UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 0F 1934
----------
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2001
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 Charter)
Florida 59-1548266
(State or Other Jurisdiction of (I.R.S Employer
Incorporation or Organization) Identification Number)
18191 N.W. 68th Avenue, Miami, Florida 33015
(Address of Principal Executive Offices, Including Zip Code)
(305) 558-4777
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
Common Stock, par value None
$.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
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 |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.|_|
The aggregate market value of common stock held by non-affiliates of the
registrant on December 14, 2001 computed by reference to the closing price of
such stock, as quoted on the NASD Over-the-Counter Bulletin Board on such date,
was $4.8 million.
The number of shares of the registrant's common stock outstanding as of
the close of business on December 14, 2001 was 15,878,247.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be filed by the registrant
in connection with its 2002 Annual Meeting of Shareholders are incorporated by
reference into Part III.
Page 1
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (this "Form 10-K"),
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. In some cases you can identify
forward-looking statements by words such as "expects," "anticipates,"
"believes," "plans," "intends," "estimates," variations of such words and
similar expressions. These statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Factors
that would cause or contribute to the inability to obtain the results or to
fulfill the other forward-looking statements include, but are not limited to,
the following: the highly competitive nature of the lighting industry; our
reliance on key customers who may delay, cancel or fail to place orders;
consumer demand for lighting products; dependence on third party vendors and
imports from China which may limit our margins or affect the timing of revenue
and sales recognition; general domestic and international economic conditions
which may affect consumer spending; brand awareness, the existence of adverse
publicity, continued acceptance of our products in the marketplace, new products
and technological changes, and changing trends in customer tastes, each of which
can effect demand and pricing for our products; pressures on product pricing and
pricing inventories; cost of labor and raw materials; the availability of
capital; the ability to satisfy the terms of, and covenants under, credit and
loan agreements and the impact of increases in borrowing costs, each of which
affect our short-term and long-term liquidity; the costs and other effects of
legal and administrative proceedings; foreign currency exchange rates; changes
in our effective tax rate (which is dependent on our U.S. and foreign source
income); and other factors referenced in this Form 10-K. We will not undertake
and specifically decline 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.
Item 1. BUSINESS.
General
Catalina Lighting, Inc. (collectively with its subsidiaries, the
"Company") designs, manufactures, contracts for the manufacture of, imports,
warehouses and distributes a broad line of lighting fixtures and lamps under the
Westinghouse(R) brand, and the Catalina(R), Dana(R), Ring and Illuminada(R)
trade names. We also function as an original equipment manufacturer, selling
goods under our customers' private labels. We sell in the United States through
a variety of retailers including home centers, national retail chains, office
superstore chains, mass merchandisers, warehouse clubs, discount department
stores, and hardware stores. We also sell our products in the United Kingdom,
continental Europe, Canada, Mexico and South America. Currently, our product
line is comprised primarily of lighting fixtures and lamps. We have supplemented
our product lines through acquisitions but have remained focused on lighting
products. Catalina Lighting, Inc. was incorporated under the laws of the state
of Florida in 1974, started selling lighting in 1985, and became a public
company in 1988. The Company's fiscal year ends September 30. Unless otherwise
noted, all references to 2001, 2000 and 1999 relate to the fiscal years then
ended.
Products
We market a diverse product line, comprised principally of lighting
products used primarily in residential and office environments. Our product line
consists mainly of two categories: lighting fixtures and lamps. Lighting
fixtures include outdoor/security lighting, chandeliers, recessed and track
lighting, and wall and ceiling lights. We sell both table and floor lamps which
may be either functional or decorative. Functional lamps consist of halogen desk
lamps, bankers lamps, swing arm desk lamps, torchiere lamps, magnifier lamps,
and any other lamps generally used for task oriented functions. Decorative lamps
are fashion oriented and made of such materials as metal, ceramic, stained
glass, and crystal glass. A smaller percentage of our product line consists of
industrial consumables, products for the automotive aftermarket, and train and
bus lighting. We develop, manufacture and maintain separate product lines for
sale in North America, continental Europe and the United Kingdom due to the
different consumer preferences and electrical specifications of each of these
markets. We may continue to expand our product lines internally or through
acquisitions.
Distribution Methods
We utilize two distribution methods in selling our products: direct and
warehouse.
We obtain almost all of the lighting products we sell from factories in
China. Our direct sales are made either by delivering lighting products to our
customers' common carriers at a shipping point in China or by shipping the
products from China directly to customers' distribution centers, warehouses or
stores. Direct sales are made in large quantities (generally container-sized
lots) to customers, who pay pursuant to their own international, irrevocable
letters of credit (which may or may
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not be transferable) or on open credit with us. Upon receipt of a transferable
letter of credit, we transfer the portion of the letter of credit covering the
cost of merchandise to our supplier. The terms of the transfer provide that
draws may not be made by the supplier until we are entitled to be paid pursuant
to the terms of the customer's letter of credit. We have the right to draw upon
the customer's letter of credit once the products are inspected by us or our
agents, delivered to the port of embarkation and the appropriate documentation
has been presented to the issuing bank within the time periods established by
such letter of credit. With the exception of sales made into Europe by our China
subsidiary, direct sales are made by one of our North American subsidiaries. Our
China subsidiary, Go-Gro Industries, Ltd. ("Go-Gro"), either manufactures or
procures the products for our North American subsidiaries. For 2001 and 2000,
43% and 69%, respectively, of net sales were attributable to direct sales.
We also purchase products for our own account and warehouse the products
for subsequent resale to customers. We are responsible for costs of shipping,
insurance, customs clearance and duties, storage and distribution related to
such warehouse products and therefore, warehouse sales usually command higher
per unit sales prices than direct sales of the same items. We own a 473,000
square foot warehouse facility near Tupelo, Mississippi, own and lease various
warehouse facilities in the U.K. and lease warehouse facilities in Toronto,
Canada and Mexico City, Mexico. In 2001 and 2000, warehouse sales accounted for
57% and 31%, respectively, of net sales. The increase in warehouse sales for
2001 is attributable to our acquisition of Ring Limited ("Ring"), our U.K.
subsidiary, on July 5, 2000, as substantially all of Ring's sales are warehouse
sales.
The relative proportion of our sales generated by each method is dependent
upon customer buying preferences and, to a lesser extent, our sales strategies.
Purchasing on a direct basis allows the customer to generally pay a lower per
unit price than purchasing the same items from the warehouse, but such method
typically requires the customer to purchase in greater quantities and thus
assume the costs, risks and liquidity requirements associated with holding
larger inventories. Customer buying preferences are influenced by a number of
business, economic and other factors. The underlying factors driving customer
buying preferences often vary from customer to customer and are subject to
change. Over the past six years, our larger U.S. customers have increased their
direct business with us while reducing their purchases from the warehouse.
Business Segments
For internal management reporting purposes we operate three primary
business segments, which also correspond to the major geographic segments of our
business: Catalina Industries, Inc. (United States), Go-Gro Industries, Ltd.
(China) and Ring Limited (United Kingdom). We added the United Kingdom as a
primary business segment with the acquisition of Ring in 2000. We also have
operating subsidiaries in Canada (Catalina Canada), and Mexico (Catalina
Mexico). Sales (in thousands) for each primary segment for the fiscal years
ended September 30, 2001, 2000 and 1999 are set forth in the table below. Sales
for Ring for 2000 represent sales from July 5, 2000 to September 30, 2000.
Years Ended September 30,
-----------------------------------------
2001 2000 1999
--------- --------- ---------
Catalina Industries $ 78,943 $ 122,222 $ 135,308
Go-Gro Industries 108,671 141,356 136,945
Ring Limited 104,847 24,529 --
Others 27,198 29,914 23,806
Intersegment eliminations (84,873) (115,391) (119,498)
--------- --------- ---------
$ 234,786 $ 202,630 $ 176,561
========= ========= =========
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 17 of Notes to Consolidated Financial Statements
for financial information by primary business segment.
Catalina Industries, Inc. (United States)
Catalina Industries designs, imports, warehouses and distributes lighting
fixtures and lamps in the United States to major retailers, including home
centers, office superstore chains, mass merchandisers, discount department
stores and warehouse clubs. Order entry, customer service and other support
functions for this segment are performed at the corporate headquarters in Miami,
Florida. Catalina Industries owns and operates a 473,000 square foot
distribution facility located near Tupelo, Mississippi.
Catalina Industries sells its products under the Westinghouse(R) brand,
the Catalina(R), Dana(R), and Illuminada(R) trade names, and also under its
customers' private labels. Catalina Industries markets a diverse product line
used primarily in residential and office settings. Its product line consists
mainly of two categories: lighting fixtures and lamps. Lighting fixtures include
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outdoor/security lighting, chandeliers, recessed and track lighting, and wall
and ceiling lights. Lamps sold by Catalina Industries include both table and
floor models and may be either functional or decorative. Functional lamps
consist of halogen desk lamps, bankers lamps, swing arm desk lamps, torchiere
lamps, magnifier lamps, and other lamps generally used for task oriented
functions. Decorative lamps are fashion oriented and made of such materials as
metal, ceramic, stained glass, and crystal glass.
Catalina Industries purchases its products from Go-Gro, our China
manufacturing and sourcing subsidiary. These products are manufactured by Go-Gro
or purchased from other factories by Go-Gro. Catalina Industries arranges for
the shipment of its products directly from Go-Gro or other China factories to
the customers' distribution centers or stores. Catalina Industries also sells
and ships from its Mississippi distribution facility (see "Distribution
Methods").
Catalina Industries' business is somewhat seasonal in nature. Historically
this segment's sales have been greater during the quarters ended June 30 and
September 30 due to home improvement activity occurring in the spring and summer
and retailer back-to-school promotions.
Catalina Industries competes on the basis of service, price and scope of
product offerings (see "Strategy"). Its industry is highly fragmented, with no
one competitor or small group of competitors possessing a dominant market
position (see "Competition").
Home Depot, Wal-Mart and K Mart are presently Catalina Industries' three
largest customers, constituting 33.3%, 16.9% and 13.6%, respectively, of this
segment's sales for 2001. These customers and one other represented 70% and 63%
of this segment's sales for 2001 and 2000, respectively.
At December 15, 2001 and 2000, the backlog of orders for Catalina
Industries amounted to $7.0 million and $8.3 million, respectively. Although any
of these orders could be cancelled by the customer prior to shipment we believe,
based upon experience, that substantially all of these orders will be shipped.
Go-Gro Industries, Ltd. (China)
Go-Gro both manufactures products and purchases products from independent
suppliers located in China. Catalina Industries, Catalina Canada and Catalina
Mexico obtain substantially all of their lighting products from Go-Gro. In
addition, Ring purchases a small amount of its products from Go-Gro. Go-Gro
maintains administrative offices in Hong Kong and manufacturing facilities in
the Guangdong Province of China.
In September 2000 Go-Gro deposited the purchase price of approximately $1
million for its joint venture partner's interest in Go-Gro's Chinese cooperative
joint venture manufacturing subsidiary, Shenzhen Jiadianbao Electrical Products
Co., Ltd. ("SJE"). This purchase was finalized in December 2000. During the
quarter ended March 31, 2001, SJE was converted under Chinese law from a
cooperative joint venture to a wholly owned foreign entity and its name was
changed to Jiadianbao Electrical Products (Shenzhen) Co., Ltd. ("JES").
JES obtained non-transferable land use rights for the land on which its
primary manufacturing facilities were constructed under a Land Use Agreement
dated April 11, 1995 between SJE and the Bureau of National Land Planning Bao-An
Branch of Shenzhen City. This agreement provides JES with the right to use this
land until January 18, 2042 and required the construction of approximately
500,000 square feet of factory buildings and 211,000 square feet of dormitories
and offices. This construction has been completed.
In connection with the settlement with Go-Gro's former joint venture
partner in SJE, JES acquired the land use rights for a parcel of land adjoining
its primary manufacturing facilities. Under the separate land use agreement for
this parcel, JES has the right to use the land through March 19, 2051 and is
obligated to complete new construction on the land (estimated to cost
approximately $1.3 million) by March 20, 2002. If this construction is not
completed by that date JES is subject to fines of up to $55,000, and if the
construction is not completed by March 20, 2004, the local municipal planning
and state land bureau may take back the land use rights for the parcel without
compensation and confiscate the structures and attachments. We are presently
investigating various courses of action for this commitment, including
negotiations with the local authorities to extend or modify the agreement's
deadlines.
Go-Gro manufactures a wide range of products, including lamps, recessed
lighting fixtures, track lighting fixtures and flashlights. During 2001 and 2000
goods produced by Go-Gro constituted approximately 31% and 40%, respectively, of
the total products either purchased or manufactured by us. Go-Gro sells the
products it manufactures to other Company subsidiaries at prices established by
our management intended to provide an appropriate profit allocation between our
manufacturing and distribution activities.
Page 4
The raw materials and components essential to Go-Gro's manufacturing
process are purchased from distributors and manufacturers located in various
countries as follows: plastic resin (Germany, China, Japan, Thailand, Korea and
Taiwan), steel (Korea, Japan, Taiwan and China), cable (China and Taiwan), light
bulbs (China, Taiwan, Germany, Indonesia and Hong Kong) and various other
components (China, Europe, U.S., Taiwan and others).
Through Go-Gro, Catalina Industries and other Company subsidiaries arrange
for, and coordinate, the purchase of a significant volume of products from
independent Chinese manufacturers. See "Dependence on China".
We choose our contract manufacturers based on price, quality of
merchandise, reliability and ability to meet our timing requirements for
delivery. Manufacturing commitments are made on a purchase order basis. Go-Gro,
Ring, or the customer is often required to post a letter of credit prior to
shipment.
Go-Gro employees supervise our manufacturing contractors. These employees'
responsibilities include the establishment and ongoing development of close
relationships with the manufacturers, setting product and manufacturing
standards, performing quality assurance functions including inspection at
various stages, tracking costs, performing and/or working with engineering, and
oversight of the manufacturing processes. We maintain a quality control and
quality assurance program and have established inspection and test criteria for
each of our products. These methods are applied by Go-Gro or its agents
regularly to product samples in each manufacturing location prior to shipment
and shipments are tested for quality control inspection.
In addition to its sales to other Company subsidiaries, Go-Gro sells
directly for its own account to European distributors and retailers. Such sales
were approximately $24.8 million and $27.0 million in 2001 and 2000,
respectively. At December 15, 2001 and 2000, Go-Gro's backlog of orders to these
third parties amounted to $2.9 million and $5.5 million, respectively.
Ring Limited (United Kingdom)
We acquired Ring on July 5, 2000. Ring is a wholesaler and distributor
headquartered in Leeds, England consisting of eight principal companies
comprising three operating divisions: Ring Lighting, Ring Automotive and
Consumables. These divisions are engaged in the sale of lighting, automotive
after-market and industrial consumable products in the United Kingdom.
Ring Lighting, a division of Ring Lamp Company Ltd., sells a product line
of lamps and lighting fixtures comparable to that offered by Catalina
Industries. These products are sold from warehouse facilities under the Ring
trade name or the customers' label to a variety of retailers in the U.K.,
including home centers and mass merchandisers. B&Q, a subsidiary of Kingfisher
PLC, is the largest customer of this division. Sales to B&Q comprised 37% of
Ring's consolidated sales for the year ended September 30, 2001 and the period
from July 5, 2000 to September 30, 2000. Ring competes on the basis of service,
product range and price, and does not believe any competitor has a dominant
position in the lighting markets it serves. The lighting division comprised 62%
of Ring's consolidated sales for the year ended September 30, 2001, and 63% of
Ring's consolidated sales for the period from July 5, 2000 to September 30,
2000.
Ring Automotive consists of the automotive division of Ring Lamp Company
Ltd. and four companies: Grove Products (Caravan Accessories) Ltd., Lighten
Point Corporation Europe Ltd., Lancer Products Ltd. and BMAC Ltd. These
companies sell an extensive line of products under each company's trade name or
under the customers' label, to the caravan, train and automotive aftermarkets.
Products sold include replacement headlights, antennas, security devices,
caravan accessory systems, flasher units and relays, windshield wiper blades and
wash systems, engine and suspension components and other automotive electrical
components. In addition, BMAC sells lighting used in the manufacture of trains
and buses. A number of competitors are present in each segmental market of this
division including manufacturers and other U.K. distributors and importers, but
we believe that no competitor has a dominant position in these markets other
than for H Burden Ltd. in the caravan sector. Ring Automotive competes on the
basis of service, product range and price. The automotive division comprised 28%
of Ring's consolidated sales for the year ended September 30, 2001, and 27% of
Ring's consolidated sales for the period from July 5, 2000 to September 30,
2000.
Van-Line Ltd., Arctic Products Ltd., and PH Products Ltd. form Ring's
consumables division. Van-Line is a leading supplier of workshop consumables and
brand tools to independent distributors. Arctic Products sells portable pipe
freezing equipment. PH Products sells a variety of products for the plumbing and
gas industry, including smoke alarms, carbon monoxide detectors, soldering
sprays and pressurized air cans. Approximately 10% of Ring's consolidated sales
were generated in the consumables division for the year ended September 30, 2001
and for the period from July 5, 2000 to September 30, 2000.
Ring purchases its products from suppliers (including Go-Gro) located
worldwide including China, the U.K. and the rest of Europe, with China being the
dominant supply source. Purchases from China suppliers, including Go-Gro,
accounted for 41% of
Page 5
Ring's purchases for the year ended September 30, 2001. A wide variety of
competitors exist for Ring including U.K., European and Chinese manufacturers
and other U.K. distributors and importers.
Ring's business is somewhat seasonal, with slightly more sales occurring
in the winter months.
At December 15, 2001 and 2000, Ring's backlog of orders amounted to $2.9
million and $2.7 million, respectively.
Strategy
Economic and other business factors led to a consolidation in the 1990s in
the retail sector for consumer products, with a limited number of large
retailers acquiring ever-increasing market shares. We focus on these major
retailers, which include home centers, office product superstores, and mass
merchandisers. Our strategies to strengthen our relationships and increase our
sales with these major retailers include the following:
1. International Expansion - Many of our U.S.-based retail customers are
expanding internationally. We believe these retailers need sophisticated
suppliers capable of meeting their worldwide requirements and expanding
with them - - manufacturers and distributors, such as the Company,
possessing global expertise, resources and operations.
We established operations in Canada in 1992 and in Mexico in 1995 to
support the international growth of key customers. The acquisition of Ring
in July 2000 represented a major step for our global distribution network.
We believe Ring strengthens our strategic position by providing both
increased access to the U.K. marketplace and an important platform for
continental Europe. Ring will enable us to better service our major North
American customers upon their entry and expansion into the U.K. and other
European markets.
2. Customer-Centric Activities - We attempt to increase our value to our
customers and differentiate ourselves from our competition by
"customizing" our business for our largest customers. To do so, we:
(i) seek input from buyers and other customer personnel to develop
product offerings, merchandising approaches and branding strategies
specific to each major retail customer;
(ii) dedicate Company-owned production resources and capabilities to each
major retailer; and
(iii) pursue technology linkages, the sharing of critical product and
sales data and the alignment of supply chain activities with our
major customers.
3. Program Selling - We strive to be the primary source of lighting products
to our retailers by offering a complete program of lighting products in a
variety of categories. The availability of more than 1000 styles of such
products as outdoor/security lighting, table, floor and torchiere lamps,
chandeliers, recessed and track lighting and wall and ceiling lights - the
majority of which are available in several colors or finishes - provides
retailers the opportunity to simplify their purchasing function by buying
more of their lighting products from us as opposed to using several
different suppliers.
4. Warehouse Supply of Goods - Our warehouses in the United States, United
Kingdom, Canada and Mexico enable us to provide our customers with the
advantage of short delivery time. Warehouse sales allow retailers to
receive products in days as compared to months for items shipped directly
to them from China. Timely deliveries can help to increase the customer's
inventory turns and profits.
Dependence on China
We obtain a very high percentage of the lighting products we sell from
factories located in China. We manufacture a portion of these products at Go-Gro
and purchase the remainder from independent suppliers.
In fiscal 2001 and 2000, Chinese suppliers, other than Go-Gro, accounted
for approximately 42% and 50%, respectively, of the total products we either
purchased or manufactured . Shunde No. 1 Lamp Factory ("Shunde") accounted for
approximately 12% of the total products we either purchased or manufactured in
fiscal 2001 and 21% in fiscal 2000. Purchases from Go-Gro and the top five
Chinese independent suppliers comprised 55% and 75%, respectively, of the total
of the products we either purchased or manufactured for fiscal 2001 and 2000,
respectively. Other than Shunde, no independent supplier accounted for more than
10% of the total of the products we either purchased or manufactured in 2001.
On July 20, 1999, we renewed an agreement with Shunde whereby Shunde
agreed to manufacture lighting products for us to be sold in North and South
America and the European Community on an exclusive basis for a three year period
beginning
Page 6
October 1, 1999 in return for annual minimum purchase requirements from us. This
agreement can be terminated if we do not meet the agreement's minimum purchase
requirements, at which time the exclusivity clause would cease. However, no
amounts would be due Shunde for failure to meet the purchase requirements. Since
inception of this agreement in 1993 through 2000, we met the minimum purchase
requirements under the agreement. Due to our U.S. sales decrease, we did not
meet the minimum purchase requirements under this agreement in 2001. However, we
have not received notice from Shunde of its intention to cancel the agreement,
and we believe the agreement will remain in effect through September 30, 2002.
Although we purchase our products from suppliers with whom we maintain
close alliances, we believe the same products could be purchased from numerous
other Chinese suppliers.
Our ability to import products from China at current tariff levels could
be materially and adversely affected if trade relations with China should
change. At present, the U.S. government has granted "normal trade relations"
("NTR", formerly "most favored nation") status to China for trade and tariff
purposes. As a result of its NTR status, China receives the same favorable
tariff treatment that the United States extends to its other "normal" trading
partners. China's NTR status, coupled with its recent admission to the World
Trade Organization, could eventually reduce barriers to manufacturing products
in and exporting products from China. However, we cannot provide any assurance
that China's WTO membership or NTR status will not change.
We have obtained a political risk insurance policy issued by the
Multilateral Investment Guarantee Agency, a member of the World Bank Group, in
the amount of $14.4 million covering existing assets of JES in China. The policy
is a long-term non-cancelable guarantee covering the risks of expropriation and
war and civil disturbance.
Competition
Our product lines span major segments within the lighting industry and,
accordingly, our products compete in a number of different markets with a number
of different competitors. We compete with other independent distributors,
importers, manufacturers, and suppliers of lighting fixtures and other consumer
products in the United States, United Kingdom, continental Europe, Canada and
China. The lighting industry is highly competitive. Other competitors market
similar products that compete with ours on the basis of price. Some of these
competitors do not maintain warehouse operations or do not provide some of the
services we provide that require us to charge higher prices to cover the added
costs. The relatively low barriers to entry into the lighting industry and the
limited proprietary nature of many lighting products also permit new competitors
to enter the industry easily. Our success in this highly competitive market
depends upon our ability to manufacture and purchase a variety of quality
products on favorable terms, ensure our products meet safety standards, deliver
the goods promptly at competitive prices, provide a wide range of services such
as electronic data interchange and customized products, packaging, and store
displays and otherwise adapt our services and product offerings to the demands
of our major retail customers.
Independent Safety Testing and ISO 9000 Certification
As part of our marketing strategy, we voluntarily submit our products to
recognized product safety testing laboratories in the countries where we market
our products. Such laboratories include Underwriters Laboratories (UL) in the
United States, Canadian Standards Association (CSA) in Canada, Specialized
Technology Resources in Great Britain, Association Nacional de Normalization y
Certification del Sector Electrico (ANCE) in Mexico and various European
electrical testing organizations. If the product is acceptable, the laboratory
issues a report, which provides a technical description of the product. It also
provides our suppliers with procedures to follow in producing the products and
periodically conducts inspections at such suppliers' facilities for compliance.
Electrical products which are manufactured in accordance with safety
certification marks are generally recognized by consumers as safe products and
such certification marks are often required by various governmental authorities
to comply with local codes and ordinances. We do not anticipate any difficulty
in maintaining the right to use the listing marks of these laboratories.
Go-Gro's manufacturing operations have been certified as meeting ISO 9000
standards. ISO (the International Organization for Standardization) first
published its quality assurance and quality management standards in 1987 and
updated them in 1994. ISO 9000 standards and certification facilitate
international commerce by providing a single set of quality standards for both
product and service oriented organizations that are recognized and respected
throughout the world.
Product Liability
We are engaged in a business which could expose us to possible claims for
injury resulting from the failure of our products to function as designed or
from other product defects. We maintain primary product liability insurance
coverage of $1 million per occurrence, $2 million in the aggregate, as well as
umbrella insurance policies providing an aggregate of $75 million in excess
umbrella insurance coverage. The primary insurance coverage requires us to self-
insure for a maximum amount of $10,000 per incident. No
Page 7
assurance can be given that the claims will not exceed available insurance
coverage or that we will be able to maintain our current level of insurance.
Trademarks and Licenses
On April 26, 1996, we 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. Originally, the agreement terminated on September 30,
2002, subject to the minimum sales conditions discussed below, after which we
had options to extend the agreement for two additional five-year terms. The
royalty payments are due quarterly and are based on a percent of the value of
our net shipments of Westinghouse branded products, subject to annual minimum
net shipments. Either party had the right to terminate the agreement if we did
not meet the minimum net shipments of $30 million for fiscal 2001 and $60
million for fiscal 2002. Net sales of Westinghouse branded products amounted to
$16.8 million and $29.0 million for the years ended September 30, 2001 and 2000,
respectively. In September 2001 we and Westinghouse amended the agreement to
eliminate both the minimum net shipment requirements and our options to extend
the license agreement upon its expiration on September 30, 2002. We do not
believe that the loss of the Westinghouse license, should it not be extended
after September 30, 2002, would have a material impact on our financial
condition or annual results of operations.
