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, 1999
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 mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
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 4, 1999: 7,010,513 SHARES.
CATALINA LIGHTING, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------
Condensed consolidated balance sheets -
June 30, 1999 and September 30, 1998......................... 3
Condensed consolidated statements of operations -
Three and nine months ended June 30, 1999 and 1998........... 5
Condensed consolidated statements of cash flows -
Nine months ended June 30, 1999 and 1998..................... 6
Notes to condensed consolidated financial statements........... 8
Management's discussion and analysis of financial
condition and results of operations.......................... 13
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings...................................... 21
ITEM 4 Submission of Matters to a Vote of Security Holders.... 22
ITEM 6 Exhibits and Reports on Form 8-K....................... 22
2
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS JUNE 30, SEPTEMBER 30,
------ 1999 1998
----------- -------------
(UNAUDITED) *
Current assets
Cash and cash equivalents $ 3,995 $ 1,790
Restricted cash equivalents and short-term investments 1,475 377
Accounts receivable, net of allowances
of 9,105 and 8,408, respectively 19,924 18,395
Inventories 28,901 28,257
Other current assets 6,550 6,897
-------- --------
Total current assets 60,845 55,716
Property and equipment, net 26,032 27,922
Restricted cash equivalents and short-term investments -- 1,430
Goodwill, net 10,675 11,017
Other assets 2,684 2,875
-------- --------
$100,236 $ 98,960
======== ========
(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 1999 1998
------------------------------------ ----------- -------------
(UNAUDITED) *
Current liabilities
Notes payable - credit lines $ -- $ 3,428
Accounts and letters of credit payable 16,487 12,423
Current maturities of convertible subordinated notes 2,500 --
Current maturities of bonds payable-real estate related 2,210 975
Current maturities of other long-term debt 467 485
Accrued litigation judgment under appeal -- 4,909
Other current liabilities 6,634 5,827
--------- ---------
Total current liabilities 28,298 28,047
Notes payable - credit lines 11,200 10,500
Convertible subordinated notes 5,100 7,600
Bonds payable - real estate related 6,000 8,215
Other long-term debt 1,561 1,909
Other liabilities 952 365
--------- ---------
Total liabilities 53,111 56,636
--------- ---------
Stockholders' equity
Common stock, issued and outstanding 7,296
shares and 7,175 shares, respectively 73 72
Additional paid-in capital 26,759 26,475
Retained earnings 21,312 15,777
Treasury stock, 341 shares (1,019) --
--------- ---------
Total stockholders' equity 47,125 42,324
--------- ---------
$ 100,236 $ 98,960
========= =========
<FN>
*Condensed from audited financial statements
</FN>
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,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales $ 46,315 $ 45,037 $ 131,246 $ 122,266
Cost of sales 36,699 36,257 104,320 98,624
--------- --------- --------- ---------
Gross profit 9,616 8,780 26,926 23,642
Selling, general and administrative
expenses 7,465 6,803 21,365 19,801
Litigation settlement (2,728) -- (2,728) --
--------- --------- --------- ---------
Operating income 4,879 1,977 8,289 3,841
--------- --------- --------- ---------
Other income (expenses):
Interest expense (531) (936) (1,931) (2,983)
Reversal of post judgment interest
related to litigation settlement 893 -- 893 --
Other income 550 30 848 428
--------- --------- --------- ---------
Total other income (expenses) 912 (906) (190) (2,555)
--------- --------- --------- ---------
Income before income taxes 5,791 1,071 8,099 1,286
Income tax provision (1,918) (238) (2,564) (298)
--------- --------- --------- ---------
Net income $ 3,873 $ 833 $ 5,535 $ 988
========= ========= ========= =========
Weighted average number of
shares outstanding
Basic 6,974 7,126 7,075 7,114
Diluted 8,759 8,511 8,570 7,557
Earnings per share
Basic $ 0.56 $ 0.12 $ 0.78 $ 0.14
Diluted $ 0.45 $ 0.11 $ 0.68 $ 0.13
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,
-------------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,535 $ 988
Adjustments for non-cash items 3,171 3,575
Change in assets and liabilities (1,381) 6,675
-------- --------
Net cash provided by (used in) operating activities 7,325 11,238
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,353) (1,173)
Proceeds from sale of facility 948 --
Decrease (increase) in restricted cash equivalents and
short-term investments 1,007 990
-------- --------
Net cash provided by (used in) investing activities 602 (183)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 235 167
Net payments to repurchase common stock (1,019) --
Payments on other liabilities (555) (489)
Payments on bonds payable -real estate related (980) (975)
Proceeds from notes payable - credit lines 25,900 23,100
Payments on notes payable - credit lines (27,100) (32,750)
Net proceeds from (payments on) notes payable - credit lines
due on demand (1,528) 226
Sinking fund redemption payments on bonds (675) (675)
-------- --------
Net cash provided by (used in) financing activities (5,722) (11,396)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,205 (341)
Cash and cash equivalents at beginning of period 1,790 1,847
-------- --------
Cash and cash equivalents at end of period $ 3,995 $ 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,
----------------------
1999 1998
------ -------
(IN THOUSANDS)
Cash paid for:
Interest $1,618 $ 2,599
Income taxes paid (refunded) $2,190 $(3,345)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
In May 1999, the Company issued 1,778 common shares to each of its seven outside
directors as compensation for their services. The aggregate market value of the
stock issued was $50,000.
