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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
(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, 1999
OR
[ ] TRANSITION PERIOD PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from_______________________ to______________________
COMMISSION FILE NO: 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 New York Stock Exchange
$.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.[ ]
Page 1
The aggregate market value of voting stock held by non-affiliates of the
Registrant computed by reference to the closing price of such stock, as reported
by the New York Stock Exchange, on December 15, 1999 was $35.6 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Company for its 2000
Annual Meeting of Stockholders or the Company's Form 10K/A are incorporated by
reference into Part III.
Number of shares outstanding of Registrant's common stock, as of
December 15, 1999: 6,950,746.
Exhibit Index at Page 61
Page 2
FORM 10-K
CATALINA LIGHTING, INC.
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (this "Form
10-K"), including statements under "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
including without limitation expectations as to future sales and operating
results, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Words such
as "expects," "anticipates," "believes," "plans," "intends," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Catalina Lighting, Inc. and its subsidiaries (the "Company")
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
but are not limited to, the following: the highly competitive nature of the
lighting industry; reliance on certain key customers; consumer demand for
lighting products; dependence on imports from China; general economic and
business conditions; advertising and promotional efforts; brand awareness; the
existence or absence of adverse publicity; acceptance of new product offerings;
changing trends in customer tastes; availability, terms and deployment of
capital; availability and cost of raw materials and supplies; the costs and
other effects of legal and administrative proceedings; foreign exchange rates;
changes in the Company's effective tax rate (which is dependent on the Company's
U.S. and foreign source income); and other factors referenced in this Form 10-K.
The Company will not undertake and specifically declines any obligation to
update or correct any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
ITEM 1. BUSINESS.
GENERAL
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 designs, manufactures, contracts for the manufacture of,
imports and distributes a broad line of lighting fixtures and lamps under the
Westinghouse(R) brand, and the Catalina(R), Dana(R) and Illuminada(R) trade
names. The Company also functions as an original equipment manufacturer, selling
goods under its customers' private labels. The Company sells principally 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. The Company also sells its
products in Europe and Canada, and, to a lesser extent, in Mexico. Currently,
its product line is comprised almost entirely of lighting fixtures and lamps.
The Company has supplemented its product lines through acquisitions but has
remained focused on lighting products.
STRATEGY
In order to expand its retail distribution network and more efficiently
and profitably service its customers, the Company focuses on the following
strategies:
TARGETED DISTRIBUTION. The Company distributes a diverse product line
through multiple retail channels. The Company targets rapidly growing and large
retailers, including leading home centers, office product superstores, mass
merchandisers, warehouse clubs and discount department stores. Large retailers
assure a broad distribution of a variety of the Company's products while
high-growth retailers provide the Company with rapid penetration of selected
industry segments. The Company's distribution strategy provides it with numerous
sources of demand and promotes the Company's brand names broadly throughout the
residential and office lighting markets in the United States, Europe, Canada and
Mexico.
PROGRAM SELLING. In its primary markets, the Company strives to be the
primary source of lighting products to its retailers by offering a complete
program of lighting products in a variety of categories. The availability of
over 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 source most of their lighting products
through the Company on a "one stop shopping" basis. The Company believes that
its broad selection of affordable products coupled with its ability to aid its
retail customers in developing a complete lighting program gives it a
competitive advantage.
Page 3
INTERNATIONAL EXPANSION. The Company's Hong Kong based subsidiary,
Go-Gro Industries Limited ("Go-Gro"), sells its products to wholesale
distributors in Europe. Go-Gro is also a major supplier to the Company's U.S.,
Canadian and Mexican subsidiaries. Management believes the Company's products
and services are well suited for further growth in Europe, Canada, Mexico and
other international markets.
TURNKEY DEPARTMENTS. The Company consults with many of its retail
customers to establish departments which allow the Company to display its
products in a customized layout designed to meet each retailer's specific
merchandising and marketing goals. The Company can design, assemble and maintain
these departments and provide the retailer with shelving plan-o-grams, signs,
point-of-purchase promotional strategies and in-store inventory stocking
programs. Turnkey departments ensure the Company's retail customers efficient
and convenient management of the Company's products within their stores and
allow the Company to maintain an attractive and informative presentation of its
products.