Our licensed brand, Westinghouse(R) and our own trademarks, Catalina(R),
Dana(R) and Illuminada(R) are registered in the United States, Canada, China and
Mexico as well as in numerous countries in the European Community.
Employees
As of September 30, 2001 we employed approximately 600 people in the
United States, United Kingdom, Canada and Mexico, and our China operations
employed approximately 2,800 people. None of our employees is represented by a
collective bargaining unit and we believe that our relationships with our
employees are good.
Financial Information about Foreign and Domestic Operations and Export Sales
We operate in the United States, United Kingdom and China, and to a lesser
extent, Canada, and Mexico. Our primary operating segments are located in the
United States, United Kingdom and China. These operating segments generally
follow the management organizational structure of the Company. Net sales to
external customers by U.S.- based operations are made primarily into the United
States. Net sales to external customers by U.K.- based operations are made
primarily into the U.K. Net sales to external customers by China-based
operations are made primarily into Europe. See Note 17 of Notes to Consolidated
Financial Statements.
Executive Officers of the Registrant
The following table sets forth certain information as of December 14, 2001
with respect to our executive officers:
Name Age Position With the Company
------------------- -------- -----------------------------------
Eric Bescoby 47 Chief Executive Officer and
Director
David W. Sasnett 45 Senior Vice President, Chief
Financial Officer, Treasurer
and Secretary
Eric Bescoby has served as our Chief Executive Officer and as a director
of the Company since July 2001. Prior to joining the Company, Mr. Bescoby was
president of JTECH Communications, Inc., an electronic communications solutions
provider, from April 2000 to June 2001. Prior to joining JTECH, Mr. Bescoby was
a division director at Environmental Industries, Inc., a full-service site
development, landscape, and horticultural services contractor, from September
1998 to March 2000. From May 1987 to August 1998, Mr. Bescoby was a division
director at Rain Bird Sprinkler Manufacturing Corporation, a leading irrigation
manufacturer.
David W. Sasnett has served as Senior Vice President of the Company since
November 1997, our Chief Financial Officer since November 1996, and our
Treasurer and Secretary since January 2001. Prior to becoming Senior Vice
President in 1997, he served as a Vice President since 1994, and prior to
becoming Chief Financial Officer in 1996, he served as our Controller since
1994. From 1993 through 1994, Mr. Sasnett was the Vice President - Finance of a
Miami-based financial institution and prior to 1993 was a senior manager with
the international accounting firm of Deloitte & Touche, LLP.
Page 8
Item 2. Properties.
The following table sets forth details about our offices, manufacturing
plants and warehouse facilities:
LEASED/
LOCATION FACILITY OWNED
----------------------- ----------------------------------------- -------------
Catalina Industries/
United States:
Miami, FL headquarters/office owned (1)
Tupelo, MS warehouse owned (1)
Go-Gro/China:
Hong Kong office leased
Shenzhen office/manufacturing plant/warehouse leased
dormitories leased
manufacturing plant/warehouse/dormitories owned (2)
Ring/United Kingdom:
Leeds office/warehouse; office/warehouse leased; owned
Hyde office/warehouse owned
Walsall office/warehouse leased
Corby office/warehouse; office/warehouse leased
Other:
Toronto, Canada office/warehouse leased
Mexico City, Mexico office/warehouse leased
----------------------- -------------------------------------------- -------------
(1) Owned subject to a first mortgage.
(2) We have purchased underlying land use rights which terminate in
2042.
All of our properties are fully utilized with the exception of one of the Corby
facilities, which Ring is presently trying to sublease, and our Tupelo facility,
in which approximately 44% of the square footage is presently utilized (or
available) for warehousing services we provide to third parties. All of our
properties are suitable for our operations.
Page 9
Item 3. Legal Proceedings.
On September 15, 1999, we filed a complaint entitled Catalina Lighting,
Inc. v. Lamps Plus, Civil Action 99-7200, in the U.S. District Court for the
Southern District of Florida, in which we requested declaratory relief regarding
claims of trade dress and patent infringement made by Lamps Plus against one of
our major customers. Lamps Plus filed an Answer and Counterclaim against us and
our customer on October 6, 1999 alleging patent infringement and trade dress.
The trade dress claim was dismissed with prejudice before trial in March 2001.
In April 2001, a jury returned a verdict finding liability against us on the
patent infringement claim and in June 2001 the Court entered a judgment of
approximately $1.6 million for damages and interest thereon. We have appealed
the judgment entered by the Court and have posted a surety bond in the amount of
$1.8 million (for which we posted $1.5 million in cash collateral) for the
appeal. We believe that we ultimately will not be found liable for patent
infringement in this case. Accordingly, no provision for loss has been recorded
in our September 30, 2001 Consolidated Financial Statements for this matter.
During the past few years we received a number of claims relating to
halogen torchieres we sold to various retailers. We maintain primary product
liability insurance coverage of $1 million per occurrence, $5 million in the
aggregate, as well as umbrella insurance policies providing an aggregate of $75
million in excess umbrella insurance coverage. The primary insurance policy
requires us to self-insure for up to $10,000 per incident and, based on
experience, have accrued $265,000 for this contingency as of September 30, 2001.
No assurance can be given that the number of claims will not exceed historical
experience or that claims will not exceed available insurance coverage or that
we will be able to maintain our current level of insurance.
We are also a party to routine litigation incidental to our business. We believe
the ultimate resolution of any such legal proceedings will not have a material
adverse effect on our financial position or annual results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Page 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
On August 9, 1999, the New York Stock Exchange ("NYSE") notified us that
it had changed its rules regarding continued listing for companies which have
shares traded on the NYSE. The new rules changed and increased the requirements
to maintain a listing on the NYSE. Through March 31, 2001, we did not meet the
new rules, which required a total market capitalization of $50 million and the
maintenance of minimum total shareholders' equity of $50 million. On April 5,
2001, the NYSE announced that it had determined that our common stock should be
removed from the list of companies trading on the NYSE. We decided not to appeal
the NYSE's decision. On May 21, 2001, our common stock began to be quoted on the
NASD Over-the-Counter Bulletin Board under the symbol "CALA.OB".
The following table presents the quarterly high and low selling price
quotations during the last two fiscal years. For periods ended prior to May 21,
2001, the common stock was listed on the NYSE, and for periods ended after May
21, 2001, the common stock has been quoted on the NASD Over-the-Counter Bulletin
Board. These quotations reflect the inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not necessarily represent actual transactions.
High Low
---- ---
Fiscal Year Ended September 30, 2000
First Quarter............................... $ 5.75 $ 3.813
Second Quarter.............................. 6.188 4.438
Third Quarter............................... 4.875 3.563
Fourth Quarter.............................. 5.063 3.375
Fiscal Year Ended September 30, 2001
First Quarter............................... $ 3.438 $ 1.563
Second Quarter.............................. 3.063 1.25
Third Quarter............................... 1.70 0.84
Fourth Quarter.............................. 1.65 0.65
On December 14, 2001, the closing price of our common stock as quoted on
the NASD Over-the-Counter Bulletin Board was $.0.30. As of December 14, 2001
there were approximately 1,844 holders of record of our common stock, including
some brokerage firms, which hold shares in street name on behalf of their
clients.
We have never paid cash dividends on our common stock. We intend to retain
future earnings, if any, to finance the expansion of our business and do not
anticipate that any cash dividends will be paid in the foreseeable future. In
addition, the terms of our credit facilities prohibit the payment of any cash
dividends or other distribution on any shares of our common stock, other than
dividends payable solely in shares of common stock, unless approval is obtained
from the lenders. Future dividend policy will depend on our earnings, capital
and financing requirements, expansion plans, financial condition and other
relevant factors.
Our Board of Directors has authorized the repurchase of up to $2.7 million
shares of our common stock from time to time in the open market or in negotiated
purchases. As of December 15, 2001, we had repurchased 641,932 shares of our
stock for $2.5 million.
In November 2000, the Board of Directors reauthorized a stockholder rights
plan by adopting a plan similar to a pre-existing rights plan which expired on
November 20, 2000. Under our new rights plan, a preferred stock purchase right
was distributed for each share of common stock outstanding at the close of
business on the November 30, 2000 record date and issued in connection with each
share issued after such date. The rights were not initially exercisable, but
upon the occurrence of certain takeover-related events, the holders of the
rights (other than an adverse or acquiring person, or group thereof), under
certain circumstances, had the right to purchase additional shares of our stock
(or, in some cases, stock of the acquiring entity) at a discount to the then
market price. The rights were redeemable by us at any time, and would otherwise
have expired on November 20, 2005. The thresholds for triggering the rights plan
was a person (as defined in the rights plan) acquiring 21% of our outstanding
stock or a declaration by the Board of Directors that a person is an "adverse
person" as defined in the rights plan, and the exercise price of the rights was
$17. We redeemed and cancelled this shareholders' rights plan in connection with
the July 23, 2001 capital infusion consummated with an affiliate of Sun Capital
Partners, Inc. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources").
Page 11
Item 6. Selected Financial Data.
(in thousands, except per share data)
At or For the Years Ended September 30,
--------------------------------------------------------------------
2001 (1) 2000 (2) 1999 (3) 1998 1997 (4)
---------- --------- --------- --------- ----------
Net sales $ 234,786 $ 202,630 $ 176,561 $ 161,860 $ 196,955
Net income (loss) $ (18,347) $ 2,845 $ 6,489 $ 1,102 $ (3,093)
Basic earnings (loss) per share $ (2.04) $ 0.40 $ 0.92 $ 0.15 $ (0.44)
Diluted earnings (loss) per share $ (2.04) $ 0.37 $ 0.80 $ 0.15 $ (0.44)
Total assets $ 146,097 $ 167,971 $ 101,897 $ 98,960 $ 116,581
Long-term borrowings $ 51,240 $ 6,888 $ 24,774 $ 28,224 $ 39,737
Certain amounts presented above for prior years have been reclassified to
conform to the current year's presentation. No cash dividends were declared
during the five-year period ended September 30, 2001.
(1) Includes a $2.6 million charge to settle executive management contracts,
$1.2 million in severance and office closing costs, other income of
$714,000 from the settlement of litigation and a provision of $5.0 million
for a valuation allowance on deferred tax assets.
(2) Includes a $500,000 charge to close the Boston office, a $788,000 charge
related to the reorganization of executive management and assets and
liabilities acquired upon the acquisition of Ring on July 5, 2000 and the
operating results for Ring for the period July 5, 2000 to September 30,
2000. Long term borrowings reflect the classification of all borrowings
under the Company's $75 million credit facility as current liabilities at
September 30, 2000.
(3) Reflects the reversal of a $2.7 million provision for a judgment related
to litigation with a former officer of the Company and the reversal of an
associated $893,000 provision for post judgment interest.
(4) Includes $930,000 in plant closing costs due to the termination of
manufacturing operations at our Meridian Lamps subsidiary and $7.5 million
in litigation costs and related professional fees.
Page 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes.
RECENT DEVELOPMENTS
During our fiscal year ended September 30, 2001 we experienced significant
declines in sales, gross profit, profitability and liquidity due primarily to
economic and competitive conditions in the United States and United Kingdom. As
a result of quarterly net losses, we were unable to comply with the financial
covenants under our $75 million credit facility with a bank syndicate group for
the quarters ended December 31, 2000, March 31, 2001 and June 30, 2001, but were
able to obtain credit facility amendments and forbearance agreements that
deferred through July 31, 2001 the lenders' ability to exercise their rights and
remedies (including the demand for immediate repayment) for the event of default
under the credit facility resulting from the failures to meet the financial
covenants.
On July 23, 2001, we obtained $11.8 million in additional funding as a
result of closing a transaction (the "Sun transaction") with Sun Catalina
Holdings LLC (SCH), an affiliate of Sun Capital Partners, Inc. (a merchant
banking firm based in Boca Raton, Florida) and other parties. See "Liquidity and
Capital Resources".
The Sun transaction constituted a change of ownership of the Company as
defined under Internal Revenue Code Section 382 (IRC 382). In general, IRC 382
can limit an entity's utilization of its net operating loss carryforwards and
other anticipated tax return deductions existing at the time the change in
ownership occurs. Based upon management's estimate of the impact of IRC 382 on
the Company arising from the Sun transaction, during the fourth quarter of 2001
we recorded a provision for a valuation allowance of approximately $5.0 million
on deferred tax assets that existed as of July 23, 2001.
RESULTS OF OPERATIONS
In the following comparison of the results of operations, our fiscal years
ended September 30, 2001, 2000 and 1999 are referred to herein as "2001", "2000"
and "1999, respectively.
Comparison of Fiscal Years Ended September 30, 2001 and 2000
Consolidated Results
We had a net loss of $18.3 million, or $2.04 per diluted share, in 2001.
Net income for 2000 was $2.8 million, or $0.37 per diluted share. Factors
contributing to the deterioration in our consolidated operating results in 2001
included:
- a $9.6 million decline in the gross profit of Catalina Industries,
as U.S. sales fell $43.1 million (35%) due to significant weakness
in the U.S. economy. Similarly, the operating income contribution of
Go-Gro dropped from $8.9 million in 2000 to $5.2 million as Go-Gro's
intercompany sales declined by $30.5 million because of the problems
experienced by Catalina Industries.
- $4.1 million in additional interest expense arising from the
incremental borrowings made to acquire Ring and an increase in our
effective interest rate as a result of various credit facility
amendments.
- charges amounting to $3.4 million in 2001 relating to the
termination of employees throughout the Company, including former
members of executive management.
- the pretax losses generated by our Chile, Argentina and Mexico
subsidiaries, which exceeded those for 2000 by $1.5 million. We
decided to cease operations in Chile and Argentina during the year
and to reduce the level of inventories held and scope of warehousing
operations in Mexico.
- a provision of approximately $5.0 million for a valuation allowance
on deferred tax assets, which reduced our overall tax benefit.
In addition, our July 5, 2000 acquisition of Ring affects the
comparability of current year results to those for 2000. Our 2001 results
include the results of Ring for the entire fiscal year, while our 2000 results
include Ring's results only for the period
Page 13
from July 5, 2000 to September 30, 2000. The pretax amounts for Ring included in
our consolidated statements of operations for 2001 and 2000 are detailed below
(in thousands):
2001 2000
-------- --------
Net sales $104,847 $ 24,529
Gross profit $ 12,824 $ 3,460
Selling, general and
administrative expenses $ 13,289 $ 3,776
Employee severance costs $ 626 $ --
Litigation settlement received $ 714 $ --
Interest expense $ 5,113 $ 957
Other expenses $ 182 $ --
Pretax loss $ 5,672 $ 1,273
Net sales for 2001 were $234.8 million, a $32.2 million increase from the
prior year. Excluding Ring, net sales for 2001 were $129.9 million, as compared
to $178.1 million in 2000. In 2001 sales to U.S. and international customers
(excluding Ring) were $78.4 million and $51.5 million, respectively, and in 2000
such sales (excluding Ring) amounted to $121.6 million and $56.5 million,
respectively.
Lamps, lighting fixtures, automotive after-market products and industrial
consumables accounted for 37%, 46%, 13% and 4%, respectively, of net sales in
2001 and 55%, 40%, 4% and 1% of net sales, respectively, in 2000. In 2001,
Ring's largest customer, B & Q, a subsidiary of Kingfisher PLC, accounted for
$40.1 million (17.1%) of net sales. In 2001 and 2000, Home Depot accounted for
$32.2 million (13.7%) and $47.0 million (23.2%), respectively, of net sales.
Sales made from warehouses constituted 57% of our net sales in 2001, up from 31%
in 2000 as a result of the Ring acquisition, as substantially all Ring sales are
made from warehouses. For 2001 and 2000 net sales to our ten largest customers
represented approximately 60% and 69%, respectively, of net sales.
Gross profit decreased by $6.3 million, and decreased as a percentage of
sales from 19.0% in 2000 to 13.7% in 2001. The decrease in the gross profit as a
percentage of sales is due to the inclusion of $104.8 million in sales from Ring
at a gross profit percentage of 12.2%, gross margin erosion for the U.S.
attributable to economic conditions and a weak retail environment and lost
contributions from the decrease in U.S. sales. Selling, general and
administrative expenses ("SG&A") for 2001 were $40.2 million, an increase of
$9.4 million from the prior year. The increase reflects SG&A related to Ring.
We expensed $2.6 million in the fourth quarter of 2001 in connection with
the Sun transaction and related resolution of obligations under employment
agreements with our former chief executive officer, two former executive vice
presidents and our chief financial officer. Pursuant to a reorganization of our
executive management structure, in December 1999 we expensed $788,000 to settle
the employment contract of another former executive vice president.
In September 2000, our United States (Catalina Industries) business
segment finalized plans to consolidate the functions of its Boston office into
the Miami headquarters. We recorded a $500,000 charge comprised of employee
severance costs ($422,000), property write-downs ($56,000) and lease termination
costs ($22,000) in September 2000 for the Boston office closure. During 2001
Catalina Industries increased its provision for lease termination costs by
$314,000 due to a continuing inability to sublease the Boston office space. Our
U.S., U.K. and China operations also terminated 75 employees during 2001,
incurring severance costs of $840,000.
Other expenses of $595,000 for 2001 consisted of a net foreign currency
loss ($488,000), dividends on Ring convertible preferred stock ($182,000), and
other miscellaneous expenses ($177,000) partially reduced by interest income
($195,000) and income from joint ventures ($57,000). Other income of $442,000 in
2000 consisted primarily of interest income ($495,000), income from joint
ventures ($185,000) and other miscellaneous income ($65,000) partially offset by
a net foreign currency loss ($303,000).
Greater interest expense for 2001 reflects the interest on the loans to
fund the Ring acquisition, interest on Ring's revolving loans of $1.2 million
and a greater weighted average interest rate.
We recorded a benefit from income taxes of $383,000 on our pretax loss for
2001. The relatively low effective rate of this benefit (2.0%) reflects a $5.0
million provision for a valuation allowance on deferred tax assets existing at
the date of the Sun transaction (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Developments"). Our
effective income tax rate is dependent on both the total amount of pretax income
generated and the source of such income (i.e. domestic or foreign).
Consequently, our effective tax rate may vary in future periods. Our effective
income tax
Page 14
rate reflects the anticipated tax benefits associated with a 1999 restructuring
of our international operations. Should these tax benefits not materialize, we
may experience an increase in our effective consolidated income tax rate.
Results By Segment
See Note 17 of Notes to Consolidated Financial Statements for the
financial tables for each business segment.
Catalina Industries (United States)
Catalina Industries had a segment loss in 2001 of $3.3 million as compared
to a contribution of $5.3 million in 2000. The decrease in segment contribution
in 2001 reflects lower sales.
Sales by Catalina Industries to external customers were $78.3 million in
2001, a decrease of $43.1 million from 2000. Sales to Home Depot were $26.0
million or $13.5 million less than in 2000 and sales to the office superstores
group of customers decreased by $14.2 million. Sales to one other customer
dropped by $7 million for 2001. Management believes the sales decline is
attributable to a general slowdown in the U.S. retail economy that has affected
the purchasing patterns of Catalina Industries' major customers. In 2001, Home
Depot, Wal-Mart and K-Mart accounted for 33.3%, 16.9% and 13.6% , respectively,
of Catalina Industries' net sales and such customers accounted for 32.6%, 10.5%
and 10.2% of Catalina Industries' net sales in 2000, respectively.
Gross profit dollars decreased by $9.6 million in 2001 due to the lower
sales volume. Catalina Industries also experienced a drop in its gross profit as
a percentage of sales. The lower 2001 gross profit percentage reflects retail
pricing pressures and economic conditions.
Approximately $16.5 million of Catalina Industries' sales in 2001 were
made from its warehouse as compared to $24.3 million in warehouse sales for
2000. Lower warehouse sales in 2001 stem in part from economic factors but also
reflect a trend in Catalina Industries' business. Warehouse sales to U.S.
customers have declined in each fiscal year since 1995 when Catalina Industries'
present warehouse was constructed in Tupelo, Mississippi and annual warehouse
sales were $83.9 million. With the consolidation in the retail sector over the
last six years this segment's customer base is now comprised of fewer, larger
retailers that purchase primarily on a direct basis, whereby the merchandise is
shipped directly from the factory to the customer, rather than from the
warehouse. The relative amount of Catalina Industries' sales made from its
warehouse affects its overall gross profit percentage as warehouse sales have
historically commanded higher per unit prices than direct sales of the same
items. Catalina Industries reduced the operating costs for its warehouse in 2001
as well as in previous fiscal years. However Catalina Industries may continue to
experience declines in warehouse sales and may be unable to further reduce its
overall warehousing costs sufficiently to avoid an adverse impact on its gross
profit in the future from decreased warehouse sales.
Catalina Industries began attempting to lower inventory levels
significantly during the first quarter of 2001 to generate cash and address the
liquidity concerns created by lower sales volumes and operating losses. The
continuing weakness in the U.S. economy affected this segment's ability to
effect a major reduction in its inventories during the year, as Catalina's
Industries' gross inventories before allowances at September 30, 2000 were $12.2
million, as compared to $11.4 million at September 30, 2001. Retail conditions
and consumer confidence further weakened after the terrorist attacks in New York
City and Washington, D.C. on September 11, 2001. With the dramatic change in
market conditions and the U.S. economy in recession, many competing
manufacturers and wholesalers are selling off inventories at substantial
discounts. Certain retailers went out of business during the year, others are
experiencing financial difficulties, and management believes retailers in
general have become more selective with their inventory purchases. In response
to the current retail environment and based upon management's plans to continue
to emphasize overall inventory reductions to improve liquidity, Catalina
Industries' inventory allowance increased by $2.5 million from September 30,
2000 to September 30, 2001. The net provision recorded to increase this
allowance significantly reduced Catalina Industries' gross profit during 2001.
Any need to further increase its inventory allowance due to continuing weakness
in the U.S. retail economy could adversely impact Catalina Industries' future
gross profits.
Catalina Industries decreased its SG&A by approximately $245,000 in 2001.
Decreases in sales-related expenses and certain other expenses were sufficient
to offset a $775,000 provision for uncollectible accounts receivable for
customers that filed for bankruptcy.
In September 2000, this business segment finalized plans to consolidate
the functions of its Boston office into our Miami headquarters. We recorded a
$500,000 charge comprised of employee severance costs ($422,000), property
write-downs ($56,000) and lease termination costs ($22,000) was recorded in
September 2000 for the Boston office closure.
Page 15
The closing of the Boston office resulted in the termination of two
vice-presidents and eight customer support and administrative personnel. The
non-cash property write-down consisted of the net book value of leasehold
improvements and the office furniture and other equipment not suitable for use
by the Miami headquarters or our Canadian operations. The charge for lease
termination costs represented the remaining aggregate contractual lease
obligation for the Boston office subsequent to the date of its closure, net of
projected sublease income. Catalina Industries continued to incur and expense
normal payroll, depreciation, lease and other operating costs for its Boston
office during the 2001 fiscal year, until the office was closed in December 2000
and certain remaining employees ceased working for the Company in March 2001.
Costs incurred for the Boston office during 2001 and 2000 were $429,000 and
$999,000, respectively.
Due to the continuing inability to sublease the Boston office space,
Catalina Industries increased its provision for lease termination costs by
$314,000 during 2001. Catalina Industries also terminated 31 employees at its
Miami, Florida and Tupelo, Mississippi locations during the fourth quarter of
2001, incurring severance costs of $130,000.
Go-Gro (China)
Go-Gro's segment contribution decreased in 2001 to $4.9 million, down $4.3
million from $9.2 million in 2000, reflecting the impact of a $32.7 million
decrease in sales.
Go-Gro's sales for 2001 were $108.7 million, as compared to $141.4 million
in 2000. Sales of products manufactured by Go-Gro in 2001 (as opposed to sales
of products purchased for resale by Go-Gro from other manufacturers) decreased
by $11.1 million, to $60.3 million. Third party and intercompany sales by Go-Gro
in 2001 were $24.8 million and $83.9 million, respectively, while the comparable
sales amounts for 2000 were $27.0 million and $114.4 million, respectively. The
decline in intercompany sales for 2001 is primarily attributable to the overall
sales decline to Catalina Industries reflecting a decrease in Catalina
Industries' U.S. business. Third party sales in 2000 included $5.0 million in
sales to Ring Limited. Sales to one third-party customer were $10.5 million in
2001 and $10.1 million in 2000, respectively.
Go-Gro's gross profit dollars decreased by $4.1 million due to the $32.7
million decrease in sales, as gross profit as a percentage of sales remained
relatively constant between the years.
Ring Limited (United Kingdom)
We acquired Ring on July 5, 2000, and only the results from that date to
September 30, 2000 are included in our fiscal 2000 results, as reflected in the
table below. The Ring results (in thousands) for the full year ended September
30, 2000 (excluding acquisition costs) are also provided below and discussed for
comparison purposes in the paragraphs that follow.
Ring Results
for the Year
Ring Amounts Included in Ended
Company's Consolidated Results Sept 30, 2000
------------------------------ -------------
2001 2000
--------- ---------
Net sales $ 104,847 $ 24,529 $ 116,253
========= ========= =========
Gross profit $ 12,824 $ 3,460 $ 17,675
========= ========= =========
Pretax income (loss)
before acquisition costs $ (719) $ (213) $ 2,835
=========
Goodwill amortization 1,025 260 N/A
Acquisition related
interest costs 3,928 800 N/A
--------- ---------
Segment contribution (loss) $ (5,672) $ (1,273) N/A
========= =========
Ring's net sales in U.S. dollars fell 10% from $116.3 million in 2000 to
$104.8 million in 2001. However, in terms of Great British pounds (GBP) Ring's
sales remained relatively flat, falling only GBP 1.5 million, or 2%. The
remaining 8% of Ring's sales decline in terms of U.S. dollars relates to changes
in the average foreign exchange rate (which is used to translate Ring's results
from GBP to dollars) from 2000 to 2001. The average foreign exchange rate in
2000 was $1.565 for each pound. The British pound experienced a devaluation
relative to the dollar in 2001 of approximately 8%, as the average exchange rate
for 2001 was $1.442 for each pound.