During the nine months ended June 30, 1998, total capital lease obligations
incurred for new office, machinery and warehouse equipment aggregated $438,000.
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, 1998 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, the condensed consolidated financial statements
include all adjustments (which consist mostly of normal, recurring accruals)
considered necessary for a fair presentation. The results of operations for the
three and nine months ended June 30, 1999 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.
COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components.
The Company's net income for the three and nine months ended June 30, 1999
equals comprehensive income for the same period.
2. INVENTORIES
Inventories consisted of the following:
JUNE 30, SEPTEMBER 30,
1999 1998
-------- -------------
(IN THOUSANDS)
Raw materials $ 4,113 $ 3,777
Work-in-progress 806 713
Finished goods 23,982 23,767
------- -------
Total inventories $28,901 $28,257
======= =======
3. PROPERTY AND EQUIPMENT, NET
Shenzhen Jiadianbao Electrical Products Co., Ltd. ("SJE"), a cooperative joint
venture subsidiary of 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 non-transferable rights to
use this land until January 18, 2042. 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, of which 40 percent was
required to be and was completed by April 1, 1997. The remainder of the
construction is required to be completed 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 $16.5 million (of which $10.8
million had been expended as of June 30, 1999) and includes approximately $1
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
8
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. PROPERTY AND EQUIPMENT, NET (CONTINUED)
beginning in January 1997 of which $164,000 had been paid as of June 30, 1999. A
162,000 square foot factory, 77,000 square foot warehouse and 60,000 square foot
dormitory became fully operational in June 1997. The Company plans to finance
the remainder of the construction through funds generated from operations or
additional borrowings.
In May 1999, the Company sold the facility which housed its former Meridian
Lamps manufacturing operations for a cash payment of $948,000. The sale resulted
in a gain of $194,000.
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 $1.8 million. A provision of $4.2 million was
recorded by the Company during the quarter ended March 31, 1997 and a $893,000
provision for post-judgment interest was recorded through March 31, 1999. On
June 15, 1999 this case was settled and the Company agreed to pay Mr. Browder
$1.5 million. This settlement resulted in the reversal in the Consolidated
Statements of Operations for the three months ended June 30, 1999 of $2.7
million previously accrued for damages and attorney fees and $893,000 in
previously accrued post judgment interest.
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,
Eastern 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 the Pennsylvania case 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 defended and indemnified the
Company for all costs and expenses for claims, damages and losses, including the
costs of litigation. The case was settled on June 30, 1999 subject to the
satisfaction of certain conditions and is anticipated to be completed by
September 30, 1999. Catalina made no payments as part of the settlement. All
litigation against the Company will be dismissed and Catalina's license with
Westinghouse Electric Company, now CBS, will remain in full force and effect.
9
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. CONTINGENCIES (CONTINUED)
During fiscal 1998 and the nine months ended June 30, 1999, the Company received
a number of product liability claims relating to halogen torchieres sold by the
Company to various retailers. Management does not currently believe these claims
will result in a material uninsured liability to the Company. As a result of
these claims the Company experienced an increase in its liability insurance
premiums effective for the 1999 calendar year and will now be self-insuring up
to a maximum of $10,000 for each incident occurring in calendar 1999. Based upon
its experience during the first nine months of fiscal 1999, the Company does not
believe that this self-insurance provision will have a material adverse impact
on the Company's financial position or annual results of operations for fiscal
1999. However, no assurance can be given that claims will not exceed available
insurance coverage or that the Company will be able to maintain the same level
of insurance.
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.
YEAR 2000
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
computer 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 a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has developed and is currently executing a plan to make its computer
systems Year 2000 ready. The plan consists of five phases: (1) an inventory of
all systems and applications, including non-information technology systems; (2)
an assessment of the Year 2000 readiness of these existing systems and
applications; (3) remediation of Year 2000 problems identified in the assessment
phase; (4) testing of all systems and applications to verify the success of the
remediation phase and, if necessary (5) the implementation of contingency plans
for all significant systems and applications.
Phases 1 and 2 of the Company's plan were completed as of September 1998 and the
Company had substantially completed phases 3 and 4 as of August 1999.
