Diluted ...................................... 9,560,656 9,956,536 9,382,806 9,890,305
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the Consolidated Condensed
Financial Statements.
2
<PAGE> 5
C.P. CLARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
---------------------------------
DEC. 27, 1998 DEC. 28, 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................................. $ (5,909) $ 6,020
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization ............................................. 6,038 3,380
Provision for environmental remediation costs ............................. -- 891
Non-cash portion of restructuring charge .................................. 1,134 --
Write-off of acquired in-process research and development ................. 5,000 --
Deferred income tax benefit ............................................... -- (56)
Compensation expense associated with stock options ........................ 67 190
Changes in assets and liabilities, net of acquisition of Micronix:
Accounts receivable .................................................... 1,675 (3,857)
Inventories ............................................................ (278) (628)
Other current assets ................................................... (1,564) 843
Accounts payable ....................................................... (5,397) (1,614)
Accrued expenses ....................................................... 716 (3,866)
-------- --------
Net cash provided by operating activities .............................. 1,482 1,303
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net ................................. (7,876) (10,973)
Purchase of Micronix, net of cash acquired (Note 4) ............................ (16,012) --
-------- --------
Net cash used in investing activities .................................. (23,888) (10,973)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds from issuance of common stock ..................................... 108 145
Proceeds from exercise of options and warrants ................................. 223 915
Payments of principal on long-term debt ........................................ (271) --
Tax benefit of disqualifying disposition of incentive stock options ............ 11 104
-------- --------
Net cash provided by financing activities .............................. 71 1,164
-------- --------
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND INVESTMENTS ............. 124 367
-------- --------
NET DECREASE IN CASH, CASH EQUIVALENTS AND INVESTMENTS ......................... (22,211) (8,139)
Cash, cash equivalents and investments, beginning of period .................... 26,364 37,430
-------- --------
Cash, cash equivalents and investments, end of period .......................... $ 4,153 $ 29,291
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................................... $ 74 $ 24
======== ========
Income taxes ........................................................... $ 1,586 $ 4,813
======== ========
Acquisition of Micronix:
Fair value of assets acquired ........................................... $ 20,825 $ --
Liabilities assumed ..................................................... (4,525) --
Cash acquired ........................................................... (288) --
-------- --------
Cash paid for acquisition and direct costs net of cash acquired.......... $ 16,012 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of the Consolidated Condensed
Financial Statements.
3
<PAGE> 6
C.P. CLARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 27, 1998
(Dollars In Thousands, Except Per Share Data)
1. FISCAL PERIODS
The Company's fiscal year is comprised of either 52 or 53 weeks and ends on
the Sunday closest to March 31. Interim quarters are comprised of 13 weeks
unless otherwise noted, and end on the Sunday closest to June 30, September 30,
December 31 and March 31.
2. INTERIM FINANCIAL STATEMENTS
The unaudited interim consolidated condensed financial statements presented
herein have been prepared in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to Form
10-Q and Regulation S-X pertaining to interim financial statements. Accordingly,
these interim financial statements do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. The financial statements reflect all normal, recurring adjustments
and accruals that management considers necessary for a fair presentation of the
Company's financial position as of December 27, 1998, and results of operations
for the nine months ended December 27, 1998 and December 28, 1997. The results
for the interim periods presented are not necessarily indicative of results to
be expected for any future period. The financial statements should be read in
conjunction with the summary of significant accounting policies and notes to
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998 as filed with the Securities
and Exchange Commission.
3. EARNINGS (LOSS) PER SHARE
The Company calculates earnings (loss) per share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". Basic earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding for the
period. Diluted earnings (loss) per share reflect the potential dilution of
stock options and warrants that could share in the earnings of the Company.