Page 16
The devaluation of the British pound had both a translation and economic
impact on Ring's gross profit in 2001, which declined in terms of British pounds
by 21% to GBP 8.8 million in 2001 from GBP 11.2 million in 2000. The majority of
the gross profit decrease occurred in Ring's lighting division, which purchases
most of its products in U.S. dollars from Chinese manufacturers. Since Ring
sells in pounds, the drop in the British pound relative to the U.S. dollar
squeezed Ring's margin due to an inability in the U.K. marketplace to increase
prices sufficiently to offset the higher effective costs of purchasing its goods
from China. Highly competitive retail conditions and a less favorable product
mix also contributed to Ring's overall gross profit decline for 2001.
Ring's SG&A was approximately $1.1 million lower in 2001. Severance costs
to terminate 31 employees in 2001 were $626,000. During 2001 Ring received
$714,000 from the settlement of litigation.
Ring's stand alone interest expense on its revolving loan was $680,000
more in 2001 as average borrowings and weighted interest rates increased.
Comparison of Fiscal Years Ended September 30, 2000 and 1999
Consolidated Results
We earned $2.8 million, or $0.37 per diluted share, in 2000. Net income
for 1999, which included a non-recurring reversal of a provision for litigation
(and related interest) that increased pretax income by $3.6 million, was $6.5
million, or $0.80 per diluted share. Net income and diluted earnings per share
for 1999, as adjusted to exclude the impact of the litigation settlement, were
$4.5 million and $0.57, respectively.
Our July 5, 2000 acquisition of Ring significantly affected 2000 operating
results and the comparability of 2000 results to those for 1999. Our 2000
results include net sales of $24.5 million and a pretax loss of $1.3 million
attributable to Ring for the period July 5, 2000 to September 30, 2000. Ring's
pretax loss of $1.3 million includes interest and financing costs and goodwill
amortization related to the acquisition aggregating $1.1 million. Ring's results
for the period after its acquisition were negatively affected by an increasingly
competitive retail sector, consolidation and direct importation trends in Ring's
markets and product lines and a weakening of the British pound relative to the
U.S. dollar. See "Results By Segment - Ring Limited" for a comparative analysis
of Ring's results.
We took actions in two areas of our business that resulted in charges that
reduced 2000 pretax earnings by approximately $1.3 million. We expensed $788,000
pursuant to a reorganization of our executive management structure in December
1999. Separately, in September 2000 we finalized plans to consolidate the
functions of our Boston office into our Miami headquarters. We recorded a
$500,000 charge to provide for employee severance costs and to writedown
equipment and other property in September 2000 for the Boston office closure.
Net sales for 2000 were a record $202.6 million as a result of the Ring
acquisition. Excluding Ring, net sales for 2000 were $178.1 million, as compared
to $176.6 million in 1999. Higher unit sales to Canadian, European and other
international customers offset lower unit sales and an overall sales decline to
U.S. customers. In 2000 sales to U.S. and international customers (excluding
Ring) were $121.6 million and $56.5 million, respectively, and in 1999 such
sales amounted to $134.0 million and $42.6 million, respectively.
Lamps, lighting fixtures, automotive after-market products and industrial
consumables accounted for 55%, 40%, 4% and 1% of net sales in 2000. Lamps and
lighting fixtures accounted for 64% and 36% of net sales in 1999. In 2000 and
1999 our largest customer, Home Depot, accounted for $47.0 million (23.2%) and
$45.6 million (25.8%), respectively, of our net sales. Wal-Mart and an affiliate
accounted for $18.8 million (9.3%) and $25.6 million (14.5%) of net sales in
2000 and 1999, respectively. For 2000 and 1999, net sales to our ten largest
customers represented approximately 69% and 73%, respectively, of our net sales.
Approximately 69% of our sales in 2000 were made on a direct basis as compared
to 75% in 1999.
Gross profit increased in total dollars, but decreased as a percentage of
sales, from 1999 to 2000. The decrease in gross profit as a percentage of sales
is due in part to the inclusion of $24.5 million in sales from Ring at a gross
profit percentage of 14.1% for the fourth quarter of 2000 and other factors. See
"Results By Segment - Catalina Industries".
Page 17
SG&A for 2000 was $27.0 million (net of Ring-related SG&A of $3.8
million), a decrease of $1.5 million from 1999. The majority of this decrease
relates to reductions in (i) bonuses for U.S. employees of $916,000; (ii)
professional fees of $269,000; (iii) tradeshow expenses of $148,000; and (iv)
sales commissions of $143,000.
Greater interest expense for 2000 reflects the impact of $800,000 in
interest on the loans to fund the Ring acquisition.
Other income for 2000 consisted primarily of interest income ($495,000),
income from joint ventures ($185,000) and other miscellaneous income ($65,000).
Other income in 2000 was reduced by a net foreign currency loss of $303,000.
Other income in 1999 consisted primarily of a gain on sale of our Meridian
facility ($194,000), interest income ($349,000), income from joint ventures
($145,000) and miscellaneous income ($455,000). Other income in 1999 was reduced
by a net foreign currency loss of $25,000.
The effective income tax rates for 2000 and 1999 were 27.4% and 31.2%,
respectively, and reflect the impact of foreign income, which is taxed at a
lower rate than U.S. income.
Results By Segment
See Note 17 of Notes to Consolidated Financial Statements for the
financial tables for each business segment.
Catalina Industries (United States)
The segment contribution made by Catalina Industries in 2000 was $5.3
million, as compared to $9.0 million in 1999. The decrease in segment
contribution in 2000 reflects lower sales to U.S. customers, with a resulting
loss of gross profit dollars.
Sales by Catalina Industries to external customers were $121.4 million in
2000, a decrease of $12.3 million, or 9.2% from 1999. Sales to Wal-Mart were
$12.8 million or $9.6 million less than in 1999, as Catalina Industries
introduced new programs and benefited from promotional sales with Wal-Mart in
1999. Catalina Industries also generated $2.9 million in sales in 1999 from a
customer that went out of business prior to fiscal 2000. Sales to Home Depot,
Catalina Industries' largest customer, were $39.5 million and $40.4 million for
2000 and 1999, respectively.
The gross profit decrease of $4.9 million in 2000 is attributable to the
lower sales volume, and to a decrease in the overall gross profit percentage.
The lower gross profit percentage in 2000 reflects a change in the product mix
and a continuing reduction of Catalina Industries' warehouse sales. Most of our
major U.S. customers (including Home Depot and Wal-Mart) purchase from Catalina
Industries primarily on a direct basis. Approximately 79% of Catalina
Industries' sales to U.S. customers in 2000 were made on a direct basis as
compared to 75% in 1999. Warehouse sales to U.S. customers declined each fiscal
year in the six-year period commencing fiscal 1995, when the present warehouse
was constructed in Tupelo, Mississippi, and warehouse sales were 61% of U.S.
sales compared to the present 21%. This decline in warehouse sales as a
percentage of U.S. sales represents a significant decrease in sales dollars.
With the continued decline in warehouse sales in 2000, Catalina Industries also
earned lower overall margins on its warehouse sales, as we reduced U.S.
inventories from $15.6 million at September 30, 1999 to $10.6 million at
September 30, 2000. Catalina Industries lowered its warehousing costs by
terminating its other U.S. warehouse operation located in Los Angeles effective
March 31, 1998.
Catalina Industries lowered its SG&A by approximately $1 million in 2000,
as this segment reduced its involvement in tradeshows and its use of certain
other merchandising approaches, resulting in a decrease of more than $700,000 in
this expense category.
In September 2000, this business segment finalized plans to consolidate
the functions of its Boston office into our Miami headquarters. We recorded a
$500,000 charge comprised of employee severance costs ($422,000), property
write-downs ($56,000) and lease termination costs ($22,000) in September 2000
for the Boston office closure.
The closing of the Boston office resulted in the termination of two
vice-presidents and eight customer support and administrative personnel. The
non-cash property write-down consisted of the net book value of leasehold
improvements and the office furniture and other equipment not suitable for use
by the Miami headquarters or Canadian operations. The charge for lease
termination costs represented the remaining aggregate contractual lease
obligation for the Boston office subsequent to the date of its closure, net of
projected sublease income. Catalina Industries continued to incur and expense
normal payroll, depreciation, lease and other operating costs for its Boston
office during the 2001 fiscal year, until the office was closed in December
2000. Costs incurred for the Boston office during 2000 and 1999 were
approximately $999,000 and $905,000, respectively.
Page 18
Go-Gro (China)
Go-Gro's segment contribution rose in 2000 to $9.2 million, up $2.6
million, or 39%, from $6.6 million for 1999. Go-Gro became more profitable in
2000 by growing its sales to third parties and raising its manufacturing output.
Go-Gro's sales for 2000 were $141.4 million, an increase of $4.4 million
from the $137.0 million generated in 1999. Sales of products manufactured by
Go-Gro in 2000 (as opposed to sales of products purchased for resale by Go-Gro
from other manufacturers) increased by $13.3 million, to $71.4 million. Third
party and intercompany sales by Go-Gro in 2000 were $27.0 million and $114.4
million, respectively, while the comparable sales amounts for 1999 were $19.5
million and $117.5 million, respectively. Sales to one third party customer were
$10.1 million in 2000 and $2.7 million in 1999, respectively. In 2000 new
product introductions for Europe were the driving factor behind Go-Gro's sales
growth to third parties, while Go-Gro's greater manufacturing sales reflects the
added capacity of Go-Gro's new factory. Go-Gro's gross profit increased $2.6
million due to the growth in sales of products manufactured by Go-Gro, as the
margins Go-Gro earns on products it manufactures typically exceed the margins
Go-Gro earns on products it purchases from other manufacturers.
Ring Limited (United Kingdom)
The Ring segment recorded a pretax loss of $1.3 million for 2000, which
includes $260,000 in goodwill amortization arising from the acquisition and
$800,000 in interest and financing costs for the acquisition-related debt.
Excluding these acquisition costs, Ring's pretax loss for the period from July
5, 2000 to September 30, 2000 was approximately $210,000, as compared to pretax
income of approximately $850,000 for the quarter ended September 30, 1999.
Net sales and gross profit for the period from July 5, 2000 to September
30, 2000 were $24.5 million and $3.5 million, respectively, as compared to $26.7
million and $4.6 million, respectively, for the same period of 1999. Ring's
sales volume and gross profit reflect an increasingly competitive retail
business sector stemming from consolidation in both the lighting and automotive
markets, a general decline in the automotive aftermarket, and greater direct
importation of products by Ring's customers. In addition, a weakening of the
Great British pound relative to the U.S. dollar has increased Ring's cost of
goods and lowered its margins. The average exchange rate of the dollar to the
pound for the quarter ended September 30, 2000 was approximately 1.48 to 1, a
significant decline from the average exchange rate for the quarter ended
September 30, 1999 of 1.61 to 1. Ring's lighting division sales increased (in
local currency) in the 2000 period but such sales were made at lower margins.
Sales for Ring's automotive and consumable divisions declined in 2000, as did
such divisions' gross profits. Ring's margin erosions are directly related to
the economic factors mentioned previously.
LIQUIDITY AND CAPITAL RESOURCES
We meet our short-term liquidity needs through cash provided by
operations, borrowings under various credit facilities with banks, accounts
payable and the use of letters of credit from customers to fund certain of our
direct import sales activities. Term loans, lease obligations, mortgage notes,
bonds, subordinated debt, capital stock and sales of assets are additional
sources for our longer-term liquidity and financing needs. Based upon
management's projections and assessment of current market conditions, we believe
we will have adequate liquidity to meet our needs for fiscal 2002. See
"Liquidity and Capital Resources - Revolving Credit and Term Loan Facilities".
Cash Flows and Financial Condition
Our operating, investing and financing activities resulted in a net
increase in cash and cash equivalents of $2.3 from September 30, 2000 to
September 30, 2001.
We used funds generated from operations and proceeds from the issuance of
common stock, warrants and subordinated notes to pay for capital expenditures
and make payments of $4.1 million on our term loans. Capital expenditures for
the period totaled $4.8 million, the majority of which related to the planned
expansion of the Go-Gro manufacturing facility and Go-Gro equipment purchases.
Accounts receivable balances decreased to $27.8 million at September 30,
2001 from $36.6 million at September 30, 2000 resulting from the significant
decline in sales to U.S. customers. Inventory levels at September 30, 2001 were
$37.4 million, as compared to $52.8 million at September 30, 2000, due to our
focus on lowering inventories in each of our principal business segments in
response to current business and economic conditions and liquidity needs.
Page 19
Our agreements with our major customers provide for various sales
allowances (i.e., deductions given the customer from purchases made from us),
the most common of which are for volume discounts, consumer product returns, and
cooperative advertising. These allowances are usually defined as a percentage of
the gross sales price, and are recognized as a reduction of gross sales revenue
at the time the related sales are recorded. If the customer agreement does not
provide for the deduction of the allowance amount directly from the amount
invoiced the customer at time of billing, we record an accrual for the amounts
due. These accrued sales allowances are settled periodically either by
subsequent deduction from the accounts receivable from the customer or by cash
payment. For financial statement presentation purposes, these sales allowances
are netted against accounts receivable, and amounted to $10.4 million and $11.3
million at September 30, 2001 and 2000, respectively. The amounts of our accrued
sales allowances, by customer and in the aggregate, are dependent upon various
factors, including sales volumes, the specific terms negotiated with each
customer (including whether the allowance amounts are deducted immediately from
the invoice or accrued) and the manner and timing of settlement.
Revolving Credit and Term Loan Facilities
In July 2000 we entered into a credit facility for approximately $75
million with a bank syndication group to finance the acquisition of Ring and
repay and terminate our existing U.S. credit facility and Ring's U.K. facility.
The facility consists of two term loans amounting to $15 million and the GBP
equivalent of U.S. $15 million (GBP 10.5 million), respectively, and two
revolving facilities for loans, acceptances, and trade and stand-by letters of
credit for our ongoing operations in the U.S. and the U.K. Amounts outstanding
under the revolving facilities are limited under a borrowing base defined as
percentages of the combined accounts receivable and inventory balances for the
U.S. and U.K. Obligations under the facility are secured by substantially all of
our U.S. and U.K. assets, including 100% of the common stock of our U.S.
subsidiaries and 65% of the stock of our Canadian and first tier United Kingdom
and Hong Kong subsidiaries. The agreement prohibits the payment of cash
dividends or other distribution on any shares of our common stock, other than
dividends payable solely in shares of common stock, unless approval is obtained
from the lenders. We pay a quarterly commitment fee of .50% per annum based on
the unused portion of the revolving facilities.
Under English law, a British company cannot lawfully provide financial
assistance for the purpose of the acquisition of its own shares (which would
include using its cash flows and other sources of funds to make payments due on
debt used to fund its acquisition) unless certain conditions are met. In
addition, lenders providing the financing for the acquisition cannot perfect
their collateral interest in the assets of the acquired British company unless
such conditions are met. In order to lawfully provide financial assistance, the
acquired British company must complete a "whitewash procedure" under English
law. In essence, the whitewash procedure requires the following: (1) every
director of the acquired British company must make a statutory declaration as to
the solvency of the acquired company and its ability to pay its debts for the
next twelve months; and (2) the statutory declarations must be accompanied by an
independent auditors' report stating that the auditors' are not aware of
anything to indicate that the statutory declarations of the directors are not
reasonable. In addition, English law requires that the net assets of the
acquired British company are not reduced by the financial assistance or, to the
extent that the net assets are reduced, the reduction is funded out of
distributable profits. "Net assets" and "distributable profits" have prescribed
meanings under the statute governing the whitewash procedure. Failure to comply
with the whitewash procedure will mean the financial assistance is unlawful,
which could result in the acquired British company facing a fine and its
directors and managers facing a fine or imprisonment or both. In addition, the
transaction constituting the financial assistance together with any security
given in contravention of the financial assistance rules, may be held by English
courts to be void and unenforceable. The financial assistance rules apply to any
subsidiaries of the acquired company which are also involved in providing
financial assistance. Until the whitewash procedure is completed, cash flows
from Ring cannot be used to repay the Company's term loans and cash payments by
Ring to other Company subsidiaries are limited to trade transactions in the
normal course of business.
The $75 million credit facility contained financial covenants requiring us
to meet certain debt to adjusted earnings (i.e. leverage) and fixed charge
coverage ratios on a quarterly basis. We obtained an amendment of this credit
facility on December 22, 2000, and without this amendment we would not have been
in compliance with one of the financial covenants for the quarter ended
September 30, 2000. As a result of quarterly net losses, we were unable to
comply with the financial covenants under our $75 million credit facility for
the quarters ended December 31, 2000, March 31, 2001 and June 30, 2001 but were
able to obtain amendments to the credit facility and forbearance agreements that
deferred through July 31, 2001 the lenders' ability to exercise their rights and
remedies (including the demand for immediate repayment) for the event of default
under the credit facility resulting from the failures to meet the financial
covenants.
On July 23, 2001 we obtained $11.8 million in additional funding as a
result of closing a transaction (the "Sun transaction") with Sun Catalina
Holdings LLC ("SCH"), an affiliate of Sun Capital Partners, Inc. (a merchant
banking firm based in Boca Raton, Florida) and other parties. The $75 million
credit facility was amended and restructured in connection with the Sun
transaction.
Page 20
In exchange for the $11.8 million, we issued SCH 8,489,932 shares of
common stock (for $3 million) and $4.5 million in secured subordinated notes,
and issued $4.3 million in secured subordinated notes to another lender,
SunTrust Equity Partners ("STEP"). SCH and STEP also received the right to
obtain warrants exercisable immediately upon receipt at $.01 per warrant to
purchase an additional 3,904,838 and 1,652,636 shares, respectively, of our
common stock. Immediately after the Sun transaction, SCH owned approximately 53%
of our outstanding common stock. We also paid an affiliate of SCH a $400,000
investment banking fee in connection with the Sun transaction.
With respect to our $75 million credit facility the net proceeds from the
transaction amounting to $8.9 million were applied against the revolving loans
and term loans under this facility. Available borrowings under the revolving
loans were reallocated under the amendment to increase the U.S. revolver to
$21.4 million and decrease the U.K. revolver to the British pound equivalent of
$ 23.6 million. Borrowings under the facility bear interest, payable monthly at
our option of either the prime rate plus an applicable margin or the LIBOR rate
plus an applicable margin. The effective rate on the facility was 8.1% at
September 30, 2001. Under the amended facility, we are required to meet minimum
levels of adjusted quarterly earnings beginning with the quarter ended September
30, 2001 and revised quarterly debt to adjusted earnings and fixed charge ratios
beginning with the quarter ending December 31, 2002. Annual capital expenditures
are limited under the amendment to $3.75 million. The term loans are now
repayable in installments aggregating approximately (i) $200,000 on each of
December 31, 2001, March 31, 2002, June 30, 2002 and September 30, 2002; (ii)
$750,000 on each of December 31, 2002, March 31, 2003, June 30, 2003, and
September 30, 2003, and; (iii) $20,497,000 on December 31, 2003. The revolving
loans under the facility mature December 31, 2003. The bank syndication group's
fee for the amendment consisted of the right to obtain warrants to purchase
354,136 shares of common stock at a price of $.01 per share. The July 23, 2001
amendment to the $75 million credit facility eliminated (as an event of default)
a previous requirement of the credit facility that we complete the whitewash
procedure. However, if the whitewash procedure is not completed by December 31,
2001, 50 basis points will be added to the facility's effective interest rate.
We do not expect to complete the whitewash procedure by December 31, 2001.
The terms of our credit facilities, English law, and U.S. and foreign
income tax considerations impact the flow of funds between our major
subsidiaries. The $75 million credit facility prohibits loans to Go-Gro from
either Ring or our other companies other than normal intercompany payables
arising from trade. This facility permits loans from our U.S. companies to Ring,
but restricts the flow of funds from Ring to our non-U.K. companies to payments
constituting dividends or a return of capital. English laws and our current
inability to complete the whitewash procedure also restrict the amount of funds
that may be transferred from Ring to our U.S. companies and other subsidiaries.
The Hong Kong credit facility prohibits the payment of dividends without the
consent of the bank and limits the amount of loans or advances from Go-Gro to
our other companies. Any loan made or dividends paid either directly or
indirectly by Go-Gro to the Company or its U.S. subsidiaries could be considered
by U.S. taxing authorities as a repatriation of foreign source income subject to
taxation in the U.S. at a higher rate than that assessed in Hong Kong. The net
impact of such a funds transfer from Go-Gro could be an increase in our U.S.
income taxes payable and our effective tax rate. The credit facility for
Catalina Canada also limits payments to our other companies other than trade
payments in the ordinary course of business.
We utilize the revolving portions of our $75 million credit facility to
support our operations in the U.S. and U.K. Our U.S. operations are also
supported to a limited extent by cash flows from our China operations. Due to an
inability to transfer funds from the U.K. to the U.S. until the whitewash
procedure is completed, all payments on our term loans must presently be made by
U.S. operations. As of December 14, 2001, we had $11.8 million available under
our revolving facilities to support U.S. and U.K. operations. Since the closing
of the Sun transaction on July 23, 2001, we have significantly reduced our
overhead and operating costs in the U.S., U.K. and China through personnel
reductions and the elimination of discretionary expenditures. We plan to
continue to focus on cost control and liquidity management during 2002. Based
upon our (i) sales results for October 2001 and November 2001, (ii) current
assessments of market conditions for our business; and (iii) sales,
profitability and cash flow projections, we believe we will be in compliance
with the terms and covenants of the $75 million credit facility, and that we
will have adequate available borrowings and other sources of liquidity for 2002.
However, there can be no assurances that market conditions will not deteriorate
in the future, or that we will be able to achieve our projected results. Should
our operating losses continue, or should our cash needs in the future exceed our
available liquidity from borrowings under the revolving facilities and other
sources, we may be required to obtain either a modification of the $75 million
credit facility or funding from other sources to continue to support our
operations.
Ring has an arrangement with a U.K. bank which is secured by standby
letters of credit issued under the GBP revolving loan facility of our $75
million credit facility. The arrangement provides for borrowings, trade letters
of credit, bonds, and foreign currency forward contracts and transactions.
Borrowings, trade letters of credit, bonds and foreign currency forward
contracts outstanding under this arrangement amounted to approximately $7.1
million, $22,000, $199,000 and $5,700,000, respectively, at September 30, 2001.
Page 21
As of September 30, 2001 Catalina Canada had a credit facility with a
Canadian bank which provided 5.5 million Canadian dollars or U.S. equivalent
(approximately U.S. $3.5 million) in revolving demand credit. Canadian dollar
advances bore interest at the Canadian prime rate plus .5% (5.75% at September
30, 2001) and U.S. dollar advances bore interest at the U.S. base rate of the
bank (6.5% at September 30, 2001). In December 2001 Catalina Canada repaid this
credit facility upon the closing of a new credit facility with a different
lender. The new facility provides U.S. dollar and Canadian dollar revolving
credit loans of up to 7,000,000 Canadian dollars in the aggregate and matures
December 2004. Borrowings in Canadian dollars bear interest at the Canadian
prime rate plus 1.5% while borrowings in U.S. dollars bear interest at the rate
of the U.S. prime rate plus .5%. Borrowings under the facility are limited to a
borrowing base calculated from receivables and inventory. The credit facility is
secured by substantially all of the assets of Catalina Canada. The facility
limits the payment of dividends, advances or loans from Catalina Canada to
Catalina Lighting, Inc. to $500,000 annually, and no such amounts may be
transferred if Catalina Canada does not have sufficient excess borrowing
availability under the facility's borrowing base. The facility contains a
financial covenant requiring Catalina Canada to maintain a minimum net worth.
Go-Gro has a 60 million Hong Kong dollars (approximately U.S. $7.7
million) facility with a Hong Kong bank. The facility provides limited 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. The facility is secured by Go-Gro's assets
and a guarantee issued by the Company and requires Go-Gro to maintain a minimum
level of equity. This agreement prohibits the payment of dividends without the
consent of the bank and limits the total amount of trade receivables, loans or
advances from Go-Gro to our other companies. This facility is repayable upon
demand and is subject to an annual review by the bank. At September 30, 2001,
Go-Gro had used $1.8 million of this line for letters of credit (there were no
borrowings). As a result of our present financial situation, the Hong Kong bank
is requiring Go-Gro to maintain additional collateral in the form of cash
deposits as security on this facility. Such deposits amounted to $686,000 at
September 30, 2001.
Subordinated Notes
We issued $8.8 million in secured subordinated notes in July 2001 in
connection with the Sun transaction which are due in full on July 23, 2006.
These notes bear interest at 12%, compounded quarterly. Interest on the notes is
payable quarterly in arrears in cash commencing March 31, 2003. Interest for
quarters prior to the quarter ending March 31, 2003 will be added to the
principal amount of the note. SCH and STEP are also entitled to additional
warrants to purchase common shares at $.01 per share for the quarters during
which interest on the notes is not paid in cash. Interest was not paid on the
notes for the period July 23, 2001 to September 30, 2001, for which SCH and STEP
received additional warrants to purchase, in the aggregate, 128,400 shares of
common stock. We will be required to issue additional warrants for up to 907,189
shares of common stock if interest payments do not commence until March 31,
2003.