The Company has determined that its non-information technology systems are not
significantly affected by the Year 2000 Issue. With respect to information
technology systems, in 1997 the Company, during the normal course of upgrading
its systems to address its business needs and add functionality and efficiency
to its business processes, began the implementation of a new enterprise software
to replace the business applications supporting sales, distribution, inventory
management, finance and accounting for the Company's North American businesses.
The majority of the remainder of the Company's North American systems will be
made Year 2000 ready through purchased upgrades of commercial third-party
software packages. Go-Gro's systems and applications will be made Year 2000
ready through a combination of internal reprogramming/modification and purchased
upgrades of commercial third-party software packages. The internal
reprogramming/modifications of Go-Gro's systems and applications have undergone
testing by an independent third party.
The Company has initiated communications with the customers, suppliers and other
companies important to its business to attempt to determine the extent to which
the Company is vulnerable to such parties' failure to resolve their own Year
2000 issues.
The Company is currently and will continue utilizing both internal and external
resources to implement its Year 2000 plan. The total incremental cost to the
Company for the Year 2000 project (excluding internal resources, the costs
associated with the new enterprise system and scheduled hardware replacements
which would have been incurred
10
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. CONTINGENCIES (CONTINUED)
regardless of the Year 2000 Issue), all of which will be expensed as incurred,
is approximately $150,000, $35,000 of which has been incurred as of June 30,
1999. The Company plans to fund these costs with cash flows from operations.
The costs of the Year 2000 project are based on management's best estimates and
are dependent on a number of factors, including the continued availability of
personnel and external resources.
The Company expects to be Year 2000 compliant by October 1, 1999 and has
established contingency plans in the event remediation and testing efforts
indicate any of the Company's planned systems and applications will not be Year
2000 ready.
The Company's new enterprise software has been represented as Year 2000 ready by
its manufacturer but should such software prove to have Year 2000 problems, the
existing legacy systems will be made Year 2000 compliant through the upgrade of
the underlying database product and a limited amount of additional programming.
Contingency plans for the Company's other systems and applications contemplate
additional purchases of third-party software packages and expanded use of
external resources in remediation efforts.
Year 2000 compliance is critical to the Company due to the importance of its
computer systems and applications to its business. The Company may also be
vulnerable to the failure of significant third parties with which the Company
does business to resolve their own Year 2000 issues. The impact on the Company
of failure by either the Company or the significant third parties with which it
does business to achieve Year 2000 compliance is not reasonably estimable,
however, the Year 2000 Issue could have a material impact on the operations of
the Company.
OTHER
As a result of recent Internal Revenue Service rulings and proposed and
temporary regulations, the Company has restructured its international operations
in order to retain favorable U.S. tax treatment of foreign source income. The
Company believes its restructuring efforts will be successful in retaining
favorable tax treatment for its foreign source income. However, in the event
these efforts are unsuccessful, the Company could experience an increase in its
effective consolidated income tax rate.
5. FINANCIAL INSTRUMENT
In January 1999, the Company entered into an interest rate swap agreement
maturing May 1, 2004, to manage its exposure to interest rate movements by
effectively converting its $7.8 million debt related to the State of Mississippi
variable rate Industrial Revenue Development Bonds from a variable interest rate
to a fixed interest rate of 5.52%. Interest rate differentials paid or received
under the agreement are recognized as adjustments to interest expense.
6. CHANGE IN CONTROL AGREEMENTS
The Company has entered into Change in Control agreements with the Company's
Chief Financial Officer and its Treasurer. The agreements expire in September
2001. Such Agreements provide that, in the event of a change in control of the
Company, if the Company terminates the employment of either employee within
certain time periods or the Company fails to negotiate an acceptable employment
agreement with the employee, the Company shall pay the employee two times his
annual base salary. In addition, the agreements with these employees provide
that in the event they are terminated "without cause" where there has been no
change in control, they are entitled to a severance payment equal to their
annual base salary.
7. EMPLOYMENT AGREEMENTS
On June 4, 1999, the Company amended its employment agreements with four
executive officers in consideration for the officers agreeing to modify the
present bonus structure under each agreement. The agreement provides for
severance at the end of the present three-year term ending September 30, 2001 in
an amount equal to two times their base annual salary and benefits. Each officer
will be subject to a non-compete provision through September 30, 2003.
11
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. COMMITMENT
On April 26, 1996, and as subsequently amended, the Company entered into a
license agreement with Westinghouse Electric Corporation 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, 2002.Catalina has an option to extend the
agreement for an additional ten years. The royalty payments are due quarterly
and are based on percent of the value of the Company's net shipments of
Westinghouse branded products, subject to annual minimum payments due.
Commencing September 30, 2000 either party has the right to terminate the
agreement during fiscal years 2000 to 2002 if the Company does not meet the
minimum net shipments of $25 million for fiscal 2000, $40 million for fiscal
2001, and $60 million for fiscal 2002. Net sales of Westinghouse branded
products amounted to $14 million and $6.6 million for the nine months ended June
30, 1999 and 1998, respectively.
