UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________________ to ____________________
Commission file number 1-9917
CATALINA LIGHTING, INC
(Exact name of registrant as specified in its chapter)
FLORIDA
(State or other jurisdiction of incorporation or organization)
59-1548266
(I.R.S. Employer Identification Number)
18191 NW 68TH AVENUE, MIAMI, FLORIDA 33015
(Address of principal executive offices) (Zip Code)
(305) 558-4777
Registrant's telephone number, including area code
--------------------------------------------------------------------
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check / whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO __
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date. OUTSTANDING ON AUGUST 7, 1998: 7,174,669 SHARES.
CATALINA LIGHTING, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Condensed consolidated balance sheets -
June 30, 1998 and September 30, 1997........................... 3-4
Condensed consolidated statements of operations -
Three and nine months ended June 30, 1998 and 1997............ 5
Condensed consolidated statements of cash flows -
Nine months ended June 30, 1998 and 1997...................... 6-7
Notes to condensed consolidated financial statements............ 8-11
Management's discussion and analysis of financial
condition and results of operations........................... 12-18
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings....................................... 19
ITEM 4 Submission of Matters to a Vote of Security Holders..... 19
ITEM 6 Exhibits and Reports on Form 8-K........................ 19
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS JUNE 30, SEPTEMBER 30,
------ 1998 1997
---------------------- ---------------------
(Unaudited) *
Current assets
Cash and cash equivalents $ 1,506 $ 1,847
Accounts receivable, net of allowances
of $8,146 and $8,314 respectively 23,330 24,169
Inventories 30,163 34,612
Income taxes receivable - 2,380
Other current assets 6,778 5,406
---------------------- ---------------------
Total current assets 61,777 68,414
Property and equipment, net 28,261 29,969
Restricted cash equivalents and short-term investments 1,568 1,883
Goodwill, net 11,131 11,473
Other assets 4,480 4,842
====================== =====================
$ 107,217 $ 116,581
====================== =====================
(continued on page 4)
3
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
JUNE 30, SEPTEMBER 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------ ------------------- -----------------
(Unaudited) *
Current liabilities
Notes payable - credit lines $ 4,850 $ 5,574
Accounts and letters of credit payable 15,972 18,099
Current maturities of bonds payable 980 970
Current maturities of other long-term debt 504 476
Other current liabilities 7,281 5,586
------------------- -----------------
Total current liabilities 29,587 30,705
Notes payable - credit lines 12,300 21,000
Convertible subordinated notes 7,600 7,600
Bonds payable - real estate related 8,210 9,195
Other long-term debt 2,019 1,942
Other liabilities 5,228 5,082
------------------- -----------------
Total liabilities 64,944 75,524
------------------- -----------------
Commitments and contingencies
Stockholders' equity
Common stock, issued and outstanding 7,172
shares and 7,095 shares, respectively 72 71
Additional paid-in capital 26,538 26,311
Retained earnings 15,663 14,675
------------------- -----------------
Total stockholders' equity 42,273 41,057
------------------- -----------------
$ 107,217 $ 116,581
=================== =================
*Condensed from audited financial statements
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- ------------------------------------
1998 1997 1998 1997
----------------- ----------------- ---------------- -----------------
Net sales $ 45,037 $ 56,394 $ 122,266 $ 146,363
Cost of sales 36,257 47,413 98,624 122,977
----------------- ----------------- ---------------- -----------------
Gross profit 8,780 8,981 23,642 23,386
Selling, general and administrative
expenses 6,776 6,761 19,896 19,203
Plant closing costs - - - 930
Litigation charges and
related professional fees 27 160 (95) 7,392
----------------- ----------------- ---------------- -----------------
Operating income (loss) 1,977 2,060 3,841 (4,139)
----------------- ----------------- ---------------- -----------------
Other income (expenses):
Interest expense (936) (1,144) (2,983) (2,965)
Other income (expenses) 30 50 428 33
----------------- ----------------- ---------------- -----------------
Total other income (expenses) (906) (1,094) (2,555) (2,932)
----------------- ----------------- ---------------- -----------------
Income (loss) before income taxes 1,071 966 1,286 (7,071)
Income tax benefit (provision) (238) (144) (298) 2,927
----------------- ----------------- ---------------- -----------------
Net income (loss) $ 833 $ 822 $ 988 $ (4,144)
================= ================= ================ =================
Weighted average number of
shares outstanding
Basic 7,126 7,069 7,114 7,067
Diluted 8,511 8,406 7,557 7,067
Earnings (loss) per share
Basic $ 0.12 $ 0.12 $ 0.14 $ (0.59)
Diluted $ 0.11 $ 0.11 $ 0.13 $ (0.59)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
JUNE 30,
-----------------------------------------
1998 1997
------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 988 $ (4,144)
Adjustments for non-cash items:
Plant closing costs - 930
Litigation settlements - 4,366
Other 3,575 5,864
Change in assets and liabilities 6,675 (8,810)
------------------- ------------------
Net cash provided by (used in) operating activities 11,238 (1,794)
------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net (1,173) (6,419)
Payments for acquisitions - (632)
Decrease (increase) in restricted cash equivalents and
short-term investments 990 882
------------------- ------------------
Net cash provided by (used in) investing activities (183) (6,169)
------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 167 2
Payments on other liabilities (489) (524)
Payments on bonds (975) (970)
Proceeds from notes payable - credit lines 23,100 30,200
Payments on notes payable - credit lines (32,750) (19,838)
Net proceeds from (payments on) notes payable - credit lines
due on demand 226 (2,019)
Sinking fund redemption payments on bonds (675) (654)
------------------- ------------------
Net cash provided by (used in) financing activities (11,396) 6,197
------------------- ------------------
Net increase (decrease) in cash and cash equivalents (341) (1,766)
Cash and cash equivalents at beginning of period 1,847 1,766
------------------- ------------------
Cash and cash equivalents at end of period $ 1,506 $ -
=================== ==================
(continued on page 7)
6
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED
JUNE 30,
-----------------------------------------
1998 1997
------------------- ------------------
(IN THOUSANDS)
Cash paid for:
Interest $ 2,599 $ 2,697
Income taxes paid (refunded) $ (3,345) $ 1,038
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended June 30, 1998 and 1997, capital lease obligations
incurred for new office, machinery and warehouse equipment aggregated $438,000
and $617,000, respectively.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the accounting policies described in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and
should be read in conjunction with the consolidated financial statements and
notes which appear in that report. These 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 (which consist mostly of normal,
recurring accruals) considered necessary for a fair presentation have been
included. The results of operations for the three and nine months ended June 30,
1998 may not necessarily be indicative of operating results to be expected for
the full fiscal year due to seasonal fluctuations in the Company's business,
changes in economic conditions and other factors.
