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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2000
Commission file number 0-24690
CLARION TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Delaware |
91-1407411 |
(State of Incorporation) |
(I.R.S. Employer Identification No.) |
235 Central Avenue, Holland, Michigan 49423
(Address of principal executive offices)
Issuer's telephone number: (616) 494-8885
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. [X] Yes [ ] No
The number of shares outstanding of registrant's common stock was 20,621,215 as of July 31, 2000.
Transitional Small Business Disclosure Format (check one):
Yes __ |
No X |
-1-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLARION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
THREE MONTHS ENDED |
SIX MONTHS ENDED |
||||||||||
JULY 1, |
JUNE 30, |
JULY 1, |
JUNE 30, |
||||||||
2000 |
1999 |
2000 |
1999 |
||||||||
Net sales |
$ |
29,160 |
$ |
4,090 |
$ |
54,245 |
$ |
7,149 |
|||
Cost of sales |
23,370 |
4,378 |
44,741 |
7,395 |
|||||||
Gross profit (loss) |
5,790 |
(288) |
9,504 |
(246) |
|||||||
Selling, general and administrative expenses |
3,185 |
1,683 |
5,519 |
3,210 |
|||||||
Operating income (loss) |
2,605 |
(1,971) |
3,985 |
(3,456) |
|||||||
|
|
|
|
||||||||
Interest expense |
(2,136) |
(262) |
(3,366) |
(313) |
|||||||
Other income (expense) - net |
28 |
(181) |
76 |
(171) |
|||||||
Income (loss) before income taxes |
497 |
(2,414) |
695 |
(3,940) |
|||||||
Provision for income taxes |
202 |
(31) |
320 |
(25) |
|||||||
Net income (loss) |
$ |
295 |
$ |
(2,383) |
$ |
375 |
$ |
(3,915) |
|||
Net income (loss) |
$ |
295 |
$ |
(2,383) |
$ |
375 |
$ |
(3,915) |
|||
Preferred stock dividends declared |
(548) |
- |
(1,096) |
- |
|||||||
Loss designated to common shareholders |
$ |
(253) |
$ |
(2,383) |
$ |
(721) |
$ |
(3,915) |
|||
Loss per share (basic and diluted) |
$ |
(0.01) |
$ |
(0.14) |
$ |
(0.04) |
$ |
(0.25) |
See accompanying notes to condensed consolidated financial statements.
-2-
CLARION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
JULY 1, |
DECEMBER 31, |
||||
2000 |
1999 |
||||
(unaudited) |
(audited) |
||||
ASSETS |
|||||
Current assets: |
|
||||
Cash and cash equivalents |
$ |
1,694 |
$ |
6,560 |
|
Accounts receivable, net |
15,962 |
9,543 |
|||
Inventories |
8,711 |
3,752 |
|||
Prepaid expenses and other current assets |
1,043 |
706 |
|||
Total current assets |
27,410 |
20,561 |
|||
Property, plant and equipment, net |
50,695 |
33,594 |
|||
Cost in excess of net assets acquired, net |
31,694 |
5,567 |
|||
Other assets |
574 |
592 |
|||
$ |
110,373 |
$ |
60,314 |
||
LIABILITIES AND SHAREHOLDERS' EQUITY |
|||||
Current liabilities: |
|||||
Short-term debt |
$ |
87 |
$ |
87 |
|
Current portion of long-term debt |
3,683 |
463 |
|||
Accounts payable |
14,675 |
8,395 |
|||
Accrued liabilities and dividends payable |
9,222 |
5,885 |
|||
Total current liabilities |
27,667 |
14,830 |
|||
Long-term debt, net of current portion |
53,065 |
23,204 |
|||
Deferred taxes and other liabilities |
556 |
737 |
|||
Total liabilities |
81,288 |
38,771 |
|||
Value of common shares subject to redemption |
2,550 |
2,550 |
|||
Shareholders' equity: |
|||||
Preferred stock |
15,702 |
15,670 |
|||
Common stock |
21 |
19 |
|||
Additional paid-in capital |
32,049 |
23,820 |
|||
Accumulated deficit |
(21,237) |
(20,516) |
|||
Total shareholders' equity |
26,535 |
18,993 |
|||
$ |
110,373 |
$ |
60,314 |
See accompanying notes to condensed consolidated financial statements.
