<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission File Number: 0-24690
-----------
CLARION HOUSE, INC.
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 91-1407411
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1901 North Roselle Road, Suite 1030, Schaumburg, Illinois 60195
---------------------------------------------------------------
(Address of principal executive offices)
(847) 490-5977
------------------------------------------------
(Issuer's telephone number, including area code)
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 No X
--- ---
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of July 1, 1998, the
Company had 8,888,418 shares of common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one);
Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
CLARION HOUSE, INC.
FORM 10-QSB INDEX
This report contains "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933 and is subject to the safe harbor created by
that section. Statements regarding future operating performance, new programs
expected to be launched and other future prospects and developments are based
upon current expectations and involve certain risks and uncertainties that could
cause actual results and developments to differ materially. Potential risks and
uncertainties include such factors as demand for the company's products,
pricing, the company's growth strategy, including its ability to consummate and
successfully integrate future acquisitions, industry cyclicality and
seasonality, the company's ability to continuously improve production
technologies, activities of competitors and other risks detailed in the
company's Annual Report on Form 10-K for the year ended December 31, 1997 and
other filings with the Securities and Exchange Commission.
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997...................................1
Consolidated Statements of Earnings (unaudited) for the
Three and Six Month Periods Ended June 30, 1998 and 1997............2
Consolidated Statements of Cash Flows (unaudited) for the
Six Month Periods Ended June 30, 1998 and 1997......................3
Notes to Consolidated Interim Financial Statements..................4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................7
Item 2. Changes in Securities and Use of Proceeds...........................7
Item 3. Defaults Upon Senior Securities.....................................7
Item 4. Submission of Matters to a Vote of Security Holders.................7
Item 5. Other Information...................................................7
Item 6. Exhibits and Reports on Form 8-K....................................7
<PAGE>
<TABLE>
CLARION HOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
ASSETS
December 31, June 30,
1997 1998
------------- -------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 10,265 $ 1,940,782
Accounts receivable, net 327,768 362,241
Inventories 259,663 299,498
Prepaid tooling 0 83,742
Prepaid expense 0 18,000
Refundable federal tax 1,048 (21,772)
------------- -------------
Total Current Assets 598,744 2,682,491
PROPERTY, PLANT AND EQUIPMENT
Land 0 187,565
Machinery & equipment 1,253,121 1,289,136
Vehicles 25,955 25,955
Furniture & fixtures 47,359 88,947
Office Equipment 0 77,188
Leasehold improvement 17,021 25,011
Construction in progress 0 66,584
------------- -------------
1,343,456 1,760,386
Less accumulated depreciation 919,267 996,767
------------- -------------
424,189 763,618
OTHER ASSETS
Deposits 1,000 2,600
Deferred tax credit 35,200 35,200
Goodwill, net of amortization 230,849 1,679,028
------------- -------------
TOTAL ASSETS $ 1,289,982 $ 5,162,937
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 213,728 $ 97,599
Convertible notes, 10% 0 1,205,000
Current portion of long term debt 90,443 90,443
Current portion of obligations under capital leases 17,379 17,379
Accounts payable - trade 398,423 437,745
Accrued expenses 41,825 14,800
Officers' Loan 3,338 0
------------- -------------
Total Current Liabilities 765,136 1,862,966
DEFERRED TAX LIABILITY 1,300 1,300
LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES 419,391 889,328
CAPITAL LEASE OBLIGATIONS 51,211 43,400
------------- -------------
TOTAL LIABILITIES 1,237,038 2,796,993
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value
10,000,000 shares authorized,
5,465,000 shares outstanding and
5,165,000 shares issued at December 31,
1997 and 8,917,012 outstanding and
8,617,012 issued at June 30, 1998 51,650 86,170
Additional paid in capital 1,512,661 4,932,329
Accumulated deficit (1,511,367) (2,652,555)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 52,944 2,365,944
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 1,289,982 $ 5,162,937
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-1-
<PAGE>
<TABLE>
CLARION HOUSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- -----------------------------------
1997 1998 1997 1998
----------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Sales $ 0 $ 498,208 $ 0 $ 1,121,781
Cost of goods sold 0 680,681 0 1,324,586
