UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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 Incorporation or Organization) (I.R.S. Employer Identification No.)
18191 N.W. 68th Avenue
Miami, Florida 33015
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (305) 558-4777
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 [_]
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of the close of business on May 3, 2002 was 3,175,649, which
reflects the one-for-five reverse stock split effective April 8, 2002.
CATALINA LIGHTING, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 2002 and September 30, 2001................................... 1
Condensed Consolidated Statements of Operations -
Three and six months ended March 31, 2002 and 2001...................... 3
Condensed Consolidated Statements of Cash Flows -
Six months ended March 31, 2002 and 2001................................ 4
Notes to Condensed Consolidated Financial Statements.................... 5
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 13
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk.......... 23
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings................................................... 24
ITEM 4 - Submission of Matters to a Vote of Security Holders................. 24
ITEM 6 - Exhibits and Reports on Form 8-K.................................... 24
Signatures................................................................... 25
CATALINA LIGHTING, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
March 31, September 30,
Assets 2002 2001
------ ------------------- ------------------
(Unaudited) *
Current assets
Cash and cash equivalents $ 2,063 $ 4,613
Restricted cash equivalents and short-term investments 1,072 1,066
Accounts receivable, net of allowance for doubtful
accounts of $618 and $1,423, respectively 29,556 27,761
Inventories 33,666 37,425
Property and equipment held for sale 7,220 -
Other current assets 5,531 5,114
------------------- ------------------
Total current assets 79,108 75,979
Property and equipment, net 19,586 30,227
Goodwill, net 27,459 28,812
Other assets 11,038 11,079
------------------- ------------------
Total assets $ 137,191 $ 146,097
=================== ==================
*Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
(Continued on Page 2)
1
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(In thousands, except share data)
March 31, September 30,
Liabilities and Stockholders' Equity 2002 2001
------------------------------------ -------------------- ------------------
(Unaudited) *
Current liabilities
Accounts payable $ 25,583 $ 27,586
Revolving credit facilities 4,492 7,078
Term loans 5,209 818
Bonds payable related to assets held for sale 5,100 900
Current maturities of other long-term debt 624 878
Other current liabilities 11,659 12,466
-------------------- ------------------
Total current liabilities 52,667 49,726
Revolving credit facilities 14,126 16,366
Term loans 18,286 23,479
Subordinated notes 6,958 6,110
Bonds payable - 4,200
Other long-term debt 809 1,085
Other liabilities 5,286 5,926
-------------------- ------------------
Total liabilities 98,132 106,892
-------------------- ------------------
Minority interest 1,038 1,073
-------------------- ------------------
Commitments and Contingencies - -
Stockholders' equity
Preferred stock, $.01 par value
authorized 1,000,000 shares; none issued
Common stock, $.01 par value 165 165
authorized 100,000,000 shares; issued and outstanding
16,520,179 shares
Additional paid-in capital 34,534 34,279
Retained earnings 6,904 6,764
Accumulated other comprehensive loss (1,121) (615)
Treasury stock, at cost, 641,932 shares (2,461) (2,461)
-------------------- ------------------
Total stockholders' equity 38,021 38,132
-------------------- ------------------
$ 137,191 $ 146,097
==================== ==================
* Condensed from audited financial statements
See accompanying notes to condensed consolidated financial statements.
2
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2002 2001 2002 2001
---------- ----------- ---------- -----------
Net sales $ 53,958 $ 55,789 $ 110,112 $ 120,397
Cost of sales 42,041 47,803 88,208 102,227
---------- ----------- ---------- -----------
Gross profit 11,917 7,986 21,904 18,170
Selling, general and administrative expenses 8,338 10,175 16,618 20,768
---------- ----------- ---------- -----------
Operating income (loss) 3,579 (2,189) 5,286 (2,598)
---------- ----------- ---------- -----------
Other expenses:
Interest expense (1,915) (1,816) (3,852) (3,406)
Write-down of assets held for sale (1,098) - (1,098) -
Other income (expenses) (69) (133) (127) (315)
---------- ----------- ---------- -----------
Total other income (expenses) (3,082) (1,949) (5,077) (3,721)
---------- ----------- ---------- -----------
Income (loss) before income taxes 497 (4,138) 209 (6,319)
Income tax expense (benefit) 161 (770) 69 (1,052)
---------- ----------- ---------- -----------
Net income (loss) $ 336 $ (3,368) $ 140 $ (5,267)
========== =========== ========== ===========
Weighted average number of
shares outstanding
Basic 3,176 1,472 3,176 1,472
Diluted 4,496 1,472 4,418 1,472
Earnings (loss) per share
Basic $ 0.11 $ (2.29) $ 0.04 $ (3.58)
Diluted $ 0.07 $ (2.29) $ 0.03 $ (3.58)
See accompanying notes to condensed consolidated financial statements.
3
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended
March 31,
--------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 140 $ (5,267)
Write-down of assets held for sale 1,098
Adjustments for non-cash items 3,358 2,051
Change in assets and liabilities (1,364) 8,646
-------- --------
Net cash provided by operating activities 3,232 5,430
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (312) (3,842)
Proceeds from sale of property and equipment 702 90
Purchase of minority interest - (1,029)
Decrease (increase) in restricted cash equivalents and
short-term investments (4) (201)
-------- --------
Net cash provided by (used in) investing activities 386 (4,982)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from other long-term debt - 323
Payments on other long-term debt (509) (800)
Proceeds from revolving credit facilities 19,391 25,776
Payments on revolving credit facilities (24,114) (23,412)
Payments on term loans (404) (2,459)
Sinking fund redemption payments on bonds payable (450) (450)
-------- --------
Net cash used in financing activities (6,086) (1,022)
-------- --------
Effect of exchange rate changes on cash (82) (10)
-------- --------
Net (decrease) in cash and cash equivalents (2,550) (584)
Cash and cash equivalents at beginning of period 4,613 2,309
-------- --------
Cash and cash equivalents at end of period $ 2,063 $ 1,725
======== ========
Supplemental Cash Flow Information
Six Months Ended
March 31,
--------------------
2002 2001
-------- --------
(In thousands)
Cash paid for:
Interest $ 2,287 $ 2,807
Income taxes $ 60 $ 1,498
See accompanying notes to condensed consolidated financial statements.