A reconciliation of basic and diluted shares outstanding, as required by
SFAS No. 128, is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
DEC. 27, 1998 DEC. 28, 1997 DEC. 27, 1998 DEC. 28, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding .......... 9,394,942 9,318,452 9,382,806 9,257,446
Weighted average common share equivalents .......... 165,714 638,084 -- 632,859
--------- --------- --------- ---------
Diluted weighted average shares
outstanding(2) ..................................... 9,560,656 9,956,536 9,382,806 9,890,305
</TABLE>
The following securities were not included in computing diluted earnings per
share because their effect would be anti-dilutive.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
DEC. 27, 1998 DEC. 28, 1997 DEC. 27, 1998 DEC. 28, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Options to purchase common stock(1) ................ 2,272,137 253,000 1,634,013 425,250
Other antidilutive options and warrants(2) ......... -- -- 220,939 --
--------- ------- --------- -------
2,272,137 253,000 1,854,952 425,250
</TABLE>
(1) - In accordance with SFAS No. 128, options to purchase common stock
were excluded from diluted weighted average shares, because the option price was
above the average stock price for the period.
(2) - Other options and warrants to purchase common stock that are at or
below the average stock price for the period have been excluded, since their
inclusion would be antidilutive.
4
<PAGE> 7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. 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, located in Aliso Viejo, California.
The Company paid $16,012 for the acquisition and direct cost, net of cash
acquired. The acquisition was accounted for as a purchase in accordance with
Accounting Principles Board ("APB") Opinion No. 16, and accordingly,
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 of
$20,825, including $500 of acquisition costs, based on the fair value of the
tangible and intangible assets acquired. An independent appraisal, using proven
valuation procedures and techniques, was used to determine the fair value of the
purchased intangible assets.
Acquired intangibles include existing technologies and goodwill. These
intangibles are being amortized over their estimated useful lives of 4 to 8
years. The aggregate purchase price is made up of the following:
Current Assets.......................................... $1,268
Property, plant and equipment........................... 1,118
Acquired existing technology............................ 2,456
Other assets............................................ 644
Goodwill................................................ 10,339
In-process R&D.......................................... 5,000
-------
$20,825
=======
Intangibles include $5,000 for purchased in-process research and
development ("in-process R&D") for projects that did not have future alternative
uses. This allocation represents the estimated fair value based on risk-adjusted
cash flows related to the in-process R&D projects. The development of these
projects had not yet reached technological feasibility, and the R&D in process
had no alternative uses. Accordingly, these costs were expensed as of the
acquisition date.
Clare-Micronix's in-process R&D value is comprised of 6 primary R&D
programs. These programs include the introduction of certain new technologies.
At the acquisition date, these programs ranged in completion from 10% to 85%.
The R&D investment in the Micronix technology made by the Company from the date
of acquisition through December 27, 1998 was $500. 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 R&D would
materially impact the Company's financial condition.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development is based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new products. The rates
utilized to discount the net cash flows to their present value are based on the
weighted average cost of capital for 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 R&D were based upon
assumptions the Company believes to be reasonable but which are inherently
uncertain and unpredictable. The Company's assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances are likely to occur. For
these reasons, actual results may vary significantly from the projected results.
5. CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investment instruments with
maturities of nine months or less to be cash equivalents. Short-term investments
are instruments with maturities of less than one year. The Company accounts for
its investments in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Investments at December 27, 1998
consisted principally of overnight commercial paper and at March 31, 1998
consisted principally of overnight and short-term tax exempt commercial paper
and tax exempt variable rate municipal bonds. The Company had the option to
require the issuers of the tax exempt variable rate municipal bonds to purchase
these investments upon 7 days notice. The Company deemed these investments to be
available for sale at March 31, 1998, and they are carried at cost which
approximates market value.