----------------- --------------- --------------- ----------------
Gross profit (loss) 0 (182,473) 0 (202,805)
Selling, general and
administrative expenses 102,743 600,765 226,638 889,406
----------------- --------------- --------------- ----------------
Operating profit (loss) (102,743) (783,238) (226,638) (1,092,211)
Other income (expense)
Interest expense 0 (26,092) 0 (48,977)
Earnings (loss) before income taxes
(102,743) (809,330) (226,638) (1,141,188)
Income tax expense 0 0 0 0
----------------- --------------- --------------- ----------------
Net earnings (loss) $ (102,743) $ (809,330) $ (226,638) $ (1,139,632)
================= =============== =============== ================
Earnings per share from continuing
operations $ (.13) $ $ (.19)
=============== ================
Shares used in computation 6,355,983 5,875,006
=============== ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-2-
<PAGE>
<TABLE>
CLARION HOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1997 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net earnings (loss) $ (226,638) $ (1,141,188)
Adjustments to reconcile net earnings to
net cash provided by (used in) operations
Depreciation and amortization 660 93,328
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable 0 (34,473)
Decrease (increase) in inventories 0 (39,835)
Decrease (increase) in prepaid tooling 0 (83,742)
Decrease (increase) in prepaid expenses 0 (18,000)
Refundable federal tax 0 22,820
Increase (decrease) in accounts payable (44,948) 39,322
Increase (decrease) in accrued expenses 0 (27,025)
Deposits 0 (1,600)
Officers' loan payable 0 (3,338)
Net cash provided by (used in) operating activities (142,500) (1,193,732)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment 0 (416,930)
Investment in subsidiary 0 (1,464,007)
-------------- --------------
Net cash provided by (used) in investing activities 0 (1,880,937)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in line of credit 0 (116,129)
Issuance of convertible notes 0 1,205,000
Payments on long-term debt 0 (44,070)
Capital lease payments 0 (7,811)
Sale of company stock 142,500 3,454,188
Borrowings from long term debt 0 514,007
Net cash provided by (used in) financing activities 142,500 5,005,185
-------------- --------------
Net increase (decrease) in cash 0 1,930,517
-------------- --------------
Cash at beginning of period 19 10,265
-------------- --------------
Cash at end of period $ 19 $ 1,940,782
============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-3-
<PAGE>
CLARION HOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, the financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments have been included and all adjustments considered necessary for a
fair presentation have been included and such adjustments are of a normal
recurring nature.
Results for interim periods should not be considered indicative of results for a
full year. The year-end consolidated balance sheet was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1997.
-4-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATION"
SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S UNAUDITED FINANCIAL STATEMENTS,
THE NOTES THERETO AND THE OTHER FINANCIAL DATA INCLUDED ELSEWHERE HEREIN AND
INCLUDES FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES WHICH
ARE BASED UPON THE COMPANY'S BELIEFS, AS WELL AS ASSUMPTIONS MADE BY AND
INFORMATION CURRENTLY AVAILABLE TO THE COMPANY. THE COMPANY'S ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THE RESULTS PREDICTED BY SUCH FORWARD-LOOKING STATEMENTS
DUE TO VARIOUS FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE RISKS AND
UNCERTAINTIES WHICH ARE DISCUSSED BELOW.
RESULTS OF OPERATIONS
The Company's results of operations for the three and six months
ended June 30, 1998, included revenues of $0.50 million and $1.12 million,
respectively and cost of goods sold of $0.68 million and $1.32 million,
respectively. The Company's gross loss for the three months ended June 30, 1998
was $0.18 million. For the six months ended June 30, 1998, the Company's gross
loss was $0.20 million. The gross loss is a result of insufficient sales levels
to support fixed manufacturing costs. Management believes that sales levels will
continue to be insufficient to cover fixed overhead expenses through the
remainder of the fiscal year.
Selling, general and administrative expenses for the three and six
month periods ended June 30, 1998 were $0.60 million and $0.89 million,
respectively. The Company had operating losses of $0.78 million for the three
months ended June 30, 1998 and had operating losses of $1.09 million for the six
months ended June 30, 1998.
The Company's interest expense for the three months ended June 30,
1998 was $0.03 million and $0.05 million for the six months ended June 30, 1998.
The interest expense is primarily due to the financing obtained to support
increased sales as well as the financing of property and equipment. The
Company's net loss for the three and six months ended June 30, 1998 were $0.81
million and $1.14 million, respectively.
