U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2001
Commission file number 0-24690
CLARION TECHNOLOGIES, INC.
(Name of registrant as specified in its charter)
Delaware 91-1407411
(State of Incorporation) (I.R.S. Employer Identification No.)
38 W. Fulton, Suite 400, Grand Rapids, Michigan 49503
(Address of principal executive offices)
Issuer's telephone number: (616) 233-6680
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities and Exchange Act of 1934 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 23,961,551 as
of November 6, 2001.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CLARION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Third Quarter Ended Year to Date Ended
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
Net sales $ 26,949 $ 31,318 $ 83,474 $ 85,563
Cost of sales 26,306 27,738 82,585 72,479
----------- ----------- ----------- -----------
Gross profit 643 3,580 889 13,084
Selling, general and
administrative expenses 2,943 3,463 9,629 8,982
Impairment and other nonrecurring charges 123 - 7,556 -
----------- ----------- ----------- -----------
Operating income (loss) (2,423) 117 (16,296) 4,102
Interest expense (3,034) (2,047) (7,964) (5,413)
Other income (expense), net (47) 17 (145) 93
----------- ----------- ----------- -----------
Loss before provision for income taxes (5,504) (1,913) (24,405) (1,218)
Provision for income taxes - 175 212 495
----------- ----------- ----------- -----------
Net Loss $ (5,504) $ (2,088) $ (24,617) $ (1,713)
============ ========== ========== ===========
Net loss $ (5,504) $ (2,088) $ (24,617) $ (1,713)
Preferred stock dividends accrued (774) (554) (1,793) (1,650)
----------- ----------- ------------- -----------
Loss attributable to common
shareholders $ (6,278) $ (2,642) $ (26,410) $ (3,363)
============ =========== ============ ===========
Average shares outstanding (basic
and diluted) 23,637 22,549 23,572 20,996
============ =========== ============= ===========
Loss per share (basic and diluted) $ (.27) $ (.12) $ (1.12) $ (.16)
============ =========== ============= ===========
( ) Denotes deduction.
See accompanying notes to condensed consolidated financial statements.
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CLARION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 29, 2001 December 30, 2000
------------------ -----------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 931 $ 5,252
Accounts receivable, net 13,870 18,643
Inventories 4,456 5,375
Prepaid expenses and other current assets 156 549
----------- ----------
Total current assets 19,413 29,819
Property, plant and equipment, net 45,935 53,626
Other assets:
Goodwill, net 25,989 27,341
Deferred program costs 3,075 2,398
Deferred financing costs, net 1,047 1,192
Other - 2
--------- ----------
$ 95,459 $ 114,378
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 19,641 $ 21,586
Accrued liabilities and dividends payable 11,254 5,817
Revolving credit and current portion of long-term debt 39,666 1,580
---------- ----------
Total current liabilities 70,561 28,983
Long-term debt, net of current portion 31,675 65,924
Other liabilities 137 250
------------- ----------
Total liabilities 102,373 95,157
Value of common shares subject to redemption 2,550 2,550
Redeemable preferred stock 16,472
Shareholders' equity (deficit):
Preferred stock - 15,702
Common stock 24 24
Additional paid-in capital 33,581 33,201
Accumulated deficit (59,541) (32,256)
---------- ---------
Total shareholders' equity (deficit) (25,936) 16,671
---------- ----------
$ 95,459 $ 114,378
========= ==========
( ) Denotes deduction.
See accompanying notes to condensed consolidated financial statements.
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CLARION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Year to Date Ended
September 29, 2001 September 30, 2000
OPERATING ACTIVITIES:
Net loss $ (24,617) $ (1,713)
Depreciation and amortization 6,045 4,790
Impairment and other nonrecurring charges 7,433 -
Changes in operating assets and liabilities 5,970 (6,284)
Other, net (19) 6
----------- ----------
Cash used in operating activities (5,188) (3,201)
INVESTING ACTIVITIES:
Capital expenditures (1,709) (3,438)
Business acquisitions, net of cash acquired - (30,796)
Other 14 38
----------- ----------
Cash used in investing activities (1,695) (34,196)
FINANCING ACTIVITIES:
Net change in short-term debt - (3,587)
Proceeds from long-term borrowings 9,300 87,400
Payment of deferred financing costs (913) -
Repayments of long-term debt (5,909) (50,430)
Proceeds from issuance of capital stock 84 113
Preferred stock dividends paid - (1,521)
----------- -----------
Cash provided by financing activities 2,562 31,975
----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,321) (5,422)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,252 6,560
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 931 $ 1,138
========== ==========
( ) Denotes reduction in cash and cash equivalents.