9. STOCK OPTIONS
During the nine months ended June 30, 1999, the Company granted to certain
employees options to purchase 97,000 shares of common stock at prices ranging
from $2.125 to $5.0625. The options generally vest over a three-year period from
the grant date. The options expire in 10 years from the date of grant.
10. NEW ACCOUNTING PRONOUNCEMENTS
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.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
was issued in June 1998. SFAS 133 establishes standards for the accounting and
reporting of derivative instruments embedded in other contracts (collectively
referred to as derivatives) and of hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. This statement is effective
for fiscal years beginning after June 15, 2000. The Company has not determined
the effects, if any, that SFAS No. 133 will have on the Company's financial
position or results of operations.
12
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; advertising and promotional efforts; brand awareness; the
existence or absence of adverse publicity; acceptance of new product offerings;
changing trends in customer tastes; 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 exchange rates;
changes in the Company's effective tax rate (which is dependent on the Company's
U.S. and foreign source income) 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,
1998. 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, 1999 and 1998 are referred to as 1999 and 1998,
respectively.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Net sales and gross profit for 1999 were $46.3 million and $9.6
million, respectively, as compared to $45.0 million and $8.8 million,
respectively, for 1998. The Company generated net income of $3.9 million, ($.45
per share) in 1999 compared to $833,000 ($0.11 per share) in 1998. In 1999,
results from operations benefited from the reversal of a $2.7 million provision
related to litigation with a former officer of the Company and of an $893,000
provision for post judgment interest. The reversal of these non-recurring items
and related expenses increased diluted earnings per share in 1999 by $.24 and
diluted earnings per share, excluding non-recurring items and related expenses,
was $.21 in 1999 as compared to $.12 in 1998.
The $1.3 million increase in net sales from the prior year is primarily
attributable to higher unit sales to Canadian customers reflecting additions to
core programs and new product placements. Lamp sales increased by $714,000 to
$29.8 million and net sales for the Company's other principal line of products,
lighting fixtures, increased by $564,000 to $16.5 million. Lamps and lighting
fixtures accounted for 64% and 36%, respectively, of net sales in 1999 compared
to 65% and 35% in 1998, respectively. In 1999 and 1998, Home Depot accounted for
26.4% and 30%, respectively, of the Company's net sales and Wal-Mart accounted
for 14.9% and 4.4% of net sales in 1999 and 1998, respectively.
Gross profit increased by $836,000 in 1999 due to improved margins
earned on direct sales attributable to new product placement, a more profitable
product mix and the increase in net sales. The gross profit percentage increased
from 19.5% in 1998 to 20.8% in 1999. The improvement in the gross profit
percentage is attributable to the improved margins earned on direct sales and
the increase in net sales, which lessened the effect on such percentage of
purchasing and warehousing costs, as most of such costs are fixed.
Many of the Company's major customers (most notably Home Depot and
Wal-Mart) 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 79% of the Company's sales in 1999
were made on a direct basis as compared to 76% in 1998. Sales made by the
Company on a direct basis typically generate lower per unit margins than sales
of the same items 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.
Sales from the Company's warehouses declined during the fiscal year ended
September 30, 1998 as compared to the fiscal year ended September 30, 1997, and
such trend has continued during the three months ended June 30, 1999.
13
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company lowered its warehousing costs by closing its Los Angeles operations
effective March 31, 1998 and is attempting to compensate for this decline by
pursuing new channels of distribution which will be serviced out of the
Company's U.S. warehouse. However, there can be no assurance these efforts will
be successful, and the Company may experience further declines in sales made
from its U.S. warehouse.
Selling, general and administrative expenses ("SG&A") increased by
$662,000 from the prior year reflecting an increase in the bonuses due to the
Company's executive officers under their employment agreements aggregating
$338,000 resulting from an increase in pretax income and an increase in
professional fees of $182,000.
In June 1999, the Company settled its lawsuit with a former Officer. In
conjunction with this lawsuit, a provision of $4.2 million was recorded by the
Company during the quarter ended March 31, 1997 representing the amount of the
verdict and quarterly provisions for post-judgement interest of $893,000 were
recorded through March 31, 1999. Under the terms of the settlement, the Company
agreed to pay Mr. Browder $1.5 million, which resulted in the reversal of $2.7
million of the provision for the verdict and the full reversal of the provision
for post-judgement interest of $893,000.
Interest expense decreased to $531,000 in 1999 from $936,000 in 1998
due to lower average outstanding borrowings and a lower average interest rate.
In addition, interest in 1998 included a $106,000 provision for interest related
to the $4.2 million lawsuit discussed in the preceding paragraph.