5
<PAGE> 8
6. INVENTORIES
Inventories include materials, labor and manufacturing overhead, and are
stated at the lower of cost (first-in, first-out) or market and consist of the
following at December 27, 1998 and March 31, 1998:
DECEMBER 27, 1998 MARCH 31, 1998
----------------- --------------
Raw Material................................. $ 9,356 $ 9,568
Work in process.............................. 7,465 4,835
Finished goods............................... 6,286 7,680
------- -------
$23,107 $22,083
======= =======
7.ACCRUED EXPENSES
Accrued expenses consist of the following at December 27, 1998 and March 31,
1998:
DECEMBER 27, 1998 MARCH 31, 1998
----------------- --------------
Payroll and benefits......................... $ 3,175 $5,793
Restructuring (Note 8)....................... 2,625 --
Environmental remediation (Note 9)........... 987 1,172
Other........................................ 5,246 2,934
------- ------
$12,033 $9,899
======= ======
8. RESTRUCTURING COSTS
In the second quarter of fiscal 1999, the Company announced a restructuring
of its operations, and recorded a non-recurring pretax charge of $4,000 in
accordance with Emerging Issues Task Force Issue ("EITF") 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The
non-recurring charge includes severance-related costs associated with a
workforce reduction of approximately 60 persons on a worldwide basis, half of
which are in manufacturing and the remainder in sales, general and
administrative. The balance of this charge includes a write-down of assets
associated with the closure of the Company's Wakefield, MA production facility
which will be completed in the fourth quarter of 1999.
The components of the restructuring costs were as follows:
Employee severance, benefits and related costs........... $2,394
Write-off and write-down of assets to be disposed........ 1,134
Lease termination and relocation costs................... 410
Other.................................................... 62
------
$4,000
======
The total cash impact of the restructuring is $2,866 which the Company
anticipates to be paid by the end of the fourth quarter of fiscal 2000. During
the three months ended December 27, 1998, the Company paid $241 of
restructuring costs, related primarily to severance for 10 employees terminated,
that were identified in the restructuring plan.
9. CONTINGENCIES
Environmental Matter
The Company accrues for estimated costs associated with known environmental
matters when such costs are probable and can be reasonably estimated. The actual
costs to be incurred for environmental remediation may vary from estimates,
given the inherent uncertainties in evaluating and estimating environmental
liabilities, including the possible effects of changing laws and regulations,
the stage of the remediation process and the magnitude of contamination found as
the remediation progresses. Management believes the ultimate disposition of
known environmental matters will not have a material adverse effect upon the
liquidity, capital resources, business or consolidated financial position of the
Company. However, one or more environmental matters could have a significant
negative impact on the Company's consolidated financial results for a particular
reporting period.
6
<PAGE> 9
10.DERIVATIVE FINANCIAL INSTRUMENTS
SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments," requires disclosure of any significant
derivative or other financial instruments. The Company hedges its net
intercompany trade balance (Belgian francs) which relates to trade sales to
third party customers in the ordinary course of business. At December 27, 1998,
the Company had no outstanding Belgian franc ("BF") or Mexican peso ("MXP")
forward contracts. At March 31, 1998, the Company had thirteen outstanding BF
forward contracts amounting to 215,740 BF or $5,908 with a gross deferred loss
of $163 from the rollover of such contracts to the planned settlement date.
Also, at March 31, 1998, the Company had one outstanding MXP forward contract
amounting to 2,160 MXP or $255. The Mexican peso forward contract had no
deferred gain or loss. The forward contracts hedge currency transactional
exposure resulting from intercompany trade transactions.
11. NEW ACCOUNTING STANDARDS
In June 1997, SFAS No. 131 "Disclosure about Segments of an Enterprise and
Related Information" was issued, which establishes standards for the way public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosure about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. Financial statement disclosure for prior periods are required to be
restated. The Company is in the process of evaluating the disclosure
requirements and the Company will adopt this statement for the fiscal year ended
March 31, 1999. The adoption of SFAS No. 131 is not expected to have a material
effect on the Company's results of operations, financial position or cash flows.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," was issued, which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes of the benefit
obligations for the fair market values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer as
useful as they were when SFAS No. 87, "Employers' Accounting for Pensions," SFAS
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," were
issued. SFAS No. 132 suggests combined formats for presentation of pension and
other postretirement benefit disclosures. The Company will adopt this statement
for the fiscal year ended March 31, 1999 and it is not expected to have a
material effect on the Company's results of operations, financial position and
cash flows.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair market
value. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Adoption of the statement is not expected to have
a material impact on the Company's consolidated financial position or results of
operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5). SOP 98-5 requires all costs associated with the
pre-opening, pre-operating and organization activities to be expensed as
incurred. The Company will adopt SOP 98-5 beginning April 1, 2000. Adoption of
the statement is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
7
<PAGE> 10
12. COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130 "Reporting Comprehensive Income,"
effective April 1, 1998. SFAS No. 130 establishes standards for reporting and
displays of comprehensive income (loss) and its components in the financial
statements. The components of the Company's comprehensive income (loss) are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -------------------------------
DEC. 27, 1998 DEC. 28, 1997 DEC. 27, 1998 DEC. 28, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) ........................................ $ 91 $2,229 $(5,909) $6,020
Foreign currency translation adjustments,
net of taxes ............................................. 23 (6) (79) 54
---- ------ ------- ------
Comprehensive income (loss) .............................. $114 $2,223 $(5,988) $6,074
==== ====== ======= ======
</TABLE>
13. SUBSEQUENT EVENT
Subsequent to December 27, 1998, the Company has negotiated a new $15.0
million unsecured revolving line of credit with a new commercial bank. The
transaction is anticipated to close by the end of fiscal 1999.