See accompanying notes to condensed consolidated financial statements.
-4-
CLARION TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Clarion Technologies, Inc. and Subsidiaries (collectively referred to as
"Clarion" or the "Company") include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the results of operations for the periods shown. The financial
statements have been prepared in accordance with the instructions to Form 10-Q
and, therefore, do not include all information and footnotes necessary for a
fair presentation of consolidated financial position, results of operations and
cash flows in conformity with accounting principles generally accepted in the
United States. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-KSB for the fiscal year ended December 30, 2000.
In July 2001, the FASB issued Statement No. 141, "Business Combinations" and
Statement No. 142, "Goodwill and Other Intangible Assets". Statement No. 141
eliminates the pooling of interests method of accounting for business
acquisitions and Statement No. 142 eliminates the amortization of goodwill and
requires the Company to evaluate goodwill for impairment on an annual basis. Any
impairment of goodwill must be recognized currently as a charge to earnings in
the financial statements. The Company will be required to apply the provisions
of Statement No. 141 to all business combinations initiated after June 30, 2001
and the provisions of Statement No. 142 to all goodwill and indefinite lived
intangible assets beginning with its fiscal year starting December 30, 2001.
Application of the nonamortization provisions of Statement No. 142 in fiscal
2002 is expected to reduce intangibles amortization and increase net earnings by
approximately $0.7 million ($0.03 per share). During 2002, the Company will
perform the initial impairment tests of goodwill and indefinite lived intangible
assets as of the beginning of fiscal 2002. The Company has not yet determined
what effect these tests will have on its consolidated results of operations or
financial position.
The Company has classified checks disbursed but not yet presented for payment as
accounts payable. The amounts at September 29, 2001 and December 30, 2000 were
$1,391,000 and $573,000 respectively.
2. INVENTORIES
Inventories are stated at the lower of first-in, first-out cost or market. The
components of inventories are as follows (in thousands):
September 29, December 30,
2001 2000
---------------------- ---------------------
Raw materials $3,236 $3,222
Work in progress 394 1,152
Finished goods 826 1,001
---------------------- ---------------------
$4,456 $5,375
====================== =====================
3. BUSINESS ACQUISITIONS
On February 1, 2000, the Company acquired substantially all of the assets of
Drake Products Corporation ("Drake"), a plastic injection-molding firm serving
consumer products and automotive original equipment manufacturers (OEMs) and
tier-one suppliers. Consideration for the acquisition included 2,000,000 shares
of Clarion common stock with a fair value of $3.8 million, $25.6 million in cash
and the issuance of two subordinated promissory notes totaling $5.1 million. The
Company also assumed $6.9 million of liabilities. In related transactions, the
Company acquired the real property used by Drake for $2.6 million in cash and
the issuance of a $1.0 million promissory note.
-5-
The following unaudited pro forma consolidated results of operations are
presented as if the acquisition of Drake had been made at the beginning of the
earliest period presented (in thousands, except per share data).
Year to Date Ended
September 30, 2000
------------------
Net sales $ 89,510
Net loss attributable to common shareholders (1,785)
Loss attributable to common shareholders per share
(basic and diluted) (.16)
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 period presented or of the future results of the combined
operations.
4. 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 this reportable business segment 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 fiscal year ended December 30, 2000.
5. IMPAIRMENT AND OTHER NONRECURRING CHARGES
During the fourth quarter of 2000 and the first three quarters of 2001, the U.S.
economy experienced a slowdown in manufacturing activity. In particular, several
of the industries served by the Company, such as the domestic automotive and
heavy truck markets, are currently enduring dramatic reductions in orders. The
Company has already felt the impact of this downturn and expects these
conditions to continue in the near term. In response to these conditions,
management has taken aggressive actions to consolidate existing operations, cut
overhead costs and reduce excess capacity. These actions have resulted in the
need to write-down the value of certain assets and to recognize various costs
anticipated to execute these actions.