Other income for 1999 consisted primarily of a $194,000 gain on the
sale of the Company's Meridian facility, investment income and other
miscellaneous income.
The effective income tax rates for 1999 and 1998 were 33.1% and 22.2%,
respectively and reflect the projected impact of foreign income, which is taxed
at a significantly lower rate than U.S. income. The increase in the tax rate
from 1998 to 1999 is due to higher proportionate U.S. source income, which is
taxed at a higher rate than foreign source income. As a result of recent
Internal Revenue Service rulings and proposed and temporary regulations, the
Company has restructured its international operations in order to retain
favorable U.S. tax treatment of foreign source income. The Company believes its
restructuring efforts will be successful in retaining favorable tax treatment
for its foreign source income. However, in the event these efforts are
unsuccessful, the Company could experience an increase in its effective
consolidated income tax rate.
COMPARISON OF NINE MONTHS ENDED JUNE 30, 1999 AND 1998
Net sales and gross profit for 1999 were $131.2 million and $26.9
million, respectively, as compared to $122.3 million and $23.6 million,
respectively, for 1998. The Company generated net income of $5.5 million ($.68
per share) in 1999 compared to $988,000 ($0.13 per share) in 1998. In 1999,
results from operations benefited from the reversal of a $2.7 million provision
related to litigation with a former officer of the Company and the reversal of
an $893,000 provision for post judgment interest. The reversal of these
non-recurring items and related expenses increased diluted earnings per share in
1999 by $.23 and diluted earnings per share, excluding non-recurring items and
related expenses, was $.45 in 1999 as compared to $.16 in 1999.
The $9 million increase in net sales from the prior year reflects
higher unit sales to U.S. and Canadian customers attributable to additions to
core programs, promotional opportunities and new product placements. Lamp sales
increased by $6.1 million and net sales for the Company's other principal line
of products, lighting fixtures, increased by $2.9 million. Lamps and lighting
fixtures accounted for 64% and 36% of net sales in 1999 and 1998. In 1999 and
1998, Home Depot accounted for 27.6% and 27.5%, respectively, of the Company's
net sales and Wal-Mart accounted for 12.0% and 4.8% of net sales in 1999 and
1998, respectively.
Gross profit increased by $3.3 million in 1999 due to improved margins
earned on direct sales attributable to new product placement, a more profitable
product mix and the increase in net sales. The gross profit percentage increased
from 19.3% in 1998 to 20.5% in 1999. The improvement in the gross profit
percentage from 1998 to 1999 was attributable to the
14
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
increase in net sales, which lessened the effect on such percentage of
purchasing and warehousing costs as most of these costs are fixed, and improved
margins on direct sales.
Many of the Company's major customers (most notably Home Depot and
Wal-Mart) 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 warehouse. Approximately 76% of the Company's sales in 1999
were made on a direct basis as compared to 67% in 1998. Sales made by the
Company on a direct basis typically generate lower per unit margins than sales
of the same items 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.
Sales from the Company's warehouses declined during the fiscal year ended
September 30, 1998 as compared to the fiscal year ended September 30, 1997, and
such trend has continued during the nine months ended June 30,1999. The Company
lowered its warehousing costs by closing its Los Angeles operation effective
March 31, 1998 and is attempting to compensate for this decline by pursuing new
channels of distribution which will be serviced out of the Company's U.S.
warehouse. However, there can be no assurance these efforts will be successful,
and the Company may experience further declines in sales made from its U.S.
warehouse.
Selling, general and administrative expenses increased by $1.6 million
reflecting an increase in bonuses due to executive officers under their
employment agreements ($487,000 in the aggregate), an increase in expenses
related to the Company's operations in Mexico ($194,000), an increase in the
provision for uncollectible accounts receivable ($328,000), and an increase in
professional fees ($315,000).
In June 1999, the Company settled its lawsuit with a former Officer. In
conjunction with this lawsuit, a provision of $4.2 million was recorded by the
Company during the quarter ended March 31, 1997 representing the amount of the
verdict and quarterly provisions for post-judgement interest of $893,000 were
recorded through March 31, 1999. Under the terms of the settlement, the Company
agreed to pay Mr. Browder $1.5 million, which resulted in the reversal of $2.7
million of the provision for the verdict and the full reversal of the provision
for post-judgement interest of $893,000.
Interest expense decreased to $1.9 million in 1999 from $3 million in
1998 due to lower average outstanding borrowings and a lower average interest
rate.
Other income for 1999 consisted primarily of a $194,000 gain on the
sale of the Company's Meridian facility, investment income and other
miscellaneous income.