4
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements of
Catalina Lighting, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with the accounting policies described in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2001 and should be read in
conjunction with the consolidated financial statements and notes which appear in
that report. These statements do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America ("generally accepted accounting principles") for complete
financial statements.
In the opinion of management, the condensed consolidated financial
statements include all adjustments (which consist mostly of normal, recurring
accruals) considered necessary for a fair presentation. The results of
operations for the three months and six months ended March 31, 2002 may not
necessarily be indicative of operating results to be expected for any subsequent
quarter or for the full fiscal year due to seasonal fluctuations in the
Company's business, changes in economic conditions and other factors.
Accounts Receivable
-------------------
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 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 $10,692,000 and $10,442,000 at March 31,
2002 and September 30, 2001, respectively.
Comprehensive Loss
-------------------
Comprehensive income (loss) consisted of the following:
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In thousands) (In thousands)
Net income (loss) $ 336 $ (3,368) $ 140 $ (5,267)
Foreign currency translation loss (407) (972) (645) (735)
Change in unrealized loss on derivative
instrument, net of taxes 120 (192) 139 (52)
---------- ---------- ---------- ----------
Total comprehensive income (loss) $ 49 $ (4,532) $ (366) $ (6,054)
========== ========== ========== ==========
New Accounting Pronouncements
-----------------------------
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141"), was issued in July 2001. 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 purchase method. SFAS 141 became
effective June 30, 2001. The
5
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
adoption of SFAS 141 did not have a material impact on the Company's financial
position, results of operations or cash flows for the six months ended March 31,
2002.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), was also issued in July 2001. SFAS 142
addresses financial accounting and reporting for intangible assets acquired
individually or with a group of other assets at acquisition. SFAS 142 also
addresses financial 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. The Company will adopt SFAS 142 on October 1,
2002. As of April 2002, the Company had not assessed the impact of adopting SFAS
142.
Statement of Financial Accounting Standards No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" ("SFAS 143"),
was also issued in July 2001. 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.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), was issued in October
2001. SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and the accounting and reporting provisions 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). SFAS 144 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 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.
Reclassifications
-----------------
Certain amounts presented in the financial statements of prior periods have
been reclassified to conform to the current period's presentation.
2. Inventories
Inventories consisted of the following:
March 31, September 30,
2002 2001
--------- -------------
(In thousands)
Raw materials $ 2,932 $ 2,869
Work-in-progress 752 892
Finished goods 29,982 33,664
--------- -------------
Total inventories $ 33,666 $ 37,425
========= =============
6
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Property and Equipment Held for Sale
During the three months ended March 31, 2002, the Company began actively
marketing for sale its underutilized Tupelo, Mississippi distribution center,
which had a carrying value of $8.1 million as of March 31, 2002. On May 6,
2002, the building and substantially all of the equipment in the distribution
center were sold to a third party, resulting in a loss on sale of $1.1 million.
This loss is reflected in the March 31, 2002 financial statements as a write-
down of assets held for sale. The net proceeds from the sale after the pay-off
of the mortgage bonds of approximately $3.3 million were used to pay down the
Company's term loans.
4. Common Stock and Stock Warrants
Effective April 8, 2002, the Company announced a one-for-five reverse stock
split. As a result, the number of shares of the Company's common stock
authorized, and issued and outstanding, decreased from 100,000,000 to
20,000,000, and from 16,520,179 to 3,304,036, respectively. Earnings per share
in the financial statements reflect the reverse stock split for all periods
presented.
On January 11, 2002, the Company entered into a three-year consulting
agreement with a related party, who is an executive officer of an entity under
common control with the Company, whereby it issued to the consultant a warrant
to purchase 322,000 (pre-reverse split) shares of the Company's common stock
with an exercise price of $.44 per share (pre-reverse split) which was the
market value on the date of grant. Half of the warrants vest on January 24,
2003 and the remainder vest one year later. However, if the Company terminates
the consulting agreement without cause, the warrant becomes fully exercisable on
the date of such termination.
Interest on the subordinated 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. The note
holders are also entitled to additional warrants to purchase shares of common
stock at $.01 per share (pre-reverse split) for the quarters during which
interest on the notes is not paid in cash. Interest was not paid on the notes
for the six months ended March 31, 2002, for which the note holders received
additional warrants to purchase, in the aggregate, 345,306 (pre-reverse split)
shares of common stock. The Company will be required to issue additional
warrants for up to 561,883 (pre-reverse split) shares of common stock if
interest payments do not commence until March 31, 2003.
5. Revolving Credit Facility
The Company has a $75 million credit facility which funded the Company's
acquisition of Ring Limited (formerly known as Ring plc) ("Ring") and provides
funds through revolving facilities for the Company's U.S. and U.K. operations.
The credit facility agreement requires that the Company meet certain financial
covenants and minimum levels of adjusted quarterly earnings beginning with the
quarter ended September 30, 2001 and quarterly debt to adjusted earnings and
fixed charge ratios beginning with the quarter ending December 31, 2002.
The Company was in compliance with the financial covenants of its credit
facility for the quarter ended March 31, 2002. Based upon 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 June 30, 2002 and subsequent
quarters.