Certain amounts previously presented in the financial statements of prior
periods have been reclassified to conform to the current period's presentation.
EARNINGS (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS 128") for the quarter ended December 31, 1997 which
changes the method of calculating earnings per share. SFAS 128 requires the
presentation of "basic" earnings per share and "diluted" earnings per share on
the face of the statement of operations. Basic earnings per share is computed by
dividing the net income or loss attributable to common shareholders by the
weighted average common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Upon adoption, earnings per share data for prior periods are required to
be restated. Earnings per share information presented in the accompanying
financial statements for the three and nine months ended June 30, 1997 have been
restated to comply with SFAS No. 128.
2. INVENTORIES
Inventories consisted of the following:
JUNE 30, SEPTEMBER 30,
1998 1997
--------------------- ----------------------
(In thousands)
Raw materials $ 4,041 $ 3,569
Work-in-progress 851 1,006
Finished goods 25,271 30,037
===================== ======================
Total inventories $ 30,163 $ 34,612
===================== ======================
3. PROPERTY AND EQUIPMENT, NET
Shenzhen Jiadianbao Electrical Products Co., Ltd. ("SJE"), a cooperative joint
venture subsidiary of the Company's wholly-owned subsidiary Go-Gro Industries
Ltd. ("Go-Gro"), and the Bureau of National Land Planning Bao-An Branch of
Shenzhen City entered into a Land Use Agreement covering approximately 467,300
square feet in Bao-An County, Shenzhen City, People's Republic of China on April
11, 1995. The agreement provides SJE with the right to use this land until
January 18, 2042. The land use rights are non-transferable. Under the terms of
the SJE joint venture agreement, ownership of the land and buildings of SJE is
divided 70% to Go-Gro and 30% to the other joint venture partner. Land costs,
including the land use rights, approximated $2.6 million of which Go-Gro has
paid its 70% proportionate share of $1.8 million. Under the terms of this
agreement, as amended, SJE is obligated to construct approximately 500,000
square feet of factory buildings and 211,000 square feet of dormitories and
offices, with 40 percent of the construction required to be completed (which was
completed) by April 1, 1997 and the remainder by December 31, 1999. The Company
plans to file an application to extend the completion
8
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. PROPERTY AND EQUIPMENT, NET (CONTINUED)
deadline of December 1999. The total cost for this project is estimated at $15.5
million (of which $10 million had been expended as of June 30, 1998), and
includes approximately $1.0 million for a Municipal Coordination Facilities Fee
(MCFF). The MCFF is based upon the square footage to be constructed. The
agreement calls for the MCFF to be paid in installments beginning in January
1997. A 162,000 square foot factory, a 77,000 square foot warehouse and a 60,000
square foot dormitory became operational in June 1997.
4. CONTINGENCIES
LEGAL
On June 4, 1991, the Company was served with a copy of the Complaint in the
matter of Browder vs. Catalina Lighting, Inc., Robert Hersh, Dean S. Rappaport
and Henry Gayer, Case No. 91-23683, in the Circuit Court of the 11th Judicial
Circuit in and for Dade County, Florida. The plaintiff in the action, the former
President and Chief Executive Officer of the Company, contended that his
employment was wrongfully terminated and as such brought action for breach of
contract, defamation, slander, libel and intentional interference with business
and contractual relationships, including claims for damages in excess of $5
million against the Company and $3 million against the named directors. During
the course of the litigation the Company prevailed on its Motions for Summary
Judgment and the Court dismissed the plaintiff's claims of libel and
indemnification. On February 3, 1997, the plaintiff voluntarily dismissed the
remaining defamation claims against the Company and Directors. The breach of
contract claim was tried in February, 1997 and the jury returned a verdict
against the Company for total damages of $2.4 million (including prejudgment
interest). On July 14, 1997, the Court also granted plaintiff's motion for
attorney fees and costs of $1.9 million. A provision of $4.3 million was
recorded by the Company during the quarter ended March 31, 1997 and a $575,000
provision for post-judgment interest has been recorded through June 30, 1998.
The Company is appealing the verdict and attorney fee award.
On February 23, 1993, Dana Lighting (now Catalina Industries, Inc.), a
subsidiary of the Company, and Nathan Katz, President of Dana, were served with
a copy of the Complaint in a matter captioned Holmes Products Corp. vs. Dana
Lighting, Inc. and Nathan Katz, Case No. 93-0249 in the Superior Court of the
Commonwealth of Massachusetts, City of Worcester, Massachusetts. The plaintiff
in the action alleged that Dana Lighting engaged in acts constituting tortious
interference with contractual actions, interference with prospective economic
relationship with plaintiff's supplier and unfair competition. Plaintiff sought
injunctive relief and damages in excess of $10 million. The case was voluntarily
dismissed by the plaintiff on June 30, 1998 and the order dismissing the case
was entered on July 27, 1998.