The effective income tax rates for 1999 and 1998 were 31.7% and 23.2%,
respectively and reflect the projected impact of foreign income, which is taxed
at a significantly lower rate than U.S. income. The increase in the tax rate
from 1998 to 1999 is due to higher proportionate U.S. source income, which is
taxed at a higher rate than foreign source income. As a result of recent
Internal Revenue Service rulings and proposed and temporary regulations, the
Company has restructured its international operations in order to retain
favorable U.S. tax treatment of foreign source income. The Company believes its
restructuring efforts will be successful in retaining favorable tax treatment
for its foreign source income. However, in the event these efforts are
unsuccessful, the Company could experience an increase in its effective
consolidated income tax rate.
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 foreseeable future.
CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 1999
The Company's operating, investing and financing activities resulted in
a net increase in cash and cash equivalents of $2.2 million from September 30,
1998 to June 30, 1999.
15
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The net cash of $7.3 million provided by operating activities and the
$948,000 proceeds from the sale of the Meridian facility were used primarily to
pay for capital expenditures aggregating $1.4 million, to pay down credit lines,
to make sinking fund redemption payments on outstanding bonds and to repurchase
Company common stock.
CREDIT AND LEASING FACILITIES, BONDS, MORTGAGE AND CONVERTIBLE SUBORDINATED
NOTES
The Company has a $35 million credit facility with a group of
commercial banks. This facility provides credit in the form of revolving loans,
acceptances, and trade and stand-by letters of credit and matures on September
30, 2000. 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 plus 1.8% at June 30, 1999). 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, 1999, the Company had used
$12.4 million under this credit facility (loans amounted to $11.2 million) and
$7.1 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 4 million Canadian dollars (approximately U.S.
$2.6 million) and 35 million Hong Kong dollars (approximately U.S. $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. Canadian dollar advances bear interest at the Canadian
prime rate plus .5% (6.75% at June 30, 1999) and all U.S. dollar advances bear
interest at the U.S. base rate of the bank (8.25% at June 30, 1999). At June 30,
1999, there were no borrowings under this facility and U.S. $2.4 million was
available for additional borrowings under the borrowing base calculation. The
Hong Kong 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% (8.50% at June 30, 1999). At
June 30, 1999, there were no borrowings under the Hong Kong facility but the
facility was fully utilized for the negotiation of discrepant documents. 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 requires Go-Gro to
maintain a minimum net worth, prohibits the payment of dividends by Go-Gro
without the prior consent of the lender, and limits the amount of advances or
loans from Go-Gro to the Company at any time to 50% of Go-Gro's pre-tax profits
for the previous 12 months. Each of these credit facilities is payable upon
demand and is subject to annual reviews by the banks.
The Company has outstanding $7.6 million of 8% convertible subordinated
notes due March 15, 2002. The notes are convertible into common shares of the
Company's stock at a conversion price of $6.68 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 limits 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) its 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 (5.1% at June
16
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CREDIT AND LEASING FACILITIES, BONDS, MORTGAGE AND CONVERTIBLE SUBORDINATED
NOTES (CONTINUED)
30, 1999) 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 million direct pay letter of credit
which is not part of the Company's credit line. The unpaid balance of these
bonds was $6.9 million at June 30, 1999. In January 1999, the Company entered
into an interest rate swap agreement maturing May 1, 2004, to manage its
exposure to interest rate movements for these bonds by effectively converting
its debt from a variable interest rate to a fixed interest rate of 5.52%.
Interest rate differentials paid or received under the agreement are recognized
as adjustments to interest expense.
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 6.23% and a contractual maturity
of November 1, 2009. The bonds are secured by a $1,713,000 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 made a $1.5 million
payment to escrow on the bonds. The facility was sold in June 1999. The Company
plans to redeem the bonds at their earliest redemption date, approximately
November 1, 1999.
The Company has a $1 million facility with a U.S. financial institution
to finance the purchase of equipment in the United States, of which $533,000 was
available at June 30, 1999. In addition, the Company has a leasing facility for
$9 million Hong Kong dollars (approximately U.S. $1.2 million) with a Hong Kong
financial institution to finance the purchase of equipment for its China
facilities of which $370,000 was available at June 30, 1999.
The Company financed its corporate headquarters in Miami, Florida with
a loan payable monthly through 2004, based on a 15 year amortization schedule,
with a balloon payment in 2004. The loan bears interest at 8% and is secured by
a mortgage on the land and building. The unpaid balance of this loan was
$972,000 at June 30, 1999.
YEAR 2000
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 computer 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
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has developed and is currently executing a plan to make its
computer systems Year 2000 ready. The plan consists of five phases: (1) an
inventory of all systems and applications, including non-information technology
systems; (2) an assessment of the Year 2000 readiness of these existing systems
and applications; (3) remediation of Year 2000 problems identified in the
assessment phase; (4) testing of all systems and applications to verify the
success of the remediation phase and, if necessary (5) the implementation of
contingency plans for all significant systems and applications.
Phases 1 and 2 of the Company's plan were completed as of September
1998 and the Company has substantially completed phases 3 and 4 as of August
1999.