Bonds Payable
We 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 a $1 million leasing facility) our
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 through 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 (3.05% at September 30, 2001) 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 a $5.2 million direct
pay letter of credit which is not part of our credit lines. This direct pay
letter of credit provides that any default under any other agreement involving a
material borrowing or guarantee constitutes a default under the direct pay
letter of credit. The unpaid balance of these bonds was $5.1 million at
September 30, 2001. In January 1999, we entered into an interest rate swap
agreement maturing May 1, 2004, to manage our exposure to interest rate
movements by effectively converting this 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.
Other Obligations
We financed the purchase of our 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 $828,000 at September 30, 2001.
Immediately prior to the closing of the Sun transaction we had existing
employment agreements with our then chief executive officer, two executive vice
presidents and our chief financial officer that provided for certain payments to
these employees in the event that we experienced a "change in control". We
resolved these obligations as part of the Sun transaction by terminating the
previous employment agreements and entering into settlement agreements with
these employees which
Page 22
provide in the aggregate for (i) the granting of rights to fully vested options
to purchase 1,569,229 shares of common stock at a price of $1.18 per share and
(ii) payments of approximately $198,000 each quarter over a three-year period
beginning September 1, 2001. The quarterly payments under these settlement
agreements are suspended at any time in which a default under our credit
facility has occurred and is continuing. Effective upon the closing of the Sun
transaction, our former chief executive officer entered into a new one-year
employment agreement to serve as our president, the chief financial officer
signed a new one-year employment agreement, and the employment of the executive
vice presidents was terminated. In August 2001 our former chief executive
officer (and then acting president) resigned. As part of the settlement
agreements, we obtained covenants not to compete through July 23, 2004. Amounts
receivable from the two former executive vice presidents totaled $212,000
immediately prior to the Sun transaction. These amounts are being repaid on a
quarterly basis in the aggregate amount of $16,667 from the proceeds due these
former executives under the settlement agreements negotiated as part of the Sun
transaction. At September 30, 2001, the remaining amounts due from these
individuals totaled $194,000.
Pursuant to a reorganization of our executive management structure,
William D. Stewart, an executive vice-president left the employ of the Company
in December 1999 to pursue other interests. Under the terms of the settlement
agreement, Mr. Stewart will continue to provide consulting services under a
three-year non-compete and consulting agreement. We recorded a non-recurring
pretax charge of $788,000 in 2000 related to the settlement of our contractual
employment obligation to Mr. Stewart and we are obligated to pay $250,000
annually through December 2002 under the non-compete and consulting agreement.
Capital Expenditures
In September 2000 Go-Gro deposited the purchase price of approximately $1
million for its joint venture partner's interest in Go-Gro's Chinese cooperative
joint venture manufacturing subsidiary, Shenzhen Jiadianbao Electrical Products
Co., Ltd. ("SJE"). This purchase was finalized in December 2000. During the
quarter ended March 31, 2001, SJE was converted under Chinese law from a
cooperative joint venture to a wholly owned foreign entity and its name was
changed to Jiadianbao Electrical Products (Shenzhen) Co., Ltd. ("JES").
JES obtained non-transferable land use rights for the land on which its
primary manufacturing facilities were constructed under a Land Use Agreement
dated April 11, 1995 between SJE and the Bureau of National Land Planning Bao-An
Branch of Shenzhen City. This agreement provides JES with the right to use this
land until January 18, 2042 and required SJE to construct approximately 500,000
square feet of factory buildings and 211,000 square feet of dormitories and
offices. This construction is complete and total costs aggregated $15.8 million
through September 30, 2001.
In connection with the settlement with Go-Gro's former joint venture
partner in SJE, JES acquired the land use rights for a parcel of land adjoining
its primary manufacturing facilities. Under the separate land use agreement for
this parcel, JES has the right to use the land through March 19, 2051 and is
obligated to complete new construction on the land (estimated to cost
approximately $1.3 million) by March 20, 2002. If this construction is not
completed by that date JES is subject to fines of up to $55,000, and if the
construction is not completed by March 20, 2004, the local municipal planning
and state land bureau may take back the land use rights for the parcel without
compensation and confiscate the structures and attachments. We are presently
investigating various courses of action for this commitment, including
negotiations with the local authorities to extend or modify the agreement's
deadlines.
Litigation
During the past few years we received a number of claims relating to
halogen torchieres we sold to various retailers. We maintain primary product
liability insurance coverage of $1 million per occurrence, $2 million in the
aggregate, as well as umbrella insurance policies providing an aggregate of $75
million in excess umbrella insurance coverage. The primary insurance policy
requires us to self-insure for up to $10,000 per incident and, based on
experience, have accrued $265,000 for this contingency as of September 30, 2001.
No assurance can be given that the number of claims will not exceed historical
experience or that claims will not exceed available insurance coverage or that
we will be able to maintain our current level of insurance.
In connection with our appeal of a judgment entered by the U.S. District
Court for the Southern District of Florida in June 2001 (see "Legal
Proceedings") we have posted a surety bond in the amount of $1.8 million (for
which we have provided $1.5 million in cash collateral) for the appeal. We
believe that we ultimately will not be found liable for patent infringement in
this case. Accordingly, no provision for loss has been recorded in the
accompanying September 30, 2001 Consolidated Financial Statements for this
matter.
Page 23
Other Matters
Ring has a defined benefit pension plan which covers 27 current employees
and approximately 750 other members formerly associated with Ring. The plan is
administered externally and the assets are held separately by professional
investment managers. The plan is funded by contributions at rates recommended by
an actuary. We are reviewing the plan and believe that in the future we may
begin the process of terminating our liability under the plan. We anticipate
that a termination will require payment of a lump sum equal to the "Minimum
Funding Requirement ("MFR") shortfall. The most recent estimate as of September
2001 placed the MFR shortfall at approximately $2.2 million. The U.K. government
announced in its March 2001 budget that it intends to abolish the MFR and to
replace it with funding standards individually tailored to the circumstances of
plans and employers. Based on current information, it appears that this change
is not likely to occur before April 2003, and should we not terminate our U.K.
pension plan prior to that date, the cost to terminate the U.K. plan under the
new rules is likely to be much greater than the current $2.2 million deficit
under the MFR method.
As of September 30, 2001, Ring had outstanding 9.5 million convertible
preference shares of which 2.5 million shares were held by third parties and the
remaining 7 million shares were owned by us. The holders of the convertible
preference shares are entitled to receive in priority to the equity shareholders
a fixed cumulative dividend of 19.2 % per annum until January 1, 2004. The
shares are convertible at the option of the holder into fully paid ordinary
shares on the basis of two ordinary shares for every five preference shares. Any
outstanding preference shares on January 1, 2004 automatically will convert into
fully paid ordinary shares on the same basis.
Impact of New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") which summarizes certain of the staff's
view in applying generally accepted accounting principles to revenue recognition
in financial statements. Our adoption of SAB 101 during the quarter ended
September 30, 2001 did not impact our financial position or results of
operations.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141") "Business
Combinations". SFAS 141 addresses financial accounting and reporting for
business combinations and supercedes Accounting Principles Board Opinion No. 16,
"Business Combinations and Statement of Financial Accounting No. 38 "Accounting
for Preacquisition Contingencies of Purchased Enterprises". All business
combinations in the scope of SFAS 141 are to be accounted for under the
purchased method. SFAS 141 was effective June 30, 2001.
In July 2001, the FASB also issued Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142
addresses financial accounting and reporting for intangible assets acquired
individually or with a group of other assets (but not those acquired in a
business combination) at acquisition. SFAS 142 also addresses financial and
accounting and reporting for goodwill and other intangible assets subsequent to
their acquisition. With the adoption of SFAS 142, goodwill is no longer subject
to amortization. Rather, goodwill will be subject to at least an annual
assessment for impairment by applying a fair-value based test. The impairment
loss is the amount, if any, by which the implied fair value of goodwill is less
than carrying or book value. SFAS 142 is effective for fiscal years beginning
after December 15, 2001. Impairment loss for goodwill arising from the initial
application of SFAS 142 is to be reported as resulting from a change in
accounting principle. As of September 30, 2001, we had not assessed the impact
of adopting SFAS 142.
In July 2001, the FASB also issued Statement of Financial Accounting
Standards No. 143, "Accounting for Obligations associated with the Retirement of
Long-Lived Assets ("SFAS 143"). SFAS 143 provides the accounting requirements
for retirement obligations associated with tangible long-lived assets. SFAS 143
is effective for fiscal years beginning after June 15, 2002, and early adoption
is permitted. We are currently assessing the new standard and have not yet
determined its impact on our consolidated results of operations, cash flows or
financial position.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets ("SFAS 144"). This statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. This statement supersedes
FASB Statement 121, "Accounting for the Impairment of Long-Lived assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting provision
of APB Opinion No. 30, "Reporting the Results of Operation-Reporting the Effects
of Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transitions" for the disposal of a "segment of
a business" (as previously defined in that Opinion). This statement also amends
ARB No. 51, "Consolidated Financial Statements" to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
144 is effective for the fiscal years beginning after December 15, 2001, and
early adoption is permitted. We are currently assessing the new standard and
have not yet determined its impact on our consolidated results of operations,
cash flows, or financial position.
Page 24
Impact of Inflation and Economic Conditions
Go-Gro has periodically experienced price increases in the costs of raw
materials, which reduced Go-Gro's profitability due to an inability to
immediately pass on such price increases to its customers. Significant increases
in raw materials prices could have an adverse impact on our net sales and income
from continuing operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates and
fluctuations in foreign currency exchange rates.
Interest Rate Risk
Approximately 76% of our debt at September 30, 2001 (87% at September 30,
2000) is subject to variable interest rates. The remainder of our debt has fixed
interest rates. Our fixed interest rate debt includes bonds for the financing of
our Tupelo, Mississippi warehouse, the variable rate on which has been fixed by
means of an interest rate swap, and $8.8 million (face value) in subordinated
notes. The carrying value and market value of our debt at September 30, 2001
were $60.9 million and $61.4 million, respectively. Based upon debt balances
outstanding at September 30, 2001, a 100 basis point (i.e. 1%) addition to our
weighted average effective interest rate would increase our interest expense by
approximately $484,000 on an annual basis.
Foreign Currency Risk
We maintain significant investments in subsidiaries in the United Kingdom
and Canada, and sell our products into these foreign markets. We also maintain a
major capital investment in manufacturing facilities and supporting
administrative offices in China. Due to the significance of our international
sales and operations, our business and operating results are impacted by
fluctuations in foreign currency exchange rates. If any of the currencies of the
foreign countries in which we conduct business depreciated against the U.S.
dollar we could experience significant changes in our competitive position, cost
structure and the translations of assets, liabilities and transactions
denominated in foreign currencies, which could adversely impact our future
earnings.
We engage in limited hedging activities with respect to foreign currency
exposures. See Notes 1 and 19 of Notes to consolidated Financial Statements for
additional information regarding derivative instruments and hedging activities.
Our foreign net asset/exposures (defined as assets denominated in foreign
currency less liabilities denominated in foreign currency) at fiscal year end in
U.S. dollar equivalents were as follows:
(In thousands) 2001 2000
----------------- ------- -------
British pounds $20,377 $19,497
Hong Kong dollars $14,175 $12,609
Canadian dollars $ 4,415 $ 5,941
Our foreign currency risks relative to our significant foreign
subsidiaries are as follows:
Ring sells in Great British Pounds (GBP) but pays in U.S. dollars for
approximately 36% of the products it purchases. At the time such products are
shipped from its suppliers Ring enters into forward foreign exchange contracts
to exchange GBP for U.S. dollars, with such contracts maturing on the date
payment in U.S. dollars is due. These contracts are intended to hedge fixed
commitments (payables) for inventory purchases in U.S. dollars. At September 30,
2001 Ring had outstanding forward contracts to exchange GBP 3,247,000 for
$4,664,000. All of these contracts mature on or prior to January 15, 2002.
The short term (typically three months or less) of Ring's foreign exchange
contracts greatly limit their effectiveness as a hedge against a significant
depreciation of the GBP against the U.S. dollar over the course of a relatively
longer period, such as a year. Consequently, (as was the case in 2001) a
depreciation of the GBP against the dollar could adversely impact Ring's gross
margins to the extent the increase in the effective cost of goods purchased in
U.S. dollars could not be passed on to Ring's U.K. customers through higher
sales prices.
As Ring's assets, liabilities and transactions are denominated in GBP,
Ring's results and financial condition are subject to translation adjustments
upon their conversion into U.S. dollars for our financial reporting purposes. A
10% decline in the
Page 25
GBP relative to the U.S. dollar over the course of 2001 (i.e. - in addition to
actual exchange experience) would have reduced Ring's translated net sales by
$5.2 million, reduced Ring's translated segment loss from $5.7 million to $6.8
million and would have resulted in a net increase of $766,000 in the allowance
for foreign currency translation loss. These adjusted amounts do not reflect any
economic impacts of the devaluation of the GBP on Ring's sales, margins, results
and overall business.
More than 90% of Go-Gro's sales in 2001 (approximately 77% of which were
intercompany) were made in U.S. dollars. Go-Gro purchases in both U.S. dollars
and Hong Kong (HK) dollars. A greater portion of Go-Gro `s sales are in U.S.
dollars than its cost of sales and other operating costs; therefore a
devaluation of the HK dollar relative to the U.S. dollar could, in the short
term, increase Go-Gro's operating margins and profits assuming its sales prices
in U.S. dollars remain firm.
A significant portion of Go-Gro's assets, liabilities and transactions are
denominated in HK dollars. Consequently, Go-Gro's results and financial
condition are subject to translation adjustments upon their conversion into U.S.
dollars for our financial reporting purposes. A 10% decline in the HK dollar
relative to the U.S. dollar over the course of 2001 (i.e. - in addition to
actual exchange experience) would not have significantly impacted Go-Gro's
translated sales for 2001, but would have increased Go-Gro's translated segment
contribution for 2001 by $367,000, and resulted in an increase in its
translation loss of $1.9 million for 2001. These adjusted amounts do not reflect
any economic impacts of the devaluation of the HK dollar on Go-Gro's sales,
gross profits, results and overall business.
Catalina Canada sells in both U.S. dollars and Canadian (CDN) dollars. All
of Catalina Canada's goods are purchased from Go-Gro in U.S. dollars. Similar to
Ring, a decrease in the CDN dollar relative to the U.S. dollar could adversely
impact Catalina Canada's margins and profitability if the higher effective cost
of Catalina Canada's products could not be passed on to its customers through
higher sales prices.
An assumed 10% depreciation of the CDN dollar relative to the U.S. dollar
over the course of 2001 (i.e. - in addition to actual exchange experience) would
have resulted in a translation reduction of our net sales of 400,000 for 2001.
Page 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statements Schedules
Page
----
Independent Auditors' Report .............................................. 28
Consolidated Balance Sheets - September 30, 2001 and 2000 ................. 29
Consolidated Statements of Operations - Years Ended September 30,
2001, 2000 and 1999 .................................................. 30
Consolidated Statements of Stockholders' Equity - Years Ended
September 30, 2001, 2000 and 1999 .................................... 31
Consolidated Statements of Cash Flows - Years Ended September 30,
2001, 2000 and 1999 .................................................. 32
Notes to Consolidated Financial Statements ................................ 33
Schedule I - Condensed Financial Information .............................. 66
Schedule II - Valuation and Qualifying Accounts - Years ended
September 30, 2001, 2000 and 1999 ..................................... 70
(All other schedules have been omitted as the related information has either
been provided in the notes to consolidated financial statements or is not
required or applicable).
Page 27
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Catalina Lighting, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheets of Catalina
Lighting, Inc. and subsidiaries as of September 30, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 2001. Our
audits also included the financial statement schedules listed in Item 14(a)2.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Catalina Lighting, Inc. and
subsidiaries as of September 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2001 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
December 14, 2001
Page 28
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
September 30,
----------------------
2001 2000
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 4,613 $ 2,309
Restricted cash equivalents and short-term investments 1,066 727
Accounts receivable, net of allowances for doubtful accounts
of $1,423 and $791, respectively 27,761 36,632
Inventories 37,425 52,780
Other current assets 5,114 7,343
--------- ---------
Total current assets 75,979 99,791
Property and equipment, net 30,227 29,932
Goodwill, net 28,812 30,663
Other assets 11,079 7,585
--------- ---------
$ 146,097 $ 167,971
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving credit facilities $ 7,078 $ 22,786
Term loans 818 28,415
Accounts and letters of credit payable 27,586 36,310
Current maturities of bonds payable 900 900
Current maturities of other long-term debt 878 1,339
Income taxes payable 455 2,678
Other current liabilities 12,011 12,969
--------- ---------
Total current liabilities 49,726 105,397
Revolving credit facilities 16,366
Term loans 23,479
Subordinated notes 6,110
Bonds payable 4,200 5,100
Other long-term debt 1,085 1,788
Other liabilities 5,926 3,782
--------- ---------
Total liabilities 106,892 116,067
--------- ---------
Minority interest 1,073 1,075
--------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value
authorized 1,000,000 shares; none issued
Common stock, $.01 par value
authorized 100,000,000 shares; issued and outstanding
16,520,179 shares and 7,999,812 shares, respectively 165 80
Additional paid-in capital 34,279 28,560
Retained earnings 6,764 25,111
Accumulated other comprehensive loss (615) (461)
Treasury stock, at cost, 641,932 shares (2,461) (2,461)
--------- ---------
Total stockholders' equity 38,132 50,829
--------- ---------
$ 146,097 $ 167,971
========= =========
See accompanying notes to consolidated financial statements.
Page 29
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended September 30,
-----------------------------------
2001 2000 1999
--------- --------- ---------
Net sales $ 234,786 $ 202,630 $ 176,561
Cost of sales 202,716 164,216 140,906
--------- --------- ---------
Gross profit 32,070 38,414 35,655
Selling, general and administrative expenses 40,213 30,817 28,554
Severance and office closing costs 1,154 500 --
Executive settlements 2,586 788 --
Litigation settlements received (714) -- (2,728)
--------- --------- ---------
Operating income (loss) (11,169) 6,309 9,829
--------- --------- ---------
Other income (expenses)
Interest expense (6,966) (2,832) (2,413)
Reversal of post judgment interest related to
litigation settlement -- -- 893
Other income (expenses) (595) 442 1,118
--------- --------- ---------
Total other expenses (7,561) (2,390) (402)
--------- --------- ---------
Income (loss) before income taxes (18,730) 3,919 9,427
Income tax (provision) benefit 383 (1,074) (2,938)
--------- --------- ---------
Net income (loss) $ (18,347) $ 2,845 $ 6,489
========= ========= =========
Earnings (loss) per share
Basic
Earnings (loss) per share $ (2.04) $ 0.40 $ 0.92
Weighted average number of shares 8,980 7,074 7,055
Diluted
Earnings (loss) per share $ (2.04) $ 0.37 $ 0.80
Weighted average number of shares 8,980 8,419 8,688
See accompanying notes to consolidated financial statements.
Page 30
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Accumulated
Other
Common Stock Additional Comprehensive Treasury Stock Total
------------------- Paid-in Retained Income ------------------ Stockholders'
Shares Amount Capital Earnings (Loss) Shares Amount Equity
---------- ------- ---------- -------- ------------- -------- ------- -------------
Balance at September 30, 1998 7,174,669 $ 72 $ 26,475 $15,777 $ -- -- $ -- $42,324
Exercise of stock options 185,898 2 402 404
Common stock issued to outside
directors 12,446 50 50
Repurchase of common stock (378,200) (1,210) (1,210)
Net income 6,489 6,489
---------- ------- -------- ------- ----- -------- ------- -------
Balance at September 30, 1999 7,373,013 74 26,927 22,266 -- (378,200) (1,210) 48,057
Exercise of stock options 616,767 6 1,605 1,611
Common stock issued to outside
directors 10,032 28 28
Repurchase of common stock (263,732) (1,251) (1,251)
Comprehensive income:
Foreign currency translation loss (461)
Net income 2,845
Total comprehensive income 2,384
--------------------------------------------------------------------------------------------
Balance at September 30, 2000 7,999,812 80 28,560 25,111 (461) (641,932) (2,461) 50,829
Sale of common stock 8,489,932 85 2,179 2,264
Common stock issued to outside
directors 30,435 23 23
Warrants issued with subordinated
notes 2,265 2,265
Warrants issued for interest on
subordinated notes 49 49
Warrants issued to U.S. bank
group 191 191
Stock options issued for
executive settlements 1,020 1,020
Redemption of stock rights (8) (8)
Comprehensive loss:
Foreign currency translation (15)
gain (loss)
Change in unrealized gain (loss) (139)
on derivative instrument,
net of taxes
Net loss (18,347)
Total comprehensive loss (18,501)
---------- ------- -------- ------- ----- -------- ------- -------
Balance at September 30, 2001 16,520,179 $ 165 $ 34,279 $ 6,764 $(615) (641,932) $(2,461) $38,132
========== ======= ======== ======= ===== ======== ======= =======
See accompanying notes to consolidated financial statements.
Page 31
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended September 30,
--------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $(18,347) $ 2,845 $ 6,489
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Exchange (gain) loss (85) 43 308
Depreciation and amortization 7,974 6,132 5,392
Deferred income tax (benefit) provision (670) (463) 1,951
Loss (gain) on disposition of property and equipment 4 7 (175)
Stock options issued for executive settlements 1,020 -- --
Warrants issued for interest on subordinated notes 49 -- --
Other -- (53) --
Change in assets and liabilities, net of effect of
acquisition:
Decrease (increase) in accounts receivable 8,259 1,551 (1,493)
Decrease (increase) in inventories 15,473 (2,851) (421)
Decrease (increase) in income taxes receivable -- 3,780 --
Decrease (increase) in other current assets 1,539 (757) (163)
Decrease (increase) in other assets (1,515) (1,486) (342)
Increase (decrease) in income taxes payable (1,159) -- (1,487)
Increase (decrease) in accrued litigation judgment under appeal -- -- (4,909)
Increase (decrease) in restricted cash equivalents (336) -- --
Increase (decrease) in accounts and letters of credit payable
and other liabilities (7,293) (676) 3,511
-------- -------- --------
Total adjustments 23,260 5,227 2,172
-------- -------- --------
Net cash provided by operating activities 4,913 8,072 8,661
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (4,794) (4,295) (1,699)
Proceeds from sale of property 190 39 997
Purchase of minority interest (1,080) -- --
Payment for Ring acquisition, net of cash acquired (119) (33,351) --
Decrease (increase) in restricted cash equivalents and
short-term investments 879 1,872 986
-------- -------- --------
Net cash provided by (used in) investing activities (4,924) (35,735) 284
-------- -------- --------
(Continued on page 33)
Page 32
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Years Ended September 30,
--------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from financing activities:
Proceeds from term loans -- 30,000 --
Payments on term loans (4,074) (1,244) --
Proceeds from revolving credit facilities 45,024 46,955 35,972
Payments on revolving credit facilities (44,842) (42,109) (35,550)
Proceeds from isssuance of subordinated notes 4,574
Repayments of convertible subordinated notes -- (7,600) --
Sinking fund redemption payments on bonds (880) (878) (900)
Proceeds from other long-term debt 323 -- --
Payments on other long-term debt (1,468) (753) (737)
Payments on bonds payable (900) (2,210) (980)
Proceeds from issuance of warrants 2,265 -- --
Payment for redemption of stock rights (8)
Payments to repurchase common stock -- (1,251) (1,210)
Proceeds from issuance of common stock and
related income tax benefit 2,264 1,611 404
-------- -------- --------
Net cash provided by (used in) financing activities 2,278 22,521 (3,001)
-------- -------- --------
Effect of exchange rate changes on cash 37 198 (481)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,304 (4,944) 5,463
Cash and cash equivalents at beginning of year 2,309 7,253 1,790
-------- -------- --------
Cash and cash equivalents at end of year $ 4,613 $ 2,309 $ 7,253
======== ======== ========
Supplemental Cash Flow Information
Years Ended September 30,
------------------------------------
2001 2000 1999
------- ------- -------
Cash paid (refunded) for:
Interest $ 5,664 $ 2,771 $ 2,304
======= ======= =======
Income taxes $ 1,420 $ (584) $ 2,439
======= ======= =======
On July 5, 2000, the Company acquired Ring as follows:
Fair value of assets acquired, net
of cash and cash equivalents $ 70,001
Liabilities assumed (36,650)
--------
Net cash payment made $ 33,351
========
During the years ended September 30, 2001, 2000 and 1999, the Company issued
30,435, 10,032 and 12,446 shares of common stock to its outside directors as
compensation for their services. The aggregate market value of the stock issued
was $23,000, $28,000 and $50,000, respectively, for 2001, 2000 and 1999,
respectively.
During the year ended September 30, 2001, the Company issued warrants valued at
$191,000 to purchase 354,136 shares of common stock at $0.01 per share to its
bank syndicate group in connection with the July 23, 2001 amendment to its $75
million credit facility.
During the years ended September 30, 2000 and 1999 the Company incurred capital
lease obligations aggregating approximately $427,000 and $102,000, respectively,
for new office, computer, machinery and warehouse equipment.
See accompanying notes to consolidated financial statements.
Page 33
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
1. Summary of Significant Accounting Policies and Nature of Operations
(a) The Business
Catalina Lighting, Inc. and subsidiaries (collectively, "the Company") is a
United States-headquartered wholesaler, distributor and manufacturer of lamps,
lighting fixtures and other products. The Company sells principally in the U.S.
and the United Kingdom to a variety of retailers including home centers,
national retail chains, office superstore chains, mass merchandisers, warehouse
clubs, discount department stores and hardware stores. The Company also sells
its products in other European countries, Canada, Mexico and other foreign
markets.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Catalina Lighting,
Inc. and its subsidiaries, Catalina Industries, Inc., Go-Gro Industries, Limited
("Go-Gro"), Ring Limited ("Ring"), Catalina Canada,and other wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(c) Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("generally accepted
accounting principles") requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(d) Geographic Risks
Substantially all of the Company's products are obtained from suppliers located
in China. Any inability by the Company to continue to obtain its products from
China could significantly disrupt the Company's business. Included in the
Company's consolidated balance sheet at September 30, 2001 are net assets of
$21.8 million of Company subsidiaries located in China. With respect to these
assets, the Company maintains $14.4 million in noncancelable political risk
insurance.