7
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Segment Information
Information on operating segments and a reconciliation to income (loss)
before income taxes for the three and six months ended March 31, 2002 and 2001
are as follows (in thousands):
Three Months Ended March 31,
---------------------------------------------------------------------------
Net Sales 2002 2001
by Operating Segment: ------------------------------------ ------------------------------------
External External
Customers Intersegment Total Customers Intersegment Total
------------------------------------ ------------------------------------
United States $ 14,910 $ 97 $ 15,007 $ 15,924 $ 276 $ 16,200
China 4,054 15,981 20,035 5,403 17,089 22,492
United Kingdom 27,999 - 27,999 27,764 - 27,764
Other segments 6,995 52 7,047 6,698 185 6,883
Eliminations - (16,130) (16,130) - (17,550) (17,550)
------------------------------------ -----------------------------------
$ 53,958 $ - $ 53,958 $ 55,789 $ - $ 55,789
==================================== ===================================
Six Months Ended March 31,
---------------------------------------------------------------------------
2002 2001
------------------------------------ -----------------------------------
External External
Customers Intersegment Total Customers Intersegment Total
------------------------------------ -----------------------------------
United States $ 28,816 $ 198 $ 29,014 $ 35,180 $ 410 $ 35,590
China 9,721 32,502 42,223 13,274 40,236 53,510
United Kingdom 57,984 - 57,984 56,038 - 56,038
Other segments 13,591 63 13,654 15,905 275 16,180
Eliminations - (32,763) (32,763) - (40,921) (40,921)
------------------------------------ -----------------------------------
$110,112 $ - $110,112 $120,397 $ - $120,397
==================================== ===================================
8
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Net Sales by Location Three Months Ended Six Months Ended
of External Customers: March 31, March 31,
------------------------- ------------------------------
2002 2001 2002 2001
------------ ------------ ---------- -------------
United States $15,038 $16,130 $ 29,093 $ 35,393
United Kingdom 27,471 26,374 56,982 53,778
Canada 6,071 5,944 11,779 13,994
Other countries 5,378 7,341 12,258 17,232
------- ------- -------- --------
$53,958 $55,789 $110,112 $120,397
======= ======= ======== ========
Segment Contribution (Loss): Three Months Ended Six Months Ended
March 31, March 31,
------------------------- ----------------------------
2002 2001 2002 2001
----------- ---------- ---------- -----------
United States $ (495) $ (882) $ 5 $ (1,394)
China 1,278 987 2,288 3,034
United Kingdom 1,823 (1,418) 2,192 (2,500)
Other segments 739 (269) 1,005 (400)
------- ------- -------- --------
Subtotal for segments 3,345 (1,582) 5,490 (1,260)
Parent/administrative expenses (2,848) (2,556) (5,281) (5,059)
------- ------- -------- --------
Income (loss) before income taxes $ 497 $(4,138) $ 209 $ (6,319)
======= ======= ======== ========
Interest Expense (Income) (1): Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- -----------------------------
2002 2001 2002 2001
----------- ------------- ------------ ----------
United States $ (101) $ (111) $ (177) $ (213)
China (5) (33) (14) (113)
United Kingdom 961 1,300 2,087 2,502
Other segments 71 103 135 243
------- ------- -------- --------
Subtotal for segments 926 1,259 2,031 2,419
Parent interest expense 989 557 1,821 987
------- ------- -------- --------
Total interest expense $ 1,915 $ 1,816 $ 3,852 $ 3,406
------- ------- -------- --------
Total Assets (2): March 31, September 30,
2002 2001
--------- ---------
United States $ 49,774 $ 51,550
China 41,998 45,920
United Kingdom 67,780 68,368
Other segments 10,329 8,836
Eliminations (32,690) (28,577)
-------- --------
Total assets $137,191 $146,097
======== ========
9
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Long-Lived Assets (3):
March 31, September 30,
2002 2001
------------ --------------
United States $ 2,206 $10,891
China 14,464 15,329
United Kingdom 2,827 3,910
Other segments 89 97
------- -------
Total long-lived assets $19,586 $30,227
======= =======
Expenditures for Additions to Long-Lived Assets:
Six Months Ended March 31,
------------------------
2002 2001
--------- --------
United States $ 10 $ 65
China 117 3,499
United Kingdom 169 265
Other segments 16 13
------- -------
Total expenditures $ 312 $ 3,842
------- -------
(1) The interest expense shown for each segment includes interest charged
or earned on inter-segment advances.
(2) Total assets for United States include parent/administrative assets.
Major Customers
---------------
During the three months ended March 31, 2002 and 2001, one customer
(included in the United Kingdom operations) accounted for 18.2% and 17.8%,
respectively, of the Company's consolidated net sales. One additional customer
(included in the United States and other operations) accounted for 15.0% of the
Company's consolidated net sales for the three months ended March 31, 2002,
compared to 12.7% during the same period in 2001. The Company's top five
customers accounted for 51.6% and 47.3% of consolidated net sales during the
three months ended March 31, 2002 and 2001, respectively.
During the six months ended March 31, 2002 and 2001, one customer (included
in the United Kingdom operations) accounted for 18.7% and 17.1%, respectively,
of the Company's consolidated net sales. One additional customer (included in
the United States and other operations) accounted for 13.7% of the Company's
consolidated net sales for the six months ended March 31, 2002, compared to
12.2% during the same period in 2001. The Company's top five customers
accounted for 48.9% and 47.3% of consolidated net sales during the six months
ended March 31, 2002 and 2001, respectively.
7. Commitments and Contingencies
Westinghouse License
--------------------
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. 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.
10
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Originally, subject to the minimum sales conditions discussed below, the
agreement would terminate on September 30, 2002, with the Company having options
to extend the agreement for two additional five-year terms. 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.
Effective as of October 1, 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. Net sales of
Westinghouse branded products amounted to $5.8 million and $8.3 million for the
six months ended March 31, 2002 and 2001, respectively. Management does not
believe that the loss of the Westinghouse license will have a material effect on
the Company's financial condition or results of operations.
Litigation
----------
During the past few years, the Company has received a number of claims
relating to halogen torchieres sold by the Company to various retailers. The
Company maintains primary product liability insurance coverage of $1 million per
occurrence and $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 the Company to self-insure for
up to $10,000 per incident. Based on experience, the Company has accrued
$304,000 for this contingency as of March 31, 2002. No assurance can be given
that the number of claims will not exceed historical experience, 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. In the complaint, the Company 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 $1.8 million for the appeal (for which the Company posted $1.5 million
in cash collateral). Based upon advice of counsel, the Company believes that it
ultimately will not be found liable for patent infringement in this case.