WAREHOUSE SUPPLY OF IMPORTED GOODS. The Company's warehouses in the
United States, Canada and Mexico enable it to provide its customers with the
advantage of short delivery time. Warehouse sales allow retailers to receive
products in several days as compared to several months for items shipped
directly to them from China. Timely deliveries increase the customer's inventory
turns and profits making the Company a valuable partner in the retailer's
business.
OPERATING SEGMENTS
The Company operates in the United States and China, and to a lesser
extent, Canada and Mexico. The Company considers its primary operating segments
to be the United States 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 China-based operations are made primarily
into Europe and net sales to external customers by all other segments are made
primarily into Canada and to a lesser extent Mexico.
PRODUCTS
The Company markets a diverse product line used primarily in
residential and office settings. The Company's product line is comprised almost
entirely of two main categories: lighting fixtures and lamps. Lighting fixtures
consist of outdoor/security lighting, chandeliers, recessed and track lighting,
and wall and ceiling lights. Lamps sold by the Company 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 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. The Company also sells other
lighting-related products such as flashlights. The Company may continue to
expand its product lines internally or through acquisitions.
The Company's products are manufactured and assembled according to the
Company's design specifications. The finished products are packaged and labeled
under one of the Company's brand names: Westinghouse(R), Catalina(R), Dana(R)
and Illuminada(R). The Company also functions as an original equipment
manufacturer, selling goods under its customers' private labels.
CUSTOMERS
The Company distributes its products in North America principally
through major retail outlets, including home centers, office superstore chains,
mass merchandisers, discount department stores and warehouse clubs. Products are
also sold to a large extent in Europe to wholesale distributors under their
private labels and to select retail customers in Europe, Mexico, Australia and
China. In fiscal 1999 and 1998, Home Depot accounted for 25.8% and 27.5%,
respectively, of the Company's net sales and Wal-Mart accounted for 14.5% and
5.3%, respectively, of the Company's net sales. For the fiscal years ended
September 30, 1999 and 1998, net sales to the Company's ten largest customers
represented approximately 73% and 66%, respectively, of the Company's net sales.
The Company believes its relationships with its customers are good.
DISTRIBUTION METHODS
The Company utilizes two distribution methods to sell products:
warehouse sales and direct sales. The backlogs of unshipped orders at September
30, 1999 and 1998 were approximately $24.9 million and $26.3 million,
respectively, and at December 15, 1999 and 1998 were approximately $24.3 million
and $28.3 million, respectively. Although these orders are subject to
cancellation by the customers, the Company believes substantially all such
orders are firm.
Page 4
The Company purchases products overseas for its own account and
warehouses the products in a 473,000 square foot Company-owned facility in
Tupelo, Mississippi and in leased facilities in Toronto, Canada and in Mexico
City, Mexico. The Company is 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. For the fiscal years ended September
30, 1999 and 1998, warehouse sales accounted for 25% and 33%, respectively, of
net sales.
The Company's direct sales are made either by delivering lighting
products to the 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 not be transferable depending on
whether the goods are manufactured by Go-Gro) or on open credit with the
Company. Upon receipt of a customer's transferable letter of credit, the Company
transfers the portion of the letter of credit covering the cost of merchandise
to its supplier. The terms of the transfer provide that draws may not be made by
the supplier until the Company is entitled to be paid pursuant to the terms of
the customer's letter of credit. The Company has the right to draw upon the
customer's letter of credit once the products are inspected by the Company or
its 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. For fiscal years ended September 30, 1999
and 1998, 75% and 67%, respectively, of net sales were attributable to direct
sales.
The relative proportion of the Company's sales generated by each method
is dependent upon customer buying preferences and Company 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
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, thus
customer buying preferences over time can be inherently difficult to predict.
SOURCES OF PRODUCTS
Virtually all of the products sold by the Company are obtained from
factories located in China. The Company manufactures a portion of these products
and purchases the remainder from independent suppliers.