-3-
CLARION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
SIX MONTHS ENDED |
|||||
JULY 1, |
JUNE 30, |
||||
2000 |
1999 |
||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|||||
Net income (loss) |
$ |
375 |
$ |
(3,915) |
|
Depreciation and amortization |
2,816 |
501 |
|||
Changes in operating assets and liabilities |
(5,526) |
(5,154) |
|||
Other, net |
3 |
227 |
|||
Cash used in operating activities |
(2,332) |
(8,341) |
|||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|||||
Capital expenditures |
(1,282) |
(10,213) |
|||
Proceeds from sale of equipment |
7 |
101 |
|||
Proceeds from sale of business |
- |
108 |
|||
Business acquisitions, net of cash acquired |
(27,255) |
- |
|||
Cash used in investing activities |
(28,530) |
(10,004) |
|||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||||
Net change in short-term debt |
(3,500) |
1,133 |
|||
Proceeds from long-term borrowings |
50,800 |
9,885 |
|||
Repayments of long-term debt |
(20,283) |
(1,334) |
|||
Capital lease payments |
(161) |
(9) |
|||
Proceeds from issuance of preferred stock |
32 |
- |
|||
Proceeds from issuance of common stock |
81 |
6,515 |
|||
Preferred stock dividends paid |
(973) |
- |
|||
Cash provided by financing activities |
25,996 |
16,190 |
|||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(4,866) |
(2,155) |
|||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
6,560 |
3,973 |
|||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ |
1,694 |
$ |
1,818 |
See accompanying notes to condensed consolidated financial statements.
-4-
CLARION TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Clarion Technologies, Inc. and Subsidiaries (collectively referred to as "Clarion" or the "Company") have been prepared, without audit, in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they 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, consisting of normal recurring accruals and adjustments, considered necessary for a fair presentation of the condensed consolidated financial statements have been made. Certain amounts for prior periods have been reclassified to conform with the current period financial statement presentation. Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
Effective January 1, 2000, the Company adopted a 4-4-5 quarterly accounting cycle. Accordingly, the second quarter of 2000 began on April 2 and ended on July 1, whereas the second quarter of 1999 began on April 1 and ended on June 30. The first six months of 2000 ended on July 1, whereas the first six months of 1999 ended on June 30. The financial condition at July 1, 2000, and the results of operations and cash flows for the three and six month periods ended July 1, 2000 would have been approximately the same if the Company had not adopted this change.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. Components of inventories are summarized as follows (in thousands):
JULY 1, |
DECEMBER 31, |
||||
2000 |
1999 |
||||
Raw materials |
$ |
2,047 |
$ |
1,626 |
|
Work in process |
4,280 |
1,331 |
|||
Finished goods |
2,384 |
795 |
|||
$ |
8,711 |
$ |
3,752 |
-5-
CLARION TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3. LOSS PER SHARE
The following table reconciles the numerators and denominators used in the calculation of basic and diluted loss per share (in thousands):
THREE MONTHS ENDED |
SIX MONTHS ENDED |
||||||||||
JULY 1, |
JUNE 30, |
JULY 1, |
JUNE 30, |
||||||||
2000 |
1999 |
2000 |
1999 |
||||||||
Numerators: |
|||||||||||
Net income (loss) |
$ |
295 |
$ |
(2,383) |
$ |
375 |
$ |
(3,915) |
|||
Preferred stock dividends declared |
(548) |
- |
(1,096) |
- |
|||||||
Loss designated to common shareholders for basic and diluted earnings per share |
$ |
(253) |
$ |
(2,383) |
$ |
(721) |
$ |
(3,915) |
|||
Denominators: |
|||||||||||
Weighted-average shares outstanding for basic and diluted earnings per share |
20,563 |
16,979 |
20,223 |
15,899 |
Weighted average shares outstanding for purposes of diluted loss per share are the same as basic loss per share for each of the periods presented because all common stock equivalents are anti-dilutive given the Company's operating losses designated to the common shareholders during each of those periods.