Accordingly, no provision for loss has been recorded in the accompanying March
31, 2002 Condensed Consolidated Financial Statements for this matter. In March
2002, the U.S. Court of Appeals for the Eleventh Circuit heard oral arguments
regarding the case. The decision of the U.S. Court of Appeals is currently
pending.
Kmart Bankruptcy
----------------
On January 22, 2002, Kmart Corporation filed a Chapter 11 bankruptcy
petition with the U.S. Bankruptcy Court for the Northern District of Illinois.
The Company's sales to Kmart amounted to $10.7 million for the year ended
September 30, 2001 and $1.3 million and $4.6 million for the six months ended
March 31, 2002 and 2001, respectively. The Company has no outstanding
receivables from Kmart for the period prior to January 22, 2002, and has resumed
shipments subsequent to the bankruptcy filing. The Company is continuing to
assess the effect of the bankruptcy proceedings on future sales to Kmart.
Pension Plan
------------
Ring has a defined benefit pension plan which covers 22 current employees and
approximately 750 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 Company reviews the plan on a periodic basis, and in the
future it may determine to continue the plan or terminate the plan. If the
Company were to terminate the plan, it is anticipated that this would require
accelerated payments based on the "Minimum Funding Requirement " ("MFR")
shortfall. The most recent estimate as of March 2002 placed the MFR shortfall
at approximately $3.2 million. The U.K. government announced that it intends to
abolish the MFR and to replace it with funding standards individually tailored
to the circumstances of plans and employers.
11
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Based on current information, it appears that this change is not likely to occur
before April 2003. Should the Company not terminate its U.K. pension plan prior
to that date, the cost to terminate the plan under the new rules could be
significantly greater than the current $3.2 million deficit under the MFR
method.
IRS Audit
---------
The Internal Revenue Service has started its field work in its examination
of the Company's 1999 tax return. To date, no adjustments have been proposed.
Management believes that adequate provision for taxes has been made for the
years under examination and those not yet examined.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements in this Quarterly Report on Form 10-Q 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 or absence 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 affect 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-Q
and our Annual Report on Form 10-K for the fiscal year ended September 30, 2001,
as amended. 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.
In the following comparison of the results of operations, the three and six
months ended March 31, 2002 and 2001 are referred to as "Q2 2002" and "YTD
2002", respectively, and "Q2 2001" and "YTD 2001", respectively. Unless
otherwise noted, U.S. dollar equivalents of foreign currency amounts are based
upon the exchange rates prevailing at March 31, 2002.
Comparison of Three Months Ended March 31, 2002 and 2001
Consolidated Results
We had operating income of $3.6 million in Q2 2002 compared to an operating
loss of $2.2 million in Q2 2001. The $5.8 million operating income improvement
primarily resulted from an increase in gross profit combined with a significant
decrease in selling, general and administrative expenses ("SG&A"). These
improvements resulted in net income of $336,000, or $.07 per diluted share, in
Q2 2002, compared to a net loss of $3.4 million, or $2.29 per diluted share, in
Q2 2001. Included in Q2 2002 is a $1.1 million write-down on property held for
sale.
Net sales for Q2 2002 were $54.0 million, a $1.8 million decrease from the
same period in the prior year. The decrease in net sales is primarily
attributable to lower sales in the United States and Continental Europe.
Shipments to Kmart during the quarter were $1.2 million below the same period in
the prior year. Kmart filed a Chapter 11 bankruptcy petition with the U.S.
Bankruptcy Court for the Northern District of Illinois on January 22, 2002. We
are continuing to assess the effect of the bankruptcy proceedings on future
sales to Kmart. Continued weakness in the economy and other competitive factors
also continue to affect order volume with other North American customers. See
"Results by Segment" for further discussion.
Portable lamps, hardwired lighting fixtures, automotive after-market
products and industrial consumables accounted for 29%, 52%, 14% and 5% of net
sales in Q2 2002 compared to 37%, 44%, 14% and 5% in Q2 2001. In Q2 2002 and Q2
2001, Ring's largest customer, B & Q, a subsidiary of Kingfisher PLC, accounted
for $9.8 million (18%) and $9.9 million (18%), respectively, of our net sales.
In Q2 2002 and Q2 2001, Home Depot accounted for $8.1 million (15%) and $7.1
million (13%), respectively, of our net sales. Sales made from warehouses
constituted 65% of our net sales in Q2 2002, up from 63% in Q2 2001.
Gross profit in total dollars increased from $8.0 million in Q2 2001
to $11.9 million in Q2 2002. Gross profit as a percentage of sales increased
from 14.3% in 2001 to 22.1% in Q2 2002. The increase in gross profit as a
13
percentage of sales is attributable primarily to decreased warehousing costs,
product development costs and freight costs as well as a more favorable product
mix resulting from new product introductions.
SG&A for Q2 2002 was $8.3 million, a decrease of $1.8 million from the same
period in the prior year. The decrease in SG&A is a result of our Company-wide
efforts to reduce operating and overhead costs. Expense categories in which we
experienced significant declines included payroll and related expenses in the
U.S. ($546,000), the United Kingdom ($384,000), and Hong Kong ($175,000), travel
and entertainment ($264,000), partially offset by employee related severance
($221,000). See "Results by Segment" for further discussion.
Interest expense was $1.9 million in Q2 2002 compared to $1.8 million in Q2
2001. The increased expense is primarily attributable to the amortization of
debt discount and financing costs associated with the subordinated notes issued
in July 2001 ($360,000 of non-cash charges), partially offset by lower average
outstanding borrowings.
Other expenses of $69,000 for Q2 2002 consisted primarily of a net foreign
currency loss ($142,000), dividends on Ring convertible preference stock
($42,000), equity in loss of unconsolidated joint ventures ($44,000), partially
reduced by interest income ($18,000), and a gain on sale of property in the
United Kingdom ($138,000). Other expenses of $133,000 in Q2 2001 consisted
primarily of net foreign currency loss ($148,000), dividends on Ring convertible
preference stock ($42,000), equity in loss of unconsolidated joint venture
($8,000), partially offset by interest income ($48,000) and miscellaneous income
($17,000).