In 1994 the Company purchased Go-Gro, a lighting products manufacturer
with its administrative office located in Hong Kong and production facilities
located in the Guangdong Province of China. Go-Gro's production equipment is
owned by Shenzhen Jiadianbao Electrical Products Co., Ltd. ("SJE"), Go-Gro's
cooperative joint venture subsidiary. Approximately 50% of SJE's factory
buildings are leased from the Company's joint venture partner in SJE, Shenzhen
Baoanqu Fuda Industries Co. Ltd. ("Fuda"), a Chinese company, the remaining 50%
is owned by SJE. Under the terms of the cooperative joint venture agreement with
Fuda, Go-Gro receives 100% of the manufacturing profits and losses of SJE, while
Fuda receives a yearly management fee from SJE of approximately $400,000 in
addition to the rent for the factory buildings. Go-Gro manufactures an extensive
product line which is sold mainly to wholesale distributors and retailers in
Europe and the Company's subsidiaries. Go-Gro and its subsidiaries employ
approximately 2,900 people.
SJE leased factory buildings in three separate locations in China.
During 1995, the Company initiated a consolidation of its Go-Gro/SJE
manufacturing facilities into one large compound in order to achieve certain
manufacturing efficiencies and to control its occupancy costs in what management
believes will be an inflationary business environment. In April 1995, SJE and
the Bureau of National Land Planning Bao-An Branch of Shenzhen City entered into
a Land Use Agreement covering approximately 467,300 square feet in Bao-An
County, Shenzhen City, People's Republic of China. The agreement provides SJE
with the right to use this land until January 18, 2042. The land use rights are
non-transferable. Under the terms of the SJE joint venture agreement, ownership
of the land and buildings of SJE is divided 70% to Go-Gro and 30% to Fuda. Land
costs, including the land use rights, approximated $2.6 million of which Go-Gro
has paid its 70% proportionate share of $1.8 million.
Under the terms of this agreement, as amended, SJE is obligated to
construct approximately 500,000 square feet of factory buildings and 211,000
square feet of dormitories and offices, of which 40% was required to be and was
completed by April 1, 1997. The remainder of the construction was to be
completed by December 31, 1999; however the Company has exercised its rights to
extend the construction date to December 31, 2000 by incurring an extension fee.
The total cost for this project is estimated at $16.5 million (of which $10.1
million had been expended as of September 30, 1999) and includes approximately
$1 million for a Municipal Coordination Facilities Fee (MCFF). The MCFF is based
upon the square footage to be constructed. The agreement calls for the MCFF to
be paid in installments beginning in January 1997. A 162,000 square foot
factory, 77,000 square foot warehouse and 60,000 square foot dormitory became
fully operational in June 1997. SJE began construction of the final phase of
this facility in December 1999.
Page 5
Goods produced by Go-Gro constituted approximately 40% in 1999 and
1998, of the total products either purchased or manufactured by the Company. 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 and Taiwan), steel (Korea, Japan,
Taiwan and China), cable (China and Taiwan), light bulbs (China, Taiwan,
Germany, Indonesia and Hong Kong), lampholders (Taiwan, Germany, Italy and
China) and other various components (China, Europe, U.S., Taiwan and others).
The Company chooses manufacturers based on price, quality of
merchandise, reliability and ability to meet the Company's timing requirements
for delivery. Manufacturing commitments are made on a purchase order basis. The
Company or its customer is often required to post a letter of credit prior to
shipment.
The Company has employees located in the U.S., Hong Kong and China who
supervise the Company's 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 manufacturing
engineering, and oversight of the manufacturing processes. The Company maintains
a quality control and quality assurance program and has established inspection
and test criteria for each of its products. These methods are applied by the
Company or its agents regularly to product samples in each manufacturing
location prior to shipment and shipments are tested for quality control
inspection.
The Company expects to continue to use a limited number of contract
manufacturers and accordingly will continue to be highly dependent upon sources
outside the Company for timely production and quality workmanship.
In fiscal 1999 and 1998, Chinese suppliers, other than Go-Gro,
accounted for approximately 58% and 57%, respectively, of the total products
either purchased or manufactured by the Company. Shunde No. 1 Lamp Factory
("Shunde") accounted for approximately 29% of the total products either
purchased or manufactured by the Company in 1999 and 26% in 1998. Purchases from
Go-Gro and the top five independent suppliers comprised 88% and 87%,
respectively, of the total of the products either purchased or manufactured by
the Company for fiscal 1999 and 1998. Other than Shunde, no independent supplier
accounted for more than 10% of the total of the products either purchased or
manufactured by the Company in 1999.