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference are discussed in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998,
as filed with the Securities and Exchange Commission. See "Trends and
Uncertainties" in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
RESULTS OF OPERATIONS
The following table sets forth the relative percentage that certain income
and expense items bear to net sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 27, DECEMBER 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 73.0 69.0 71.8 68.6
----- ----- ----- -----
Gross profit.............................. 27.0 31.0 28.2 31.4
Operating expenses:
Selling, general and administrative....... 20.1 17.9 19.6 18.4
Research and development.................. 6.2 5.3 6.2 5.7
Write-off of purchased in-process
research and development.............. -- -- 4.6 --
Restructuring costs....................... -- -- 3.7 --
----- ----- ----- -----
Operating income (loss)...................... 0.7 7.8 (5.9) 7.3
Interest income.............................. 0.2 1.0 0.4 1.0
Interest expense............................. (0.2) (0.2) (0.2) --
Other (expense) income net................... (0.3) -- (0.2) --
----- ----- ----- -----
Income (loss) before income taxes............ 0.4 8.6 (5.9) 8.3
Provision (benefit) for income taxes......... 0.2 3.2 (0.4) 3.1
----- ----- ----- -----
Net income (loss)......................... 0.2% 5.4% (5.5)% 5.2%
===== ===== ===== =====
</TABLE>
Net Sales. In the third quarter of fiscal 1999 revenues totaled $37.2
million compared with $40.7 million for the same period in fiscal 1998, a
decrease of 8%. Third quarter revenues for the Company's semiconductor products,
included recently acquired Clare-Micronix, were essentially equal to the third
quarter of fiscal 1998; however, electromagnetic and other product revenues
decreased 15% in fiscal 1999 compared with the same period in the prior year.
Lower revenues were attributed to lower demand for all of the Company's products
and lower average selling prices, principally for semiconductor products.
For the nine months ended December 27, 1998, revenues of $107.8 million
compared with $114.6 million for the same period in fiscal 1998, a decrease of
6%. Sales of the Company's semiconductor products, including Clare-Micronix,
were 1% higher for the nine months of fiscal 1999 compared with fiscal 1998.
Electromagnetic and other product revenues decreased 12% in the nine months
ended December 27, 1998 compared with the same period in the prior year. Lower
revenues for the nine months ended December 27, 1998 were principally due to the
reasons affecting the Company's third quarter revenues.
9
<PAGE> 12
Net sales by major product category were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 27, DECEMBER 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Semiconductor products.................... $18.5 $18.6 $51.8 $51.1
Electromagnetic and other products........ 18.7 22.1 56.0 63.5
</TABLE>
The Company's semiconductor products are primarily used in data
communication applications such as modems and sales have grown significantly
over the last few years as Internet usage has expanded. The Company's revenues
for the nine months ended December 27, 1998 were impacted by lower demand for
the 56K modems and customer inventory reductions.
The Company's electromagnetic products are primarily used in
telecommunication applications such as telephone switching gear and cellular
phones. The continued increased usage of cellular phones has been a growth
driver for the Company's dry reed switch business and the Company has expanded
production capacity for these products. The Company believes growth is dependent
on the market acceptance of new digital cellular phones, in which the Company's
customers utilize the reed switches.