During the three months ended March 31, 2002, the Company began actively
marketing for sale its underutilized Tupelo, Mississippi distribution center,
which had a carrying value of $8.1 million as of March 31, 2002. On May 6,
2002, the building and substantially all of the equipment in the distribution
center were sold to a third party, resulting in a loss on sale of $1.1 million.
This loss is reflected in the March 31, 2002 financial statements as a write-
down of assets held for sale. The net proceeds from the sale after the pay-off
of the mortgage bonds of approximately $3.3 million were used to pay down the
Company's term loans.
The effective income tax rates for Q2 2002 and Q2 2001 were 32.4% and
18.6%, respectively. The lower effective tax rate for Q2 2001 is attributable to
significant losses, primarily in foreign jurisdictions, for which no benefit
could be recorded. 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 rate reflects the anticipated tax benefits associated
with the 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 4 of Notes to Consolidated Condensed Financial Statements for the
financial tables for each business segment.
Catalina Industries (United States)
Catalina Industries had a segment loss in Q2 2002 of $495,000 as compared
to a segment loss of $882,000 in Q2 2001. The increase in segment contribution
in Q2 2002 is primarily attributable to decreased SG&A and other operating
costs, partially offset by the $1.1 million impairment loss on assets held for
sale.
Sales by Catalina Industries to external customers were $14.9 million in Q2
2002, a decrease of $1.0 million from Q2 2001. Sales to Home Depot were $7.2
million, or $1.6 million more than in Q2 2001, while sales to the office
superstores (Office Depot and Staples), WalMart and Kmart decreased by $1.2
million, $734,000 and $1.2 million, respectively. In Q2 2002, Home Depot,
WalMart, Lowes, Staples and Kmart accounted for 48%, 15%, 7%, 4% and 4%,
respectively, of Catalina Industries' net sales and in Q2 2001, 35%, 19%, 4%,
4%, and 11%, respectively.
Gross profit for Catalina Industries was $2.0 million in Q2 2002 compared
to $1.0 million in 2001. Gross profit as a percentage of net sales increased
from 6.2% in Q2 2001 to 13.2% in Q2 2002. The increase in gross
14
profit as a percentage of net sales is primarily attributable to changes in our
customer mix, as well as reduced product development expenses and warehousing
costs.
Presently, most major U.S. customers (including Home Depot, Staples, Lowes,
Kmart and Wal-Mart) purchase from Catalina Industries primarily on a direct
basis, whereby the merchandise is shipped directly from the factory to the
customer, rather than from the warehouse. Catalina Industries serves these
customers by placing orders directly with our factory in China and with other
Far East suppliers. As more U.S. customers have changed their sourcing method,
warehouse sales to U.S. customers have 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 annual U.S. sales compared
to 17.8% for the current quarter. This percentage decline represents a
significant reduction in orders flowing through the Tupelo warehouse. As a
result of this decline in warehouse business, the Company began actively
marketing the Tupelo warehouse for sale in Q2 2002. On May 6, 2002, the
building and substantially all the equipment in the building was sold to a third
party, resulting in a loss on sale of $1.1 million. This loss is reflected in
the March 31, 2002 financial statements as a write-down of assets held for sale.
SG&A decreased from $2.0 million in Q2 2001 to $1.5 million in Q2 2002.
This decrease reflects reduced salary and related costs, travel and
entertainment, merchandising and tradeshow costs, partially offset by employee
severance costs.
Go-Gro (China)
Go-Gro's segment contribution in Q2 2002 was $1.3 million, compared to
$987,000 in Q2 2001.
Go-Gro's sales for Q2 2002 were $20.0 million, a decrease of $2.5 million
from the $22.5 million generated in Q2 2001. Sales of products manufactured by
Go-Gro in Q2 2002 (as opposed to sales of products purchased for resale by Go-
Gro from other manufacturers) decreased by $1.3 million, to $10.7 million.
Third-party and intercompany sales by Go-Gro in Q2 2002 were $4.1 million and
$15.9 million, respectively, while the comparable sales amounts for Q2 2001 were
$5.4 million and $17.1 million, respectively. The decline in the intercompany
sales in Q2 2002 primarily reflects the lower overall sales to Catalina
Industries attributable to a decline in Catalina Industries' U.S. business.
Sales to one third-party customer were $1.7 million in Q2 2002 and $2.0 million
in Q2 2001.
SG&A decreased from $1.9 million in Q2 2001 to $1.4 million in Q2 2002,
primarily as a result of lower payroll and related costs, lower travel and
entertainment and lower third party management fees, partially offset by
increased bad debt expense.
Ring Limited (United Kingdom)
Ring's segment contribution for Q2 2002 was $1.8 compared to a loss of $1.4
million in Q2 2001.
Net sales and gross profit for Q2 2002 were $28.0 million and $5.7 million,
respectively, as compared to $27.8 million and $3.3 million, respectively, for
the same period of 2001. While net sales in Q2 2002 were relatively consistent
with Q2 2001, gross profit percentage increased to 20.4% in Q2 2002 compared to
11.9%, primarily as a result of a change in product mix, reduced freight charges
and lower warehousing costs as a result of personnel reductions.
SG&A was $3.0 million in Q2 2002 compared to $3.4 million in Q2 2001. The
decrease is primarily related to lower salary and related costs.
Comparison of Six Months Ended March 31, 2002 and 2001
Consolidated Results
We had operating income of $5.3 million in YTD 2002 compared to an
operating loss of $2.6 million in YTD 2001. The $7.9 million operating income
improvement primarily resulted from an improvement in gross profit
15
and a significant decrease in SG&A. The expense reduction and improvement in
operating income resulted in net income of $140,000, or $.03 per diluted share,
in YTD 2002 compared to a net loss of $5.3 million, or $3.58 per diluted share,
in YTD 2001. Included in YTD 2002 is a $1.1 million write-down of assets held
for sale.