On July 20, 1999, the Company renewed an agreement with Shunde whereby
Shunde agreed to manufacture lighting products for the Company to be sold in
North and South America and the European Community on an exclusive basis for a
three year period beginning October 1, 1999 in return for annual minimum
purchase requirements from the Company. The agreement is terminable if the
Company does not meet its 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, the Company has met its minimum purchase requirements under the agreement.
While the Company purchases its products from a small number of large
suppliers with whom it maintains close alliances, the same products could be
purchased from numerous other suppliers.
The continued importation of products from China and the Company's
business could be affected by any trade issues impacting U.S. - China relations.
On June 3, 1999, the President of the United States extended to the
People's Republic of China "Most Favored Nation" treatment for the entry of
goods into the United States for an additional year, beginning July 3, 1999. The
trade status has been renamed "Normal Trade Relations" because it applies to all
but a handful of U.S. trading partners. In the context of United States tariff
legislation, such treatment means that products are subject to favorable duty
rates upon entry into the United States. On July 27, 1999 the House of
Representatives supported the President's decision and rejected a bill to impose
trade sanctions against China due to alleged human rights abuses, nuclear
proliferation policies and a growing U.S. trade deficit with China. Members of
Congress and the "human rights community" will continue to monitor the human
rights issues in China and adverse developments in human rights and other trade
issues in China could affect U.S. - China relations. As a result of various
political and trade disagreements between the U.S. Government and China, it is
possible restrictions could be placed on trade with China in the future which
could adversely impact the Company's operations and financial position.
The Company 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 its purchase and expansion of SJE in China.
The contract is a long-term non-cancelable guarantee covering the risks of
expropriation and war and civil disturbance. The Company obtained guarantees to
cover existing assets of $11.0 million and stand-by guarantees of $3.4 million
on construction of its SJE facilities.
Page 6
In June 1997, the Company ceased manufacturing operations at Meridian
Lamps, Inc. ("Meridian"), a wholly-owned subsidiary with a manufacturing
facility located in Meridian, Mississippi, which commenced operations in late
December 1994. Meridian produced decorative table and floor lamps. The Meridian
facility consisted of 123,000 square feet. The Company sold the facility in June
1999. Meridian's operations generated $2.8 million in net sales during fiscal
1997.
COMPETITION
The Company's product lines span major segments within the lighting
industry and, accordingly, the Company's products compete in a number of
different markets with a number of different competitors. The Company competes
with other independent distributors, importers, manufacturers, and suppliers of
lighting fixtures and other consumer products. The lighting industry is highly
competitive. Other competitors market similar products that compete with the
Company on the basis of price. Some of these competitors do not maintain
warehouse operations or do not perform some of the services provided by the
Company, which require the Company to charge higher prices. 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. The ability of the Company to compete successfully in this highly
competitive market depends upon its ability to manufacture and purchase quality
products on favorable terms, ensure its products meet safety standards, deliver
the goods promptly at competitive prices, and provide a wide range of services
such as electronic data interchange and customized products, packaging, and
store displays.
INDEPENDENT SAFETY TESTING
As part of its marketing strategy, the Company voluntarily submits its
products to recognized product safety testing laboratories in countries in which
it markets its products. Such laboratories include Underwriters Laboratories
(UL) in the United States, Canadian Standards Association (CSA) in Canada,
British Standards (BS) in Great Britain, Association Nacional de Normalizacion 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 the Company's 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. The Company does not anticipate any
difficulty in maintaining the right to use the listing marks of these
laboratories.
PRODUCT LIABILITY
The Company is engaged in a business, which could expose it to possible
claims for injury resulting from the failure of its products. The Company
maintains primary product liability insurance coverage of $1 million per
occurrence, $2 million in the aggregate, as well as a $25 million aggregate
umbrella insurance policy and $75 million excess umbrella insurance. The primary
insurance coverage requires the Company to self-insure for a maximum amount of
$10,000 per incident occurring after January 1, 1999. No assurance can be given
that the claims will not exceed available insurance coverage or that the Company
will be able to maintain the same level of insurance. See "Legal Proceedings".