On December 17, 1996 White Consolidated Industries, Inc. ("White"), which has
acquired certain limited trademark rights from Westinghouse Electric Corp.
("Westinghouse") to market certain household products under the
White-Westinghouse trademark, notified the Company of a lawsuit against
Westinghouse and the Company filed in the United States District Court, for the
Northern District of Ohio. The lawsuit challenged the Company's right to use the
Westinghouse trademarks on its lighting products and alleges trademark
infringement. On December 24, 1996, Westinghouse and the Company served a
Complaint and Motion for Preliminary Injunction against White, AB Electrolux,
Steel City Vacuum Co., Inc., Salton/Maxim Housewares, Inc., Newtech Electronics
Corp., and Windmere Durable Holdings, Inc. in the United States District Court,
Western District of Pennsylvania, Case No. 96-2294 alleging that the defendants
had violated Westinghouse's trademark rights, breached the Agreement between
Westinghouse and White and sought an injunction to enjoin White against
interference with their contractual arrangements. In October 1997, the cases
were consolidated in Pennsylvania and on November 7, 1997 White filed a
Counterclaim and Third Party Claims against Westinghouse, Catalina and Minami
International Corporation alleging trademark infringement, trademark dilution,
false designation of origin, false advertising and unfair competition and
seeking injunctive relief and damages. Both the Company and Westinghouse
vigorously dispute White's allegations. Pursuant to the License Agreement
between Westinghouse and the Company, Westinghouse is defending and indemnifying
the Company for all costs and expenses for claims, damages and losses, including
the costs of litigation, accordingly no provision for this matter has been
recorded in the accompanying condensed consolidated financial statements.
Discovery is proceeding and the case should be tried in 1999.
9
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. CONTINGENCIES (CONTINUED)
The Company has received a number of claims relating to halogen torchieres sold
by the Company to various retailers. While the Company is still in the process
of evaluating these claims, management does not currently believe they will
result in a material uninsured liability to the Company. However, the Company
may experience an increase in its future product liability insurance premiums
effective for the 1999 calendar year as a result of these claims.
The Company is also a defendant in other legal proceedings arising in the course
of business. In the opinion of management the ultimate resolution of these other
legal proceedings will not have a material adverse effect on the financial
position or annual results of operations of the Company.
OTHER
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failure or
miscalculations. The Company is in the process of identifying and assessing the
systems that could be affected by the Year 2000 Issue and is developing an
implementation plan to resolve the issue. The Company expects to complete the
assessment, formalize its plan for corrective action and estimate the potential
incremental costs required to address this issue by December 1998. The Company
is presently unable to determine what impact, if any, the Year 2000 issue will
have on its operations.
Substantially all of the products either purchased or manufactured by the
Company are imported from China. The continued importation into the U.S. of
products manufactured in China could be affected by any one of several
significant trade issues that presently impact U.S. - China relations. On June
3, 1998, the President of the United States extended to the People's Republic of
China "Most Favored Nation" ("MFN") treatment for the entry of goods into the
United States for an additional year, beginning July 3, 1998. The trade status
has been renamed "Normal Trade Relations" because it applies to all but a
handful of U.S. trading partners. In the context of United States tariff
legislation, such treatment means that products are subject to favorable duty
rates upon entry into the United States. On July 22, 1998 the House of
Representatives supported the President's decision and rejected a bill to impose
trade sanctions against China due to alleged human rights abuses, nuclear
proliferation policies and a growing U.S. trade deficit with China. Members of
Congress and the "human rights community" will continue to monitor the human
rights issues in China and adverse developments in human rights and other trade
issues in China could affect U.S. - China relations. As a result of various
political and trade disagreements between the U.S. Government and China, it is
possible restrictions could be placed on trade with China in the future which
could adversely impact the Company's operations and financial position.
During late 1997 various countries in Southeast Asia (including Thailand, South
Korea, Malaysia, the Philippines and Indonesia) were involved in an emerging
crisis impacting their economies and characterized by currency devaluations,
rising interest rates, deteriorating economic growth and declining capital
markets. The Company does not conduct business with, or have a significant
investment in, any of these countries. However, this crisis could have serious
adverse repercussions on the financial stability of all countries in the region,
including Hong Kong and China, and has implications for the global financial
system as well, including the United States. The Company believes that this
Asian economic crisis has not significantly impacted its business to date.
However, the Company is presently unable to determine what impact, if any, this
Asian economic crisis will have on its business in the future.
As a result of recent Internal Revenue Service rulings and proposed and
temporary regulations, the Company is in the process of restructuring its
international operations in order to retain favorable U.S. tax treatment of
foreign source income. The Company believes it should be successful in this
restructuring. However, in the event the Company is unsuccessful in this effort,
the Company will likely experience an increase in its consolidated effective
income tax rate.
5. COMMITMENTS
During the three months ended June 30, 1998 the Company completed the
move of its Canadian subsidiary from Montreal to Toronto and finalized a lease
agreement for its new Toronto headquarters. The lease has a 10 year term
expiring June 30, 2008 with an average annual rent of approximately $180,000.