The Company has determined that its non-information technology systems
are not significantly affected by the Year 2000 Issue. With respect to
information technology systems, in 1997 the Company, during the normal course of
upgrading its systems to address its business needs and add functionality and
efficiency to its business processes, began the implementation of a new
enterprise software to replace the business applications supporting sales,
distribution, inventory management, finance and accounting for the Company's
North American businesses. The majority of the remainder of the Company's North
American systems will be made Year 2000 ready through purchased upgrades of
commercial third-party software packages. Go-Gro's systems and applications will
be made Year 2000 ready through a combination of internal
reprogramming/modification and purchased upgrades of commercial third-party
software
17
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 (CONTINUED)
packages. The internal reprogramming/modifications of Go-Gro's systems and
applications have undergone testing by an independent third party.
The Company has initiated communications with the customers, suppliers
and other companies important to its business to attempt to determine the extent
to which the Company is vulnerable to such parties' failure to resolve their own
Year 2000 issues.
The Company is currently and will continue utilizing both internal and
external resources to implement its Year 2000 plan. The total incremental cost
to the Company for the Year 2000 project (excluding internal resources, the
costs associated with the new enterprise system and scheduled hardware
replacements which would have been incurred regardless of the Year 2000 Issue),
all of which will be expensed as incurred, is approximately $150,000, $35,000 of
which has been incurred as of June 30, 1999. The Company plans to fund these
costs with cash flows from operations. The costs of the Year 2000 project and
the timetable in which the Company expects to finish its Year 2000 project are
based on management's best estimates and are dependent on a number of factors,
including the continued availability of personnel and external resources.
The Company expects to be Year 2000 compliant by October 1, 1999 and
has established contingency plans in the event remediation and testing efforts
indicate any of the Company's planned systems and applications will not be Year
2000 ready. The Company's new enterprise software has been represented as Year
2000 ready by its manufacturer but should such software prove to have Year 2000
problems, the existing legacy systems will be made Year 2000 compliant through
the upgrade of the underlying database product and a limited amount of
additional programming. Contingency plans for the Company's other systems and
applications contemplate additional purchases of third-party software packages
and expanded use of external resources in remediation efforts.
Year 2000 compliance is critical to the Company due to the importance
of its computer systems and applications to its business. The Company may also
be vulnerable to the failure of significant third parties with which the Company
does business to resolve their own Year 2000 issues. The impact on the Company
of failure by either the Company or the significant third parties with which it
does business to achieve Year 2000 compliance is not reasonably estimable,
however, the Year 2000 Issue could have a material adverse impact on the
operations of the Company.
OTHER
Shenzhen Jiadianbao Electrical Products Co., Ltd. ("SJE"), a
cooperative joint venture subsidiary of 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
non-transferable rights to use this land until January 18, 2042. 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, of which 40 percent was required to be and was completed by April 1,
1997. The remainder of the construction is required to be completed 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 $16.5
million (of which $10.8 million had been expended as of June 30, 1999) and
includes approximately $1 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 of which $164,000 had been paid as of June 30, 1999. A 162,000 square foot
factory, 77,000 square foot warehouse and 60,000 square foot dormitory became
fully operational in June 1997. The Company plans to finance the remainder of
the construction through funds generated from operations or additional
borrowings.
On April 26, 1996, and as subsequently amended, the Company entered
into a license agreement with Westinghouse Electric Corporation 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, 2002. Catalina has an option to extend the
agreement for an additional ten years. The royalty payments are due quarterly
18
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
and are based on a percent of the value of the Company's net shipments of
Westinghouse branded products, subject to annual minimum payments due.
Commencing September 30, 2000 either party has the right to terminate the
agreement during fiscal years 2000 to 2002 if the Company does not meet the
minimum net shipments of $25 million for fiscal 2000, $40 million for fiscal
2001, and $60 million for fiscal 2002. Net sales of Westinghouse branded
products amounted to $14 million and $6.6 million for the nine months ended June
30, 1999 and 1998, respectively.
As a result of recent Internal Revenue Service rulings and proposed and
temporary regulations, the Company restructured its international operations in
order to retain favorable U.S. tax treatment of foreign source income. The
Company believes its restructuring efforts will be successful in retaining
favorable tax treatment for its foreign source income. However, in the event
these efforts are unsuccessful, the Company could experience an increase in its
effective consolidated income tax rate.
On June 3, 1999, 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, 1999.
The MFN 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 27, 1999 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.
The Company expects to continue to obtain most of its products from
China, and maintains significant capital investments in China. Large
fluctuations in currency rates could have a material effect on the Company's
cost of products, thereby decreasing the Company's ability to compete. All
purchases of finished goods are made in U.S. dollar which limit the Company's
exposure to foreign currency fluctuations with respect to fluctuations that
would impact existing outstanding purchase commitments. However the Company is
subject to foreign currency fluctuations to the extent such fluctuations affect
the cost of products purchased (or manufactured) or the Company's ability to
sell into domestic or foreign markets. During the three months ended June 30,
1999 the Company became aware from published reports of the possibility of a
devaluation in the Hong Kong dollar and the Chinese Renminbi. The Company is
presently unable to determine the impact such devaluation would have on its
business.