At the start of 2001, the Company had two manufacturing operations located in
Greenville, Michigan. On March 16, 2001, the Company announced the closing of
one of these facilities. The plant closing resulted in the transfer of employees
and related production to other Company facilities, including the remaining
facility in Greenville and the Company's other facilities located in Western
Michigan. Management accrued a nonrecurring pre-tax charge of $1.5 million
related to the closing to cover various exit costs ($0.7 million) and
anticipated non-cash losses on the sale of the property, plant and certain
equipment ($0.8 million) in the first quarter of 2001. At the end of July, 2001,
the closing activities were substantially completed. As of the end of the third
quarter, $40,000 of exit cost payments were charged against the related
liability.
During the second quarter of 2001, the Company announced its decision to
relocate certain functions previously located in its Technical Center and to
outsource the manufacture of tooling. Specifically, these actions included the
relocation of engineering, program management and sales personnel to the
Company's manufacturing facilities in order to provide integrated support to the
manufacturing operations. In addition, many of the tool makers and equipment
previously used in the manufacture of tooling have been moved directly into the
manufacturing facilities to provide more efficient and cost effective tool
maintenance support to the Company's manufacturing operations. The Company will
continue to program manage new tooling programs for its customers but will
outsource the actual tool manufacturing. Management accrued a nonrecurring
pre-tax charge of $0.9 million related to these actions to cover various exit
costs ($0.4 million) and anticipated non-cash losses on the disposition of
certain furniture, fixtures and equipment ($0.5 million) in the second quarter
of 2001. At the end of the third quarter, $0.1 million of exit cost payments and
$0.5 million of losses on property disposals have been recorded against the
related reserves. Other nonrecurring moving costs of approximately $12,000 and
$0.1 million were incurred and expensed during the second and third quarters,
respectively.
-6-
Given current operating and industry conditions, the Company has performed an
analysis of the expected future cashflows related to its manufacturing
facilities and determined that an asset impairment charge in the amount of $5.0
million is required to adjust the net carrying value of the assets of one of its
facilities, including goodwill, to fair value under the provisions of Statement
of Financial Accounting Standards No. 121. This non-cash charge was recorded
during the second quarter of 2001.
6. LONG-TERM DEBT
Effective April 17, 2001, the Company negotiated an amendment to the senior
credit facility that provides for the following:
- The maturity of the facility has been amended from February 28, 2003 to
April 30, 2002.
- The term loan portion of the credit facility, prior to amendment, provided
for principal payments of $0.3 million per month until February 28, 2002
and $0.4 million monthly thereafter. The amendment provides for principal
payments at various times between July 1, 2001 and December 31, 2001
totaling $0.3 million, with remaining outstanding balances due at maturity
of the facility.
- Interest rate margins have been increased by 0.25% and 0.75% for borrowing
under the prime rate option for revolving credit and term loans,
respectively, and by 1.0% for term loan borrowings under the LIBOR option.
- The banks have provided an additional $1.0 million term loan that will be
due in full at maturity of the credit facility on April 30, 2002. This term
loan provides immediate additional liquidity and is guaranteed by one of
the Company's Directors. A warrant to purchase 225,000 shares of common
stock was issued to the Director in consideration for this guarantee.
- The revolving credit limit has been increased from $15.0 million to $17.0
million, subject to an asset-based borrowing calculation. This increase
provides up to $2.0 million of additional liquidity depending on inventory
and accounts receivable levels.
- All prior covenant violations and default remedies were waived through
April 30, 2002, and covenants were reset for the remainder of the term of
the credit facility.
On April 17, 2001, the Company also negotiated an amendment to its subordinated
credit facility that provides for the following:
- Interest payments from March 31, 2001 will accrue, but not be paid prior to
the maturity of the senior credit facility on April 30, 2002. This deferred
interest will remain a future obligation of the Company. During the period
of interest deferral, the interest rate will increase to 15.0%. The
interest rate will return to 12.0% upon payment of the deferred interest.
- An additional $3.0 million of capital was funded by the original
subordinated lender and certain Company Directors and executive officers
through this amended credit facility. In addition to cash interest as
provided under the subordinated credit agreement, the providers of this
capital received a warrant to purchase 3.0 million shares of Clarion common
stock for $.0001 per share. The warrant expires 10 years from the date of
issuance.