10
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. COMMITMENTS (CONTINUED)
On April 26, 1996, the Company entered into a license agreement with
Westinghouse Electric Corporation ("Westinghouse") to market and distribute a
full range of lighting fixtures, lamps and other lighting products under the
Westinghouse brand name in exchange for royalty payments. The agreement
terminates on September 30, 2001. Catalina has an option to extend the agreement
for an additional ten years. The royalty payments are due quarterly and are
based on a percent of the value of the Compan s net shipments of Westinghouse
branded products, subject to annual minimum payments due for fiscal 1997 and
1998. Commencing September 30, 1999 either party has the right to terminate the
agreement during the fiscal years 1999 to 2001 if the Company does not meet the
minimum net shipments of $25 million for fiscal 1999, $40 million for fiscal
2000, and $60 million for fiscal 2001. Net sales of Westinghouse branded
products amounted to $6.6 million and $6.5 million for the nine months ended
June 30, 1998 and 1997, respectively.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," was issued. SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 130 requires that a company (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
the balance sheet. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company has not determined
the effects, if any, that SFAS No. 130 will have on its consolidated financial
statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. SFAS No. 131 establishes standards for
the way that public companies report selected information about operating
segments in annual financial statements and requires that those companies report
selected information about segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131,
which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise", but retains the requirement to report information about major
customers, requires that a public company report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 requires that a public company report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. However, SFAS No. 131 does not require the reporting of
information that is not prepared for internal use if reporting it would be
impracticable. SFAS No. 131 also requires that a public company report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997, with disclosures in interim financial statements not required in the year
of adoption. The Company has not determined the effects, if any, that SFAS No.
131 will have on the disclosures in its consolidated financial statements.
11
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, including without limitation
expectations as to future sales and profitability, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company and its subsidiaries to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
but are not limited to, the following: the highly competitive nature of the
lighting industry; reliance on certain key customers; consumer demand for
lighting products; dependence on imports from China; general economic and
business conditions; operating costs; advertising and promotional efforts; brand
awareness; the existence or absence of adverse publicity; acceptance of new
product offerings; changing trends in customer tastes; changes in business
strategy; availability, terms and deployment of capital; availability and cost
of raw materials and supplies; the costs and other effects of legal and
administrative proceedings; foreign and domestic tax laws; and other factors
referenced in this Form 10-Q and in the Company's annual report on Form 10-K for
the year ended September 30, 1997. The Company will not undertake and
specifically declines any obligation to update or correct any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
In the following comparison of the results of operations, the three and
nine months ended June 30, 1998 and 1997 are referred to as 1998 and 1997,
respectively.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Net sales and gross profit for 1998 were $45 million and $8.8 million,
respectively, as compared to $56.4 million and $9 million, respectively, for
1997. The Company generated net income of $833,000 ($.11 per share) in 1998
compared to net income of $822,000 ($.11 per share) in 1997.
The $11.4 million decrease in net sales from the prior year reflects
lower unit sales and is primarily attributable to an $8.5 million decline in
sales of one product class, halogen torchieres. The sales decline for the
halogen torchieres continues a trend of declining sales of this product which
began in the first quarter of fiscal 1998 and is due in part to media attention
focused on incidents of fire associated with this product. For the nine months
ended June 30, 1998 halogen torchiere sales aggregated $12.4 million, which were
$16.6 million less than halogen torchiere sales for the same period of fiscal
1997. Another $3 million of the $11.4 million sales decrease for the three
months was due to lower European sales. For the nine months ended June 30, 1998
sales to European customers were $13.7 million, as compared to $21.4 million for
the nine months ended June 30, 1997. Due in part to declining European sales the
Company expects that sales for the fourth quarter of fiscal 1998 will be less
than the $50.6 million reported for the fourth quarter of fiscal 1997. Lamp
sales decreased by $12.9 million and net sales for the Company's other principal
line of products, lighting fixtures, increased by $1.5 million. Lamps and
lighting fixtures accounted for 65% and 35%, respectively, of net sales in 1998
compared to 74% and 26% in 1997, respectively. In 1998 and 1997, Home Depot
accounted for 30% and 21.5%, respectively, of the Company's net sales and Kmart
accounted for 7.2% and 19.7% of net sales in 1998 and 1997, respectively.
Gross profit decreased by $200,000 in 1998 due to the decline in net
sales. The gross profit percentage increased to 19.5% in 1998 from 15.9% in
1997. The improvement in the gross profit percentage is attributable to improved
margins earned on direct sales due to a more profitable product mix and
favorable sales returns and incentives experience.
Many of the Company's major customers (most notably Home Depot and
Kmart) purchase from the Company primarily on a direct basis, whereby the
merchandise is shipped directly from the factory to the customer, rather than
from the Company's warehouses. Approximately 76% of the Company's sales in 1998
were made on a direct basis as compared to 69% in 1997. Sales made by the
Company on a direct basis typically generate lower margins than sales from the
Company's warehouses. The amount of the Company s sales made on a direct basis
is dependent upon customer buying preferences, which are influenced by a number
of factors that vary from customer to customer.
12
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Selling, general and administrative expenses ("SG&A") remained
consistent with 1997. However, SG&A expenses as a percentage of sales were 15%
in 1998 compared to 12% in 1997 as a result of the decline in sales.
Interest expense decreased to $936,000 in 1998 from $1.1 million in
1997 due to lower average outstanding borrowings.
Other income for 1998 consisted primarily of rental income on the
Meridian facility.
The effective income tax rates for 1998 and 1997 were 22% and 15%,
respectively and reflect the projected impact of foreign income, which is taxed
at a significantly lower rate than U.S. income. As a result of recent Internal
Revenue Service rulings and proposed and temporary regulations, the Company is
in the process of restructuring its international operations in order to retain
favorable U.S. tax treatment of foreign source income. The Company believes it
should be successful in this restructuring. However, in the event the Company is
unsuccessful in this effort, the Company will likely experience an increase in
its consolidated effective income tax rate.
MERIDIAN
The Company ceased manufacturing operations and closed its Meridian
Lamps facility in June 1997. Net sales for 1997 were $570,000, cost of sales was
$813,000 and the pretax loss was $432,000.
COMPARISON OF NINE MONTHS ENDED JUNE 30, 1998 AND 1997
Net sales and gross profit for 1998 were $122.3 million and $23.6
million, respectively, as compared to $146.4 million and $23.4 million,
respectively, for 1997. The Company generated net income of $1 million ($.13 per
share) in 1998 compared to a net loss of $4.1 million ($.59 per share) in 1997.