Net sales to customers located outside of the United States decreased 4% in
the third quarter of fiscal 1999 to $17.7 million from $18.5 million in the same
period in fiscal 1998. Net sales to customers in Europe represented 31% and 30%
of the Company's net sales for the third quarter and nine months ended December
27, 1998, respectively. Net sales decreased 15% and 6% in local currencies, and
decreased 10% and 5%, in U.S. dollars for the third quarter and nine months
ended December 27, 1998, respectively and were impacted by lower demand from
European customers in the third quarter and nine months ended December 27, 1998.
Net sales to customers in Asia represent 16% and 14% of the Company's net
sales for the third quarter and nine months ended December 27, 1998, and in U.S.
dollars increased 13% and 4%, respectively, for the periods compared with the
prior year. During fiscal 1999, several Asian countries experienced continuing
economic problems. The Company believes that this issue may have impacted the
financial results for fiscal 1999.
The Company monitors its currency exposure and international economic
developments and takes actions to reduce the Company's risk from exposures to
fluctuations in foreign currency markets. Due to the inherent uncertainty of
foreign exchange markets the Company cannot predict future events in this area.
The Company will continue to focus on new markets and expansion of certain
existing international markets.
Gross Profit. The Company's gross profit as a percentage of net sales
decreased to 27.0% in the third quarter of fiscal 1999 from 31.0% in the same
period of fiscal 1998. This decrease was principally due to underutilized plant
capacity in semiconductors, reed switches and reed relay manufacturing, and
relates to higher fixed manufacturing costs associated with the Company's
capacity expansions, since the prior year. Also, gross profit was negatively
impacted by lower sales volume. These negative impacts were partially offset by
a favorable sales mix of a higher proportion of semiconductor revenues. The
Company's gross profit as a percentage of net sales decreased to 28.2% in the
nine months ended December 27, 1998 from 31.4% in the same period of fiscal
1998, principally due to the same reasons affecting the Company's third quarter
gross margins.
Selling, General and Administrative Expense. Selling, general and
administrative ("S,G&A") expenses increased $0.2 million or 3% to $7.5 million
in the third quarter of fiscal 1999 from $7.3 million in the same period in the
prior fiscal year. Included in the third quarter of fiscal 1999 results were
$0.4 million to write-down the Company's Chicago site to net realizable value
and $0.3 million of goodwill amortization expense, related to the Clare-Micronix
acquisition. Excluding these items, S,G&A expenses were lower, principally due
to lower sales commissions.
S,G&A expenses were 20.1% of net sales for the third quarter of fiscal 1999
as compared with 17.9% for the same period in the prior fiscal year, due to the
lower revenues. S,G&A expenses increased less than 1% to $21.2 million for the
nine months of fiscal 1999 as compared with $21.0 million for the same period in
the prior fiscal year. S,G&A expenses were 19.6% as a percentage of net sales
for the nine months of fiscal 1999 compared with 18.4% for the same period in
the prior year principally due to the same reasons affecting the Company's third
quarter S,G&A expenses.
10
<PAGE> 13
Research and Development Expense. Research and development (R&D) expense
increased to $2.3 million for the third quarter of fiscal 1999 from $2.2 million
for the same period in fiscal 1998, due to new projects and the Clare-Micronix
acquisition. R&D expense increased to $6.7 million for the nine months ended
September 30, 1998 compared with $6.5 million for the same period in fiscal
1998.
Write-off of purchased in-process research and development. Intangible
assets acquired as part of Clare-Micronix include $5.0 million for purchased
in-process research and development ("in-process R&D") for projects that did not
have future alternative uses. This allocation represents the estimated fair
value based on risk-adjusted cash flows related to the in-process R&D projects.
The development of these projects had not yet reached technological feasibility,
and the R&D in process had no alternative uses. Accordingly, these costs were
expensed as of the acquisition date. The investment in R&D in Micronix from the
acquisition date through December 27, 1998 was $0.5 million. See Note 4 of the
Consolidated Condensed Financial Statements.