(e) Cash and Cash Equivalents
Cash on hand and in banks, money market funds and other short-term securities
with maturities of three months or less when purchased are considered cash and
cash equivalents.
(f) Accounts Receivable
Pursuant to an agreement between the Company and a bank, the Company transferred
to the bank the credit risk of certain of its Canadian receivables for a fee
equal to .75 percent of billings to customers covered by the arrangement. Ring
has a similar arrangement related to its receivables for a fee equal to .09
percent of U.K. billing and .56 percent of non-U.K. billing. Gross accounts
receivable secured under such agreements at September 30, 2001 and 2000 amounted
to $20.7 million and $20.6 million, respectively. In addition, certain of the
Company's sales are made to customers who pay pursuant to their own
international, irrevocable, transferable letters of credit. Gross accounts
receivable secured by such letters of credit at September 30, 2001 and 2000
amounted to $5.4 million and $7.0 million, respectively.
The Company provides allowances against accounts receivable for sales
deductions, returns and doubtful accounts. The Company's agreements with its
major customers provide for various sales allowances (i.e., deductions given the
customer from purchases made from the Company), the most common of which are for
volume discounts, consumer product returns, and
Page 34
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
1. Summary of Significant Accounting Policies and Nature of Operations
(continued)
cooperative advertising. These allowances are usually defined as a percentage of
the gross sales price, and are recognized as a reduction of gross sales revenue
at the time the related sales are recorded. If the customer agreement does not
provide for the deduction of the allowance amount directly from the amount
invoiced the customer at time of billing, the Company records an accrual for the
amounts due. These accrued sales allowances are settled periodically either by
subsequent deduction from the accounts receivable from the customer or by cash
payment. For financial statement presentation purposes, these sales allowances
are netted against accounts receivable, and amounted to $10,442,000 and
$11,260,000 at September 30, 2001 and September 30, 2000, respectively.
(g) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
(h) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Interest expense incurred for the construction of facilities is
capitalized until such facilities are ready for use. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the lease term or estimated useful
lives of the related assets.
(i) Restricted Cash Equivalents and Short-Term Investments
The Company's restricted cash equivalents and short term investments at
September 30, 2001 represented sinking fund payments on bonds issued to finance
the Company's U.S. warehouse and investment income earned on such payments and a
$686,000 cash deposit with the Company's Hong Kong bank held for letters of
credit issued on behalf of the Company. Restricted cash equivalents and short
term investments at September 30, 2000 represented the sinking fund payments on
the bonds issued to finance the Company's U.S. warehouse and investment income
earned and $350,000 held in escrow in Mexico pursuant to the resolution of legal
proceedings.
(j) Goodwill
Goodwill represents the excess of cost over fair value of net assets acquired
and is being amortized on a straight-line basis over periods from twenty to
forty years. The Company periodically evaluates the recoverability of recorded
costs for goodwill based upon estimations of future undiscounted cash flows from
the related acquired companies. Should the Company determine it probable that
future estimated undiscounted cash flows from any of its acquired companies will
be less than the carrying amount of the associated goodwill, an impairment of
goodwill would be recognized, and goodwill would be reduced to the amount
estimated to be recoverable. Accumulated amortization of goodwill amounted to
$5.1 million and $3.6 million at September 30, 2001 and 2000, respectively.
(k) Capital Leases
Leases that transfer substantially all of the benefits and risks of ownership to
the Company are accounted for as the acquisition of assets and assumption of
obligations. Accordingly, capitalized leased assets are recorded as property and
equipment and the present values of the minimum lease payments are recorded as
capital lease obligations under other long-term debt. Depreciation of such
assets is computed using the shorter of the lease terms or estimated useful
lives of the assets and is included in depreciation expense.
(l) Income Taxes
The Company and its wholly-owned domestic subsidiaries file consolidated federal
and state tax returns in the United States. Separate foreign tax returns are
filed for the Company's Hong Kong, China, Canadian, U.K. and Mexican
subsidiaries. The
Page 35
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
1. Summary of Significant Accounting Policies and Nature of Operations
(continued)
Company follows the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.
The effect on deferred taxes of a change in tax rates is recognized in income in
the year that includes the enactment date.
(m) Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income or loss
attributable to common shareholders by the weighted average number of common
shares outstanding during the year. 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.
(n) Foreign Currency Translation
The accounts of the Company's foreign subsidiaries are translated into U.S.
dollars as follows: for subsidiaries where the functional currency is the U.S.
dollar, monetary balance sheet accounts are translated at the current exchange
rate and nonmonetary balance sheet accounts are translated at historical
exchange rates. Income and expense accounts are translated at the average
exchange rates in effect during the year. Adjustments resulting from the
translation of these entities are included in net income (loss). For
subsidiaries where the functional currency is other than the U.S. dollar, all
balance sheet accounts are translated at the current exchange rate. Income and
expense accounts are translated at the average exchange rates in effect during
the year. Resulting translation adjustments are reflected as a separate
component of stockholders' equity ("other comprehensive income (loss)"). Foreign
currency transaction gains and losses are included in consolidated net income
(loss).
(o) Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method. Accordingly, compensation cost for stock options issued is measured as
the excess, if any, of the fair value of the Company's common stock at the date
of grant over the exercise price of the options. The pro forma net earnings
(loss) per common stock amounts as if the fair value methods had been used are
presented in Note 14 of Notes to Consolidated Financial Statements.
(p) Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable. In performing the review for recoverability, the Company estimates
the future undiscounted cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected undiscounted future
cash flows is less than the carrying amount of the assets, an impairment loss is
recognized, by comparing the fair value of assets to their carrying value.
(q) Comprehensive Income (loss)
Comprehensive income (loss) consisted of the following:
Year Ended September 30,
--------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Net income (loss) $(18,347) $ 2,845 $ 6,489
Foreign currency translation gain (loss) (15) (461) --
Change in unrealized loss on derivative
instrument, net of taxes (139) -- --
-------- -------- --------
Total comprehensive income (loss) $(18,501) $ 2,384 $ 6,489
======== ======== ========
Page 36
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
1. Summary of Significant Accounting Policies and Nature of Operations
(continued)
The foreign currency translation gain (loss) relates to the Company's United
Kingdom operations. The Company's investment in such operations is permanent in
nature and consequently no adjustment for income taxes was made.
(r) Revenue Recognition
The Company manufactures and sells its products pursuant to purchase orders
received from customers and recognizes revenue at the time its products are
delivered to the customer or the customer's carrier. Any shipping, handling or
other costs incurred by the Company associated with the sale are expensed as
cost of sales at the time of sale recognition.
(s) Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") 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. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives are either
offset against the change in fair value of assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income (loss)
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company adopted SFAS 133 on October 1, 2000 and the cumulative effect on the
accumulated comprehensive loss on such date was income of $153,000 (net of
$86,000 in income taxes). The fair value of the derivative instrument on
September 30, 2001 was a loss of $139,000 (net of $78,000 in income taxes).
All derivatives are recognized on the balance sheet at their fair value. On the
date the derivative contract is entered into, the Company designates the
derivative as (1) a hedge of the fair value of a recognized asset or liability
or of an unrecognized firm commitment ("fair value" hedge), (2) a hedge of a
forecasted transaction or of the variability of cash flows to be received or
paid related to a recognized asset or liability ("cash flow" hedge), (3) a
foreign-currency fair-value or cash-flow hedge ("foreign currency" hedge), or
(4) a hedge of a net investment in a foreign operation. Changes in the fair
value of a derivative that is highly effective as - and that is designated and
qualifies as - a fair-value hedge, along with the loss or gain on the hedged
asset or liability that is attributable to the hedged risk (including losses or
gains on firm commitments), are recorded in current-period earnings. Changes in
the fair value of a derivative that is highly effective as - and that is
designated and qualifies as - a cash-flow hedge are recorded in other
comprehensive income (loss), until earnings are affected by the variability of
cash flows (e.g., when periodic settlements on a variable-rate asset or
liability are recorded in earnings).
Changes in fair value of derivatives that are highly effective as - and that are
designated and qualify as - foreign-currency hedges are recorded in either
current-period earnings or other comprehensive income (loss), depending on
whether the hedge transaction is a fair-value hedge (e.g., a hedge of a firm
commitment that is to be settled in a foreign currency) or a cash-flow hedge
(e.g., a foreign-currency-denominated forecasted transaction). If, however, a
derivative is used as a hedge of a net investment in a foreign operation, its
changes in fair value, to the extent effective as a hedge, are recorded in the
cumulative translation adjustments account within equity. The Company formally
documents all relationships between hedging instruments and hedged items, as
well as its risk-management objective and strategy for undertaking various hedge
transactions. This process includes linking all derivatives that are designated
as fair-value, cash-flow, or foreign-currency hedges to specific assets and
liabilities on the balance sheet or to specific firm commitments or forecasted
transactions. The Company also formally assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items. If it is determined that a derivative is not highly
effective as a hedge or that it has ceased to be a highly effective hedge, the
Company will discontinue hedge accounting prospectively. See also Note 19 of
Notes to Consolidated Financial Statements.
Page 37
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
1. Summary of Significant Accounting Policies and Nature of Operations
(continued)
(t) Impact of Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101") which summarizes certain of the staff's view in
applying generally accepted accounting principles to revenue recognition in
financial statements. The adoption of SAB 101 by the Company during the quarter
ended September 30, 2001 did not impact its financial position or results of
operations.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141") "Business Combinations".
SFAS 141 addresses financial accounting and reporting for business combinations
and supercedes Accounting Principles Board Opinion No. 16, "Business
Combinations and Statement of Financial Accounting No. 38" "Accounting for
Preacquisition Contingencies of Purchased Enterprises". All business
combinations in the scope of SFAS 141 are to be accounted for under the
purchased method. SFAS 141 was effective June 30, 2001.
In July 2001, the FASB also issued Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses
financial accounting and reporting for intangible assets acquired individually
or with a group of other assets (but not those acquired in a business
combination) at acquisition. SFAS 142 also addresses financial and accounting
and reporting for goodwill and other intangible assets subsequent to their
acquisition. With the adoption of SFAS 142, goodwill is no longer subject to
amortization. Rather, goodwill will be subject to at least an annual assessment
for impairment by applying a fair-value based test. The impairment loss is the
amount, if any, by which the implied fair value of goodwill is less than the
carrying or book value. SFAS 142 is effective for fiscal years beginning after
December 15, 2001 and is therefore effective for the Company for its fiscal year
ending September 30, 2003. Impairment loss for goodwill arising from the initial
application of SFAS 142 is to be reported as resulting from a change in
accounting principle. As of September 30, 2001, the Company had not assessed the
impact of adopting SFAS 142.
In July 2001, the FASB also issued Statement of Financial Accounting Standards
No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets ("SFAS 143"). SFAS 143 provides the accounting requirements
for retirement obligations associated with tangible long-lived assets. SFAS 143
is effective for fiscal years beginning after June 15, 2002, and early adoption
is permitted. The Company is currently assessing the new standard and has not
yet determined its impact on its consolidated results of operations, cash flows
or financial position.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"). This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement supersedes FASB
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting provision
of APB Opinion No. 30, "Reporting the Results of Operation-Reporting the Effects
of Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transitions" for the disposal of a "Segment of
a Business" (as previously defined in that Opinion). This statement also amends
ARB No. 51, "Consolidated Financial Statements" to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
144 is effective for the fiscal years beginning after December 15, 2001, and
early adoption is permitted. The Company is currently assessing this new
standard and has not yet determined its impact on its consolidated results of
operations, cash flows, or financial position.
(u) Reclassifications
Certain amounts presented in the financial statements of prior periods have been
reclassified to conform to the current year presentation.
2. Capital Infusion
On July 23, 2001 the Company obtained $11.8 million in additional funding as a
result of closing a transaction (the "Sun transaction") with Sun Catalina
Holdings LLC (SCH), an affiliate of Sun Capital Partners, Inc. (a merchant
banking firm based in Boca Raton, Florida) and other parties.
Page 38
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
2. Capital Infusion (continued)
In exchange for the $11.8 million, the Company issued SCH 8,489,932 shares of
common stock (for $3 million) and $4.5 million in secured subordinated notes,
and issued $4.3 million in secured subordinated notes to another lender,
SunTrust Equity Partners (STEP). SCH and STEP also received the right to obtain
warrants exercisable immediately upon receipt at $.01 per share to purchase an
additional 3,904,838 and 1,652,636 shares, respectively, of the Company's common
stock. Immediately after the Sun transaction, SCH owned approximately 53% of the
Company's outstanding common stock. The Company entered into a ten-year
agreement with an affiliate of SCH to provide management services to the Company
at an annual fee of $500,000. The Company also paid a $400,000 investment
banking fee to an affiliate of SCH in connection with the Sun transaction.
The Company amended and restructured its $75 million credit facility in
connection with the Sun transaction. The net proceeds from the transaction,
amounting to $8.9 million, were applied against the revolving loans and term
loans under this credit facility. The amendment to this credit facility revised
the financial covenants under the facility, reduced required quarterly principal
payments on the term loans, reallocated available borrowings between the U.S.
and U.K. revolving loans, provide for lump sum repayment of the revolving loans
and term loans on December 31, 2003, and limits the Company's consolidated
capital expenditures. See Note 6 of Notes to Consolidated Financial Statements.
The Company had employment agreements with its former chief executive officer,
two former executive vice presidents and its chief financial officer at the time
of the Sun transaction that provided for certain payments to these employees in
the event the Company experienced a "change in control". The Company resolved
these obligations as part of the Sun transaction by terminating the previous
employment agreements and entering into settlement agreements with these
employees, which agreements provide in the aggregate for (i) the granting of
options to purchase 1,569,229 shares of common stock at a price of $1.18 per
share, subject to the increase in the Company's authorized shares, as discussed
below, and (ii) payments of approximately $198,000 each quarter over a three-
year period beginning September 1, 2001. The quarterly payments under these
settlement agreements are suspended at any time in which a default under the
Company's credit facility has occurred and is continuing. Effective with the
closing of the Sun transaction, the Company's former chief executive officer
entered into a new one-year employment agreement to serve as the Company's
president, the chief financial officer signed a new one-year employment
agreement, and the employment of the Company's executive vice presidents was
terminated. As part of the settlement agreements, the Company obtained covenants
not to compete through July 23, 2004. The accompanying Consolidated Statement of
Operations for the year ended September 30, 2001 includes a charge of $2,586,000
relating to these settlement agreements.
Prior to the Sun transaction, 7,388,315 shares of the Company's common stock
were outstanding, and another 1,523,434 shares were issuable upon exercise of
outstanding stock options. In connection with the Sun transaction and the
amendment of the credit facility, the Company issued SCH 8,489,932 shares and,
subject to an increase in the Company's authorized shares, granted the rights to
SCH and the other parties to obtain warrants and stock options for up to an
additional 8,766,428 shares. Because the aggregate number of shares (including
shares issuable upon exercise of options or warrants) to be issued in the
transaction exceeded the remaining available authorized shares at the time of
the Sun transaction, the Company was required to obtain subsequent shareholder
approval to increase its number of authorized shares to an amount sufficient to
provide for the additional shares contingently issuable as a result of the Sun
transaction. This shareholder approval was obtained at a special shareholders'
meeting held November 7, 2001 at which time the shareholders increased the
Company's authorized shares to 100 million.
As a result of the Sun transaction, the Company's board of directors was
expanded to nine members, and six individuals designated by SCH became members
of the board of directors. On July 25, 2001, an individual who was formerly the
president and a director of an affiliate of SCH was named chief executive
officer of the Company. In addition, the board of directors was expanded to ten
members and this individual became a member of the board of directors. On August
8, 2001 the Company's former chief executive officer and then-acting president
resigned from the board of directors and terminated his employment with the
Company.
3. Acquisition
On July 5, 2000 the Company acquired all of the outstanding ordinary shares and
74% of the convertible preference shares of Ring PLC ("Ring"). Ring is a leading
supplier of lighting, automotive aftermarket products and industrial consumables
in the United Kingdom. The acquisition, recorded under the purchase method of
accounting, included the purchase of 39.6 million ordinary shares at 50 pence
per share (approximately U.S. $30.1 million), 7 million convertible preference
shares at 20 pence per share
Page 39
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
3. Acquisition (continued)
(approximately U.S. $2.1 million) plus acquisition costs, resulted in a total
purchase price of U.S. $33.8 million. A portion of the purchase price was
allocated to assets acquired and liabilities assumed based on estimated fair
market value at the date of acquisition. The excess of the purchase price over
the fair market value of Ring's tangible assets was $21.3 million, which was
allocated to goodwill. The goodwill is being amortized over 20 years on a
straight-line basis. During 2001 the Company reduced this goodwill by $749,000
reflecting the favorable settlement of tax liabilities.
4. Inventories
Inventories consisted of the following:
September 30,
--------------------
2001 2000
------- -------
(In thousands)
Raw materials $ 2,869 $ 6,700
Work-in-progress 892 1,159
Finished goods 33,664 44,921
------- -------
$37,425 $52,780
======= =======
Inventory allowances amounted to $6.8 million and $2.0 million at September 30,
2001 and 2000, respectively.
5. Property and Equipment
Property and equipment and related depreciable lives were as follows:
September 30,
------------------- Depreciable
2001 2000 lives
------- ------- -------------
(In thousands)
Land $ 1,707 $ 1,707 --
Land use rights 2,578 1,898 47 years
Buildings and improvements 19,850 15,615 5 to 30 years
Leasehold improvements 2,223 2,544 lease terms
Furniture and office equipment 1,536 1,477 3 to 7 years
Computer software and equipment 5,464 4,912 2 to 5 years
Machinery, molds and equipment 15,691 14,879 3 to 15 years
Vehicles 2,810 2,681 4 to 5 years
Construction in progress 168 2,168 --
Other assets 156 179 2 years
------- -------
52,183 48,060
Less accumulated depreciation 21,956 18,128
------- -------
$30,227 $29,932
======= =======
Depreciation expense (including the amortization expense of assets under capital
leases) for the years ended September 2001, 2000 and 1999 was approximately
$4,914,000, $4,130,000 and $4,297,000, respectively.
Page 40
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
6. Revolving Credit and Term Loan Facilities
The Company entered into a credit facility for approximately $75 million with a
bank syndication group to finance the acquisition of its U.K. subsidiary, Ring
Ltd., and repay and terminate its existing U.S. credit facility and Ring's U.K.
facility. This facility was subsequently amended on July 23, 2001 in connection
with a capital infusion to the Company (see Note 2). The facility consists of
two term loans amounting to $15 million and the Great British Pound (GBP)
equivalent of U.S. $15 million (GBP 10.2 million), respectively, and two
revolving facilities for loans, acceptances, and trade and stand-by letters of
credit for the Company's ongoing operations in the U.S. and the U.K. of $21.4
million and the GBP equivalent of U.S. $23.6 million, respectively. Amounts
outstanding under the revolving facilities are limited under a borrowing base
defined as percentages of the combined accounts receivable and inventory
balances for the U.S. and U.K. Obligations under the facility are secured by
substantially all of the Company's U.S. and U.K. assets, including 100% of the
common stock of the Company's U.S. subsidiaries and 65% of the stock of the
Company's Canadian and first tier United Kingdom and Hong Kong subsidiaries. The
credit facility prohibits the payment of cash dividends or other distributions
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. The
Company pays a quarterly commitment fee of .50% per annum based on the unused
portion of the revolving facilities. Borrowings under the facility bear
interest, payable monthly at the Company's option of either the prime rate plus
an applicable margin or the LIBOR rate plus an applicable margin. The effective
rate on this facility was 8.1% at September 30, 2001. Under the amended
facility, the Company is required to meet minimum levels of adjusted quarterly
earnings beginning with the quarter ended September 30, 2001 and revised
quarterly debt to adjusted earnings and fixed charge ratios beginning with the
quarter ending December 31, 2002. Annual capital expenditures are limited under
the amendment to $3.75 million. The term loans are repayable in installments
aggregating approximately (i) $200,000 on each of December 31, 2001, March 31,
2002, June 30, 2002 and September 30, 2002; (ii) $750,000 on each of December
31, 2002, March 31, 2003, June 30, 2003, and September 30, 2003, and; (iii)
$20,497,000 on December 31, 2003. The revolving loans under the facility mature
December 31, 2003. The bank syndication group's fee for the July 23, 2001
amendment consisted of warrants, valued at $191,000, to purchase 354,136 shares
of the Company's common stock at a price of $.01 per share.
Proceeds from the $75 million credit facility were used in part to fund the
Company's acquisition of Ring, a British company, on July 5, 2000. Under English
law, a British company cannot lawfully provide financial assistance for the
purpose of the acquisition of its own shares (which would include using its cash
flows and other sources of funds to make payments due on debt used to fund its
acquisition) unless certain conditions are met. In addition, lenders providing
the financing for the acquisition cannot perfect their collateral interest in
the assets of the acquired British company unless such conditions are met. In
order to lawfully provide financial assistance, the acquired British company
must complete a "whitewash procedure" under English law. In essence, the
whitewash procedure requires the following: (1) every director of the acquired
British company must make a statutory declaration as to the solvency of the
acquired company and its ability to pay its debts for the next twelve months;
and (2) the statutory declarations must be accompanied by an independent
auditors' report stating that the auditors are not aware of anything to indicate
that the statutory declarations of the directors are not reasonable. In
addition, English law requires that the net assets of the acquired British
company are not reduced by the financial assistance or, to the extent that the
net assets are reduced, the reduction is funded out of distributable profits.
"Net assets" and "distributable profits" have prescribed meanings under the
statute governing the whitewash procedure. Failure to comply with the whitewash
procedure will mean the financial assistance is unlawful, which could result in
the acquired British company facing a fine and its directors and managers facing
a fine or imprisonment or both. In addition, the transaction constituting the
financial assistance together with any security given in contravention of the
financial assistance rules, may be held by English courts to be void and
unenforceable. The financial assistance rules apply to any subsidiaries of the
acquired company which are also involved in providing financial assistance.
Until the whitewash procedure is completed, cash flows from Ring cannot be used
to repay the Company's term loans and cash payments by Ring to other Company
subsidiaries are limited to trade transactions in the normal course of business.
The July 23, 2001 amendment to the $75 million credit facility eliminated (as an
event of default) a previous requirement of the credit facility that the Company
complete the whitewash procedure. However, if the whitewash procedure is not
completed by December 31, 2001, 50 basis points will be added to the facility's
effective interest rate. The Company does not expect to complete the whitewash
procedure by December 31, 2001. At September 30, 2001 $32.3 million in net
assets of Ring were restricted under the credit facility and U.K. laws, and
could not be transferred to the Company.
The Company was in compliance with the financial covenants of its $75 million
credit facility for the quarter ended September 30, 2001. Based upon its sales
results for October 2001 and November 2001, its current assessment of market
conditions for its business, and its projections for the remainder of its 2002
fiscal year, the Company expects to be in compliance with the credit facility's
financial covenants for the December 31, 2001 and subsequent quarters. The
Company is dependent upon borrowings under the revolving loans of its $75
million credit facility to fund its operations. Should the Company be unable to
comply with
Page 41
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
6. Revolving Credit and Term Loan Facilities (continued)
the terms and financial covenants of its $75 million credit facility, it would
be required to obtain a modification to the facility or another source of
financing to operate. There can be no assurances that market conditions will not
deteriorate in the future, or that the Company will be able to achieve its
projected results for 2002.
Ring has an arrangement with a U.K. bank which is secured by standby letters of
credit issued under the U.K. revolving credit facility. The arrangement provides
for borrowings, trade letters of credit, bonds and foreign currency forward
contracts and transactions. Borrowings, trade letters of credit, bonds and
foreign currency forward contracts outstanding under this arrangement amounted
to $7.1 million, $22,000, $199,000 and $5.7 million, respectively, at September
30, 2001.
As of September 30, 2001 Catalina Canada had a credit facility with a Canadian
bank which provided 5.5 million Canadian dollars or U.S. equivalent
(approximately U.S. $3.5 million) in revolving demand credit. Canadian dollar
advances bore interest at the Canadian prime rate plus .5% (5.75% at September
30, 2001) and U.S. dollar advances bore interest at the U.S. base rate of the
bank (6.5% at September 30, 2001). In December 2001 Catalina Canada repaid this
credit facility upon the closing of a new credit facility with a different
lender. The new facility provides U.S. dollar and Canadian dollar revolving
credit loans of up to 7 million Canadian dollars in the aggregate and matures
December 2004. Borrowings in Canadian dollars bear interest at the Canadian
prime rate plus 1.5% while borrowings in U.S. dollars bear interest at the rate
of the U.S. prime rate plus 0.5%. Borrowings under the facility are limited to a
borrowing base calculated from receivables and inventory. The credit facility is
secured by substantially all of the assets of Catalina Canada. The facility
limits the payment of dividends, advances or loans from Catalina Canada to
Catalina Lighting, Inc. to $500,000 annually; however, no such amounts may be
transferred if Catalina Canada does not have sufficient excess borrowing
availability under the facility's borrowing base. The facility contains a
financial covenant requiring Catalina Canada to maintain a minimum net worth. At
September 30, 2001, $2.7 million in net assets of Catalina Canada would have
been restricted under the new credit facility and could not have been
transferred to the Company.