The $24.1 million decrease in net sales from the prior year reflects
lower units sales and is attributable to a $16.6 million decline in sales of one
product class, halogen torchieres, a decrease in European sales of $7.7 million
and a decline of $3.3 million in sales of now discontinued products, the
Meridian lamps and "Hugger" flashlights. The sales decline for the halogen
torchieres continues a trend of declining sales of this product which began in
the first quarter of fiscal 1998 and is attributed in part to media attention
focused on incidents of fire associated with this product. For the nine months
ended June 30, 1998 halogen torchiere sales aggregated $12.4 million, as
compared to $29 million for the same period of fiscal 1997. For the nine months
ended June 30, 1998 sales to European customers were $13.7 million, as compared
to $21.4 million for the nine months ended June 30, 1997. Due in part to
declining European sales the Company expects that sales for the fourth quarter
of fiscal 1998 will be less than the $50.6 million reported for the fourth
quarter of fiscal 1997. Lamp sales decreased by $22.7 million and net sales for
the Company's other principal line of products, lighting fixtures, decreased by
$1.4 million. Lamps and lighting fixtures accounted for 64% and 36%,
respectively, of net sales in 1998 compared to 69% and 31%, respectively, in
1997. In 1998 and 1997, Home Depot accounted for 27.5% and 18.2%, respectively,
of the Company's net sales.
Gross profit increased by $256,000 in 1998. The gross profit percentage
increased to 19.3% in 1998 from 16% in 1997. The improvement in the gross profit
percentage is attributable to improved margins earned on direct sales due to a
more profitable product mix and favorable sales returns and incentives
experience. The lower gross profit percentage for 1997 also reflects an $870,000
provision for discontinued inventory required as a result of management's
decision to cease operations at Meridian
Many of the Company's major customers (most notably Home Depot and
Kmart) purchase from the Company primarily on a direct basis, whereby the
merchandise is shipped directly from the factory to the customer, rather than
from the Company's warehouses. Approximately 67% of the Company's sales in 1998
were made on a direct basis as compared to 61% in 1997. Sales made by the
Company on a direct basis typically generate lower margins than sales from the
Company's warehouses. The amount of the Compan s sales made on a direct basis is
dependent upon customer buying preferences, which are influenced by a number of
factors that vary from customer to customer.
Selling, general and administrative expenses ("SG&A") increased by
$693,000 due to increased costs in the Orient to support the Company's new
factory's operations ($527,000), an increase in royalties ($245,000) and higher
U.S. personnel costs ($224,000). These increases were partially offset by a
decrease of $333,000 in SG&A incurred by Meridian which ceased operations in
June 1997. SG&A expenses were 16.3% of sales in 1998 compared to 13.1% in 1997.
The increase in SG&A as a percentage of sales is attributable to the factors
mentioned above and the decline in sales.
13
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In 1997, in conjunction with the decision to cease Meridian's
operations, the Company recorded a $930,000 charge to write down the plant and
related equipment to fair market value (less disposition costs) and to provide
for severance payments to Meridian's employees.
Litigation charges and related professional fees in 1997 represented
the amount provided for an adverse jury verdict (currently under appeal) of $4.3
million on litigation with the Company's former Chief Executive Officer, a
payment of $1,000,000 to settle patent litigation with Black & Decker, and the
related professional fees incurred for these two matters (see Note 4 of Notes to
Condensed Consolidated Financial Statements).
Interest expense remained the same at $3 million. A decrease in
interest expense as a result of lower borrowings was offset by a $141,000
increase in the provision for interest related to the $4.3 million adverse jury
verdict presently under appeal (the provision was for approximately 4 months in
1997 compared to 9 months in 1998).
Other income for 1998 includes a gain of $164,000 on the sale of
marketable equity securities, with the remainder consisting primarily of rental
income on the Meridian facility, interest and other miscellaneous income,
partially offset by foreign exchange losses.
The effective income tax rates for 1998 and 1997 were 23% and 41%,
respectively. The higher effective tax rate for 1997 is attributable to the
combination of (1) foreign pretax income, which is taxed at a significantly
lower rate than U.S. income, and (2) a pretax loss for U.S. operations, on which
the Company recorded a tax benefit at the applicable U.S. rates. The Company's
effective income tax rate is dependent both on the total amount of pretax income
generated and the relative distribution of such total income between domestic
and foreign operations. Consequently, the Company's effective tax rate may vary
in future periods. As a result of recent Internal Revenue Service rulings and
proposed and temporary regulations, the Company is in the process of
restructuring its international operations in order to retain favorable U.S. tax
treatment of foreign source income. The Company believes it should be successful
in this restructuring. However, in the event the Company is unsuccessful in this
effort, the Company will likely experience an increase in its consolidated
effective income tax rate.
MERIDIAN
The Company ceased manufacturing operations and closed its Meridian
Lamps facility in June 1997. Net sales for 1997 were $2.1 million, cost of sales
was $4.1 million and the pretax loss was $3.6 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its short-term liquidity needs through cash provided
by operations, accounts payable, borrowings under various credit facilities with
banks, and the use of letters of credit from customers to fund certain of its
direct import sales activities. Lease obligations, mortgage notes, convertible
subordinated notes, bonds and capital stock are additional sources for the
longer-term liquidity and financing needs of the Company. Management believes
the Company's available sources of cash will enable it to fulfill its liquidity
requirements for the next year.
CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 1998
The Company's operating, investing and financing activities resulted in
a net decrease in cash and cash equivalents of $341,000 from September 30, 1997
to June 30, 1998.
The net cash of $11.2 million provided by operating activities was used
primarily to pay for capital expenditures aggregating $1.2 million, to pay down
credit lines and to make sinking fund redemption payments on outstanding bonds.