TRADEMARKS AND PATENTS
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 agreement terminates on
September 30, 2002. The Company has an option to extend the agreement for an
additional ten years. The royalty payments are due quarterly and are based on a
percent of the value of the Company's net shipments of Westinghouse branded
products, subject to annual minimum payments due. Commencing September 30, 2000
either party has the right to terminate the agreement during fiscal years 2000
to 2002 if the Company does not meet the minimum net shipments of $25 million
for fiscal 2000, $40 million for fiscal 2001 and $60 million for fiscal 2002.
Net sales of Westinghouse branded products amounted to $20.5 million and $10.9
million for the years ended September 30, 1999 and 1998, respectively.
The Company's licensed brand, Westinghouse(R) and the Company's own
trademarks, Catalina(R), Dana(R) and Illuminada(R) are registered in the United
States, Canada and Mexico as well as in numerous countries in the European
Community and China. The Company is in the process of registering its trademarks
in Central and South America.
Page 7
EMPLOYEES
As of November 30, 1999 the Company employed approximately 240 people
in the United States, Canada and Mexico. The Hong Kong and China operations,
including Go-Gro's cooperative joint venture, employed approximately 2,900
people. None of the Company's employees are represented by a collective
bargaining unit and the Company believes that its relationships with its
employees are good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company operates in the United States and China, and to a lesser
extent, Canada and Mexico. The Company considers its primary operating segments
to be the United States 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 China-based operations are made primarily
into Europe and net sales to external customers by all other segments are made
primarily into Canada and to a lesser extent Mexico. See Note 14 of Notes to
Consolidated Financial Statements.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of December 23,
1999 with respect to the executive officers of the Company:
NAME AGE POSITION WITH THE COMPANY
- ----------------------------- ------- ----------------------------------------
Robert Hersh 53 Chairman, President,
Chief Executive Officer, Director
- ----------------------------- ------- ----------------------------------------
Dean S. Rappaport 47 Executive Vice President,
Chief Operating Officer
- ----------------------------- ------- ----------------------------------------
Nathan Katz 44 Executive Vice President
- ----------------------------- ------- ----------------------------------------
David W. Sasnett 43 Senior Vice President, Chief Financial
Officer, Chief Accounting Officer
- ----------------------------- ------- ----------------------------------------
Thomas M. Bluth 42 Vice President, Secretary, Treasurer
- ----------------------------- ------- ----------------------------------------
None of the Company's officers has any family relationship with any
director or other officer. "Family relationship" for this purpose means any
relationship by blood, marriage, or adoption, not more remote than first cousin.
ROBERT HERSH has been the President and Chief Executive Officer of the
Company since April 1991, Chairman of the Board since June 1991 and a Director
of the Company since April 1988. Mr. Hersh served as the Executive Vice
President of the Company from 1985 to April 1991 and as Secretary from June 1989
until June 1991.
DEAN S. RAPPAPORT has been Executive Vice President of the Company
since January 1988 and was a Director of the Company from April 1988 until May
1999. From January 1988 to November 1996 Mr. Rappaport was Chief Financial
Officer and Treasurer of the Company. Mr. Rappaport was promoted to Chief
Operating Officer of the Company in November 1996. From 1984 until he joined the
Company, Mr. Rappaport was a partner with Wachsman & Rappaport, P.A., a public
accounting firm located in Margate, Florida.
NATHAN KATZ has been Executive Vice President of the Company since
October 1, 1993 and President of Catalina Industries (formerly known as Dana
Lighting, Inc.), a wholly owned subsidiary of the Company since August 1989.
From October 1983 to August 1989, Mr. Katz was the Chief Executive Officer of
Dana Imports, Inc., an importer of lamps located in Boston, Massachusetts.
DAVID W. SASNETT has been a Vice President of the Company since
November 1994. In November 1997, Mr. Sasnett became a Senior Vice President of
the Company. In November 1996, Mr. Sasnett became the Chief Financial Officer of
the Company. Prior to that time, he was the Company's Controller. From 1993
until he joined the Company, Mr. Sasnett was the Vice President - Finance and
Controller of Hamilton Bank, N.A. and from 1980 to 1993 was employed by the
international accounting firm of Deloitte & Touche.