Net sales for YTD 2002 were $110.1 million, a $10.3 million decrease from
the same period in the prior year. The decrease in net sales is primarily
attributable to lower sales in the United States, Continental Europe and Canada.
Shipments to Kmart during the six months were $3.2 million below the same period
in the prior year. Kmart filed a Chapter 11 bankruptcy petition with the U.S.
Bankruptcy Court for the Northern District of Illinois on January 22, 2002. We
are continuing to assess the effect of the bankruptcy proceedings on future
sales to Kmart. Continued weakness in the economy and other competitive factors
also continue to affect order volume with other North American customers. See
"Results by Segment" for further discussion.
Portable lamps, hardwired lighting fixtures, automotive after-market
products and industrial consumables accounted for 31%, 49%, 15% and 5% of net
sales in YTD 2002 compared to 38%, 45%, 12% and 5% in YTD 2001. In YTD 2002 and
YTD 2001, Ring's largest customer, B & Q, a subsidiary of Kingfisher PLC,
accounted for $20.6 million (19%) and $20.6 million (17%), respectively, of our
net sales. In YTD 2002 and YTD 2001, Home Depot accounted for $15.1 million
(14%) and $14.7 million (12%), respectively, of our net sales. Sales made from
warehouses constituted 65% of our net sales in YTD 2002, up from 59% in YTD
2001.
Gross profit in total dollars increased from $18.1 million in YTD 2001 to
$21.9 million in YTD 2002, and gross profit as a percentage of sales increased
from 15.1% in 2001 to 19.9% in YTD 2002. The increase in gross profit as a
percentage of sales is attributable primarily to changes in our customer mix as
well as decreased warehousing and product development costs as a result of our
initiatives to lower operating costs.
SG&A for YTD 2002 was $16.6 million, a decrease of $4.2 million from the
same period in the prior year. The decrease in SG&A is a result of our Company-
wide efforts to reduce operating and overhead costs. Expense categories in
which we experienced significant declines included payroll and related expenses
in the U.S. ($1.2 million), the United Kingdom ($756,000), and Hong Kong
($248,000), travel and entertainment ($427,000), merchandising and displays
($190,000), bad debt and VAT tax provisions ($769,000), proceeds from insurance
claim, net of expenses incurred ($224,000), partially offset by employee related
severance ($284,000) and management fees ($250,000). See "Results by Segment"
for further discussion.
Interest expense was $3.9 million in YTD 2002 compared to $3.4 million in
YTD 2001. The increased expense is primarily attributable to the amortization of
debt discount and financing costs associated with the subordinated notes issued
in July 2001 ($617,000 of non-cash charges), partially offset by lower average
outstanding borrowings.
Other expenses of $127,000 for YTD 2002 consisted primarily of a net
foreign currency loss ($211,000), dividends on Ring convertible preference stock
($87,000), equity in loss of unconsolidated joint ventures ($135,000), partially
reduced by a gain on sale of Ring property ($138,000) and interest income
($109,000) and other miscellaneous income ($62,000). Other expenses of $315,000
in YTD 2001 consisted primarily of net foreign currency loss ($298,000),
dividends on Ring convertible preference stock ($86,000) and equity in loss of
unconsolidated joint ventures ($54,000), partially offset by interest income
($128,000).
The effective income tax rates for YTD 2002 and YTD 2001 were 33.0% and
16.6%, respectively. The lower effective tax rate for YTD 2001 is attributable
to significant losses, primarily in foreign jurisdictions, for which no benefit
could be recorded. 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 rate reflects the anticipated tax benefits associated
with the 1999 restructuring of our international operations. Should these tax
benefits not materialize, we may experience an increase in our effective
consolidated income tax rate.
16
Results By Segment
See Note 6 of Notes to Consolidated Condensed Financial Statements for the
financial tables for each business segment.
Catalina Industries (United States)
Catalina Industries had a segment profit in YTD 2002 of $5,000 as compared
to a segment loss of $1.4 million in YTD 2001. The increase in segment
contribution in YTD 2002 is primarily attributable to an improvement in gross
profit and decreased SG&A and other operating costs.
Sales by Catalina Industries to external customers were $28.9 million in
YTD 2002, a decrease of $6.4 million from YTD 2001. Sales to Home Depot were
$13.4 million or $3.1 million more than in YTD 2001, while sales to WalMart,
Kmart and the office superstores (Office Depot and Staples) decreased by $3.9
million, $3.2 million and $1.5 million, respectively. In YTD 2002, Home Depot,
WalMart, Staples, Lowes and Kmart accounted for 47%, 10%, 7%, 7%, and 5%,
respectively, of Catalina Industries' net sales and in YTD 2001, 29%, 19%, 5%,
6% and 13%, respectively.
Gross profit for Catalina Industries was $3.8 million in YTD 2002 compared
to $2.5 million in 2001. Gross profit as a percentage of net sales increased
from 7.1% in YTD 2001 to 13.2% in YTD 2002. The increase in gross profit as a
percentage of net sales is primarily attributable to changes in our customer
mix, as well as reduced product development expenses and warehousing costs .
Presently, most major U.S. customers (including Home Depot, Staples, Lowes,
Kmart and Wal-Mart) purchase from Catalina Industries primarily on a direct
basis, whereby the merchandise is shipped directly from the factory to the
customer, rather than from the warehouse. Catalina Industries serves these
customers by placing orders directly with our factory in China and with other
Far East suppliers. As more U.S. customers have changed their sourcing method,
warehouse sales to U.S. customers have 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 annual U.S. sales compared
to 20.0% for the six months. This percentage decline represents a significant
reduction in orders flowing through the Tupelo warehouse. As a result of this
decline in warehouse business, the Company began actively marketing the Tupelo
warehouse for sale in Q2 2002. On May 6, 2002, the building and substantially
all the equipment in the building were sold to a third party, resulting in a
loss on sale of $1.1 million. This loss is reflected in the March 31, 2002
financial statements as a write-down on assets held for sale.