Restructuring costs. In the second quarter of fiscal 1999, the Company
announced a restructuring of its operations, and recorded a non-recurring charge
of $4.0 million. The non-recurring charge includes severance-related costs
associated with a workforce reduction of approximately 60 persons on a worldwide
basis, half of which are in manufacturing and the remainder in sales, general
and administrative. The balance of this charge includes write-down of assets
associated with the closure of the Company's Wakefield, Massachusetts production
facility. See Note 8 of the Consolidated Condensed Financial Statements.
Interest Income. Interest income decreased to $0.1 million for the third
quarter of fiscal 1999 from $0.4 million for the same period in fiscal 1998 due
to lower cash balances. The decrease in cash was primarily due to cash used for
the acquisition of Clare-Micronix in July, 1998. Interest income is derived from
investments of the Company's cash in both commercial paper and short term tax
exempt municipal bonds.
Interest Expense. Interest expense for the third quarter of fiscal 1999 was
the same as in the third quarter of fiscal 1998.
Other (Expense) Income. In the third quarter of fiscal 1999 other (expense)
income consists principally of net foreign currency transactional losses, while
in the same period in fiscal 1998, other (expense) income consisted principally
of net foreign currency transactional gains. During the nine months ended
December 27, 1998, other (expense) income consists principally of net foreign
currency transactional losses, while in the same period in fiscal 1998, other
(expense) income consisted principally of a one-time royalty payment received
and net foreign currency transactional gains.
Income Taxes. In accordance with generally accepted accounting principles,
the Company has provided for income taxes at its estimated annual effective tax
rate. In the second quarter of fiscal 1999, the Company increased its effective
tax rate from 37% to 39%, as a result of non-deductible goodwill and technology
amortization expense related to the Clare-Micronix acquisition. The 39% rate is
effective for the rest of fiscal 1999. In fiscal 1998, the effective rate was
37%, as a result of the favorable treatment of the Company's foreign sales
corporation, utilization of net operating loss carryforward, and investment in
variable rate tax exempt municipal bonds.
TRENDS AND UNCERTAINTIES
Acquisition. On July 6, 1998, the Company acquired Micronix Integrated
Systems, Inc. ("Clare-Micronix"), a designer and manufacturer of analog and
mixed-signal application specific integrated circuits, located in Aliso Viejo,
California for approximately $16 million, excluding acquisition costs and
assumed liabilities. The Company has limited experience in integrating acquired
companies or technologies into its operations. Therefore, there can be no
assurance the Company will operate the acquired business effectively and that
the resulting profitability will be at anticipated levels. Also, there can be no
assurance that the Company will be able to retain key personnel, the loss of
which could have a material adverse effect on the Company's operating results.
Competition. C.P. Clare competes with various global companies. Certain
competitors of the Company have greater manufacturing, engineering or financial
resources.
Customer Concentration. In the third quarter of fiscal 1999, the Company's
ten largest customers accounted for 44% of total net sales. The Company is
highly reliant upon continued revenues from its largest customers and any
material delay, cancellation or reduction of orders from these customers could
have a material adverse effect on the Company's future results.
Development of New Products. Technological change and new product
introductions characterize the markets for the Company's products. In
particular, the Company is dependent on the communications industry, which is
characterized by intense competition and rapid technological change. The Company
expects sales to the communications industry to continue to represent a
significant portion of its sales for the foreseeable future. A decline in demand
for communications related equipment such as facsimile machines, modems and
cellular telephones would cause a significant decline in demand for the
Company's products. The Company has invested
11
<PAGE> 14
heavily over the past several years in the capital expenditures necessary to
develop new products. Slower than expected acceptance of new products will
adversely affect the Company's operating results. To remain competitive, the
Company must continue to develop new process and manufacturing capabilities to
meet customer needs and introduce new products that reduce size and increase
functionality and performance. With the addition of Clare-Micronix, the Company
will need to develop and bring to market the acquired technology and new
products in the areas of high-voltage analog and mixed-signal application
specific integrated circuits. Development of all these capabilities is expected
to require significant additional capital expenditures. The Company is currently
limited by its existing capital availability and may need to use its existing or
new lines of credit, in order to fund the capital expenditures required to
develop new products. If the Company is unable to access adequate sources of
capital or is unable to design, develop and introduce competitive new products,
its operating results will be adversely affected.