NOTE 4. BUSINESS COMBINATIONS
Purchase Transactions:
On February 1, 2000, the Company acquired substantially all the assets of Drake Products Corporation ("Drake"), a full-service plastic injection molding firm based in Greenville, Michigan. Consideration for the acquisition included 2 million shares of Clarion common stock, approximately $25 million in cash and the issuance of two subordinated promissory notes totaling approximately $5.1 million. The Company also assumed approximately $6.7 million of liabilities. The transaction was accounted for under the purchase method of accounting; therefore, assets and liabilities were recorded based upon their fair values at the date of acquisition. Operating results have been included in the Company's condensed consolidated statements of income from the date of acquisition. The Company recorded $26.5 million of costs in excess of the fair value of the net assets acquired, which is being amortized over 40 years.
In a related transaction, the Company acquired the real property used by Drake for $2.2 million in cash and the issuance of a $1.0 million promissory note.
On September 30, 1999, the Company acquired all the outstanding stock of Double "J" Molding, Inc. ("Double J"), a tier-two automotive supplier of plastic injection molded parts, for 850,000 shares of Clarion common stock. The transaction was accounted for under the purchase method of accounting. As such, operating results have been included in the Company's condensed consolidated statements of income from the date of acquisition.
On August 31, 1999, the Company acquired all the outstanding stock of Wamar Products, Inc. ("Wamar Products"), a plastic injection molder and assembler of plastic component and finished products, for $6.8 million in cash and
-6-
CLARION TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4. BUSINESS COMBINATIONS (continued)
200,000 shares of Clarion common stock. The transaction was accounted for under the purchase method of accounting. As such, operating results have been included in the Company's condensed consolidated statements of income from the date of acquisition.
The following unaudited pro forma consolidated results of operations are presented as if the acquisitions of Drake, Double J and Wamar Products had been made at the beginning of the periods presented (in thousands, except per share data).
THREE MONTHS ENDED |
SIX MONTHS ENDED |
||||||||||
JULY 1, |
JUNE 30, |
JULY 1, |
JUNE 30, |
||||||||
2000 |
1999 |
2000 |
1999 |
||||||||
Net sales |
$ |
29,160 |
$ |
27,321 |
$ |
58,192 |
$ |
53,539 |
|||
Net income (loss) |
295 |
(2,726) |
303 |
(4,182) |
|||||||
Loss designated to common shareholders per share (basic and diluted) |
(0.01) |
(0.14) |
(0.04) |
(0.22) |
The unaudited pro forma information is not necessarily indicative of the results of operations that would have occurred had the purchases been made at the beginning of the periods presented or of the future results of the combined operations.
Pooling Transactions:
On August 31, 1999 the Company acquired all the outstanding stock of Wamar Tool & Machine Co. ("Wamar Tool"), a fully equipped mold making and mold repair firm that serves the plastic injection molding industry, for 200,000 shares of Clarion common stock. The acquisition has been accounted for as a pooling of interests and accordingly all prior period condensed consolidated financial statements have been restated to include the combined results of operations, financial position and cash flows of Wamar Tool.
Net sales and net income of the separate companies for the periods preceding the acquisition and the combined amounts presented in the accompanying condensed consolidated financial statements are presented below (in thousands):
THREE MONTHS ENDED JUNE 30, 1999 |
SIX MONTHS ENDED JUNE 30, 1999 |
||||
Net sales: |
|||||
Clarion Technologies, Inc. |
$ |
3,615 |
$ |
6,463 |
|
Wamar Tool |
475 |
686 |
|||
Combined |
$ |
4,090 |
$ |
7,149 |
|
Net loss: |
|||||
Clarion Technologies, Inc. |
$ |
(2,384) |
$ |
(3,897) |
|
Wamar Tool |
1 |
(18) |
|||
Combined |
$ |
(2,383) |
$ |
(3,915) |
-7-
CLARION TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5. GEOGRAPHIC AND SEGMENT DATA
The Company operates in a single geographic location, North America, and in a single reportable business segment, plastic injection molding.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
NOTE 6. SUBSEQUENT EVENT
On July 20, 2000, the Company issued a $30 million senior subordinated term note (the "Note") and a warrant to purchase 2,847,797 shares of Clarion common stock, which was exercised on August 2, 2000 for a nominal amount, to the William Blair Mezzanine Capital Fund III, L.P. ("Mezzanine Fund").