Such capital expenditures included $883,000 in costs incurred by Go-Gro for the
purchase of machinery, molds and equipment and building improvements.
14
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CREDIT AND LEASING FACILITIES, CONVERTIBLE SUBORDINATED NOTES, MORTGAGE AND
BONDS
The Company has a $50 million credit facility with a group of
commercial banks. This facility provides credit in the form of a $3.8 million
non-revolving loan and $46.2 million in revolving loans, acceptances, and trade
and stand-by letters of credit, matures September 30, 1999 and provides for
quarterly principal payments of $950,000 on the non-revolving loan. The
non-revolving loan bears interest at prime plus 1% and other borrowings under
the facility bear interest, payable monthly, at the Company's preference of
either the prime rate or the LIBOR rate plus a variable spread based upon
earnings, debt and interest expense levels defined under the credit agreement
(LIBOR + 2.5% at June 30, 1998). Obligations under this facility are secured by
substantially all of the Company's U.S. assets. The Company is required to
comply with various convenants in connection with this facility and borrowings
are subject to a borrowing base calculated from U.S. receivables and inventory.
In addition, the agreement prohibits the payment of any cash dividends or other
distribution on any shares of the Company's common stock, other than dividends
payable solely in shares of common stock, unless approval is obtained from the
lenders. At June 30, 1998, the Company had used $16.4 million under its credit
facility and $9.5 million was available for additional borrowings under the
borrowing base calculation.
The Company's Canadian and Hong Kong subsidiaries have credit
facilities with foreign banks of $2.9 million and $4.5 million, respectively.
Borrowings under the Canadian facility are secured by substantially all of the
assets of the Canadian subsidiary and are limited under a borrowing base defined
as the aggregate of certain percentages of accounts receivable and inventory.
Advances bear interest at the Canadian prime rate plus .5% (7% at June 30,
1998). At June 30, 1998, borrowings amounted to U.S. $2 million and U.S.
$213,000 was available for additional borrowings under the borrowing base
calculation. Borrowings under the Hong Kong facility are secured by
substantially all the assets of Go-Gro. The facility provides credit in the form
of acceptances, trade and stand-by letters of credit, overdraft protection and
negotiation of discrepant documents presented under export letters of credit
issued by banks. Advances bear interest at the Hong Kong prime rate plus .25%
(10.25% at June 30, 1998). At June 30, 1998, there were no borrowings under this
facility and $3 million was available for borrowings. Each of these credit
facilities are payable upon demand and are subject to annual reviews by the
banks. With respect to the Canadian facility, the agreement prohibits the
payment of dividends and the Company is required to comply with various
covenants, which effectively restrict the amount of funds which may be
transferred from the Canadian subsidiary to the Company. The Hong Kong facility
limits the payment of dividends to the Company but does not limit advances or
loans from Go-Gro to the Company.
The Company has outstanding $7.6 million of 8% convertible subordinated
notes due on March 15, 2002. The notes are convertible into common shares of the
Company's stock at a conversion price of $7.31 per share, subject to certain
anti-dilution adjustments (as defined in the Note Agreement), at any time prior
to maturity. The notes are subordinated in right of payment to all existing and
future senior indebtedness of the Company and the notes are callable at the
option of the Company with certain required premium payments. Principal payments
of approximately $2.5 million are required on March 15 in each of the years 2000
and 2001. The remaining outstanding principal and interest is due in full on
March 15, 2002. Interest is payable semiannually. The terms of the Note
Agreement require the Company to maintain specific interest coverage ratio
levels in order to increase its credit facilities or otherwise incur new debt
and to maintain a minimum consolidated net worth. In addition, the note
agreement prohibits the declaration or payment of dividends on any shares of the
Company's capital stock, except dividends or other distributions payable solely
in shares of the Company's common stock, and the purchase or retirement of any
shares of capital stock or other capital distributions.
The Company arranged for the issuance in 1995 of $10.5 million in State
of Mississippi Variable Rate Industrial Revenue Development Bonds to finance
(along with internally generated cash flow and the Company's $1 million leasing
facility) a warehouse located near Tupelo, Mississippi. The bonds have a stated
maturity of May 1, 2010 and require mandatory sinking fund redemption payments,
payable monthly, of $900,000 per year from 1996 to 2002, $600,000 per year in
2003 and 2004, and $500,000 per year from 2005 to 2010. The bonds bear interest
at a variable rate (5.6% at June 30, 1998) that is adjustable weekly to the rate
the remarketing agent for the bonds deems to be the market rate for such bonds.
The bonds are secured by a lien on the land, building, and all other property
financed by the bonds. Additional security is provided by an $8.9 million direct
pay letter of credit which is not part of the Company's credit line.
15
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CREDIT AND LEASING FACILITIES, CONVERTIBLE SUBORDINATED NOTES, MORTGAGE AND
BONDS (CONTINUED)
The Company financed the purchase and improvements of its Meridian
manufacturing facility through the issuance of a series of State of Mississippi
General Obligation Bonds (Mississippi Small Enterprise Development Finance Act
Issue, 1994 Series GG) with an aggregate available principal balance of
$1,605,000, a weighted average coupon rate of 6.36% and a contractual maturity
of 15 years. The bonds are secured by a first mortgage on land, building and
improvements and a $1.4 million standby letter of credit which is not part of
the Company's credit line. Interest on the bonds is payable semiannually and
principal payments are due annually. In June 1997, the Company ceased
manufacturing operations at Meridian and leased the facility to a
non-manufacturing entity and in August 1997 made a $1.5 million payment in
escrow with respect to the bonds. The Company plans to redeem the bonds at their
earliest redemption date, approximately November 1, 1999.