- All prior covenant violations and default remedies were permanently waived
and covenants were reset for the remainder of the term of the credit
facility.
At September 29, 2001, the Company was in violation of certain of its revised
covenants in its senior credit agreement and was in technical default of the
agreement. In the event (i) these violations are not remedied, and (ii) the
senior lenders elect to accelerate the senior debt, an event of default would
exist under the Company's subordinated credit facility and the related
subordinated debt would be callable at that time. The Company does not currently
anticipate these events occurring.
-7-
Effective August 1, 2001, the Company received funding in the form of a $5.0
million subordinated term note (the "Note"). Proceeds from the Note were used to
repay $3.6 million of revolving debt with the remaining $1.4 million used for
operations. The Note requires monthly payments of principal and interest, at a
rate of 8% per annum, beginning November 1, 2001, with a maturity date of May 1,
2002. The Note is secured by certain assets of the Company and is subordinated
to the Company's senior bank debt.
Also effective August 1, 2001, the Company received an additional investment of
$1.3 million from one of its directors to be used in the operations of the
Company. This investment is intended to be in the form of a short term
subordinated term note and as a result is recorded in the current portion of
long term debt as of September 29, 2001. As part of this transaction, the
Company expects to issue warrants to purchase shares of the Company's common
stock with a nominal exercise price.
7. PREFERRED STOCK
Effective April 6, 2001, the terms of the Company's convertible preferred stock
were amended. The dividend rate on the outstanding stock has been reduced to 12%
from 14% of the liquidation value and dividends, at the option of the Company,
and may be paid in either common stock or cash. The liquidation value was also
increased from $8.00 to $10.00. The dividend rate will increase back to 14% and
then 16% if the preferred stock is not redeemed by certain specified dates. In
addition, the conversion features of the preferred stock were changed such that
it is convertible at the option of the holder at any time, unless previously
redeemed, into shares of common stock of the Company at a conversion rate of
3.33 shares of common stock for each share of preferred stock through March 31,
2002, at which time the conversion rate becomes 5 shares of common stock per
share of preferred stock, subject to adjustment in certain events. The Company
may at any time redeem all or any portion of the convertible preferred stock for
$10.00 per share plus all accrued and unpaid dividends thereon. The preferred
stock has a mandatory redemption date of March 31, 2003, subject to any existing
contractual agreements that may prohibit such redemption. The amended senior
credit agreement does not allow, however, for such cash dividend payments prior
to April 30, 2002 unless approved by the lenders. As a result of this mandatory
redemption provision, the outstanding preferred stock is no longer reflected in
the equity section of the balance sheet but is now reflected as a long-term
obligation of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The following information should be read in conjunction with the accompanying
Condensed Consolidated Financial Statements of the Company and Management's
Discussion and Analysis of Financial Condition and Results of Operations set
forth in the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 30, 2000.
The Company is a full-service custom injection molder, providing program
management, design and engineering services, 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 businesses 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,
including a business combination effective on February 1, 2000, for the assets
of Drake Products Corporation, a full-service plastic injection molding firm,
and the real properties used by the Drake operations. This business combination
was accounted for as a purchase and accordingly, financial data in Management's
Discussion and Analysis of Financial Condition and Results of Operations only
include operating results for this company subsequent to the effective
acquisition date, which impacts the comparability of results between the periods
presented.
-8-
RESULTS OF OPERATIONS
The table below summarizes the components of the Company's Condensed
Consolidated Statements of Operations as a percentage of net sales:
Third Quarter Ended Year to Date Ended
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 97.6% 88.6% 98.9% 84.7%
---------- ---------- ---------- ----------
Gross profit (loss) 2.4% 11.4% 1.1% 15.3%
Selling, general and
administrative expenses 11.4% 11.1% 11.5% 10.5%
Impairment and other
nonrecurring charges - - 9.1% -
---------- ---------- ---------- ----------
Operating income (loss) (9.0%) 0.3% (19.5%) 4.8%
Interest expense (11.2%) (6.5%) (9.5%) (6.3%)
Other income (expense), net (0.2%) 0.1% (0.2%) 0.1%
---------- ---------- ---------- ----------
Loss before provision for
income taxes (20.4%) (6.1%) (29.2%) (1.4%)
Provision for income taxes - 0.6% 0.3% 0.6%
---------- ---------- ---------- ----------
NET LOSS (20.4%) (6.7%) (29.5%) (2.0%)
========== ========== ========== ==========
Net sales
Net sales of $26.9 million in the third quarter of 2001 were $4.4 million
(14.1%) lower than net sales of $31.3 million in the third quarter of 2000. Net
sales for the first three quarters of 2001 were $83.5 million, a decrease of
$2.1 million (2.5%) over net sales of $85.6 million for the same period in the
prior year. The third quarter decrease was primarily due to lower OEM automotive
sales as a result of the continued economic downturn in the domestic automotive
industry as well as a decrease in tooling sales resulting from the Company's
decision in the second quarter to outsource the manufacturing of tooling. The
decrease for the year to date period is primarily due to the foregoing as well
as lower consumer products sales due to a significant program launch and model
changeover with a major customer.