The Note requires quarterly payments of interest only and matures on June 30, 2007. The current rate of interest on the Note is 12%, which may be reduced to 11.5% at such time as the Company raises at least $20 million of additional equity. The Note may be prepaid, at the Company's option, in minimum increments of $500,000 at any time after three years. The Note is unsecured and is subordinated to the Company's senior bank debt. Proceeds from the Note were used to repay the Company's $12 million term loan, repay the balance outstanding of $13.4 million under the Company's revolving credit facility and repay $3 million of the subordinated note issued in connection with the acquisition of Drake.
The Note contains certain covenants that require the Company, among other things, to maintain a certain fixed charge coverage ratio and maintain certain leverage ratios. The covenants also include restrictions on capital expenditures, Company indebtedness and payment of dividends.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
The following information should be read in conjunction with the accompanying Condensed Consolidated Financial Statements of the Company and the Management's Discussion and Analysis or Plan of Operation set forth in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
The Company is a full-service custom injection molder, providing rapid prototyping and design models, mold design and engineering services, mold manufacturing, injection molding and post-molding assembly to a diverse base of customers in the automotive, heavy truck, office furniture and consumer goods industries.
Clarion's business strategy is to create, through acquisitions and internal growth, one of the largest full-service custom injection molding business in the highly fragmented plastic injection-molding industry to serve customers in the Company's target markets.
The Company has completed several key acquisitions during the past two years. During 1999, the Company entered into two business combinations that were accounted for as poolings of interests. Accordingly, all financial data in the Management's Discussion and Analysis or Plan of Operation is reported as though these companies have always been one entity. In April, the Company acquired Mito Plastics, Inc. a full-service product development company providing program management, industrial design, engineering, prototyping and tooling from concept through delivery of complete assemblies all under one roof. In August, the Company acquired Wamar Tool & Machine Co., a fully equipped mold making and mold repair firm that serves the plastic injection molding industry.
The Company also entered into two business combinations during 1999 and one during 2000 that were accounted for as purchases. Accordingly, financial data in the Management's Discussion and Analysis or Plan of Operations only include operating results for these companies subsequent to their effective acquisition dates, which impact the comparability of results between the periods presented. On August 31, 1999, the Company acquired Wamar Products, Inc. a plastic injection molder and assembler of plastic component and finished products. On October 1, 1999, the Company acquired Double "J" Molding, Inc., a tier two automotive supplier of plastic injection molded parts. On February 1, 2000, the Company acquired the assets of Drake Products Corporation, a full-service plastic injection molding firm.