Page 8
THOMAS M. BLUTH has been Vice President since August 1994 and Secretary
of the Company since November 1994. Mr. Bluth became Treasurer of the Company in
November 1996. From 1989 until he joined the Company, Mr. Bluth was Vice
President and General Counsel for Ellis Diversified, Inc. From 1987 to 1989, Mr.
Bluth was the Assistant Tax Director for Southwestern Bell Corporation.
ITEM 2. PROPERTIES.
The following table sets forth details about the Company's offices,
manufacturing plants and warehouse facilities:
LEASED/
LOCATION FACILITY OWNED
- ----------------------------- ------------------------------- --------------
United States:
Miami, FL headquarters/office owned (1)
Tupelo, MS warehouse owned (1)
Dallas, TX office/warehouse leased (2)
Easton, MA office leased
China:
Hong Kong office leased
Shenzhen office/manufacturing leased
plant/warehouse
dormitories leased
manufacturing plant/
warehouse/dormitories owned (3)
Other:
Toronto, Canada office/warehouse leased
Mexico City, Mexico office/warehouse leased
- ----------------------------- ------------------------------- --------------
(1) Owned subject to a first mortgage.
(2) The Company has subleased the warehouse space under this lease to an
unrelated party.
(3) This facility is owned by a joint venture in which the Company has a
70% interest as to ownership of the facility. The joint venture
purchased land use rights which terminate in the year 2042.
All of the Company's properties are fully utilized with the exception of the
Dallas facility, which has been fully leased except for the office space. All of
the Company's properties are suitable for its operations.
Page 9
ITEM 3. LEGAL PROCEEDINGS.
During fiscal years 1998 and 1999 the Company received a number of
claims relating to halogen torchieres sold by the Company to various retailers.
Management does not currently believe these claims will result in a material
uninsured liability to the Company. The Company experienced an increase in its
liability insurance premiums effective for the 1999 calendar year and has been
self-insuring up to a maximum of $10,000 for each incident occurring after
January 1, 1999. Based upon its experience, the Company does not believe that
this self-insurance provision will have a material adverse impact on the
Company's financial position or annual results of operations. However, 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. See "Product
Liability."
The Company is also a defendant in other legal proceedings arising in
the course of business. In the opinion of management the ultimate resolution of
these other legal proceedings will not have a material adverse effect on the
financial position or annual results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended September 30, 1999, no matters were submitted
for a vote of the Company's stockholders.
Page 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded on the New York Stock Exchange
under the symbol LTG. The following table sets forth, for the periods indicated,
the high and low closing prices of the common stock as reported by the New York
Stock Exchange.
High Low
Fiscal Year Ended September 30, 1998
First Quarter 6 7/16 3 3/8
Second Quarter 4 3/8 3 1/4
Third Quarter 4 5/8 3 5/8
Fourth Quarter 4 1/8 2 1/16
Fiscal Year Ended September 30, 1999
First Quarter 2 3/4 2
Second Quarter 3 11/16 2 1/8
Third Quarter 5 1/8 2 11/16
Fourth Quarter 5 11/16 4 1/8
On December 15, 1999, the closing price of the Company's common stock
as reported on the New York Stock Exchange was $5.125. As of December 15, 1999,
there were approximately 1,700 holders of record of the Company's common stock,
including some brokerage firms which hold shares in street name on behalf of
their clients.
The Company has never paid cash dividends on its common stock. The
Company intends to retain future earnings, if any, to finance the expansion of
its business and does not anticipate that any cash dividends will be paid in the
foreseeable future. In addition, the terms of the Company's domestic credit
facility and convertible subordinated notes prohibit the payment of any cash
dividends or other distribution on any shares of the Company's common stock,
other than dividends payable solely in shares of common stock, unless approval
is obtained from the lenders. Future dividend policy will depend on the
Company's earnings, capital and financing requirements, expansion plans,
financial condition and other relevant factors.
The Company's board of directors has authorized the repurchase of up to
$2 million of common shares of the Company from time to time in the open market
or in negotiated purchases. As of December 15, 1999, the Company had repurchased
449,500 shares of its stock for $1.6 million.
Page 11
ITEM 6. SELECTED FINANCIAL DATA.