Go-Gro, the Company's Hong Kong subsidiary, has a 60 million Hong Kong dollars
(approximately U.S. $7.7 million) facility with a Hong Kong bank. The facility
provides limited 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. The facility is
secured by Go-Gro's assets and a guarantee issued by the Company and requires
Go-Gro to maintain a minimum level of equity. This agreement prohibits the
payment of dividends without the consent of the bank and limits the total amount
of trade receivables, loans or advances from Go-Gro to its parent and
affiliates. At September 30, 2001, $20.8 million in net assets of Go-Gro were
restricted under the agreement and could not be transferred to the Company. This
facility is repayable upon demand and is subject to an annual review by the
bank. At September 30, 2001, Go-Gro had used $1.8 million of this line for
letters of credit. As a result of the Company's present financial situation, the
Hong Kong bank is requiring Go-Gro to maintain additional collateral in the form
of cash deposits as security on this facility. Such deposits amounted to
$686,000 at September 30, 2001, which are included in restricted cash
equivalents in the accompanying Consolidated Balance Sheet.
Page 42
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
The Company's availability under its revolving credit facilities consisted of
the following (in thousands):
September 30, 2001
---------------------
U.S./U.K. Canadian
Facility Facility
---------------------
Total lines of credit $ 45,000 $ 3,483
Less:
Borrowings (14,800) (1,566)
Stand-by letters of credit (10,459)
Trade letters of credit (1,442)
Amount unavailable under borrowing base (11,452) (863)
---------------------
Amounts available $ 6,847 $ 1,054
=====================
6. Revolving Credit and Term Loan Facilities (continued)
The weighted average interest rate on the current portion of revolving credit
facilities was 10.0% and 9.16% at September 30, 2001 and 2000, respectively, and
was 8.30% and 9.15% on the current portion of term loans at September 30, 2001
and 2000, respectively.
7. Bonds Payable
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, aggregating $900,000 per year through 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 (3.05% at September 30, 2001) 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 a
$5.2 million direct pay letter of credit which is not part of the Company's $75
million credit facility. This direct pay letter of credit provides that any
default under any other agreement involving a material borrowing or guarantee
constitutes a default under the direct pay letter of credit. The outstanding
balance of these bonds was $5.1 million and $6.0 million, at September 30, 2001
and 2000, respectively. 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 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 aggregate maturities of bonds payable at September 30, 2001, are as follows
(in thousands):
2002 $ 900
2003 600
2004 600
2005 500
2006 500
Thereafter 2,000
------
$5,100
======
8. Subordinated Notes
On July 23, 2001 the Company obtained $11.8 million in additional funding from
the issuance of 8,489,932 shares of common stock, $8.8 million in subordinated
notes and warrants exercisable immediately upon receipt at $.01 per warrant to
purchase an additional 5,557,474 shares of the Company's common stock (see Note
2). The subordinated notes are due in full on July 23, 2006 and these notes bear
interest at 12%, compounded quarterly. Interest on the notes is payable
quarterly commencing March 31, 2003. Interest not paid in cash is added to the
principal of the notes. The notes are prepayable subject to a premium equal to
5% of the note principal. The holders of the subordinated notes are also
entitled to additional warrants to purchase common shares at $.01 per share for
the quarters during which interest on the notes is not paid in cash. Interest
was not paid on those notes for the period July 23, 2001 to September 30, 2001,
for which the note holders received additional warrants for a total of 128,400
shares of common stock. The Company would subsequently issue additional warrants
for 907,189 shares of common stock if interest payments do not commence until
March 31, 2003.
The amount reflected for the subordinated notes in the accompanying September
30, 2001 Consolidated Balance Sheet consisted of the following (in thousands):
Page 43
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
8. Subordinated Notes (continued)
Original principal balance $ 8,800
Additions to principal for interest
not paid in cash 199
Unamortized discount for
warrants issued (2,889)
-------
$ 6,110
=======
On June 30, 2000, the Company prepaid $4.3 million of the $5.1 million then
outstanding balance on 8% convertible subordinated notes and the remaining
$733,000 was prepaid in July 2000. The $5.1 million balance was due in two equal
installments on March 15, 2001 and March 15, 2002. The Company had previously
repaid $2.5 million of these notes in March 2000.
9. Other Long-Term Debt
Other long-term debt consisted of the following:
September 30,
------------------
2001 2000
------- -------
(In thousands)
Mortgage note payable monthly through 2004 based on a
15 year amortization schedule with a balloon payment
in 2004, bearing interest at 8%, secured by land and
building with a net book value of $1.3 million at
September 30, 2001 $ 828 $ 896
Borrowings under a leasing facility with a Hong Kong
financial institution to finance the purchase of
equipment for the China facility; payable monthly,
bearing interest at the Hong Kong Interbank Borrowing
Rate plus 2.5% (5.81% at September 30, 2001), maturing
in 2002 and secured by a guarantee issued by the
Company and warehouse equipment with a net book value
of $62,000 at September 30, 2001 99 277
Borrowings under a leasing facility with a U.S.
financial institution to finance the purchase of U.S.
assets; payable monthly, maturing at various dates
through 2003, bearing interest at 8.75%, and secured
by office, computer and warehouse equipment with a net
book value of $90,000 at September 30, 2001 98 301
Borrowings with a U.K. financial institution to
finance the purchase of vehicles and equipment,
payable monthly, maturing at various dates through
2003, bearing interest at the institution's base rate
plus 1.25%, adjusted monthly (6.0% at September 30,
2001), and secured by vehicles and equipment with a
net book value of $787,000 at September 30, 2001 646 1,214
Borrowings which financed the purchase of computer
equipment in the U.S., maturing in 2003, bearing
interest at rates ranging from 8.81% to 10.81% and
secured by computer equipment with a net book value of
$228,000 at September 30, 2001 246 399
Other 46 40
------- -------
Subtotal 1,963 3,127
Less current maturities (878) (1,339)
------- -------
$ 1,085 $ 1,788
======= =======
Page 44
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
9. Other Long-Term Debt (continued)
The aggregate maturities of other long-term debt at September 30, 2001 are as
follows (in thousands):
2002 $ 878
2003 388
2004 697
------
$1,963
======
10. Income Taxes
The following table summarizes the differences between the Company's effective
income tax rate and the statutory federal income tax rate:
Years Ended September 30,
----------------------------
2001 2000 1999
---- ---- ----
Statutory federal income tax rate (34.0)% 34.0% 34.0%
Increase (decrease) resulting from:
State income taxes, net of federal
income tax effect 0.4 3.4 2.8
Foreign tax rate differential (0.4) (18.7) (6.3)
Goodwill amortization 2.7 6.2 1.6
Provision for IRC 382 26.8 -- --
Other 2.5 2.5 (0.9)
---- ---- ----
(2.0)% 27.4% 31.2%
==== ==== ====
Page 45
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
10. Income Taxes (continued)
The income tax provision (benefit) consisted of the following:
Current Deferred Total
------- -------- -------
(In thousands)
Year ended September 30, 2001
Federal $ 2 $ (186) $ (184)
State 20 (88) (68)
Foreign 265 (396) (131)
------- ------- -------
$ 287 $ (670) $ (383)
======= ======= =======
Year ended September 30, 2000
Federal $ 279 $ (377) $ (98)
State 64 70 134
Foreign 1,194 (156) 1,038
------- ------- -------
$ 1,537 $ (463) $ 1,074
======= ======= =======
Year ended September 30, 1999
Federal $ (95) $ 1,788 $ 1,693
State 80 165 245
Foreign 1,002 (2) 1,000
------- ------- -------
$ 987 $ 1,951 $ 2,938
======= ======= =======
The Sun transaction constituted a change of ownership of the Company as defined
under Internal Revenue Code Section 382 (IRC 382) which can limit the
utilization of loss carryforwards and other tax return deductions existing at
the time the change in ownership occurs. The deferred tax benefit for 2001 was
reduced by a provision of approximately $5.0 million for the estimated impact of
IRC 382. The deferred tax benefit for the years ended September 30, 2001 and
2000 includes $3,423,000 and $962,000, respectively, for the benefits of loss
carryforwards.
Income (loss) before income taxes by source consisted of the following:
Years Ended September 30,
-----------------------------------------
2001 2000 1999
-------- ------- ------
(In thousands)
United States $(16,662) $ (733) $5,046
Foreign (2,068) 4,652 4,381
-------- ------- ------
$(18,730) $ 3,919 $9,427
======== ======= ======
Page 46
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
10. Income Taxes (continued)
The tax effects of each type of temporary difference that gave rise to the
Company's current net deferred tax asset (included on other current assets) are
as follows:
September 30,
--------------------
2001 2000
------- -------
(In thousands)
Accounts receivable allowances $ 1,371 $ 916
Prepaid expenses (245) (150)
Allowances and capitalized costs for inventory 2,015 856
Accrued expenses 428 379
Restructuring charge 86 175
Other 49 14
Valuation allowance (2,158) --
------- -------
$ 1,546 $ 2,190
======= =======
The tax effects of each type of temporary difference and carryforward that gave
rise to the Company's net long term deferred tax asset (included in other long
term assets) are as follows:
September 30,
-----------------------
2001 2000
-------- -------
(In thousands)
Pension obligation $ 1,420 $ 1,409
Executive settlements 483 --
Depreciation:
U.S. assets (532) (572)
Foreign assets 301 195
U.S. loss and other U.S. carryforwards 4,218 1,169
Foreign tax loss carryforwards 2,094 1,510
Foreign capital loss carryforwards 8,370 8,292
Other 295 151
Valuation allowance (13,068) (9,880)
-------- -------
$ 3,581 $ 2,274
======== =======
Page 47
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
10. Income Taxes (continued)
At September 30, 2001, the Company had $12.0 million in U.S. loss carryforwards
for federal income tax return purposes. Utilization of these loss carryforwards,
however, is expected to be limited under IRC 382. At September 30, 2001, foreign
operating and capital loss carryforwards were $8.0 million and $27.9 million,
respectively. The U.S. loss can be carried forward for up to 20 years and the
foreign losses must be utilized within the carryforward periods of the
international jurisdictions. A valuation allowance has been provided for the
majority of the foreign operating and capital tax loss carryforwards. The
foreign operating and capital losses expire as follows (in thousands):
Year of Operating Capital
expiration losses losses
---------- ---------- ----------
2005 161
2006 271
2007 419
2008 596
2009 786
2010 537
2011 715
Indefinite 4,520 27,901
---------- ----------
$ 8,005 $ 27,901
========== ==========
The Company has not provided for possible U.S. income taxes on $27.3 million in
undistributed earnings of foreign subsidiaries that are considered to be
reinvested indefinitely. Calculation of the unrecognized deferred tax liability
related to these foreign earnings is not practicable.
11. Minority Interest
Ring has outstanding 9.5 million convertible preference shares of which 2.5
million shares were held by third parties and the remaining 7 million shares
were owned by the Company. The holders of the convertible preference shares are
entitled to receive in priority to the equity stockholders a fixed cumulative
dividend of 19.2% per annum until January 1, 2004. The shares are convertible at
the option of the holder into fully paid ordinary shares on the basis of two
ordinary shares for every five preference shares. Any outstanding preference
shares on January 1, 2004 automatically will convert into fully paid ordinary
shares on the same basis.
12. Pension Benefits
Ring has a defined benefit pension plan (the "plan") which covers 27 current
employees and approximately 750 other members formerly associated with Ring. The
plan is administered externally and the assets are held separately by
professional investment managers. The plan is funded by contributions at rates
recommended by an actuary. The components of net pension cost for the year ended
September 30, 2001 and the period from the date of acquisition of Ring (July 5,
2000) to September 30, 2000 and for the year ended September 30, 2001 were as
follows (in thousands):
Year Ended July 5, 2000 to
September 30, 2001 September 30, 2000
------------------ ------------------
Service cost $ 246 $ 71
Interest cost 1,020 248
Expected return on plan assets (1,030) (250)
------------------ ------------------
$ 236 $ 69
================== ==================
Page 48
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
12. Pension Benefits (continued)
The reconciliation of the beginning and ending balances of the benefit
obligation and fair value of plan assets, and the funded status of the plan are
as follows (in thousands):
Year Ended July 5, 2000 to
September 30, 2001 September 30, 2000
------------------ ------------------
Change in benefit obligation:
Benefit obligation at beginning of period $ 20,978 $ 21,256
Service cost 246 71
Interest cost 1,020 248
Benefits paid (614) (126)
Participants' contributions 43 --
Benefit obligation (gain) loss 1,539 --
Foreign currency (gain) loss 3 (471)
------------------ ------------------
Benefit obligation at end of period $ 23,215 $ 20,978
================== ==================
Year Ended July 5, 2000 to
September 30, 2001 September 30, 2000
------------------ ------------------
Change in plan assets:
Fair value of plan assets at beginning of period $ 16,140 $ 16,566
Actual return on plan assets (1,190) (19)
Employer contributions 389 86
Benefits paid (614) (126)
Participants' contributions 43 --
Foreign currency loss (42) (367)
------------------ ------------------
Fair value of plan assets at end of period $ 14,726 $ 16,140
================== ==================
September 30,
----------------------------------------
2001 2000
------------------ ------------------
Funded status:
Funded status (liability) $ (8,489) $ (4,838)
Unrecognized actuarial loss 4,083 267
------------------ ------------------
Net liability recognized $ (4,406) $ (4,571)
================== ==================
Page 49
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
12. Pension Benefits (continued)
September 30,
-----------------
2001 2000
------ ------
Accrued benefit liability recognized in the Company's
balance sheet $4,406 $4,571
====== ======
The weighted average assumptions used in the actuarial computations that derived
the above amounts were as follows:
2001 2000
----- ----
Discount rate 5.0% 5.0%
Expected return on plan assets 6.25% 6.5%
Average rate of compensation increase 4.0% 5.0%
Rate of pension benefit increase 3.0% 3.0%
The Company is reviewing the plan and may in the future begin the process of
terminating its liability under the plan. It is anticipated that a termination
will require payment of a lump sum equal to the "Minimum Funding Requirement
("MFR") shortfall. The most recent estimate as of September 2001 placed the MFR
shortfall at approximately $2.2 million. The U.K. government announced in its
March 2001 budget that it intends to abolish the MFR and to replace it with
funding standards individually tailored to the circumstances of plans and
employers. Based on current information, it appears that this change is not
likely to occur before April 2003, and should Ring not terminate its U.K.
pension plan prior to that date, the cost to terminate Ring's U.K. plan under
the new rules is likely to be much greater than the current $2.2 million deficit
under the MFR method.
Page 50
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
13. Earnings (Loss) Per Share
The computation of basic and diluted earnings (loss) per common share (EPS) is
as follows (in thousands except per share data):
Years Ended September 30,
------------------------------
2001 2000 1999
-------- ------- -------
Basic EPS
Numerator:
Net income (loss) attributable to common stockholders $(18,347) $ 2,845 $ 6,489
======== ======= =======
Denominator:
Weighted average shares outstanding for the year 9,622 7,607 7,252
Weighted average of shares repurchased
for the year (642) (533) (197)
-------- ------- -------
Weighted average shares used for basic EPS 8,980 7,074 7,055
======== ======= =======
Basic EPS $ (2.04) $ 0.40 $ 0.92
======== ======= =======
Diluted EPS
Numerator:
Net income (loss) $(18,347) $ 2,845 $ 6,489
Interest on convertible subordinated notes, net of
income taxes -- 250 424
-------- ------- -------
Net income (loss) available to common stockholders $(18,347) $ 3,095 $ 6,913
======== ======= =======
Denominator:
Weighted average shares outstanding for the year 9,622 7,607 7,252
Shares upon conversion of convertible subordinated notes -- 748 1,138
Effect of stock options* -- 597 495
Effect of warrants** -- -- --
Weighted average of shares repurchased
for the year (642) (533) (197)
-------- ------- -------
Weighted average shares used for diluted EPS 8,980 8,419 8,688
======== ======= =======
Diluted EPS $ (2.04) $ 0.37 $ 0.80
======== ======= =======
* The weighted average shares issuable upon the exercise of stock options not
included in the calculation because such options were antidilutive were
1,772,000, 228,000, and 540,000 for 2001, 2000 and 1999, respectively.
** Weighted average shares issuable upon the exercise of warrants which were not
included in the calculation because they were antidilutive were 1,117,537 for
2001.
Page 51
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
14. Common Stock, Stock Options, Stock Warrants and Stock Rights
Common Stock
The Company's board of directors has authorized the repurchase of up to $2.7
million of common shares of the Company from time to time in the open market or
in negotiated purchases. Through September 30, 2001, the Company had repurchased
641,932 shares for $2.5 million.
In November 2001, the Company's stockholders approved an increase in the number
of authorized shares of common stock from 20 million to 100 million which has
been reflected retroactively in the accompanying Consolidated Balance Sheet.
Stock Options Under Plans
In August 1987, the Company adopted the Stock Option/Stock Appreciation Rights
Plan ("Employee Plan"), which provided for the granting of options to officers
and other key employees. Under the Employee Plan, the Company and its
stockholders authorized the granting of options for up to 1,750,000 shares of
common stock to be granted as either incentive or nonstatutory options at a
price of 100% of the fair market value of the shares at the date of grant, 110%
in the case of a holder of more than 10% of the Company's stock. Options
generally vested ratably over a three-year period commencing on October 1
following the date of grant and are exercisable with cash or previously acquired
common stock of the Company, no later than 10 years from the grant date. With
the adoption in November 2001 of the Stock Incentive Plan described below, no
further options will be granted under the Employee Plan.
In March 1989, the Company adopted the Non-Employee Director Stock Option Plan
("Director Plan"), which provided for the granting of options for up to 50,000
shares of common stock to non-employee directors. Under the Director Plan,
options to purchase 2,000 common shares were granted annually through 1997 to
non-employee directors automatically upon their election to the Board of
Directors which vest upon the serving of a one-year term. The exercise price is
the fair market value of the common stock on the date the options are granted.
These options are generally exercisable no later than ten years from the date of
grant. With the adoption in November 2001 of the Stock Incentive Plan described
below, no further options will be granted under the Director Plan.
In March 2000, the Company's Board of Directors approved a Stock Option Plan
("Broad Based Plan") which provided for the granting of options to purchase
325,000 shares of common stock at a purchase price equal to the fair market
value on the date of grant. The exercise price is the fair market value of the
common stock on the date the options are granted. One third of the options
becomes exercisable one year after the date of the grant with one third vesting
during each of the following two years. These options are generally exercisable
no later than ten years from the date of grant. With the adoption in November
2001 of the Stock Incentive Plan described below, no further options will be
granted under the Broad Based Plan.
In November 2001, the Company adopted the Stock Incentive Plan ("Incentive
Plan") which provides for the granting of options to directors, officers,
employees, consultants and advisors of the Company and subsidiaries. The number
of shares of common stock that may be issued pursuant to the Incentive Plan is
2,250,000 shares, subject to adjustment as provided in the Incentive Plan. Under
the Incentive Plan, participants may receive Incentive Stock Options ("ISO") or
Nonqualified Stock Options at a price determined by the Board of Directors,
provided, however, that such price shall not, in the case of an ISO, be less
than 100% of the fair market value of the shares on the date of grant. The
option term shall not exceed 10 years from the date of grant. In November 2001
the Company granted options to purchase 708,000 shares to directors and officers
at prices ranging from $0.38 to $5.00, including options to purchase 150,000
shares at $1.18 per share to the Company's chief financial officer in accordance
with his employment agreement dated July 23, 2001.
In November 2001, the Company adopted the Management Settlement Stock Incentive
Plan (the "Settlement Plan") which provides for the settlement of the Company's
obligations to certain of the Company's former and current employees under
employment agreements previously entered into between the Company and such
employees (see Note 2).
Page 52
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
14. Common Stock, Stock Options, Stock Warrants and Stock Rights (continued)
Transactions and related information for each plan are as follows:
Employee Plan: Number of Weighted Average
Options Price Per Share
---------- ----------------
Options outstanding at September 30, 1998 1,289,648 $3.99 **
Options granted 91,000 $3.28
Options exercised (185,898) $2.20
Options terminated (63,848) $4.10
---------- ----------------
Options outstanding at September 30, 1999 1,130,902 $2.81
Options exercised (364,767) $2.27
Options terminated (6,201) $3.93
---------- ----------------
Options outstanding at September 30, 2000 759,934 $3.05
Options terminated (582,500) $3.17
---------- ----------------
Options outstanding at September 30, 2001 177,434 $2.66
========== ================
Options exercisable at September 30, 2001 167,931 $2.59
========== ================
** On December 11, 1998, the exercise price of 784,733 outstanding options was
restated to $2.4375, the market value of the Company's stock on such date.
Director Plan: Number of Weighted Average
Options Price Per Share
---------- ----------------
Options outstanding at September 30, 1998 46,000 $6.59
Options terminated (2,000) $12.13
---------- ----------------
Options outstanding at September 30, 1999 44,000 $6.34
Options terminated (20,000) $6.25
---------- ----------------
Options outstanding at September 30, 2000 24,000 $6.42
Options terminated (20,000) $6.70
---------- ----------------
Options outstanding at September 30, 2001 4,000 $5.00
========== ================
Options exercisable at September 30, 2001 4,000 $5.00
========== ================
Page 53
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
14. Common Stock, Stock Options, Stock Warrants and Stock Rights (continued)
Broad Based Plan: Number of Weighted Average
Options Price Per Share
---------- ----------------
Options outstanding at September 30, 1999 -- --
Options granted 246,000 $3.94
---------- ----------------
Options outstanding at September 30, 2000 246,000 $3.94
Options terminated (77,000) $3.94
---------- ----------------
Options outstanding at September 30, 2001 169,000 $3.94
========== ================
Options exercisable at September 30, 2001 56,325 $3.94
========== ================
Other Stock Options
On October 1, 1991, the Company issued options to purchase 20,000 shares at
$3.38 to an employee. On December 1, 1998 the exercise price of these options
was restated to $2.4375, the market value of the Company's stock on such date.
The options were fully exercisable at September 30, 2001 and expired on October
1, 2001.
On January 3, 1992, the Company issued to certain of its executives and
non-employee directors options to purchase 275,000 shares at $4.88 per share. On
December 11, 1998, the exercise price of 150,000 of these options was restated
to $2.4375, the market value of the Company's stock on such date. As of
September 30, 2001, 75,000 of these options remained unexercised and were fully
exercisable. These options expire January 3, 2002.
On December 1, 1994, the Company granted to a new employee options to purchase
10,000 shares of common stock at $6.75 per share. On December 11, 1998, the
exercise price of these options was restated to $2.4375, the market value of the
Company's stock on such date. The options were fully exercisable at September
30, 2001 and expire on December 1, 2004.
On March 4, 1996, the Company issued options to purchase 10,000 shares at $5.38
to a consultant. The options were fully exercisable at September 30, 2001 and
expire on March 4, 2006.
On August 27, 1996, the Company issued to one of its executives options to
purchase 5,000 shares of common stock at $3.75 per share. On December 11, 1998,
the exercise price of these options was restated to $2.4375, the market value of
the Company's stock on such date. The options were fully exercisable at
September 30, 2001 and expire on August 26, 2006.
On March 12, 1997, the Company issued options to purchase 20,000 shares of
common stock at $3.75 per share to new members of the Company's Board of
Directors. The options were fully exercisable at September 30, 2001 and expire
on March 11, 2007.
On September 1, 1999, the Company granted to a new employee options to purchase
5,000 shares of common stock at $4.94 per share. The options expire 10 years
from the grant date and one-third became exercisable one year after the date of
grant with one-third vesting during each of the following two years. At
September 30, 2001, 3,333 options were exercisable.
During fiscal 2000, the Company issued to certain new employees options to
purchase 214,000 shares at prices ranging from $4.06 to $4.38 per share, the
market value of the Company's stock on grant date. The options expire 10 years
from the grant date. One
Page 54
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
14. Common Stock, Stock Options, Stock Warrants and Stock Rights (continued)
third of the options became exercisable one year after the date of the grant
with one third vesting during each of the following two years. At September 30,
2001, 71,331 options were exercisable.
During fiscal 2001, the Company issued to certain employees options to purchase
25,000 shares at prices ranging from $1.89 to $2.75 per share, the market value
of the Company's stock on grant date. The options expire 10 years from the grant
date. One third of the options becomes exercisable one year after the date of
the grant with one third vesting during each of the following two years.
Transactions and related information relating to other stock options are
summarized as follows:
Number of Weighted Average
Options Price Per Share
---------- ----------------
Options outstanding at September 30, 1998 638,500 $3.81 **
Options granted 11,000 $3.45
Options terminated (24,500) $3.00
---------- ----------------
Options outstanding at September 30, 1999 625,000 $2.84
Options granted 214,000 $4.36
Options exercised (252,000) $1.93
---------- ----------------
Options outstanding at September 30, 2000 587,000 $3.79
Options granted 26,000 $2.06
Options terminated (229,000) $3.00
---------- ----------------
Options outstanding at September 30, 2001 384,000 $4.14
========== ================
Options exercisable at September 30, 2001 216,330 $4.22
========== ================
** On December 11, 1998, the exercise price of 290,000 outstanding options was
restated to $2.4375, the market value of the Company's stock on such date.