The Company has a $1 million leasing facility with a financial
institution to finance the purchase of equipment in the United States, of which
$369,000 was available at June 30, 1998. In addition, the Company has a leasing
facility for $9 million Hong Kong dollars (U.S. $1.2 million) with a Hong Kong
financial institution to finance the purchase of machinery and equipment for its
China facilities of which U.S. $370,000 was available at June 30, 1998.
The Company financed its corporate headquarters in Miami, Florida with
a loan payable monthly through 1999, based on a 15 year amortization schedule,
with a balloon payment in 1999, bearing interest at 8% and secured by a mortgage
on the land and building.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," was issued in June
1997. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that a company (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. The Company has not determined the effects, if any, that SFAS No. 130
will have on its consolidated financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. SFAS No. 131 establishes standards for
the way that public companies report selected information about operating
segments in annual financial statements and requires that those companies report
selected information about segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131,
which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise", but retains the requirement to report information about major
customers, requires that a public company report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 requires that a public company report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. However, SFAS No. 131 does not require the reporting of
information that is not prepared for internal use if reporting it would be
impracticable. SFAS No. 131 also requires that a public company report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement, of segment amounts from period to period. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997, with disclosures in interim financial statements not required in the year
of adoption. The Company has not determined the effects, if any, that SFAS No.
131 will have on the disclosures in its consolidated financial statements.
16
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER
Shenzhen Jiadianbao Electrical Products Co., Ltd. ("SJE"), a
cooperative joint venture subsidiary of the Company's wholly-owned subsidiary
Go-Gro Industries Ltd. ("Go-Gro"), and the Bureau of National Land Planning
Bao-An Branch of Shenzhen City entered into a Land Use Agreement covering
approximately 467,300 square feet in Bao-An County, Shenzhen City, People's
Republic of China on April 11, 1995. The agreement provides SJE with the right
to use this land until January 18, 2042. The land use rights are
non-transferable. Under the terms of the SJE joint venture agreement, ownership
of the land and buildings of SJE is divided 70% to Go-Gro and 30% to the other
joint venture partner. Land costs, including the land use rights, approximated
$2.6 million of which Go-Gro has paid its 70% proportionate share of $1.8
million. Under the terms of this agreement, as amended, SJE is obligated to
construct approximately 500,000 square feet of factory buildings and 211,000
square feet of dormitories and offices, with 40 percent of the construction
required to be completed (which was completed) by April 1, 1997 and the
remainder by December 31, 1999. The Company plans to file an application to
extend the completion deadline of December 1999. The total cost for this project
is estimated at $15.5 million (of which $10 million had been expended as of June
30, 1998), and includes approximately $1.0 million for a Municipal Coordination
Facilities Fee (MCFF). The MCFF is based upon the square footage to be
constructed. The agreement calls for the MCFF to be paid in installments
beginning in January 1997. A 162,000 square foot factory, a 77,000 square foot
warehouse and a 60,000 square foot dormitory became fully operational in June
1997.
On April 26, 1996, the Company entered into a license agreement with
Westinghouse Electric Corporation ("Westinghouse") to market and distribute a
full range of lighting fixtures, lamps and other lighting products under the
Westinghouse brand name in exchange for royalty payments. The agreement
terminates on September 30, 2001. Catalina has an option to extend the agreement
for an additional ten years. The royalty payments are due quarterly and are
based on a percent of the value of the Compan s net shipments of Westinghouse
branded products, subject to annual minimum payments due for fiscal 1997 and
1998. Commencing September 30, 1999 either party has the right to terminate the
agreement during the fiscal years 1999 to 2001 if the Company does not meet the
minimum net shipments of $25 million for fiscal 1999, $40 million for fiscal
2000, and $60 million for fiscal 2001. Net sales of Westinghouse branded
products amounted to $6.6 million and $6.5 million for the nine months ended
June 30, 1998 and 1997, respectively.
On December 17, 1996 White Consolidated Industries, Inc. ("White"),
which has acquired certain limited trademark rights from Westinghouse Electric
Corp. ("Westinghouse") to market certain household products under the
White-Westinghouse trademark, notified the Company of a lawsuit against
Westinghouse and the Company filed in the United States District Court, for the
Northern District of Ohio. The lawsuit challenged the Company's right to use the
Westinghouse trademarks on its lighting products and alleges trademark
infringement. On December 24, 1996, Westinghouse and the Company served a
Complaint and Motion for Preliminary Injunction against White, AB Electrolux,
Steel City Vacuum Co., Inc., Salton/Maxim Housewares, Inc., Newtech Electronics
Corp., and Windmere Durable Holdings, Inc. in the United States District Court,
Western District of Pennsylvania, Case No. 96-2294 alleging that the defendants
had violated Westinghouse's trademark rights, breached the Agreement between
Westinghouse and White and sought an injunction to enjoin White against
interference with their contractual arrangements. In October 1997, the cases
were consolidated in Pennsylvania and on November 7, 1997 White filed a
Counterclaim and Third Party Claims against Westinghouse, Catalina and Minami
International Corporation alleging trademark infringement, trademark dilution,
false designation of origin, false advertising and unfair competition and
seeking injunctive relief and damages. Both the Company and Westinghouse
vigorously dispute White's allegations. Pursuant to the License Agreement
between Westinghouse and the Company, Westinghouse is defending and indemnifying
the Company for all costs and expenses for claims, damages and losses, including
the costs of litigation, accordingly no provision for this matter has been
recorded in the financial statements. Discovery is proceeding and the case
should be tried in 1999.
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations. The Company is in the process of identifying and
assessing the systems that could be affected by the Year 2000 Issue and is
developing an implementation plan to resolve the issue. The Company expects to
complete the assessment, formalize its plan for corrective action, and estimate
the potential incremental costs required to address this issue by December 1998.
