10-Q 1 a2062548z10-q.txt 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) ~~/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 23, 2001.~~

OR ~~/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

COMMISSION FILE NO. 0-26092 ------------------------ CLARE INC. (Exact Name Of Registrant As Specified In Its Charter) MASSACHUSETTS 04-2561471 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 78 CHERRY HILL DRIVE, BEVERLY, 01915 MASSACHUSETTS (zip code) (Address of principal executive offices)

------------------------ Registrant's telephone number, including area code: (978) 524-6700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of October 31, 2001, there were 9,828,364 shares of Common Stock, $.01 par value per share, outstanding. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- CLARE INC. TABLE OF CONTENTS

CLARE INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the Consolidated Condensed Financial Statements. 1 CLARE INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)

The accompanying notes are an integral part of the Consolidated Condensed Financial Statements. 2 CLARE INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the Consolidated Condensed Financial Statements. 3 CLARE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SEPTEMBER 23, 2001 (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, and December 31. 2. INTERIM FINANCIAL STATEMENTS The unaudited interim consolidated condensed financial statements presented herein have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements. Accordingly, these interim financial statements do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements reflect all normal, recurring adjustments and accruals that management considers necessary for a fair presentation of the Company's financial position as of September 23, 2001, and results of operations for the three and six months ended September 23, 2001 and September 24, 2000. 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, 2001 as filed with the Securities and Exchange Commission. 3. LOSS PER SHARE Options to purchase 2,389,442 and 1,898,069 shares of common stock for the three months ended and options to purchase 2,389,442 and 1,380,073 shares of common stock for the six months ended September 23, 2001 and September 24, 2000, respectively, were not included in calculating dilutive net loss per share because the effect would be anti-dilutive. 4. DISCONTINUED OPERATIONS On August 10, 2001, the Company sold the business and certain assets (primarily inventory and fixed assets) of its reed switch business to Sumida REMtech Corporation, a subsidiary of Sumida Corporation of Japan, for $8,000 cash. Pursuant to Accounting Principles Board (APB) Opinion No. 30, REPORTING RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, (APB No. 30) the consolidated financial statements of the Company have been presented to reflect the disposition of the reed switch business in accordance with APB 30. Accordingly, revenues, expenses, and cash flows of the reed switch business have been excluded from the respective captions in the accompanying consolidated statements of operations and consolidated statements of cash flows. The net assets and liabilities of the reed switch business have been reported as "Net assets or liabilities of discontinued operations" in the accompanying consolidated balance sheets; the net operating losses of the reed switch business have been reported as "Net loss from discontinued operations" in the accompanying consolidated statements of operations; the net loss from the sale of the reed switch business has been presented as "Net loss on sale of discontinued operation"; 4 and the net cash flows of the reed switch business have been reported as "Net cash used in discontinued operations" in the accompanying consolidated statements of cash flows. Net sales for the reed switch business were approximately $853 and $3,069 for the three and six months ended September 23, 2001, respectively, and were $2,613 and $7,884 for the three and six months ended September 24, 2000, respectively. Net assets (liabilities) of discontinued operations were as follows (in thousands):

5. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investment instruments with maturities of three months or less to be cash equivalents. Cash equivalents consisted of money market accounts and overnight demand notes at September 23, 2001 and March 31, 2001. 6. INVENTORIES Inventories include materials, labor and manufacturing overhead, and are stated at the lower of cost (first-in, first-out) or market and consist of the following at September 23, 2001 and March 31, 2001:

7. ACCRUED EXPENSES Accrued expenses consist of the following at September 23, 2001 and March 31, 2001:

8. CREDIT FACILITY The Company has a $10,000 committed revolving Credit Facility (the "Credit Facility") expiring December 31, 2002. Interest on 30-day loans is based on either LIBOR plus a spread ranging from 0.50% to 1.50%, based on Company performance or the higher of the latest Federal Funds rate plus 5 0.50% or the bank's reference rate. The Company must be 110% cash collateralized under the Credit Facility. There have been no borrowings since the inception of the Credit Facility in March 1999. However, as of September 23, 2001 and March 31, 2001, the Company had $2,045 of letters of credit outstanding under the Credit Facility in connection with certain leases. Letters of credit in the amount of $2,045 are collateralized by $2,250 cash on deposit at the bank as of September 23, 2001 and March 31, 2001. The letters of credit expire on December 31, 2001 and will automatically renew annually at the discretion of the lessor. The cash collateral is included in restricted cash in the accompanying balance sheets. The Credit Facility contains a financial covenant that requires the Company to maintain minimum working capital. The Credit Facility also contains certain non-financial covenants. The Company was in compliance with all covenants as of September 23, 2001. 9. RESTRUCTURING COSTS In March 2001, the Company implemented a restructuring plan to better align its organization with its corporate strategy and recorded a restructuring charge of $723 in accordance with Emerging Issues Task Force Issue ("EITF") 94-3 and SEC Staff Accounting Bulletin 100. The 2001 restructuring charge includes severance-related costs associated with workforce reduction of approximately 20 persons across the following functions: manufacturing (15), general and administrative (1), research and development (4). At September 23, 2001, approximately $115 of the accrued restructuring remained. The total cash impact of the restructuring was approximately $723, all of which will be paid by the end of the fourth quarter of fiscal 2002. 10. 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. 11. NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations". SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. This statement is effective for all business combinations initiated after June 30, 2001. In July 2001, the FASB issued SFAS no. 142, "Goodwill and Other Intangible Assets". This statement applies to goodwill and intangible assets acquired after June 30, 2001, as well as goodwill and intangible assets previously acquired. Under this statement goodwill as well as certain other intangible assets, determined to have an infinite life, will no longer be amortized, instead these assets will be reviewed for impairment on a periodic basis. Early adoption of this statement is permitted for noncalendar year-end companies whereby the entity's fiscal year begins after March 15, 2001 and its first interim period financial statements have not been issued. Pursuant to this statement, the Company elected early adoption during the first fiscal quarter ended June 24, 2001. The goodwill associated with 6 the Clare-Micronix acquisition is no longer subject to amortization over its estimated useful life. Such goodwill will be subject to an annual assessment for impairment. As a result of this early adoption the Company's amortization expense for the six month period ended September 23, 2001 is approximately $600 lower than the six months ended September 24, 2000. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement amends FASB Statement No. 19 and is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is currently evaluating the ultimate impact of this statement on its results of operations or financial position until such time as its provisions are applied. In October 2001, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards (SFAS) No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes FASB SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, but retains SFAS No. 121's fundamental provisions for (a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also supersedes the accounting/reporting provisions of Accounting Principles Board (APB) Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for segments of a business to be disposed of but retains APB No. 30's requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is evaluating the impact of the adoption of SFAS No. 144. 12. COMPREHENSIVE LOSS SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires disclosure of all components of comprehensive income (loss). Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The Company does not have any items of comprehensive income (loss) other than net income (loss). 13. FINANCIAL INFORMATION BY SEGMENT The Company changed this composition of reportable operating segments during fiscal 2002. Reportable operating segments are Solid State Relays, Integrated Circuits and Corporate. 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 7 measure transfers of sales between Company segments. Segment information for the quarters ended September 23, 2001 and September 24, 2000 is as follows.

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. Long-lived tangible assets by geographic area were as follows:

8 Revenues by geographic area for the three and six months ended September 23, 2001 and September 24, 2000 were as follows:

9 ITEM 2. 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, 2001, 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:

NET SALES. In the second quarter of fiscal 2002, revenues from continuing operations totaled $10.0 million compared with $17.2 million for the same period in fiscal 2001, a decrease of 42%. For the six months ended September 23, 2001, revenues from continuing operations were $23.1 million compared with $33.4 million for the same period in the prior year, a decrease of 31%. Lower sales, for both the quarter and year to date, were largely the result of decreased demand for solid state relays in the communications market. Net sales from continuing operations to customers located outside of the United States totaled $3.1 million or about 31% of total net sales and $7.7 million or about 33% of total net sales for the three and six month periods ended September 23, 2001, respectively. Net sales to customers in Europe represented 22% and 20% for the three and six month periods ended September 23, 2001, respectively. Net sales to customers in Asia represented 11% and 13% of total net sales for the three and six month periods ended September 23, 2001, respectively. 10 The Company monitors its currency exposure and international economic developments and takes actions to reduce the Company's risk from exposures to fluctuations in foreign currency markets. Because the Company ships and invoices all of its business from the United States, 100% of sales into Asia and approximately 75% of sales into Europe are U.S dollar denominated transactions and are, therefore, not exposed to exchange risk. Although a portion of sales into Europe are denominated in Euros, the related foreign currency assets are partially naturally hedged by foreign currency liabilities for local sales operations. GROSS PROFIT. Gross profit from continuing operations as a percentage of net sales was 5.8% in the second quarter of fiscal 2002 compared with 37.0% during the same period in fiscal 2001. The decrease was primarily the result of under-utilization of the Company's semiconductor fabrication facility and a one-time downward adjustment to certain inventory valuations. The gross profit ratio from continuing operations decreased to 14.0% for the six months ended September 23, 2001 from 36.8% for the comparable period ended September 24, 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative (S,G&A) expenses decreased $1.8 million, or 34%, in the second quarter of fiscal 2002 from $5.3 million for the same period in the prior fiscal year. The decrease was attributable primarily to reduced employment, lower third-party sales commissions, and lower promotion expense. On a year-to-date basis, S,G&A expense totaled $7.1 million, down $3.9 million from the prior year. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense (R&D), net of customer funded engineering, totaled $3.1 million for the second quarter of fiscal 2002, down $0.5 million from the comparable prior year period. The decrease was principally due to higher customer funded engineering. On a year-to-date basis, R&D expense aggregated $5.5 million, which was $1.0 million, or 16%, lower than last year. Despite lower overall spending, the Company continued to invest in product design and process technology to support new products such as application specific integrated circuits (ASICs), the Line Card Access Switch (LCAS), LiteLink, and OLED display drivers. INTEREST INCOME. Interest income totaled $0.2 million and $0.4 million for the second quarter and first six months of fiscal 2002, respectively. Interest income is derived from investments in both commercial paper and short-term tax exempt municipal bonds. Lower interest income compared with the prior fiscal year periods resulted from lower average cash balances. OTHER EXPENSE, NET. Other expense included a $0.25 million charge to revalue the Company's minority investment in Enrichnet, a quality of service software provider that became dormant during the quarter. LOSS FROM DISCONTINUED OPERATIONS AND LOSS ON SALE OF DISCONTINUED OPERATIONS. On August 10, 2001, the Company sold all of the assets of its Reed Switch business to Sumida Corporation of Japan for $8.0 million and recorded a $0.2 million net loss on the transaction. In accordance with APB Opinion No. 30, Reporting the Results of Operations, the business is being accounted for as a discontinued operation and appears on one line in the financial statements. See note 4 to financial statements. INCOME TAXES. In accordance with generally accepted accounting principles, the Company has provided for income taxes at its estimated annual effective tax rate. For the first six months of fiscal years 2001 and 2002, the Company did not record a tax benefit for pre-tax losses because it is not likely that such a benefit will be utilized in the foreseeable future. TRENDS AND UNCERTAINTIES COMPETITION. Clare competes with various global companies. Certain competitors of the Company have greater manufacturing, engineering or financial resources. 11 CUSTOMER CONCENTRATION. In the second quarter of fiscal 2002, the Company's ten largest customers accounted for 43% 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. The Company has invested heavily over the past several years in the capital expenditures necessary to develop new products. Slower than expected acceptance of new products will adversely affect the Company's operating results. To remain competitive, the Company must continue to develop new process and manufacturing capabilities to meet customer needs and introduce new products that reduce size and increase functionality and performance. FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced fluctuation in its operating results in the past and its operating results may fluctuate in the future. In addition, because of 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. 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. In 1997, 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, demand for 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 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. 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. These factors have not had a material effect on the Company's results; however, there can be no assurance that there will not be such an impact in the future. LIQUIDITY. The Company ended the quarter with cash balances of $24.4 million compared with $25.9 million at September 24, 2000. The Company maintains a $10.0 secured committed revolving credit facility. If the Company is unable to access adequate sources of capital this 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. 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, which could have a material adverse effect on future results. 12 LIQUIDITY AND CAPITAL RESOURCES During the three months ended September 23, 2001, the Company's cash and cash equivalents increased by $3.8 million to $24.4 million. This increase consisted of the net of the proceeds from the sale of the Reed Switch business ($8.0 million), cash provided from working capital ($1.8 million), and cash provided by depreciation and amortization ($1.5 million) offset, in part, by operating losses ($7.5 million). In fiscal 1999, the Company entered into a $10 million secured committed revolving credit facility. No borrowings have been made against this credit facility. Although the Company has had no borrowings against this line, the facility has been used to obtain letters of credit totaling $1.8 million at September 23, 2001 to secure future operating lease payments. 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. 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 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK None 13 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is subject to routine litigation incident to the conduct of its business. None of such proceedings is considered material to the business or financial condition of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULT UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None. 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

November 6, 2001 14

CLARE INC 10-Q