Gross profit
Gross profit, as a percentage of 2001 net sales, was 2.4% for the third quarter
and 1.1% for the first three quarters, compared to 11.4% and 15.3% in the
corresponding periods of 2000. Gross margin in the third quarter of 2001 was
negatively impacted by new product pricing issues, a continued increase in
prices of resin which, in some cases, have not been passed on to customers, and
lower plant utilization due to reduced sales as discussed above. The decrease
for the year to date period is primarily due to the foregoing as well as launch
costs associated with the consumer products model changeover.
-9-
Impairment and other nonrecurring charges
During the fourth quarter of 2000 and the first three quarters of 2001, the U.S.
economy has experienced a slowdown in manufacturing activity. In particular,
several of the industries served by the Company, such as the domestic automotive
and heavy truck markets, are currently experiencing material reductions in
orders. The Company has already felt the impact of this downturn and expects
these conditions to continue in the near term. In response to these conditions,
management has taken action to consolidate existing operations, cut overhead
costs and reduce excess capacity. These actions have resulted in the need to
write-down the value of certain assets and to recognize the costs anticipated to
execute these actions.
At the start of 2001, the Company had two manufacturing operations located in
Greenville, Michigan. On March 16, 2001, the Company announced the closing of
one of these facilities. The plant closing resulted in the transfer of employees
and related production to other Company facilities, including the remaining
facility in Greenville and the Company's other facilities located in Western
Michigan. Management accrued a nonrecurring pre-tax charge of $1.5 million
related to the closing to cover various exit costs ($0.7 million) and
anticipated non-cash losses on the sale of the property, plant and certain
equipment ($0.8 million) in the first quarter of 2001. At the end of July, 2001
the closing activities were substantially completed. At the end of the third
quarter, $40,000 of exit cost payments had been recorded against the related
liability.
During the second quarter of 2001, the Company announced its decision to
relocate certain functions previously located in its Technical Center and to
outsource the manufacture of tooling. Specifically, these actions included the
relocation of engineering, program management and sales personnel to the
Company's manufacturing facilities in order to provide integrated support to the
manufacturing operations. In addition, many of the tool makers and equipment
previously used in the manufacture of tooling have been moved directly into the
manufacturing facilities to provide more efficient and cost effective tool
maintenance support to the Company's manufacturing operations. The Company will
continue to program manage new tooling programs for its customers but will
outsource the actual tool manufacturing. Management accrued a nonrecurring
pre-tax charge of $0.9 million related to these actions to cover various exit
costs ($0.4 million) and anticipated non-cash losses on the disposition of
certain furniture, fixtures and equipment ($0.5 million) in the second quarter
of 2001. At the end of the third quarter, $0.1 million of exit cost payments and
$0.5 million of losses on property disposals have been recorded against the
related reserves. Other nonrecurring moving costs of approximately $12,000 and
$0.1 million were incurred and expensed during the second and third quarters,
respectively.
Under the guidance of FASB Statement No. 121, the Company performed an analysis
of the expected future cashflows related to one of its manufacturing facilities
and determined that an asset impairment charge in the amount of $5.0 million was
required to properly reflect the current value of the assets, including
goodwill, related to this facility. This non-cash charge was recorded during the
second quarter of 2001.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses decreased $0.4 million
(11.4%) from $3.5 million for the comparable quarter in 2000. SG&A expenses for
the first three quarters of 2001 were $9.8 million, an increase of $0.8 million
(8.9%) over SG&A expenses for the same period in the prior year. The year to
date SG&A expenses were impacted by a one-time charge of $0.8 million in the
second quarter charged against accounts receivable reflecting anticipated losses
from a customer's pending financial reorganization and certain billings that are
being contested by a customer. Excluding the impact of these charges, SG&A
expense in the first three quarters would have been the same as 2000.