Fluctuations in Operating Results. The Company has experienced fluctuation
in its operating results in the past and its operating results may fluctuate in
the future. The Company has increased the scope and geographic area of its
operations. In addition, based on the recent capital expansions, the Company has
increased its operational fixed costs. This expansion also has resulted in new
and increased responsibilities for management personnel and has placed pressures
on the Company's operating systems. These operating systems are in the process
of being updated and centralized, while the existing operating systems are
phased out. The Company's future success will depend to a large part on its
ability to manage these changes and manage effectively its remote offices and
facilities.
Full Utilization of the New Wafer Fabrication Facility. The Company
completed construction of a larger, more advanced semiconductor facility in
Beverly, Massachusetts to address capacity constraints and operating
efficiencies in the production of its semiconductor products. To date, lower
demand in semiconductor products has not allowed the Company to fully utilize
the facility and has contributed to a decline in the Company's overall gross
margin rate. In addition, it is not expected that the new facility will be fully
utilized in the short term, as certain planned new semiconductor products,
including the Clare-Micronix products, will require significant additional
capital investment to be able to be produced in the fabrication facility.
Currently, these wafers and products are made utilizing outside foundries. A
delay or lack of capital investment in the new manufacturing fabrication
facility would have a material adverse effect on future operating results.
International Operations. The Company's international operations are
subject to several risks including, but not limited to, fluctuations in the
value of foreign currencies, changes to import and export duties or regulations,
greater difficulty in collecting accounts receivable and labor unrest. While, to
date, these factors have not had a material effect on the Company's results,
there can be no assurance that there will not be such an impact in the future.
Liquidity. The Company's cash balance was significantly reduced, primarily
by the acquisition of Clare-Micronix, during the first nine months of fiscal
1999 to approximately $4 million. The Company is currently negotiating with a
new commercial bank agent regarding a $15 million credit facility. A delay in
the negotiations or lack of a credit agreement could have a material adverse
effect on the Company's liquidity.
Markets. The Company continues to evaluate its operations and product
offerings, in order to invest in or potentially divest of certain business or
market opportunities.
New Systems. The Company is in the process of implementing an Oracle
Enterprise Resource Planning ("ERP") system for certain applications and
locations. The vendor has informed the Company that this new system is compliant
with year 2000 issues. This effort is consuming significant resources of the
Company and implementation of various applications is scheduled throughout
fiscal year 1999. As a result of the systems transition, the Company may
experience business disruptions or compliance issues which may have a material
adverse effect on the Company's results of operations.
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 demand needs effectively and on a timely basis. Also, the suppliers
could experience their own business disruption, including Year 2000, which could
have a material adverse effect on future results.
Restructuring. On September 21, 1998, the Company announced a restructuring
of its operations, in order to reduce costs, primarily in general and
administrative and manufacturing. The restructuring involves workforce
reductions and a facility closure. The Company's future results are dependent on
the successful implementation and completion of the announced restructuring.
Delays in such implementation or the inability to complete the restructuring in
a timely manner would have a material adverse effect on the Company's future
operating results. As a result of the restructuring, there can be no assurance
that the Company will be able to retain key personnel that were not identified
as part of the restructuring. The loss of additional personnel could have a
material adverse effect on the Company's operating results.
12
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended December 27, 1998, the Company's cash, cash
equivalents and investments decreased by $22.2 million. Operations provided $1.5
million of cash during this period, mainly as a result of non cash adjustments
offset by the net loss and decreases in net assets and liabilities. The Company
used $23.9 million for investing activities, including $16.0 million paid when
the Company acquired Clare-Micronix, (see Note 4 of the Notes to Consolidated
Condensed Financial Statements), and $7.9 million in capital expenditures.
Financing activities provided $0.2 million of cash during the period, primarily
from the proceeds of exercises of stock options and warrants.