No meaningful comparison can be made to the three and six month
periods ended June 30, 1997 in that during that period the Company did not have
any operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital needs and capital equipment
requirements have increased as a result of the growth of the Company and are
expected to continue to increase as a result of anticipated growth. Increases in
required working capital and capital equipment requirements are expected to be
met from cash flow from operations, equipment financing, revolving credit
borrowings and the sale of the Company's equity securities. As of June 30, 1998,
the Company had working capital of $0.82 million.
The Company has financed its operations to date through the sale of
its equity securities and has received gross proceeds of $2.43 million from the
sale of its equity securities during the six month period ended June 30, 1998.
The Company also financed its operations for the six months ended June 30, 1998
through the issuance of convertible notes in the amount of $1.20 million.
Management believes that its current working capital, along with expected
revenues from operations, will satisfy its capital requirements for the next
twelve months.
-5-
<PAGE>
The Company used cash in operating activities of $1.19 million for
the six months ended June 30, 1998. Cash used for operating activities in the
period was primarily the result of net loss, depreciation and amortization, and
changes in working capital due to increases in accounts receivable, inventories
and prepaid tooling. The Company used cash in investing activities of $1.88
million for the six months ended June 30, 1998. Cash used in investing
activities was for the purchase of property, plant and equipment. The Company
generated $5.0 million in cash flow from financing activities for the six months
ended June 30, 1998. The financing activities in the period were primarily a
result of the issuance of convertible notes and the sale of Company stock.
On July 1, 1998, the Company commenced a private offering of its
common stock. The minimum offering is 500,000 shares and the maximum offering is
1,000,000 shares. The offering price per share is $2.00.
The liquidity provided by the Company's credit facilities, combined
with cash flow from operations and financing activities, is expected to be
sufficient to meet the Company's anticipated working capital and capital
expenditure needs for existing operations for at least twelve months. There can
be no assurance, however, that such funds will not be expended prior thereto due
to changes in economic conditions or other unforeseen circumstances, requiring
the Company to obtain additional financing prior to the end of such twelve month
period. In addition, the Company intends to pursue future growth through
opportunistic acquisitions which may involve the expenditure of significant
funds. Depending upon the nature, size and timing of future acquisitions, the
Company may be required to obtain additional debt or equity financing in
connection with such future acquisitions. There can be no assurance, however,
that additional financing will be available to the Company, when and if needed,
on acceptable terms or at all.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, in less than two years, computer systems
and software used by many companies will need to be upgraded to comply with such
"Year 2000" requirements. The Company believes that its internal systems are
either already Year 2000 compliant or can be upgraded without significant
expenditures.
-6-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Inapplicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 1998, the Company sold
1,935,000 shares of common stock for cash at a price of one dollar
($1.00) per share pursuant to the exercise of options granted by the
Company to certain of its officers, directors, director nominees and
affiliates. The sales were conducted pursuant to Section 4(2) of the
Securities Act of 1933 (the "Act").
The Company also sold 100,000 shares of common stock for cash at a
price of one dollar and seventy-five cents ($1.75) per share pursuant
to warrants granted to certain individuals in consideration for
consulting services performed for the benefit of the Company. The
sales of the Company's common stock were conducted pursuant to
Section 4(2) of the Act.
The Company issued 38,594 shares of common stock as consideration for
the purchase of computer equipment. The shares were issued at a price
of two dollars ($2.00) per share.
The Company also issued an aggregate of 950,000 shares in exchange
for one hundred percent (100%) of the outstanding shares of Rose &
Associates, Inc. pursuant to an Agreement and Plan of Reorganization
dated and entered into on March 31, 1998.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
ITEM 5. OTHER INFORMATION
Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Index of Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Inapplicable.
-7-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CLARION HOUSE, INC.
Dated: September 30, 1998 By: /S/ Troy D. Wiseman
----------------------------
Troy D. Wiseman,
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1940782
<SECURITIES> 0
<RECEIVABLES> 362241
<ALLOWANCES> 0
<INVENTORY> 299498
<CURRENT-ASSETS> 2682491
<PP&E> 1760386
<DEPRECIATION> 996767
<TOTAL-ASSETS> 5162937
<CURRENT-LIABILITIES> 1862966
<BONDS> 0
0
0
<COMMON> 86170
<OTHER-SE> 2279774
<TOTAL-LIABILITY-AND-EQUITY> 5162937
<SALES> 1121781
<TOTAL-REVENUES> 1121781
<CGS> 1324586
<TOTAL-COSTS> 2213992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48977
<INCOME-PRETAX> (1141188)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1139632)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1139632)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