Interest expense
Interest expense for the third quarter of 2001 increased $1.0 million (50.0%) to
$3.0 million from $2.0 million for the comparable quarter in 2000. Interest
expense for the first three quarters of 2001 was $8.0 million, an increase of
$2.6 million (48.1%) over interest expense for the same period in the prior
year. The increase in interest expense for the third quarter was primarily due
to higher interest rates that became effective with the Third Amendment to the
Company's senior credit facility, higher outstanding debt balances, and
amortization of additional amounts of bank
-10-
financing fees. Year to date interest expense increased as well due to financing
of the Drake business acquisition four weeks into the first quarter of 2000, the
acquisition of Small Parts in July, 2000, and funding of capital expenditures.
Income taxes
The Company's effective income tax rates for all periods presented differed from
the applicable statutory rates primarily due to nondeductible goodwill
amortization, Michigan Single Business Tax, and fully reserving federal income
tax benefits associated with net operating losses. The federal tax benefits, if
any, from net operating loss carryforwards will only be recognized as the
Company generates taxable income in future periods.
Net loss
The Company recorded a net loss of $5.5 million for the third quarter of 2001
and a net loss of $24.6 million for the first three quarters of 2001 compared to
a net loss of $2.1 million and $1.7 million, in the same periods of 2000,
respectively. As discussed above in the gross profit, impairment and other
nonrecurring charges, and selling, general and administrative expenses sections,
the results for 2001 include the impact of lower margins due to the impact of
the economic slowdown as well as $8.2 million of one-time charges.
LIQUIDITY AND CAPITAL RESOURCES
At September 29, 2001, the Company had negative working capital of $51.1 million
compared to positive $0.8 million at December 30, 2000. The decrease in working
capital is mainly attributable to a $38.1 million increase in the current
maturities of long-term debt (the Company's senior credit facility matures on
April 30, 2002), a net loss $24.6 million (which includes depreciation and
amortization of $6.0 million and non-cash impairment and other nonrecurring
charges of $7.6 million) and capital expenditures of $1.7 million. Additionally,
in response to current economic conditions, the Company has successfully reduced
accounts receivable and inventory balances.
Investing activities consisted primarily of capital expenditures in the first
three quarters of 2001 compared to capital expenditures and business
acquisitions in the same period of 2000. Capital expenditures totaling $1.7
million in 2001 consisted primarily of new molding equipment and investments in
plant automation. During the first three quarters of 2000, the Company had
capital expenditures of $3.4 million and acquired the Drake operations using
$27.3 million of cash. No acquisitions occurred during the first three quarters
of 2001.
Financing activities provided $2.5 million of net cash in 2001 as compared to
providing $32.0 million in 2000. The Company's senior credit facility was
entered into in the first quarter of 2000 in connection with the Drake
acquisition, which provided amounts for the acquisition and to refinance other
revolving credit and term debt agreements. Financing activities also included
the use of cash totaling $1.5 million in 2000 for preferred stock dividends.
During the first three quarters of 2001, financing activities included repayment
of debt, payment of deferred financing costs, additional borrowing on the line
of credit and bank debt, and proceeds of common stock issuances related to the
Employees Stock Purchase Plan.
Effective August 1, 2001, the Company received additional funding in the form of
a $5.0 million subordinated term note (the "Note"). Proceeds from the Note were
used to repay $3.6 million of revolving debt with the remaining $1.4 million
used for operations. The Note requires monthly payments of principal and
interest, at a rate of 8% per annum, beginning November 1, 2001, with a maturity
date of May 1, 2002. The Note is secured by certain assets of the Company and is
subordinated to the Company's senior bank debt.
Also effective August 1, 2001, the Company received an additional investment of
$1.3 million from one of its directors to be used in the operations of the
Company. This investment is intended to be in the form of a short term
subordinated term note and as a result is recorded in the current portion of
long term debt as of September 29, 2001. As part of this transaction, the
Company expects to issue warrants to purchase shares of the Company's common
stock with a nominal exercise price.