SG&A decreased from $4.2 million in YTD 2001 to $2.9 million in YTD 2002.
This decrease reflects reduced salary and related costs, travel and
entertainment, merchandising costs, legal and professional fees and bad debt
expense.
Go-Gro (China)
Go-Gro's segment contribution in YTD 2002 was $2.3 million, compared to
$3.0 million in YTD 2001.
Go-Gro's sales for YTD 2002 were $42.2 million, a decrease of $11.3 million
from the $53.5 million generated in YTD 2001. Sales of products manufactured by
Go-Gro in YTD 2002 (as opposed to sales of products purchased for resale by Go-
Gro from other manufacturers) decreased by $6.8 million, to $24.0 million.
Third-party and intercompany sales by Go-Gro in YTD 2002 were $9.7 million and
$32.5 million, respectively, while the comparable sales amounts for YTD 2001
were $13.3 million and $40.2 million, respectively. The decline in the
intercompany sales in YTD 2002 primarily reflects the lower overall sales to
Catalina Industries and Catalina Canada attributable to a decline in U.S. and
Canadian business. Sales to one third-party customer were $3.6 million in YTD
2002 and $5.8 million in YTD 2001.
SG&A decreased from $3.8 million in YTD 2001 to $3.0 million in YTD 2002,
primarily as a result of lower payroll and related costs, travel and
entertainment and lower third-party management fees and lower bank charges.
17
Ring Limited (United Kingdom)
Ring's segment contribution for YTD 2002 was $2.2 million compared to a
loss of $2.5 million in YTD 2001.
Net sales and gross profit for YTD 2002 were $58.0 million and $10.2
million, respectively, as compared to $56.0 million and $6.8 million,
respectively, for the same period of 2001. The increase in net sales is
primarily attributable to growth in Ring's automotive division. Gross profit
percentage increased to 17.7% in YTD 2002 compared to 12.1% for the same period
in 2001, primarily as a result of a change in product mix, reduced freight
charges and lower warehousing costs as a result of personnel reductions.
SG&A was $6.0 million in YTD 2002 compared to $6.7 million in YTD 2001.
The decrease is primarily related to lower salary and related costs.
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 and capital stock are sources for our longer-term liquidity
and financing needs.
Cash Flows and Financial Condition
We used funds generated from operations of $3.2 million, proceeds from the
sale of property and cash on hand to pay down debt of $6.1 million and make
capital investment of $312,000. Availability under our revolving credit facility
increased from $7.9 million at September 30, 2001 to $12.9 million at March 31,
2002.
Accounts receivable balances increased to $29.6 million at March 31, 2002
from $27.8 million at September 30, 2001 primarily as a result of significantly
higher sales in the Ring segment during the three months ended March 31, 2002
compared to the three months ended September 30, 2001. Inventory levels at
March 31, 2002 were $33.7 million, as compared to $37.4 million at September 30,
2001, due to our focus on lowering our inventories in each of our principal
business segments.
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 $10,692,000 and
$10,442,000 at March 31, 2002 and September 30, 2001, 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 originally amounting to $15 million and
the 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 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.
18
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 our term loans and cash payments by Ring to other Company subsidiaries
are limited to trade transactions in the normal course of business.
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 private
investment firm based in Boca Raton, Florida) and other parties. Our $75
million credit facility was amended and restructured in connection with the Sun
transaction.
As a part of the restructuring, 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
U.S. $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
9.4% at March 31, 2002. Under the amended facility, we are required to meet
minimum levels of adjusted quarterly earnings beginning with the quarter ended
September 30, 2001 and 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 on December 31, 2003. The bank syndication
group's fee for the amendment consisted of the right to obtain warrants to
purchase 354,136 (pre-reverse split) shares of common stock at a price of $.01
per share (pre-reverse split). 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 was not completed by December 31, 2001, 50 basis points
would be added to the facility's effective interest rate. We did not complete
the whitewash procedure by December 31, 2001 and, consequently, the effective
interest rate on the credit facility increased.
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 $7.0
million, $4.5 million, $1.0 million and $585,000, respectively, at March 31,
2002.
19
Catalina Canada has a credit facility with a Canadian company that provides
U.S. dollar and Canadian dollar revolving credit loans up to $7 million Canadian
dollars in the aggregate. The facility matures in 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 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 us 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 March 31, 2002, Go-Gro had used none of this line for
letters of credit and there were no borrowings. The Hong Kong bank from time to
time also requires Go-Gro to maintain additional collateral in the form of cash
deposits as security on this facility. At March 31, 2002, such deposits
amounted to $328,000.
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. Our
$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 the fact that the whitewash
procedure is not yet completed also restrict the amount of funds that may be
transferred from Ring to our U.S. companies and other subsidiaries. Our 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 us or our 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 April 29, 2002, we had $14.5 million available under our
revolving facilities to support U.S. and U.K. operations, an increase of $7.9
million from September 30, 2001.
Since July 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. As of March 31, 2002, we were in
compliance with the terms and covenants of our $75 million credit facility.
Based upon (i) current assessments of market conditions for our business and
(ii) sales, profitability and cash flow projections, we believe we will continue
to be in compliance with the terms and covenants of our $75 million credit
facility and that we will have adequate available borrowings and other sources
of liquidity for the remainder of the 2002 fiscal year. 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.
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. The note holders are also entitled to
20
additional warrants to purchase shares of common stock at $.01 per share (pre-
reverse split) 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
March 31, 2002, for which the note holders received additional warrants to
purchase, in the aggregate, 473,706 (pre-reverse split) shares of common stock.
We will be required to issue additional warrants for up to 561,883 (pre-reverse
split) shares of common stock if interest payments do not commence until March
31, 2003.
Ring Preference Shares
We have accrued approximately $298,000 as of March 31, 2002 for the payment
of dividends on Ring's preference shares. Presently Ring does not have
sufficient equity under English law to repay these dividends. We will continue
to accrue these dividends until such time as Ring generates sufficient profits
to allow payment.