During fiscal 1998 and the nine months ended June 30, 1999, the Company
received a number of product liability claims relating to halogen torchieres
sold by the Company to various retailers. Management does not currently believe
these claims will result in a material uninsured liability to the Company. As a
result of these claims the Company experienced an increase in its liability
insurance premiums effective for the 1999 calendar year and will now be
self-insuring up to a maximum of $10,000 for each incident occurring in calendar
1999. Based upon its experience during the first nine months of fiscal 1999, the
Company does not believe that this self-insurance provision will have a material
adverse impact on the Company's financial position or annual results of
operations for fiscal 1999. However, no assurance can be given that claims will
not exceed available insurance coverage or that the Company will be able to
maintain the same level of insurance.
The Company's board of directors has authorized the repurchase of up to
$2 million of common shares of the Company from time to time in the open market
or in negotiated purchases. As of June 30, 1999, the Company had repurchased
340,900 shares for $1,019,000.
On August 9, 1999 the New York Stock Exchange ("NYSE") notified the
Company that it had changed its rules regarding continued listing criteria for
companies which have shares traded on the NYSE. The new rules change and
increase the requirements to maintain a NYSE listing. As of June 30, 1999, the
Company does not meet one of the new rules, which requires that any NYSE listed
company, which has a total market capitalization of less than $50 million,
maintain minimum total stockholders' equity of $50 million. The Company's
stockholders equity as of June 30, 1999 was $47,125,000. The Company believes it
can meet the new listing rules and, as requested by NYSE, will provide the NYSE
with its plan to meet the new standard by February, 2001. However, no assurances
can be given that the NYSE will accept the Company's plan, or that the
objectives of the plan will be accomplished by February, 2001. If the NYSE does
not accept the Company's plan, or the Company is unable to achieve the plan's
objective, the Company's shares could be delisted from the NYSE.
19
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was also issued in June 1997. SFAS No. 131 establishes standards
for the way that public companies report selected information about operating
segments in financial statements and requires that those companies report
selected information about segments in interim and annual 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. The Company has not determined the effects, if any, that SFAS No. 131 will
have on the disclosures in its consolidated financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued in June 1998. SFAS 133 establishes standards for the
accounting and reporting of derivative instruments embedded in other contracts
(collectively referred to as derivatives) and of hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. This statement is
effective for fiscal years beginning after June 15, 2000. The Company has not
determined the effects, if any, that SFAS No. 133 will have on the Company's
financial position or results of operations.
20
CATALINA LIGHTING, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 $1.8 million. A provision of $4.2 million was
recorded by the Company during the quarter ended March 31, 1997 and a $893,000
provision for post-judgment interest was recorded through March 31, 1999. On
June 15, 1999 this case was settled and the Company agreed to pay Mr. Browder
$1.5 million. This settlement resulted in the reversal in the Consolidated
Statements of Operations for the three months ended June 30, 1999 of $2.7
million previously accrued for damages and attorney fees and $893,000 in
previously accrued post judgment interest.
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,
Eastern 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 the Pennsylvania case 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 defended and indemnified the
Company for all costs and expenses for claims, damages and losses, including the
costs of litigation. The case was settled on June 30, subject to the
satisfaction of certain conditions and is anticipated to be completed by
September 30, 1999. Catalina made no payments as part of the settlement. All
litigation against the Company will be dismissed and Catalina's license with
Westinghouse Electric Company, now CBS, will remain in full force and effect.
21
CATALINA LIGHTING, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION (CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.174 Purchase and Sale Contract dated May 6, 1999, between Meridian Lamps,
Inc. and Saunders of Meridian, LLC.
10.175 Form of Amendment to Employment Agreements, dated June 4, 1999 with
Executive officers Hersh, Katz, Rappaport and Stewart.
11 Schedule of Computation of Diluted Earnings per Share.
27 Financial Data Schedule
(b) REPORT ON FORM 8-K
On June 15, 1999, the Company filed a Report on Form 8-K
concerning the settlement of its lawsuit with its former Chief
Executive Officer, John Browder.
22
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 13, 1999
23
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.174 Purchase and Sale Contract dated May 6, 1999, between Meridian
Lamps, Inc. and Saunders of Meridian, LLC.
10.175 Form of Amendment to Employment Agreements, dated June 4, 1999 with
Executive officers Hersh, Katz, Rappaport and Stewart.
11 Schedule of Computation of Diluted Earnings per Share.
27 Financial Data Schedule