-9-
RESULTS OF OPERATIONS
The table below outlines the components of the Company's Statement of Income as a percentage of net sales:
THREE MONTHS ENDED |
SIX MONTHS ENDED |
||||||
JULY 1, |
JUNE 30, |
JULY 1, |
JUNE 30, |
||||
2000 |
1999 |
2000 |
1999 |
||||
Net sales |
100.0% |
100.0% |
100.0% |
100.0% |
|||
Cost of sales |
80.1% |
107.0% |
82.5% |
103.4% |
|||
Gross profit |
19.9% |
(7.0%) |
17.5% |
(3.4%) |
|||
Selling, general and administrative expenses |
11.0% |
41.2% |
10.2% |
44.9% |
|||
Operating income (loss) |
8.9% |
(48.2%) |
7.3% |
(48.3%) |
|||
|
|
|
|
||||
Interest expense |
(7.3%) |
(6.4%) |
(6.2%) |
(4.4%) |
|||
Other income - net |
.1% |
(4.4%) |
.2% |
(2.4%) |
|||
Income (loss) before income taxes |
1.7% |
(59.0%) |
1.3% |
(55.1%) |
|||
Provision for income taxes |
.7% |
(.7%) |
.6% |
(.3%) |
|||
Net income (loss) |
1.0% |
(58.3%) |
.7% |
(54.8%) |
THREE MONTHS ENDED JULY 1, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net sales
Net sales for the second quarter of 2000 were $29.2 million, an increase of $25.1 million over net sales of $4.1 million for the corresponding period of 1999. Substantially all of this increase related to sales recorded by Wamar Products, Double J and Drake, which were acquired subsequent to June 30, 1999.
Gross profit
Gross profit, as a percentage of net sales, for the second quarter of 2000 was 19.9% compared to a negative 7.0% for the corresponding period of 1999. This increase was primarily attributable to the gross profit generated by the Company's small and medium tonnage injection molding facilities, which were acquired subsequent to the second quarter of 1999. Adversely impacting gross profit for the second quarter of 2000 was the under absorption of overhead costs at the Company's new Montpelier, Ohio large tonnage injection molding facility that is operating below practical capacity. Management believes that business booked or anticipated to be booked later in 2000 and beyond should bring the margins at this facility closer to those obtained at the Company's other injection molding facilities. Manufacturing overhead at this facility is being minimized where possible. Gross profit for the second quarter of 1999 was adversely impacted by the under absorption of fixed costs associated with the start-up operations at the Montpelier facility, the Company's sole injection molding facility at the time.
-10-
Selling, general and administrative expenses
Selling, general and administrative expenses for the second quarter of 2000 increased $1.5 million to $3.2 million from $1.7 million for the comparable quarter in 1999. This increase was primarily attributable to the Drake acquisition during the first quarter of 2000 and the ongoing investment being made in order to support the Company's long-term strategy of growth through acquisitions. As a percentage of net sales, selling, general and administrative expenses decreased from 41.2% to 11.0%. The decrease, as a percentage of net sales, was indicative of higher net sales in the second quarter of 2000, as compared to the second quarter of 1999. The Company anticipates that the level of selling, general and administrative expenses will continue to increase in order to support continued growth and expansion, however, management believes that selling, general and administrative expenses should continue to decrease as a percentage of net sales.
Interest expense
Interest expense for the second quarter of 2000 increased $1.8 million to $2.1 million from $0.3 million for the comparable quarter in 1999. The increase was the result of higher debt levels for financing the new Montpelier facility, certain acquisition funding and general working capital needs.
Income taxes
The Company's effective income tax rate for the second quarter of 2000 and 1999 differed from the applicable statutory rate primarily due to nondeductible goodwill amortization, the effect of Michigan Single Business tax, and fully reserving future federal income tax benefits associated with net operating loss carryforwards until such time as it is likely that these benefits will be realized.
Net income (loss)
Net income for the second quarter of 2000 increased to $0.3 million compared to a net loss of $2.4 million for the second quarter of 1999 for the reasons noted above.
SIX MONTHS ENDED JULY 1, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net sales
Net sales for the first six months of 2000 was $54.2 million, an increase of $47.1 million over net sales of $7.1 million for the corresponding period of 1999. Of this increase, $44.8 million related to sales recorded by Wamar Products, Double J and Drake, which were acquired subsequent to June 30, 1999. The remaining sales increase was primarily attributable to higher sales volume at the Company's new Montpelier, Ohio large-tonnage facility, which was in its start-up phase during the first half of 1999.