Westinghouse License
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. 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. Originally, subject to the minimum
sales conditions discussed below, the agreement would terminate on September 30,
2002, after which we had options to extend the agreement for two additional
five-year terms. 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. Effective as of October 1, 2001, we and Westinghouse
signed an amendment to the license agreement that eliminates the minimum net
shipments requirement but also eliminates our option to extend the license
agreement upon the agreement's expiration on September 30, 2002. Net sales of
Westinghouse branded products amounted to $5.8 million and $8.3 million for the
six months ended March 31, 2002 and 2001, respectively. We do not believe that
the loss of the Westinghouse license will have a material effect on our
financial condition or results of operations.
Litigation
During the past few years, we received a number of claims relating to
halogen torchieres sold by us 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. Based on experience,
we have accrued $304,000 for this contingency as of March 31, 2002. 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 the same level of insurance.
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 the complaint, 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 the appeal (for which we posted $1.5 million in
cash collateral). 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 March 31, 2002 Condensed Consolidated Financial
Statements for this matter. In March 2002, the U.S. Court of Appeals for the
Eleventh Circuit heard oral arguments regarding the case. The decision of the
U.S. Court of Appeals is currently pending.
Other Matters
Our ability to import products from China at current tariff levels could be
materially and adversely affected if the normal trade relations ("NTR", formerly
"most favored nation") status the U.S. government has granted to China for trade
and tariff purposes is terminated. As a result of its NTR status, China
receives the same favorable tariff
21
treatment that the United States extends to its other "normal" trading partners.
China's NTR status, coupled with its admission to the World Trade Organization
("WTO"), 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.
Ring has a defined benefit pension plan which covers 22 current employees
and over 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 future of 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
March 31, 2002 placed the MFR shortfall at approximately $3.2 million. The U.K.
government announced 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 plan under the new rules is
likely to be significantly greater than the current $3.2 million deficit under
the MFR method.
As of June 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 the Company. 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
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141"), was issued in July 2001. 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 purchase method. SFAS 141 became
effective June 30, 2001. The adoption of SFAS 141 did not have a material impact
on our financial position, results of operations or cash flows for the three
months or six months ended March 31, 2001.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), was also issued in July 2001. 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
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 April 2002, we have not assessed the impact of
adopting SFAS 142.
Statement of Financial Accounting Standards No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" ("SFAS 143"),
was also issued in July 2001. 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.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), was issued in October
2001. SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operation-Reporting the Effects of Disposal
22
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). SFAS 144 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 fiscal years beginning after December 15, 2001, and early adoption
is permitted. We are currently assessing this new standard and have not yet
determined its impact on our consolidated results of operations, cash flows or
financial position.
Impact of Inflation and Economic Conditions
Go-Gro has periodically experienced price increases in the costs of raw
materials, which reduce 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 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our market risk exposure during the
six months ended March 31, 2002 that would require an update to the disclosure
in our Annual Report on Form 10-K for the fiscal year ended September 30, 2001,
as filed with the Securities and Exchange Commission on December 24, 2001.
23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In our Annual Report on Form 10-K for the fiscal year ended September 30,
2001, as filed with the Securities and Exchange Commission on December 24, 2001,
we reported that we have appealed a judgment of $1.6 million for damages and
interest thereon that was entered by the U.S. District Court for the Southern
District of Florida in June 2001 in connection with a patent infringement
counterclaim filed against us in Catalina Lighting, Inc. v. Lamps Plus, Civil
Action 99-7200. As we reported, we have posted a surety bond in the amount of
$1.8 million for the appeal (for which we posted $1.5 million in cash
collateral). In March 2002, the U.S. Court of Appeals for the Eleventh Circuit
heard oral arguments regarding the case. The decision of the U.S. Court of
Appeals is currently pending. We believe that we ultimately will not be found
liable for patent infringement in this case.
In addition, during the past few years, we have received a number of claims
relating to halogen torchieres sold by us 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.
Based on experience, we have accrued $304,000 for this contingency as of March
31, 2002. 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 the same 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
The Company held its Annual Meeting of Shareholders on March 14, 2002. One
matter was considered and voted upon at the Annual Meeting: the election of nine
persons to serve as directors for a one-year term.
The nominations of Eric Bescoby, Kevin J. Calhoun, C. Deryl Couch, Michael
H. Kalb, Rodger R. Krouse, Marc J. Leder, George R. Rea, Patrick J. Sullivan and
Clarence E. Terry were considered and ultimately approved, by the votes set
forth below.
Votes Votes
For Withheld
--------------- ----------------
Eric Bescoby 9,205,284 375,377
Kevin J. Calhoun 9,204,284 376,377
C. Deryl Couch 9,204,284 376,377
Michael H. Kalb 9,557,261 23,400
Rodger R. Krouse 9,204,684 375,977
Marc J. Leder 9,204,684 375,977
George R. Rea 9,580,261 400
Patrick J. Sullivan 9,580,261 400
Clarence E. Terry 9,204,284 376,377
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description
--------- ---------------------------------------------------------------------
10.32(b) Amendment No. 1 to Consulting and Non-Competition Agreement by and
between the registrant and William D. Stewart, effective as of
January 1, 2002.
10.37 Warrant to Purchase Shares of Common Stock by the registrant in favor
of Robert H. Patterson, dated January 24, 2002.
(b) Reports on Form 8-K.
None.
* * * * *
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CATALINA LIGHTING, INC.
/s/ Eric Bescoby
------------------------------
Eric Bescoby
Chief Executive Officer
/s/ Lynn Skillen
------------------------------
Lynn Skillen
Chief Financial Officer
(Chief Accounting Officer)
Date: May 6, 2002
25
INDEX TO EXHIBITS
Exhibit
Number Description
--------- ---------------------------------------------------------------------
10.32(b) Amendment No. 1 to Consulting and Non-Competition Agreement by and
between the registrant and William D. Stewart, effective as of
January 1, 2002.
10.37 Warrant to Purchase Shares of Common Stock by the registrant in favor
of Robert H. Patterson, dated January 24, 2002.
26