The Company is presently unable to determine what impact, if any, the Year 2000
issue will have on its operations.
17
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Substantially all of the products either purchased or manufactured by
the Company are imported from China. The continued importation into the U.S. of
products manufactured in China could be affected by any one of several
significant trade issues that presently impact U.S. - China relations. On June
3, 1998, the President of the United States extended to the People's Republic of
China "Most Favored Nation" ("MFN") treatment for the entry of goods into the
United States for an additional year, beginning July 3, 1998. The trade status
has been renamed "Normal Trade Relations" because it applies to all but a
handful of U.S. trading partners. In the context of United States tariff
legislation, such treatment means that products are subject to favorable duty
rates upon entry into the United States. On July 22, 1998 the House of
Representatives supported the President's decision and rejected a bill to impose
trade sanctions against China due to alleged human rights abuses, nuclear
proliferation policies and a growing U.S. trade deficit with China. Members of
Congress and the "human rights community" will continue to monitor the human
rights issues in China and adverse developments in human rights and other trade
issues in China could affect U.S. - China relations. As a result of various
political and trade disagreements between the U.S. Government and China, it is
possible restrictions could be placed on trade with China in the future which
could adversely impact the Company's operations and financial position.
During late 1997 various countries in Southeast Asia (including
Thailand, South Korea, Malaysia, the Philippines and Indonesia) were involved in
an emerging crisis impacting their economies and characterized by currency
devaluations, rising interest rates, deteriorating economic growth and declining
capital markets. The Company does not conduct business with, or have a
significant investment in, any of these countries. However, this crisis could
have serious adverse repercussions on the financial stability of all countries
in the region, including Hong Kong and China, and has implications for the
global financial system as well, including the United States. The Company
believes that this Asian economic crisis has not significantly impacted its
business to date. However, the Company is presently unable to determine what
impact, if any, this Asian economic crisis will have on its business in the
future.
As a result of recent Internal Revenue Service rulings and proposed and
temporary regulations, the Company is in the process of restructuring its
international operations in order to retain favorable U.S. tax treatment of
foreign source income. The Company believes it should be successful in this
restructuring. However, in the event the Company is unsuccessful in this effort,
the Company will likely experience an increase in its consolidated effective
income tax rate.
18
CATALINA LIGHTING, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 23, 1993, Dana Lighting (now Catalina Industries, Inc.), a
subsidiary of the Company, and Nathan Katz, President of Dana, were
served with a copy of the Complaint in a matter captioned Holmes
Products Corp. vs. Dana Lighting, Inc. and Nathan Katz, Case No.
93-0249 in the Superior Court of the Commonwealth of Massachusetts,
City of Worcester, Massachusetts. The plaintiff in the action alleged
that Dana Lighting engaged in acts constituting tortious interference
with contractual actions, interference with prospective economic
relationship with plaintiff's supplier and unfair competition.
Plaintiff sought injunctive relief and damages in excess of $10
million. The case was voluntarily dismissed by the plaintiff on June
30, 1998 and the order dismissing the case was entered on July 27,
1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the Company's Annual Meeting of Stockholders, held on June 10,
1998, the stockholders voted on the following matters:
(i) to elect eight persons to serve as directors of the Company
until the 1999 Annual Meeting of Stockholders by the following
votes:
IN FAVOR AGAINST NOT VOTED
---------------------------- --------------------------- ------------------------
SHARES % SHARES % SHARES %
---------------- ----------- -------------- ----------- ------------ ----------
Robert Hersh 4,815,891 67.7% 1,597,012 22.5% 696,166 9.8%
Dean S. Rappaport 4,815,891 67.7% 1,597,012 22.5% 696,166 9.8%
William Stewart 4,824,591 67.9% 1,588,312 22.3% 696,166 9.8%
Ryan Burrow 5,225,273 73.5% 1,187,630 16.7% 696,166 9.8%
Henry Latimer 5,226,273 73.5% 1,186,630 16.7% 696,166 9.8%
Jeffrey Silverman 6,356,973 89.4% 55,930 0.8% 696,166 9.8%
Leonard Sokolow 5,224,873 73.5% 1,188,030 16.7% 696,166 9.8%
(ii) to ratify the appointment of Deloitte & Touche LLP to serve as
the Company's auditors for the fiscal year ending September
30, 1998 by a vote of 6,390,301 (89.9%) shares cast for the
proposal in favor, 13,935 (.2%) shares against and 704,833
(9.9%) shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
(a) 10.159 Lease Agreement between Dana Realty Trust and Catalina
Industries dated July 23, 1998.
10.160 Offer to Lease from Catalina Lighting Canada, Inc. to TAG
Quattro Inc dated March 12, 1998.
10.161 Change in Control Agreement between Thomas M. Bluth and
Catalina Lighting dated May 7, 1998.
10.162 Change in Control Agreement between David W. Sasnett and
Catalina Lighting dated May 7, 1998.
11 Schedule of Computation of Diluted Earnings (Loss) per Share.
(b) REPORTS ON FORM 8-K
None.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
/s/ ROBERT HERSH
----------------
Robert Hersh
Chief Executive Officer and
President
/s/ DAVID W. SASNETT
--------------------
David W. Sasnett
Chief Financial Officer and
Chief Accounting Officer
Date: August 14, 1998
20
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.159 Lease Agreement between Dana Realty Trust and Catalina Industries
dated July 23, 1998.
10.160 Offer to Lease from Catalina Lighting Canada, Inc. to TAG Quattro Inc
dated March 12, 1998.
10.161 Change in Control Agreement between Thomas M. Bluth and Catalina
Lighting dated May 7, 1998.
10.162 Change in Control Agreement between David W. Sasnett and Catalina
Lighting dated May 7, 1998.
11 Schedule of Computation of Diluted Earnings (Loss) per Share.
27 Financial Data Schedule