Gross profit
Gross profit, as a percentage of net sales, for the first six months of 2000 was 17.5% compared to a negative 3.4% for the corresponding period of 1999. This increase was primarily attributable to the gross profit generated by the Company's small and medium tonnage injection molding facilities, which were acquired subsequent to June 30, 1999, and the increased absorption of overhead costs as a result of higher sales volume at the Company's Montpelier large tonnage injection molding facility, which was in its start-up phase during the first half of 1999. Adversely impacting gross profit for the first six months of 2000 was the under absorption of overhead costs at the Montpelier facility that is operating below practical capacity. Management believes that business booked or anticipated to be booked later in 2000 and beyond should bring the margins at this facility closer to those obtained at the Company's other injection molding facilities. Manufacturing overhead at this facility is being minimized where possible. Gross profit for the first six months of 1999 was adversely impacted by the under absorption of fixed costs associated with the start-up operations at the Montpelier facility, the Company's sole injection molding facility at the time.
-11-
Selling, general and administrative expenses
Selling, general and administrative expenses for the first six months of 2000 increased $2.3 million to $5.5 million from $3.2 million for the comparable period in 1999. This increase was primarily attributable to the Drake acquisition during the first quarter of 2000 and the ongoing investment being made in order to support the Company's long-term strategy of growth through acquisitions. As a percentage of net sales, selling, general and administrative expenses decreased from 44.9% to 10.2%. This decrease, as a percentage of net sales, was indicative of higher net sales in the first six months of 2000, as compared to the first six months of 1999. The Company anticipates that the level of selling, general and administrative expenses will continue to increase in order to support continued growth and expansion, however, management believes that selling, general and administrative expenses should continue to decrease as a percentage of net sales.
Interest expense
Interest expense for the first six months of 2000 increased $3.1 million to $3.4 million from $0.3 million for the comparable period in 1999. The increase was due to higher debt levels for financing the new Montpelier facility, certain acquisition funding and general working capital needs.
Income taxes
The Company's effective income tax rate for the first six months of 2000 and 1999 differed from the applicable statutory rate primarily due to nondeductible goodwill amortization, the effect of Michigan Single Business tax, and fully reserving future federal income tax benefits associated with net operating loss carryforwards until such time as it is likely that these benefits will be realized.
Net income (loss)
Net income for the first six months of 2000 increased to $0.4 million compared to a net loss of $3.9 million for the first six months of 1999 for the reasons noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a total cash balance of $1.7 million at July 1, 2000. The Company's primary cash requirements are for working capital needs, capital expenditures, business acquisitions, debt service obligations and preferred stock dividends. These cash requirements have increased due to the growth of the Company and are expected to continue to increase as a result of future anticipated growth. Historically, the Company's main sources of cash have been from the sale of equity securities and bank borrowings. The Company believes that cash generated from operations, together with amounts available under its revolving credit facility and any other available financing source, will be adequate to permit the Company to meet its cash requirements, although no assurance can be given in this regard. Changes in the Company's economic condition or other unforeseen circumstances could cause these funds to not be available to meet its cash requirements. In addition, the Company intends to pursue, as part of its business strategy, future growth through acquisitions that 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 transactions. 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.
Net cash used by operating activities decreased to $2.3 million for the first six months of 2000 from $8.3 million for the comparable period of 1999. The decrease in cash used by operating activities was primarily attributable to improved profitability. Working capital at July 1, 2000 was a negative $0.3 million, compared with a positive $5.7 million at December 31, 1999. The decrease reflected the cash paid and current portion of long-term debt incurred in connection with the Drake acquisition.
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During the first six months of 2000, the Company used cash of $1.3 million for capital expenditures, $27.3 million, net of cash acquired, for acquisitions and $1.0 million to pay dividends to preferred shareholders.
On February 1, 2000, the Company acquired substantially all the assets of Drake Products Corporation, a full-service plastic injection molding firm based in Greenville, Michigan. Consideration for the acquisition included 2 million shares of Clarion common stock, approximately $25.1 million in cash and the issuance of two subordinated promissory notes totaling approximately $5.1 million. The Company also assumed approximately $6.7 million of liabilities. In a related transaction, the Company also acquired the real property used by Drake for $2.2 million in cash and the issuance of a $1.0 million subordinated promissory note.