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As shown in the Company's most recent annual report Form 10-KSB, the Company
incurred significant net losses in each of the past two fiscal years and is
highly leveraged. Also, the Company had violated certain covenants of its senior
credit facility, which the senior lenders waived until April 30, 2002, the date
on which the senior credit facility matures. Finally, the Company has
experienced liquidity constraints as noted above and current market conditions
in two of the industries the Company serves, heavy truck and automotive,
indicate that a decline in overall unit sales for OEMs can be expected in 2001
as compared to 2000. This anticipated decline in OEM sales could result in
continued adverse financial conditions that may be experienced throughout the
supply chain within these industries, and therefore, could continue to
negatively affect our operations through the first half of 2002.
In response to debt covenant violations and in anticipation of continued tight
liquidity, management negotiated a comprehensive restructuring of our senior and
subordinated credit facilities effective April 17, 2001 and of our convertible
preferred stock effective April 6, 2001. The details of this restructuring are
discussed in Notes 5 and 6 of the condensed consolidated financial statements.
At September 29, 2001,the Company was in violation of certain of its revised
covenants in its senior credit agreement and was in technical default of the
agreement. In the event (i) these violations are not remedied, and (ii) the
senior lenders elect to accelerate the senior debt, an event of default would
exist under the Company's subordinated credit facility and the related
subordinated debt would be callable at that time. The Company does not currently
anticipate these events occurring.
Management believes that the restructuring activities and additional funding
discussed above, combined with appropriate operational changes and other
activities undertaken, will provide us with sufficient capital resources to meet
our needs through the anticipated refinancing of our senior credit facilities in
the second quarter of 2002. Long term viability of the Company is dependent on
the successful refinancing of this debt.
Management is aggressively pursuing several operating initiatives to reduce
costs and improve future profitability and cash flow. These initiatives include:
o We have implemented actions to reduce our overhead cost structure and
continue to better leverage the purchasing power of consolidated operations
with our vendors;
o We have reduced production and administrative staff levels;
o We have reviewed our production programs and have eliminated unprofitable
product lines; o We have obtained price increases from selected customers;
o We are eliminating excess manufacturing capacity; o We have closed one of
our manufacturing facilities in Greenville, Michigan, and have moved
related production to other existing facilities;
o We are considering the sale of one additional manufacturing facility and
the potential sale-leaseback of some or all of our real estate; and,
o We have transferred engineering, program management and sales staff to our
manufacturing facilities, retaining capabilities and improving synergies
while eliminating the overhead cost of the Technical Center.
Management expects challenges to face us and many other companies in the
industries in which we are involved with over the coming months. However,
aggressive actions are being taken to guide this organization through these
challenges and to reduce the organization's cost structure, enabling it to
improve its operations and cashflow.
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. Changes in control have occurred as part of the equity
transactions completed by the Company in recent years. However, the Company
believes that these changes have not reached the 50% level that would eliminate
the future cash benefits from utilizing NOL carryforwards. As the Company
executes it strategy of growth through acquisitions, there are likely
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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.
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.
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 and liquidity and capital resources, as well as
expectations with respect to future sales, operating efficiencies, product
expansion, and the refinancing of the Company's senior credit facility 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; the timing, impact and other uncertainties of
future acquisitions; and the Company's relationship with its lenders. The
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is a change in interest rates in
connection with its outstanding variable rate short-term and long-term debt. An
increase in interest rates of 1% could result in the Company incurring an
additional $0.4 million in annual interest expense. Conversely, a decrease in
interest rates of 1% could result in the Company saving $0.4 million in annual
interest expense. The Company does not expect such market risk exposure to have
a material adverse effect on the Company. The Company does not enter into market
risk sensitive instruments for trading purposes.
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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 third quarter ended September 29, 2001, the Company did not issue any
unregistered shares of its Common Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Refer to Liquidity and Capital Resources Section within Management's Discussion
and Analysis of Financial Condition and Results of Operations in Part I, Item 2
and Note 6 to the Condensed Consolidated Financial Statements in Part I, Item 1.
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
No exhibits required.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this report
is filed.
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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: November 13, 2001 /s/ Edmund Walsh
Edmund Walsh, Acting Chief Financial Officer
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