The following table summarizes information about all stock options outstanding
(including options under the Sun transaction-See Note 2) at September 30, 2001:
Options Outstanding Options Exercisable
----------------------------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Range of Exercise Options Remaining Exercise Options Exercise
Prices Outstanding Contractual Life Price Exercisable Price
----------------- ----------- ---------------- -------- ----------- --------
$1.18 to $1.89 1,739,229 9.8 years $1.19 1,569,229 $1.18
$2.12 to $2.75 188,934 3.2 years $2.42 185,600 $2.42
$3.75 to $4.88 508,500 7.3 years $4.25 243,653 $4.34
$4.94 to $6.25 17,000 5.5 years $5.35 15,333 $5.40
----------------- ----------- ---------------- -------- ----------- --------
$1.18 to $6.25 2,453,663 8.7 years $1.95 2,013,815 $1.71
================= =========== ================ ======== =========== ========
For purposes of the following proforma disclosures, the weighted-average fair
value of options has been estimated on the date of grant or repricing using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants
Page 55
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
14. Common Stock, Stock Options, Stock Warrants and Stock Rights (continued)
in 2001, 2000 and 1999, respectively: no dividend yield; expected volatility of
75%, 62% and 62%, risk-free interest rate of 3.7%, 6.4% and 5.2% and an expected
term for options granted of five years for 2001, six and a half years for 2000
and 1999 and two years for options repriced during 1999. The weighted average
fair value at date of grant of options granted during 2001, 2000, and 1999 was
$0.57, $2.36 and $1.97 ($.70 for options repriced) per option, respectively. Had
the compensation cost been determined based on the fair value at the grant or
repricing date, the Company's net income (loss) and basic and diluted earnings
per share would have been reduced to the proforma amounts indicated below (in
thousands, except per share amounts):
Years Ended September 30,
---------------------------------------
2001 2000 1999
---------- ---------- ----------
Net income (loss) - as reported $ (18,347) $ 2,845 $ 6,489
Net income (loss) - proforma $ (18,636) $ 2,685 $ 5,764
Basic earnings (loss) per share - as reported $ (2.04) $ 0.40 $ 0.92
Basic earnings (loss) per share - proforma $ (2.08) $ 0.38 $ 0.82
Diluted earnings (loss) per share - as reported $ (2.04) $ 0.37 $ 0.80
Diluted earnings (loss) per share - proforma $ (2.08) $ 0.35 $ 0.71
Stock Warrants
In connection with the Sun transaction on July 23, 2001, the Company issued
warrants to purchase 5,557,474 common shares exercisable immediately upon
receipt at $.01 per share. Also in connection with the Sun transaction, the
Company issued $8.8 million in secured subordinated notes bearing interest at
12%, compounded quarterly. Interest on the notes is payable quarterly in cash
commencing March 31, 2003. Interest and principal on the notes are prepayable
subject to a premium equal to an additional 5% of the principal amount of the
note. The noteholders are also entitled to additional warrants to purchase
common shares at $.01 pre share for the quarters during which interest on the
notes is not paid in cash. The Company did not pay in cash the interest due for
the period from July 23, 2001 to September 30, 2001, which resulted in warrants
to purchase an additional 128,400 common shares at $.01 per share. The Company
would subsequently issue additional warrants for 907,189 shares of common stock
if cash interest payments do not commence until March 31, 2003.
The Company issued warrants to purchase 354,136 common shares at $.01 per share
to its bank syndicate group in connection with the July 23, 2001 amendment of
its $75 million credit facility.
Stock Rights
In November 2000, the Company's Board of Directors reauthorized its stockholder
rights plan, by adopting a plan similar to a pre-existing rights plan which
expired on November 20, 2000. Under the Company's new rights plan, a preferred
stock purchase right was distributed for each share of common stock outstanding
at the close of business on the November 30, 2000 record date and is issued in
connection with each share issued after such date. The rights were not initially
exercisable, but upon the occurrence of certain takeover-related events, the
holders of the rights (other than an adverse or acquiring person, or group
thereof), under certain circumstances, had the right to purchase additional
shares of Company stock (or, in some cases, stock of the acquiring entity) at a
discount to the then market price. The rights were redeemable by the Company at
any time, and would otherwise have expired on November 20, 2005. The thresholds
for triggering the rights plan was a person (as defined in the rights plan)
acquiring 21% of the outstanding stock of the Company or a declaration by the
Board of Directors that a person is an "adverse person" as defined in the rights
plan, and the exercise price of the rights was $17. The Company redeemed and
cancelled this stockholders' rights plan in connection with the Sun transaction.
Page 56
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
15. Commitments
The Company leases offices, warehouse facilities, equipment and vehicles under
non-cancelable operating leases that expire at various dates through 2019 with
the exception of certain U.K. land use rights which expire in 2073. Certain
leases provide for future rent adjustments based on changes in market rates or
increases in minimum lease payments based upon increases in annual real estate
taxes and insurance. Future minimum lease payments under non-cancelable
operating leases and minimum rentals to be received under non-cancelable
subleases as of September 30, 2001 by fiscal year, were as follows (in
thousands):
Minimum Rental Minimum
Payments Sublease Receipts Net
----------------- ----------------- ----------
2002 $ 2,495 $ 169 $ 2,326
2003 2,209 168 2,041
2004 1,871 151 1,720
2005 1,625 136 1,489
2006 1,590 136 1,454
Thereafter 17,518 324 17,194
----------------- ----------------- ----------
$ 27,308 $ 1,084 $ 26,224
================= ================= ==========
Total net rental expense for all operating leases amounted to approximately $3.2
million, $1.9 million and $1.5 million for the years ended September 2001, 2000
and 1999, respectively.
In September 2000 the Company's wholly-owned Hong Kong subsidiary, Go-Gro
Industries ("Go-Gro") deposited the purchase price of approximately $1 million
for its joint venture partner's interest in Go-Gro's Chinese cooperative joint
venture manufacturing subsidiary, Shenzhen Jiadianbao Electrical Products Co.,
Ltd. ("SJE"). This purchase was finalized in December 2000. During the quarter
ended March 31, 2001, SJE was converted under Chinese law from a cooperative
joint venture to a wholly owned foreign entity and its name changed to
Jiadianbao Electrical Products (Shenzhen) Co., Ltd. ("JES").
JES obtained non-transferable land use rights for the land on which its primary
manufacturing facilities were constructed under a Land Use Agreement dated April
11, 1995 between SJE and the Bureau of National Land Planning Bao-An Branch of
Shenzhen City. This agreement provides JES with the right to use this land until
January 18, 2042 and required SJE to construct approximately 500,000 square feet
of factory buildings and 211,000 square feet of dormitories and offices. This
construction has been completed.
In connection with the settlement with Go-Gro's former joint venture partner in
SJE, JES acquired the land use rights for a parcel of land adjoining its primary
manufacturing facilities. Under the separate land use agreement for this parcel,
JES has the right to use the land through March 19, 2051 and is obligated to
complete new construction on the land (estimated to cost approximately $1.3
million) by March 20, 2002. If this construction is not completed by that date
JES is subject to fines of up to $55,000, and if the construction is not
completed by March 20, 2004, the local municipal planning and state land bureau
may take back the land use rights for the parcel without compensation and
confiscate the structures and attachments.
On April 26, 1996, 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. Originally, subject to the minimum
sales conditions discussed below, the agreement terminated on September 30,
2002, with the Company having options to extend the agreement for two additional
five-year terms. The royalty payments are due quarterly and are based on a
percent of the value of the Company's net shipments of Westinghouse branded
products, subject to annual minimum net shipments. Either party had the right to
terminate the agreement if the Company did not meet the minimum net shipments of
$30 million for fiscal 2001 and $60 million for fiscal 2002. Net sales of
Westinghouse branded products amounted to $16.8 million and $29.0 million for
the years ended September 30, 2001 and 2000, respectively. In September 2001 the
Company and Westinghouse signed an amendment to the license agreement that
eliminates the minimum net shipments requirement but also eliminates the
Company's option to extend the license agreement upon the agreement's expiration
on September 30, 2002. Management does not believe that the loss of the
Westinghouse license will have a material adverse effect on its financial
condition or annual results of operations.
Page 57
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
15. Commitments (continued)
Ring has employment agreements with fifteen of its officers and key employees
which provide for notice periods in the case of termination varying from 6 to 36
months. Their total annual basic salary cost amounts to approximately U.S. $1.5
million. The agreements contain benefit packages including contributions to
Ring's pension plans ranging from 5% to 10% of salary. In addition, the
agreements contain post-termination restrictive covenants.
Pursuant to a reorganization of the Company's executive management structure, an
Executive Vice President left the Company in December 1999. The Company agreed
to settle its contractual employment obligation to this executive for a payment
of $788,000. The executive will continue to provide consulting services under a
three-year non-compete and consulting agreement for annual payments of $250,000
through December 2002.
In January 2000, the Company renewed a consulting agreement with a former
employee for a two-year period beginning April 1, 2000, for an annual fee of
$140,000, payable monthly.
Go-Gro has provided a financial guarantee of 4.8 million Hong Kong dollars (US
$615,000) relating to the credit facility of a joint venture.
16. Related Party Transactions
On July 23, 2001, the Company entered into a ten-year agreement with an
affiliate of the Company's majority stockholder to provide management services
to the Company at an annual fee of $500,000, payable quarterly. This management
services expense for the year ended September 30, 2001 amounted to $98,000.
The Company leases its Hong Kong office from a company owned by a stockholder of
the Company. The lease expires in 2004 but may be extended for an additional
year. Rent expense related to this lease was approximately $222,000, $255,000,
and $255,000 for the years ended September 30, 2001, 2000 and 1999,
respectively.
During the years ended September 30, 2001, 2000 and 1999, Go-Gro, a wholly-owned
subsidiary of the Company, purchased $1.9 million, $2.7 million and $1.7
million, respectively, in raw materials from an affiliate which is fifty percent
owned by the Company. Amounts due by Go-Gro to this affiliate were $282,000 and
$459,000 at September 30, 2001 and 2000, respectively.
During the years ended September 30, 2001 and 2000, Go-Gro purchased $2.1
million and $2.8 million, respectively, in raw materials from another affiliate
which is forty percent owned by the Company. Amounts due by Go-Gro to this
affiliate were $239,000 and $375,000 at September 30, 2001 and 2000,
respectively.
The Company leased a facility located in Massachusetts from an entity in which
an officer and a former officer had an ownership interest. The lease expired in
June 1999. Rent expense related to this lease was approximately $99,000 for the
year ended September 30, 1999.
Amounts receivable from two former Executive Vice Presidents of the Company
totaled $212,000 immediately prior to the Sun transaction. These amounts are
being repaid on a quarterly basis in the aggregate amount of $16,667 from the
proceeds due these former executives under the settlement and termination
Agreements negotiated as part of the Sun transaction. At September 30, 2001, the
remaining amounts due from these individuals totaled $194,000.
17. Segment Information
For internal management reporting purposes the Company operates three primary
business segments, which also correspond to the major geographic segments of the
Company's business: Catalina Industries (United States), Go-Gro Industries
(China) and Ring Limited (United Kingdom). The Company added the United Kingdom
as a primary business segment with the acquisition of Ring PLC on July 5, 2000.
Catalina Industries and Ring Limited are engaged in the importation and
distribution of lighting products. Go-Gro manufactures and procures products for
other Company subsidiaries. These operating segments generally follow the
management organizational structure of the Company. Net sales to external
customers by U.S. and U.K.-based operations are made primarily into the United
States and the United Kingdom, respectively. Net sales to external customers by
China-based operations are made primarily into Europe and net sales to external
customers other than sales made by the Company's three reportable
Page 58
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
17. Segment Information (continued)
operating segments are made primarily into Canada and to a lesser extent Mexico
and South America. Intersegment sales represent shipments of finished products
sold at prices determined by management. The Company evaluates the performance
of its operating segments and allocates resources to them based on net sales and
segment contribution. Segment contribution is defined as income (loss) before
Parent/holding company and certain administrative expenses, unusual items, tax
transfer pricing adjustments and income taxes. Prior years' data has been
restated to conform to the current year reportable operating segments
presentation. Information on operating segments and a reconciliation to income
(loss) before income taxes for the years ended September 2001, 2000 and 1999 are
as follows (in thousands):
Net Sales by Business Segment:
Years Ended September 30,
-----------------------------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------------- ----------------------------------- -----------------------------------
External External External
customers Intersegment Total customers Intersegment Total customers Intersegment Total
-------- ------------ --------- -------- ------------ --------- -------- ------------ ---------
United States $ 78,283 660 $ 78,943 $121,401 $ 821 $ 122,222 $133,749 $ 1,559 $ 135,308
China 24,804 83,867 108,671 26,983 114,373 141,356 19,523 117,422 136,945
United Kingdom 104,847 -- 104,847 24,529 -- 24,529 -- -- --
Other segments 26,852 346 27,198 29,717 197 29,914 23,289 517 23,806
Eliminations -- (84,873) (84,873) -- (115,391) (115,391) -- (119,498) (119,498)
----------------------------------- ----------------------------------- -----------------------------------
Total $234,786 -- $ 234,786 $202,630 $ -- $ 202,630 $176,561 $ -- $ 176,561
=================================== =================================== ===================================
Net Sales by Location of External Customers:
Years Ended September 30,
------------------------------------------
2001 2000 1999
------------------------------------------
United States $ 78,728 $121,558 $133,974
Canada 23,303 24,953 19,938
United Kingdom 102,285 29,436 --
Other 30,470 26,683 22,649
------------------------------------------
Net Sales $234,786 $202,630 $176,561
==========================================
Net Sales by Product Class:
Years Ended September 30,
--------------------------------------
2001 2000 1999
--------------------------------------
Lighting $194,184 $193,065 $176,561
Automotive after-market 29,761 6,821 --
Industrial consumables 10,841 2,744 --
--------------------------------------
$234,786 $202,630 $176,561
======================================
Page 59
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
17. Segment Information (continued)
Segment Contribution:
Years Ended September 30,
----------------------------------
2001 2000 1999
----------------------------------
United States $ (3,303) $ 5,290 $ 8,971
China 4,946 9,196 6,641
United Kingdom (5,672) (1,273) --
Other segments (1,721) 577 (463)
----------------------------------
Subtotal for segments (5,750) 13,790 15,149
Reversal of provision for litigation -- -- 2,728
Reversal of post judgment interest
related to litigation settlement -- -- 893
Executive settlements (2,586) (788) --
Parent/administrative expenses (10,394) (9,083) (9,343)
----------------------------------
Income (loss) before income taxes $(18,730) $ 3,919 $ 9,427
==================================
Interest (Income) Expense (1):
Years Ended September 30,
----------------------------------
2001 2000 1999
----------------------------------
United States $ (481) $ 299 $ 947
China (127) 161 443
United Kingdom 5,113 957 --
Other segments 404 478 440
----------------------------------
Subtotal for segments 4,909 1,895 1,830
Parent 2,057 937 583
----------------------------------
Total interest expense $ 6,966 $ 2,832 $ 2,413
==================================
Total Assets:
September 30,
------------------------------
2001 2000
------------------------------
United States (2) $ 51,550 $ 64,263
China 45,920 53,170
United Kingdom 68,368 75,505
Other segments 8,836 14,252
Eliminations (28,577) (39,219)
------------------------------
Total assets $ 146,097 $ 167,971
==============================
Page 60
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
17. Segment Information (continued)
Long-Lived Assets (3):
September 30,
-------------------------
2001 2000
-------------------------
United States $10,891 $12,156
China 15,329 12,516
United Kingdom 3,910 5,125
Other segments 97 135
-------------------------
Total long-lived assets $30,227 $29,932
=========================
Expenditures for Additions to Long-Lived Assets (4);
Years Ended September 30,
------------------------------------
2001 2000 1999
------------------------------------
United States $ 110 $1,013 $ 538
China 4,188 3,111 1,019
United Kingdom 482 580 --
Other segments 14 18 244
------------------------------------
Total expenditures $4,794 $4,722 $1,801
====================================
(1) The interest expense shown for each segment includes interest paid or
earned on intersegment advances.
(2) Total assets for United States include parent/administrative assets.
(3) Represents property and equipment, net.
(4) Includes $427,000 and $102,000 in expenditures which were financed via
capital lease obligations for the years ended September 30, 2000 and 1999,
respectively.
Major Customers
During the years ended September 30, 2001, 2000 and 1999 one customer (included
in the U.S. and other segments) accounted for 13.7%, 23.2% and 25.8%
respectively, of the Company's net sales and one other customer and its
affiliate (included in the U.S. and other segments) accounted for 8.6%, 9.3% and
14.5% of the Company's net sales during the years ended September 30, 2001, 2000
and 1999, respectively. One other customer (primarily included in the United
Kingdom segment) accounted for 17.1% and 4.5%, respectively, of the Company's
net sales during the years ended September 30, 2001 and 2000.
Page 61
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
18. Severance and Office Closing Costs
In September 2000, the Company's United States (Catalina Industries) business
segment finalized plans to consolidate the functions of its Boston office into
the Miami headquarters. A $500,000 charge comprised of employee severance costs
($422,000), property write-downs ($56,000) and lease termination costs ($22,000)
was recorded in September 2000 for the Boston office closure.
The closing of the Boston office resulted in the termination of two vice
presidents and eight customer support and administrative personnel. The non-cash
property write-down consisted of the net book value of leasehold improvements
and the office furniture and other equipment not suitable for use by the Miami
headquarters or the Company's Canadian operations. The charge for lease
termination costs represented the remaining aggregate contractual lease
obligation for the Boston office subsequent to the date of its closure, net of
projected sublease income. Catalina Industries continued to incur and expense
normal payroll, depreciation, lease and other operating costs for its Boston
office through March 31, 2001, amounting to $429,000, until the office was
closed in December 2000 and certain remaining employees ceased working for the
Company in March 2001. Operating costs for the Boston office were approximately
$429,000, $999,000 and $905,000 for the years ended September 30, 2001, 2000 and
1999, respectively.
In 2001 Catalina Industries increased its provision for lease termination costs
by $314,000 due to a continuing inability to sublease the Boston office space.
The Company also terminated approximately 75 employees in 2001 in the U.S.,
U.K., and China, incurring severance costs of $ 840,000.
19. Derivative Instruments and Hedging Activities
The Company sells its products in Europe and the United Kingdom and maintains
major capital investments in manufacturing facilities in China, administrative
offices in Hong Kong, and sales and distribution operations in the United
Kingdom. The Company also has subsidiaries in Canada and Mexico and sells its
products in these foreign countries. Of the Company's revenues for the years
ended September 30, 2001, 2000 and 1999, 66%, 40% and 24%, respectively, were
generated from international customers. The Company's activities expose it to a
variety of market risks, including the effects of changes in foreign currency
exchange rates. These foreign currency exposures are monitored and managed by
the Company. The Company's foreign currency risk management program focuses on
the unpredictability of foreign currency exchange rate movements and seeks to
reduce the potentially adverse effects that the volatility of these movements
may have on its operating results.
The Company maintains a foreign currency risk management strategy that uses
derivative instruments to protect its interests from unanticipated fluctuations
in earnings and cash flows caused by volatility in currency exchange rates.
Movements in foreign currency exchange rates pose a risk to the Company's
operations and competitive position, since exchange rate changes may affect
profitability, cash flows, and business and/or pricing strategies. The Company
uses foreign currency forward exchange contracts to partially hedge these risks.
By using derivative financial instruments to hedge exposures to changes in
exchange rates, the Company exposes itself to credit risk and market risk.
Credit risk is the failure of the counterparty to perform under the terms of the
derivative contract. When the fair value of a derivative contract is positive,
the counterparty owes the Company, which creates repayment risk for the Company.
When the fair value of a derivative contract is negative, the Company owes the
counterparty and, therefore, it does not possess repayment risk. The Company
minimizes the credit (or repayment) risk in derivative instruments by entering
into transactions with high quality counterparties.
The Company's derivatives activities are subject to the management, direction
and control of its Foreign Currency Risk Management Committee (FCRMC). The FCRMC
is composed of the chief executive officer, the chief financial officer, and
other officers of the Company. The FCRMC reports to the board of directors on
the scope of its derivatives activities. The FCRMC (1) sets forth risk
management philosophy and objectives through a corporate policy, (2) provides
guidelines for derivative instrument usage, and (3) establishes procedures for
control and valuation, counterparty credit approval, and the monitoring and
reporting of derivative activity.
Page 62
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
19. Derivative Instruments and Hedging Activities (continued)
Fair-Value Hedges
During the year ended September 30, 2001 and for the period from July 5, 2000
(acquisition date) to September 30, 2000, the Company's U.K. subsidiaries
entered into forward exchange contracts to hedge the foreign currency exposure
of its firm commitments to purchase certain inventories from China and Europe in
currencies other than the British pound. The forward contracts used in this
program mature in three months or less, consistent with the related purchase
commitments.
Cash Flow Hedge
The Company uses an interest-rate swap to convert the variable rate bonds
payable related to its U.S. warehouse facility into a fixed rate of 5.52%. The
fair value of this cash-flow hedge of $139,000 (loss, net of tax benefit) at
September 30, 2001 is included in stockholders' equity as part of the
accumulated comprehensive loss.
20. Contingencies
Litigation
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
Statement of Operations for the year ended September 30, 1999 of $2.7 million
previously accrued for damages and attorney fees and $893,000 in previously
accrued post-judgment interest.
During the past few years the Company received a number of claims relating to
halogen torchieres sold by the Company to various retailers. After January 1,
1999, the Company is self-insuring a portion of these claims up to $10,000 per
incident. Based upon its experience, the Company is presently accruing for this
self-insurance provision and has accrued $265,000 for this contingency as of
September 30, 2001. No assurance can be given that the number of claims will not
exceed historical experience or that claims will not exceed available insurance
coverage or that the Company will be able to maintain the same level of
insurance.
On September 15, 1999, the Company filed a complaint entitled Catalina Lighting,
Inc. v. Lamps Plus, Civil Action 99-7200, in the U.S. District Court for the
Southern District of Florida. The lawsuit requested declaratory relief regarding
claims of trade dress and patent infringement made by Lamps Plus against a major
customer of the Company. Lamps Plus filed an Answer and Counterclaim against the
Company and its customer on October 6, 1999 alleging patent infringement and
trade dress. The trade dress claim was dismissed with prejudice before trial in
March 2001. In April 2001, a jury returned a verdict finding liability against
the Company on the patent infringement claim and in June 2001 the Court entered
a judgment of approximately $1.6 million for damages and interest thereon. The
Company has appealed the judgment entered by the Court and has posted a surety
bond in the amount of $1.5 million for the appeal. Based upon advice of counsel,
the Company believes that it ultimately will not
Page 63
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
20. Contingencies (continued)
be found liable for patent infringement in this case. Accordingly, no provision
for loss has been recorded in the accompanying September 30, 2001 Consolidated
Financial Statements for this matter.
The Company is also a defendant in other legal proceedings arising in the course
of business. In the opinion of management (based on the advice of counsel) the
ultimate resolution of these other legal proceedings will not have a material
adverse effect on the Company's financial position or annual results of
operations.
21. Disclosure about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents, restricted cash equivalents and short-term
investments, accounts receivable and accounts and letters of credit payable:
The carrying amount approximates fair value due to the short maturity of those
instruments.
Revolving credit facilities, term loans, bonds payable, subordinated notes and
other long-term debt:
The fair value of the Company's revolving credit facilities, term loans, bonds
payable, subordinated notes and other long-term debt is estimated based on the
current rates offered to the Company for borrowings with similar terms and
maturities.
Estimated fair values of the Company's financial instruments are as follows (in
thousands):
September 30,
----------------------------------------
2001 2000
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------- ------- ------- -------
Cash and cash equivalents $ 4,613 $ 4,613 $ 2,309 $ 2,309
Restricted cash equivalents and
short-term investments $ 1,066 $ 1,066 $ 727 $ 727
Accounts receivable, net $27,761 $27,761 $36,632 $36,632
Revolving credit facilities $23,444 $23,444 $22,786 $22,786
Term loans $24,297 $24,297 $28,415 $28,415
Accounts and letters of credit payable $27,586 $27,586 $36,310 $36,310
Bonds payable $ 5,100 $ 5,318 $ 6,000 $ 5,758
Subordinated notes $ 6,110 $ 6,352 $ -- $ --
Other long-term debt $ 1,963 $ 2,015 $ 3,127 $ 3,099
It was not practicable to estimate the fair value of the Company's $7.6 million
convertible subordinated notes at September 30, 2000.
Page 64
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 2001, 2000 and 1999 (Continued)
22. Selected Quarterly Financial Data (Unaudited)
(In thousands except per share data)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (1)
=========================================================================================================
Fiscal 2001
=========================================================================================================
Net Sales $ 64,608 $ 55,789 $ 60,548 $ 53,841
=========================================================================================================
Gross Profit $ 10,184 $ 7,986 $ 8,060 $ 5,840
=========================================================================================================
Net Income (Loss) $ (1,899) $ (3,368) $ (2,417) $ (10,663)
---------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share:
---------------------------------------------------------------------------------------------------------
Basic $ (0.26) $ (0.46) $ (0.33) $ (0.77)
---------------------------------------------------------------------------------------------------------
Diluted $ (0.26) $ (0.46) $ (0.33) $ (0.77)
=========================================================================================================
1st Quarter (2) 2nd Quarter 3rd Quarter 4th Quarter (3)
=========================================================================================================
Fiscal 2000
=========================================================================================================
Net Sales $ 43,208 $ 42,033 $ 46,705 $ 70,684
=========================================================================================================
Gross Profit $ 8,895 $ 8,001 $ 8,907 $ 12,611
=========================================================================================================
Net Income $ 537 $ 752 $ 1,080 $ 476
---------------------------------------------------------------------------------------------------------
Earnings Per Share:
---------------------------------------------------------------------------------------------------------
Basic $ 0.08 $ 0.11 $ 0.15 $ 0.07
=========================================================================================================
Diluted $ 0.07 $ 0.10 $ 0.14 $ 0.06
=========================================================================================================
(1) Includes a $2.6 million charge to settle executive management contracts,
$1.1 million in severance and office closing costs and a provision of $5.0
million for a valuation allowance on deferred tax assets.
(2) Reflects a $788,000 charge related to the reorganization of the executive
management.
(3) Reflects the results of operations of Ring which was acquired on July 5,
2000 and a $500,000 restructuring charge.