At July 1, 2000, the Company's total debt was $56.8 million, of which $49.9 million represented bank debt. At December 31, 1999 total debt was $23.8 million, of which $22.8 million represented bank debt. The increase in total debt resulted principally from new long-term bank borrowings of $50.8 million and the issuance of $6.1 million in subordinated promissory notes associated with the Drake acquisition, offset by repayments totaling $23.9 million.
Clarion replaced its existing credit agreements with a new revolving and term credit agreement (the "Credit Agreement") on February 29, 2000 in connection with the acquisition of Drake. The Credit Agreement, which was entered into with a group of commercial banks, provides for aggregate borrowings of up to $53.0 million consisting of: (i) a $15 million revolving credit facility; (ii) a $12 million term loan; and (iii) a $26 million amortizing term loan. The Credit Agreement expires in February 2003 .
On July 20, 2000, the Company issued a $30 million senior subordinated term note (the "Note") and a warrant to purchase 2,847,797 shares of Clarion common stock, which was exercised on August 2, 2000 for a nominal amount, to the William Blair Mezzanine Capital Fund III, L.P. The Note requires quarterly payments of interest only and matures on June 30, 2007. The current rate of interest on the Note is 12%, which may be reduced to 11.5% at such time as the Company raises at least $20 million of additional equity. The Note may be prepaid, at the Company's option, in minimum increments of $500,000 at any time after three years. The Note is unsecured and is subordinated to the Company's senior bank debt. Proceeds from the Note were used to repay the Company's $12 million term loan, repay the balance outstanding of $13.4 million under the Company's revolving credit facility and repay $3 million of the subordinated note issued in connection with the acquisition of Drake.
TAX CONSIDERATIONS
The Company has net operating loss ("NOL") carryforwards for tax purposes that are available to offset future taxable income. However, there are federal tax laws that restrict or eliminate NOL carryforwards when certain changes of control occur. A 50% change of control, which is calculated over a rolling three-year period, may cause the Company to lose some or all of its NOL carryforward benefits. Due to the significant number of equity transactions that have occurred in recent years the Company believes there have been changes in control, however, the Company also believes there are currently no restrictions that would eliminate the future cash benefits from utilizing its NOL carryforwards. As the Company executes it strategy of growth through acquisitions, there are likely to be more transactions in the future involving private or public sales of equity securities. The Company cannot make any assurances that such transactions will not result in the loss of NOL carryforward benefits in the future due to changes in control.
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INFLATION
The Company does not believe that sales of its products are affected materially by inflation, although there can be no assurance that inflation will not affect sales in the future. The Company does believe that its financial performance could be adversely affected by inflation in the plastic resin market. The primary plastic resins used by the Company are produced from petrochemical feedstock mostly derived from natural gas liquids. Supply and demand cycles in the petrochemical industry, which are often impacted by OPEC policies, can cause substantial price fluctuations. Consequently, plastic resin prices may increase as a result of changes in natural gas liquid prices and the capacity, supply and demand for resin and petrochemical feedstock from which they are produced. In many instances the Company has been able to pass through changes in the cost of its raw materials to customers in the form of price increases. However, there is no assurance that the Company will be able to continue such pass throughs, or that the timing of such pass throughs will coincide with the Company's increased costs. To the extent that increases in the cost of plastic resin cannot be passed on to customers, or that the duration of time lags associated with a pass through becomes significant, such increases may have an adverse impact on gross profit margins and the overall profitability of the Company.
YEAR 2000 READINESS DISCLOSURE
Many computer systems and software products were designed to accept only two digits in date code fields which could result in recognizing the entry ″00″ as the year 1900 rather than the year 2000. Consequently, such computer systems and software products needed to be upgraded to comply with Year 2000 ("Y2K") requirements. Clarion had actively taken steps prior to December 31, 1999 to insure that information technology systems, embedded technology and material third parties were all prepared to process date-related information in the Year 2000 without disruption.
As of the date of this filing, the Company has not experienced any Y2K-related problems and is currently unaware of any potential interruptions that could result from Y2K readiness issues. The Company continues to monitor its operations and transactions with customers and vendors for possible Y2K issues.