At December 27, 1998, the Company had $1.3 million of outstanding debt, of
which $0.6 represented capital leases assumed when the Company acquired
Clare-Micronix. In fiscal 1998, the Company entered into a $40 million
unsecured, committed revolving multicurrency credit facility ("credit
facility"). No borrowings have been made against this credit facility. The
credit facility required the Company to maintain certain financial ratios. Due
to the non-recurring charges during the second quarter of fiscal 1999, the
Company was not in compliance with one of the covenants. The Company is
currently negotiating with a new commercial bank agent regarding a $15.0 million
unsecured, committed credit facility. The Company expects to complete
negotiations by the end of the fiscal year. See Note 13 of the Consolidated
Condensed Financial Statements.
The Company manages its foreign exchange exposure by monitoring its net
monetary position using natural hedges of its assets and liabilities denominated
in local currencies and entering into forward contract hedges with financial
institutions for trade transactions. There can be no assurance that this policy
will eliminate all currency exposure.
The Company believes that cash generated from operations, cash, cash
equivalents and investments and amounts available under its credit agreement and
operating lease facilities will be sufficient to satisfy its working capital
needs and planned capital expenditures for the balance of this fiscal year.
However, there can be no assurance that events in the future will not require
the Company to seek additional capital sooner or, if so required, that adequate
capital will be available on terms acceptable to the Company.
YEAR 2000 ISSUE
The Company 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 expects to finish the
assessment process by its 1999 fiscal year end.
The Company is in the process of implementing an Oracle Enterprise
Resource Planning ("ERP") system, Version 10.7 Smart Client, for many
applications and sites, including: order entry, manufacturing and financial
systems. The software vendor has informed the Company that the new system is
compliant with Year 2000 issues. To date, approximately 2,500 hours of employee
time has been devoted to, and approximately $3.0 million has been expended on
systems upgrades directly relating to the implementation.
In addition, the Company's other facilities, including Guadalajara and St.
Louis have other manufacturing and financial systems software. These systems are
being evaluated to assess compliance. The Company presently believes that with
modification to existing software and conversion to the new ERP system, the Year
2000 problem will not pose significant operational problems. However, the
Company is conducting further testing and may conduct an external audit
following the conclusion of its internal assessment.
The Company's potential exposure extends beyond financial applications to
include suppliers, customers, facilities, manufacturing equipment and other
communication equipment. The Company has established a cross-functional team,
which is in the process of reviewing these issues and developing effective
strategies to minimize risk. The Company has begun to undertake several steps in
this review, including: evaluating all systems and equipment by site; sending
letters to all major vendors assessing their Year 2000 compliance status; and
making upgrades to systems or equipment, when applicable. The Company is
continuing this effort across all Company locations. To date, the Company has
received written assurances from over 50% of our significant vendors that they
are Year 2000 compliant.
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
13
<PAGE> 16
between them will be compatible following December 31, 1999.
Based on its initial assessments to date, the Company believes it will not
experience any material disruption as a result of Year 2000 issues in internal
manufacturing processes, information processing, interface with key customers,
or with processing orders and billing. However, further assessments could find
certain critical third party providers, such as those supplying electricity,
water, telephone service, and certain raw materials or services may experience
difficulties resulting in disruption of service or supplies to the Company. A
shutdown of the Company's operations at individual facilities could occur for
the duration of the disruption. At present, the Company has not developed
complete contingency plans but intends to determine whether to develop any such
plan early in fiscal year 1999. There can be no assurance that Year 2000 issues
will not have a material adverse effect on the Company's business, results of
operation and financial condition. C.P. Clare supports the exchange of
information regarding the Year 2000 matters and designates the foregoing as Year
2000 Readiness Disclosures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to routine litigation incident to the conduct
of its business. None of such proceedings is considered material to the business
or the financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27.0 Financial Data Schedule (Edgar)
(b) Reports on Form 8-K
None
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C.P. CLARE CORPORATION
By: /s/ Harry Andersen
-------------------------------
Harry Andersen
Senior Vice President and Chief
Financial Officer
DATE: FEBRUARY 9, 1999
15
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