Page 65
CATALINA LIGHTING, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION
The Company's credit facilities and U.K. laws place restrictions on the amount
of assets that may be transferred by Ring, Go-Gro and Catalina Canada to the
parent company or other subsidiaries. These restricted net assets totalled $20.8
million, $2.7 million and $32.3 million for the Go-Gro, Catalina Canada and Ring
subsidiaries, respectively, at September 30, 2001. The financial information for
the Company has been adjusted in this schedule to report Ring, Go-Gro and
Catalina Canada on the equity basis of accounting. No cash dividends were paid
by these subsidiaries during the three years ended September 30, 2001.
Balance Sheets September 30,
-------------- -----------------------
ASSETS 2001 2000
--------- ---------
Current assets (In thousands)
Cash and cash equivalents $ 126 $ 246
Restricted cash equivalents and short-term investments 380 727
Accounts receivable, net of allowances for doubtful
accounts of $962,000and $663,000, respectively 4,289 11,957
Inventories 8,597 15,092
Income taxes receivable 283 406
Other current assets 2,370 3,357
--------- ---------
Total current assets 16,045 31,785
Property and equipment, net 10,892 12,164
Investment in and net amounts due to or from Go-Gro 21,804 17,413
Investment in and net amounts due to or from Catalina Canada 2,835 2,484
Investment in and net amounts due to or from Ring 32,349 33,645
Goodwill, net 4,515 4,676
Other assets 7,296 3,917
--------- ---------
$ 95,736 $ 106,084
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving credit facilities $ -- $ 14,400
Term loans 818 28,415
Accounts and letters of credit payable 704 902
Current maturities of bonds payable 900 900
Current maturities of other long-term debt 312 424
Other current liabilities 3,788 3,487
--------- ---------
Total current liabilities 6,522 48,528
Revolving credit facilities 14,800 --
Term loans 23,479 --
Subordinated notes 6,110 --
Bonds payable 4,200 5,100
Other long-term debt 860 1,173
Other liabilities 1,633 454
--------- ---------
Total liabilities 57,604 55,255
--------- ---------
Stockholders' equity
Common Stock 165 80
Additional paid-in capital 34,279 28,560
Retained earnings 6,764 25,111
Accumulated other comprehensive loss (615) (461)
Treasury stock (2,461) (2,461)
--------- ---------
Total stockholders' equity 38,132 50,829
--------- ---------
$ 95,736 $ 106,084
========= =========
Page 66
CATALINA LIGHTING, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION
(Continued)
Statements of Operations Years Ended September 30,
------------------------ -------------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Net sales $ 82,106 $ 126,521 $ 137,415
Cost of sales 75,813 107,866 116,553
--------- --------- ---------
Gross profit 6,293 18,655 20,862
Selling, general and administrative expenses 17,645 17,284 19,261
Litigation settlement -- -- (2,728)
Severance and office closing costs 469 500 --
Executive settlements 2,586 788 --
--------- --------- ---------
Operating income (loss) (14,407) 83 4,329
--------- --------- ---------
Other income (expenses)
Interest expense (4,140) (2,331) (2,340)
Reversal of post judgment interest related to
litigation settlement -- -- 893
Equity in income of Go-Gro 2,400 4,525 4,229
Equity in income of Catalina Canada 57 591 17
Equity in loss of Ring (2,809) (825) --
Interest income (expense) on advances to
subsidiaries (225) 535 683
Administrative fee income from Catalina Canada 498 355 312
Other income (expenses) 27 (52) 302
--------- --------- ---------
Total other income (expenses) (4,192) 2,798 4,096
--------- --------- ---------
Income (loss) before income taxes 18,599 2,881 8,425
Income tax (provision) benefit 252 (36) (1,936)
--------- --------- ---------
Net income (loss) $ (18,347) $ 2,845 $ 6,489
========= ========= =========
Page 67
CATALINA LIGHTING, INC., AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION
(Continued)
Statements of Cash Flows
Years Ended September 30,
----------------------------------
2001 2000 1999
-------- --------- --------
(In thousands)
Cash flows from operating activities:
Net income (loss) $(18,347) $ 2,845 $ 6,489
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Equity in loss (income) of Go-Gro, Catalina Canada and Ring 352 (4,291) (4,246)
Depreciation and amortization 2,347 2,810 1,977
Deferred income tax (benefit) provision (274) (307) 1,953
(Gain) loss on disposition of property and equipment -- -- (175)
Stock options issued for executive settlements 1,020
Warrants issued for interest on subordinated notes 49
Change in assets and liabilities:
Decrease (increase) in accounts receivable 7,668 1,023 (2,361)
Decrease (increase) in inventories 6,495 3,598 1,628
Decrease (increase) in income taxes receivable 123 1,399 (657)
Decrease (increase) in other current assets 336 744 342
Decrease (increase) in restricted cash equivalents and
short term investments 350
Decrease (increase) in other assets (1,443) (945) (336)
Increase (decrease) in accrued litigation judgment under appeal -- -- (4,909)
Increase (decrease) in accounts and letters of credit
payable and other liabilities 1,124 247 (530)
-------- -------- --------
Total adjustments 18,147 4,278 (7,314)
-------- -------- --------
Net cash provided by (used in) operating activities (200) 7,123 (825)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (111) (580) (420)
Proceeds from sale of property -- -- 997
Payment for acquisition of Ring, net of cash acquired (119) (33,351) --
Decrease (increase) in investment in and net amounts due to or from
Go-Gro, Catalina Canada and Ring (3,680) 7,416 2,249
Decrease (increase) in restricted cash equivalents and
short-term investments 878 1,872 986
-------- -------- --------
Net cash provided by (used in) investing activities (3,032) (24,643) 3,812
-------- -------- --------
(Continued on page 69)
Page 68
CATALINA LIGHTING, INC., AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION
(Continued)
Statements of Cash Flows (continued)
Years Ended September 30,
----------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from financing activities: (In thousands)
Proceeds from term loans -- 30,000 --
Payments on term loans (4,074) (1,244) --
Proceeds from revolving credit facilities 32,308 43,160 35,701
Payments on revolving credit facilities (31,950) (42,510) (35,550)
Proceeds from issuance of subordinated notes 4,574 -- --
Payments on convertible subordinated notes -- (7,600) --
Sinking fund redemption payments on bonds (880) (878) (900)
Payments on other long-term debt (425) (511) (576)
Payments on bonds payable (900) (2,210) (980)
Proceeds from isuuance of warrants 2,265 -- --
Payments for redemption of stock rights (8)
Payments to repurchase common stock -- (1,251) (1,210)
Proceeds from issuance of common stock and
related income tax benefit 2,264 1,611 404
-------- -------- --------
Net cash provided by (used in) financing activities 3,174 18,567 (3,111)
-------- -------- --------
Effect of exchange rate changes on cash (62) (801) --
Net increase (decrease) in cash and cash equivalents (120) 246 (124)
Cash and cash equivalents at beginning of year 246 -- 124
-------- -------- --------
Cash and cash equivalents at end of year $ 126 $ 246 $ --
======== ======== ========
Supplemental Cash Flow Information
Years Ended September 30,
=====================================
2001 2000 1999
======= ======= =======
(in thousands)
Cash paid (refunded) for:
Interest $ 3,357 $ 2,271 $ 2,228
======== ======= =======
Income taxes $ (177) $(1,343) $ 612
======== ======= =======
On July 5, 2000, the Company acquired Ring as follows:
Fair value of assets acquired, net
of cash and cash equivalents $ 70,001
Liabilities assumed (36,650)
--------
Net cash payment made $ 33,351
========
During the years ended September 30, 2001, 2000 and 1999, the Company issued
6087, 1,672 and 1,778 shares of common stock to each of its outside directors as
compensation for their services. The aggregate market value of the stock issued
was $23,000, $28,000 and $50,000 for 2001, 2000 and 1999, respectively.
During the year ended September 30, 2001, the Company issued warrants to
purchase 354,136 shares of common stock at $0.01 per share to its bank syndicate
group in connection with the July 23, 2001 amendment to its $75 million credit
facility.
During the years ended September 2000 and 1999 the Company incurred capital
lease obligations aggregating approximately, $427,000 and $102,000,
respectively, for new office, computer, machinery and warehouse equipment.
Page 69
CATALINA LIGHTING, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
---------------------
Balance at Charged to Balance
beginning of costs and at end of
Description year expenses Other Deductions year
------------------------------------- ------------ ---------- ------- ----------- ---------
Allowance for doubtful accounts -
deducted from accounts
receivable in the balance sheet:
Year ended September 30, 2001 $ 791 $ 1,105 $ -- $ (473) $ 1,423
============ ========== ======= =========== =========
Year ended September 30, 2000 $ 793 $ 408 $ -- $ (410) $ 791
============ ========== ======= =========== =========
Year ended September 30, 1999 $ 616 $ 639 $ -- $ (462) $ 793
============ ========== ======= =========== =========
Inventory allowances - deducted from
inventory in the balance sheet:
Year ended September 30, 2001 $ 2,025 $ 5,588 $ -- $ (765) $ 6,848
============ ========== ======= =========== =========
Year ended September 30, 2000 $ 2,318 $ 1,300 $ -- $ (1,593) $ 2,025
============ ========== ======= =========== =========
Year ended September 30, 1999 $ 1,656 $ 971 $ -- $ (309) $ 2,318
============ ========== ======= =========== =========
Allowance for impairment of
long-lived assets - deducted
from property and equipment
in the balance sheet:
Year ended September 30, 2001 $ -- $ -- $ -- $ -- $ --
============ ========== ======= =========== =========
Year ended September 30, 2000 $ -- $ -- $ -- $ -- $ --
============ ========== ======= =========== =========
Year ended September 30, 1999 $ 519 $ -- $ -- $ (519) $ --
============ ========== ======= =========== =========
Page 70
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is incorporated by reference from
the definitive proxy statement for the Company for its 2002 Annual Meeting of
Shareholders which will be filed within 120 days of September 30, 2001.
Alternatively, such information will be included in an amendment to this form
10-K.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference from
the definitive proxy statement for the Company for its 2002 Annual Meeting of
Shareholders which will be filed within 120 days of September 30, 2001.
Alternatively, such information will be included in an amendment to this form
10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference from
the definitive proxy statement for the Company for its 2002 Annual Meeting of
Shareholders which will be filed within 120 days of September 30, 2001.
Alternatively, such information will be included in an amendment to this form
10-K.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference from
the definitive proxy statement for the Company for its 2000 Annual Meeting of
Shareholders which will be filed within 120 days of September 30, 2001.
Alternatively, such information will be included in an amendment to this form
10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Documents Filed as Part of this Report. The following
consolidated financial statements of the Company and its
subsidiaries are filed as part of this Report:
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 2001 and 2000
Consolidated Statements of Operations for the Years Ended
September 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the Years
Ended September 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended
September 2001, 2000 and 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. The following financial
statement schedules are included in this Report:
Schedule I - Condensed Financial Information
Schedule II - Valuation and Qualifying Accounts for the Years
Ended September 2001, 2000 and 1999
Page 71
3. Exhibits. The following exhibits are filed with this Report or incorporated
by reference:
Exhibit
Number Description
------ -----------
3.1 Registrant's Second Amended and Restated Articles of Incorporation,
as amended.
3.2 Registrant's Amended and Restated By-Laws.
4.1 Secured Junior Subordinated Note due 2006 of the registrant, in
favor of Sun Catalina Holdings, LLC, dated July 23, 2001. (1)
4.2 Indenture of Trust, dated May 1, 1995, relating to $10.5 million
Mississippi Business Finance Corporation Taxable Variable Rate
Industrial Development Revenue Bonds Series 1995. (2)
10.1 Third Amended and Restated Revolving Credit and Term Loan Agreement
dated July 23, 2001 among the registrant, Catalina International
Limited, Ring Limited, SunTrust Bank, and certain other lenders
named therein.
10.2 Financing Agreement dated July 17, 2000 between Go-Gro Industries
Ltd. and Standard Chartered Bank (3)
10.3(a) Financing Agreement dated May 1, 1996 between Catalina Lighting
Canada, (1992), Inc. and National Bank of Canada. (4)
10.3(b) First Amendment to Financing Agreement dated October 17, 1997
between Catalina Lighting Canada, (1992), Inc. and National Bank of
Canada.
10.3(c) Second Amendment to Financing Agreement dated December 19, 1997
between Catalina Lighting Canada, (1992), Inc. and National Bank of
Canada. (5)
10.3(d) Third Amendment to Financing Agreement dated May 15, 2000 between
Catalina Lighting Canada, (1992), Inc. and National Bank of Canada.
(6)
10.3(e) Fourth Amendment to Financing Agreement between Catalina Lighting
Canada, (1992), Inc. and National Bank of Canada, dated December 15,
2000. (3)
10.4 Sub-Lease Agreement dated September 23, 1994 by and between the
registrant and Shippers Warehouse, Inc. (8)
10.5 Multi-Tenant Commercial Lease dated as of March 12, 1998 between TAG
Quattro Inc. and Catalina Lighting Canada Ltd. (9)
10.6 Lease Agreement dated April 30, 1999 by and between Dana Realty
Trust and Catalina Industries, Inc. (10)
10.7 $1,200,000 Mortgage Deed and Security Agreement and Mortgage Note,
dated September 28, 1994, issued by the registrant in favor of
Mississippi Business Finance Corporation. (8)
10.8 Renewal Mortgage Note by the registrant in favor of SunTrust Bank,
Central Florida, National Association, dated October 5, 1998. (11)
10.9(a) Agreement dated September 29, 1993 between the registrant and Shunde
No. 1 Lamp Factory. (12)
10.9(b) Amendment to Agreement dated July 20, 1999 between the registrant
and Shunde No. 1 Lamp Factory.
10.10 Amended and Restated Stock Purchase Agreement between the registrant
and Sun Catalina Holdings, LLC, dated as of July 23, 2001. (1)
10.11 Amended and Restated Note Purchase Agreement between the registrant
and Sun Catalina Holdings, LLC, dated as of July 23, 2001. (1)
10.12 Warrant to Purchase Shares of Common Stock by the registrant in
favor of Sun Catalina Holdings, LLC, dated July 23, 2001. (1)
10.13 Voting Agreement and Irrevocable Proxy, dated as of July 23, 2001,
by and among Sun Catalina Holdings, LLC, the registrant, and certain
shareholders and option holders of the registrant. (1)
10.14 Shareholders Agreement, dated as of July 23, 2001, by and among Sun
Catalina Holdings, LLC, SunTrust Banks, Inc., and the registrant.
(1)
10.15 Registration Rights Agreement, dated as of July 23, 2001, by and
among the registrant, Sun Catalina Holdings, LLC, SunTrust Banks,
Inc., and SunTrust Bank. (1)
10.16 Employment Agreement dated as of July 23, 2001 by and between the
registrant and David Sasnett.
10.17 Management Services Agreement dated as of July 23, 2001 by and
between the registrant and Sun Capital Partners Management, LLC
Page 72
10.18 Separation Agreement and Release dated July 23, 2001 between the
registrant and Nathan Katz.
10.19 Separation Agreement and Release dated July 23, 2001 between the
registrant and Dean Rappaport.
10.20 Termination Agreement and Release dated July 23, 2001 between the
registrant and Robert Hersh.
10.21 Termination Agreement and Release dated July 23, 2001 between the
registrant and Nathan Katz.
10.22 Termination Agreement and Release dated July 23, 2001 between the
registrant and Dean Rappaport.
10.23 Termination Agreement and Release dated July 23, 2001 between the
registrant and David Sasnett.
10.24(a) License Agreement, dated April 26, 1996, by and between Westinghouse
Electric Corporation and the registrant. (13)
10.24(b) First Amendment to the License Agreement, dated March 29, 1999,
between CBS Corporation (formerly Westinghouse Electric Corporation)
and the registrant. (10)
10.24(c) Second Amendment to the License Agreement, dated February 2, 2001,
between Westinghouse Electric Corporation (as assignee) and the
registrant. (14)
10.25 Note Agreement dated March 15, 1994 among the registrant and
Massachusetts Mutual Life Insurance Company, MassMutual Corporate
Investors, MassMutual Participation Investors, S.O. P.A.F.
International S.A., Prudential Securities, Inc. and Jefferies Group,
Inc. (15)
10.26 Loan Agreement between Mississippi Business Finance Corporation and
Catalina Industries, Inc. (formerly Dana Lighting, Inc.), dated May
1, 1995. (2)
10.27(a) Letter of Credit Agreement, dated May 1, 1995, between Catalina
Industries, Inc. (formerly Dana Lighting, Inc) and Sun Bank,
National Association, as amended on June 30, 1995. (2)
10.27(b) Second Amendment to Letter of Credit Agreement between Catalina
Industries, Inc. and SunTrust Bank, Central Florida, National
Association (formerly SunTrust, National Association). (16)
10.27(c) Third Amendment to Letter of Credit Agreement, dated March 27, 1996,
between Catalina Industries, Inc. and SunTrust Bank, Central
Florida, National Association. (13)
10.27(d) Fourth Amendment to Letter of Credit Agreement, dated December 30,
1996, between Catalina Industries, Inc. and SunTrust Bank, Central
Florida, National Association. (17)
10.27(e) Fifth Amendment to Letter of Credit Agreement, dated March 31, 1997,
between Catalina Industries, Inc. and SunTrust Bank, Central
Florida, National Association. (17)
10.27(f) Sixth Amendment to Letter of Credit Agreement, dated September 30,
1997, between Catalina Industries, Inc. and SunTrust Bank, Central
Florida, National Association. (4)
10.27(g) Seventh Amendment to Letter of Credit Agreement, dated December 31,
1997, between Catalina Industries, Inc. and SunTrust Bank, Central
Florida, N.A. (5)
10.27(h) Eighth Amendment to Letter of Credit Agreement, dated March 31,
1998, between Catalina Industries, Inc. and SunTrust Bank, Central
Florida, N.A. (5)
10.27(i) Ninth Amendment to Letter of Credit Agreement, dated September 30,
1998, between Catalina Industries, Inc. and SunTrust Bank, Central
Florida, N.A. (18)
10.27(j) Tenth Amendment to Letter of Credit Agreement, dated March 31, 1999,
between Catalina Industries, Inc. and SunTrust Bank, Central
Florida, N.A. (19)
10.27(k) Eleventh Amendment to Letter of Credit Agreement, dated September
30, 1999, between Catalina Industries, Inc. and SunTrust Bank,
Central Florida, N.A. (20)
10.28 Construction Loan Agreement between Sun Bank, National Association
and Catalina Industries, Inc. (formerly Dana Lighting, Inc.), dated
May 1, 1995. (2)
10.29 First Amendment to Note Agreement between the registrant and
Massachusetts Mutual Life Insurance Company, MassMutual Corporate
Investors, MassMutual Participation Investors, MassMutual Corporate
Value Partners, Prudential Securities Inc. and SO. P.A.F.
International S.A. dated June 28, 1995. (2)
10.30 Second Amendment to Note Agreement between the registrant and
Massachusetts Mutual Life Insurance Company, MassMutual Corporate
investors, MassMutual Participation Investors, MassMutual Corporate
Value Partners, Ltd., Prudential Securities Inc. and SO. P.A.F.
International S.A. dated September 30, 1995. (21)
10.31 Recommended Cash Offers, dated June 1, 2000, by NM Rothschild & Sons
Limited on behalf of Catalina International PLC to acquire the whole
of the ordinary and convertible preference share capital of Ring
PLC. (22)
10.32 Consulting and Non-competition Agreement effective as of December
24, 1999 between the registrant and William D. Stewart. (20)
Page 73
10.33 Land Use Agreement, dated April 11, 1995, between Jiadianbao
Electrical Products (Shenzhen) Co., Ltd. (formerly known as Shenzhen
Jiadianbao Electrical Products Co., Ltd.) and the Bureau of National
Land Planning Bao-An Branch of Shenzhen City. (2)
10.34 Registrant's Stock Incentive Plan.
10.35 Registrant's Management Settlement Stock Option Plan.
11 Computation of Diluted Earnings Per Share
21 Subsidiaries of the registrant.
23 Consent of Deloitte & Touche LLP
----------
(1) Incorporated by reference to exhibit filed with the registrant's Report on
Form 8-K, as filed with the SEC on August 7, 2001.
(2) Incorporated by reference to exhibit filed with the registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995.
(3) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the year ended September 30, 2000, as filed with
the SEC on December 29, 2000.
(4) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the year ended September 30, 1997, as filed with
the SEC on December 29, 1997.
(5) Incorporated by reference to exhibit filed with the registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, as filed with
the SEC on May 15, 1998.
(6) Incorporated by reference to exhibit filed with the registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000, as filed with the
SEC on August 11, 2000.
(7) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the year ended September 30, 1996, as filed with
the SEC on December 30, 1996.
(8) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the year ended September 30, 1994, as filed with
the SEC on December 28, 1994.
(9) Incorporated by reference to exhibit filed with the registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998, as filed with the
SEC on August 14, 1998.
(10) Incorporated by reference to exhibit filed with the registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, as filed with
the SEC on May 13, 1999.
(11) Incorporated by reference to exhibit filed with the registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1998, as filed with
the SEC on February 16, 1998.
(12) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the year ended September 30, 1993, as filed with
the SEC on December 28, 1993.
(13) Incorporated by reference to exhibit filed with the registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996, as filed with
the SEC on May 14, 1996.
(14) Incorporated by reference to exhibit filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 2000, as filed with
the SEC on February 14, 2001.
(15) Incorporated by reference to exhibit filed with the registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1994.
(16) Incorporated by reference to exhibit filed with the registrant's Quarterly
Report on Form 10-Q for the Quarter ended December 31, 1995.
(17) Incorporated by reference to exhibit filed with the registrant's Quarterly
Report on Form 10-Q for the Quarter ended March 31, 1997, as filed with
the SEC on May 15, 1997.
(18) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the year ended September 30, 1998, as filed with
the SEC on December 29, 1998.
(19) Incorporated by reference to exhibit filed with the registrant's Quarterly
Report on Form 10-Q for the Quarter ended June 30, 1999, as filed with the
SEC on August 13, 1999.
(20) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the year ended September 30, 1999, as filed with
the SEC on December 29, 1999.
(21) Incorporated by reference to exhibit filed with the registrant's Annual
Report on Form 10-K for the year ended September 30, 1995, as filed with
the SEC on December 27, 1995.
(22) Incorporated by reference to exhibit filed with the registrant's Report on
Form 8-K, as filed with the SEC on July 20, 2000.
Page 74
(b) Reports on Form 8-K:
On August 7, 2001, we filed with the Securities and Exchange Commission a
Report on Form 8-K (Item 1) to report the change-in-control of the Company on
July 23, 2001.
(c) Undertaking:
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933 (the "1933
Act"), the undersigned Registrant hereby undertakes as follows, which
understanding shall be incorporated by reference into Registrant's Registration
Statements on Form S-8 Nos. 33-23900, 33-33292, 33-62378 and 33-94016.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit of proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
Page 75
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CATALINA LIGHTING, INC.
By: /s/ Eric Bescoby
----------------------------------------
Eric Bescoby
Chief Executive Officer
December 20, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons of behalf of the
Company and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
By: /s/ Eric Bescoby Chief Executive Officer December 20, 2001
---------------------- (Principal Executive
Eric Bescoby Officer) and Director
By: /s/ David W. Sasnett Chief Financial Officer December 21, 2001
---------------------- (Principal Financial and
David W. Sasnett Accounting Officer) and
Senior Vice President
By: /s/ Kevin Calhoun Director December 21, 2001
---------------------
Kevin Calhoun
By: /s/ C. Deryl Couch Director December 21, 2001
---------------------
C. Deryl Couch
By: /s/ Michael Kalb Director December 21, 2001
----------------------
Michael Kalb
By: /s/ Rodger R. Krouse Director December 21, 2001
---------------------
Rodger R. Krouse
By: /s/ Marc J. Leder Director December 21, 2001
--- -----------------
Marc J. Leder
By: /s/ George Rea Director December 20, 2001
---------------------
George Rea
By: /s/ Howard Steinberg Director December 20, 2001
---------------------
Howard Steinberg
By: /s/ Patrick Sullivan Director December 20, 2001
---------------------
Patrick Sullivan
By: Director
---------------------
Clarence E. Terry
By: /s/ Brion G. Wise Director December 20, 2001
----------------------
Brion G. Wise
Page 76
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Registrant's Second Amended and Restated Articles of
Incorporation, as amended.
3.2 Registrant's Amended and Restated By-Laws.
10.1 Third Amended and Restated Revolving Credit and Term Loan
Agreement dated July 23, 2001 among the registrant, Catalina
International Limited, Ring Limited, SunTrust Bank, and certain
other lenders named therein.
10.3(b) First Amendment to Financing Agreement dated October 17, 1997
between Catalina Lighting Canada, (1992), Inc. and National Bank
of Canada
10.9(b) Amendment to Agreement dated July 20, 1999 between the
registrant and Shunde No. 1 Lamp Factory.
10.16 Employment Agreement dated as of July 23, 2001 by and between
the registrant and David Sasnett.
10.17 Management Services Agreement dated as of July 23, 2001 by and
between the registrant and Sun Capital Partners Management, LLC.
10.18 Separation Agreement and Release dated July 23, 2001 between the
registrant and Nathan Katz.
10.19 Separation Agreement and Release dated July 23, 2001 between the
registrant and Dean Rappaport.
10.20 Termination Agreement and Release dated July 23, 2001 between
the registrant and Robert Hersh.
10.21 Termination Agreement and Release dated July 23, 2001 between
the registrant and Nathan Katz.
10.22 Termination Agreement and Release dated July 23, 2001 between
the registrant and Dean Rappaport.
10.23 Termination Agreement and Release dated July 23, 2001 between
the registrant and David Sasnett.
10.34 Registrant's Stock Incentive Plan.
10.35 Registrant's Management Settlement Stock Option Plan.
11 Computation of Diluted Earnings per Share.
21 Subsidiaries of the registrant.
23 Consent of Deloitte & Touche LLP