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
The statements contained in this document or incorporated by reference that are not historical facts are forward-looking statements within the meaning of the ″safe harbor″ provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based on management's current expectations or beliefs and are subject to a number of risks and uncertainties. In particular, any statement contained herein regarding the consummation and benefits of future acquisitions, as well as expectations with respect to future sales, operating efficiencies, and product expansion are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company, which may cause actual results, performance or achievements to differ materially from those described in the forward looking statements. Factors which may cause actual results to differ materially from those contemplated by the forward-looking statements, include, among other things: overall economic and business conditions; the demand for the Company's goods and services; competitive factors in the industries in which the Company competes; increases in production or material costs that cannot be recouped in product pricing; changes in government regulations; changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); interest rate fluctuations and other capital market conditions; the ability to achieve anticipated synergies and other cost savings in connection with acquisitions; and the timing, impact and other uncertainties of future acquisitions. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not currently involved in any material lawsuits. The Company is subject to claims and litigation in the ordinary course of its business, but does not believe that any such claim or litigation will have a material adverse effect on its consolidated financial position, results of operations or cash flow.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended July 1, 2000, the Company issued unregistered shares of its Common Stock in the following transactions:
In April, the Company issued 4,000 shares of Common Stock as consideration for services rendered to the Company. The securities were issued for an aggregate consideration of $8,000 pursuant to Section 4(2) of the Securities Act of 1933, as amended. There were no underwriters involved in the transaction.
In June, the Company issued 7,000 shares of Common Stock as consideration for services rendered to the Company. The securities were issued for an aggregate consideration of $28,000 pursuant to Section 4(2) of the Securities Act of 1933, as amended. There were no underwriters involved in the transaction.
In June, the Company issued 42,241 shares of Common Stock as consideration for services rendered to the Company. The securities were issued for an aggregate consideration of $84,482 pursuant to Section 4(2) of the Securities Act of 1933, as amended. There were no underwriters involved in the transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the annual meeting of stockholders held on June 20, 2000, the stockholders of the Company took the following actions:
1. The holders of common stock elected the following nine directors for terms of office expiring at the annual meeting of stockholders in the year 2001:
NAME |
FOR |
WITHHOLD |
|
Harrington Bischof |
19,657,967 |
27,945 |
|
Bryan C. Cressey |
19,666,657 |
18,955 |
|
Terence M. Graunke |
19,666,657 |
18,955 |
|
Michael C. Miller |
19,666,657 |
18,955 |
|
Jack D. Rutherford |
19,666,657 |
18,955 |
|
Frederick A. Sotok |
19,666,657 |
18,955 |
|
Frank T. Steck |
19,666,657 |
18,955 |
|
Craig A. Wierda |
19,666,657 |
18,955 |
|
Troy D. Wiseman |
19,630,902 |
55,010 |
2. The holders of common stock approved a Board of Directors proposal to adopt the Clarion Technologies, Inc., 2000 Employees' Stock Purchase Plan. The vote was 17,805,749 for and 21,770 against and 1,858,393 broker non-votes.
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3. The holders of common stock approved a Board of Directors proposal to adopt the First Amendment to the Clarion Technologies, Inc. 1999 Stock Incentive Plan. The vote was 17,784,749 for and 39,270 against and 1,861,893 broker non-votes.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER |
DESCRIPTION |
|
27 |
Financial Data Schedule |
(b) The Company filed the following report on Form 8-K during the three months ended July 1, 2000:
May 12, 2000; pursuant to Item 7, the Company amended its current report previously filed related to the acquisition of substantially all the assets of Drake Products Corporation. The amended report included audited financial statements for Drake Products Corporation and related pro forma financial information.
SIGNATURES
In accordance with Section 13 or 15(d) 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.
CLARION TECHNOLOGIES, INC.
Date: August 15, 2000 |
/s/ David W. Selvius |
David W. Selvius, Chief Financial Officer |
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