(in thousands, except per share data)
AT OR FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------
1999 (1) 1998 1997 (2) 1996 1995
--------- --------- --------- --------- ---------
Net sales $ 176,561 $ 161,860 $ 196,955 $ 184,630 $ 176,292
Net income (loss) $ 6,489 $ 1,102 $ (3,093) $ 1,603 $ 400
Basic earnings (loss) per share $ 0.92 $ 0.15 $ (0.44) $ 0.23 $ 0.06
Diluted earnings (loss) per share $ 0.80 $ 0.15 $ (0.44) $ 0.21 $ 0.05
Total assets $ 101,897 $ 98,960 $ 116,581 $ 117,462 $ 120,051
Long-term borrowings $ 24,774 $ 28,224 $ 39,737 $ 36,571 $ 46,299
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, 1999.
(1) 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.
(2) Includes $930,000 in plant closing costs due to the termination of
manufacturing operations at the Company's 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.
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, including without limitation
expectations as to future sales and operating results, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Words such as "expects,"
"anticipates," "believes," "plans," "intends," "estimates," variations of such
words and similar expressions are intended to identify such forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company and its subsidiaries to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, the
following: the highly competitive nature of the lighting industry; reliance on
certain key customers; consumer demand for lighting products; dependence on
imports from China; general economic and business conditions; advertising and
promotional efforts; brand awareness; the existence or absence of adverse
publicity; acceptance of new product offerings; changing trends in customer
tastes; availability and cost of raw materials and supplies; the costs and other
effects of legal and administrative proceedings; foreign exchange rates; changes
in the Company's effective tax rate (which is dependent on the Company's U.S.
and foreign source income); and other factors referenced in this Form 10-K. The
Company will not undertake and specifically declines any obligation to update or
correct any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
The Company's fiscal years ended September 30, 1999, 1998 and 1997 are
referred to herein as "1999", "1998" and "1997", respectively.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
relationship to net sales of amounts presented in the Company's consolidated
statements of operations.
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 79.8 80.8 83.5
------------ ------------ ------------
Gross profit 20.2 19.2 16.5
Selling, general and
administrative expenses 16.1 16.4 13.1
Reversal of provision for
litigation (1.5) - -
Plant closing costs - - 0.5
Litigation charges and related
professional fees - - 3.8
------------ ------------ ------------
Operating income (loss) 5.6 2.8 (0.9)
Interest expense (1.4) (2.3) (2.1)
Reversal of post-judgment interest 0.5 - -
Other income 0.6 0.4 -
------------ ------------ ------------
Income (loss) before income taxes 5.3 0.9 (3.0)
Income tax benefit (provision) (1.6) (0.2) 1.4
------------ ------------ ------------
Net income (loss) 3.7 % 0.7 % (1.6)%
============ ============ ============
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1999 AND 1998
Net sales and gross profit for 1999 were $176.6 million and $35.7
million, respectively, as compared to $161.9 million and $31.1 million,
respectively, for 1998. The Company generated net income of $6.5 million ($.80
per share) in 1999 compared to $1.1 million ($0.15 per share) in 1998. In 1999,
results from operations benefited from the reversal of a $2.7 million provision
Page 13
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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. The
reversal of these non-recurring items and related expenses increased diluted
earnings per share in 1999 by $.23. Diluted earnings per share, as adjusted to
exclude these non-recurring items and related expenses in both years, was $.57
in 1999 as compared to $.19 in 1998.
The $14.7 million increase in net sales from the prior year reflects
higher unit sales to U.S. and Canadian customers attributable to additions to
core programs, promotional opportunities and new product placements. Lamp sales
increased by $13.6 million and net sales for the Company's other principal line
of products, lighting fixtures, increased by $1.1 million. Lamps and lighting
fixtures accounted for 66% and 34% of net sales in 1999 compared to 63% and 37%
in 1998, respectively. In 1999 and 1998, Home Depot accounted for 25.8% and
27.5%, respectively, of the Company's net sales and Wal-Mart accounted for 14.5%
and 5.3% of net sales in 1999 and 1998, respectively. For the fiscal years ended
September 30, 1999 and 1998, net sales to the Company's ten largest customers
represented approximately 73% and 66%, respectively, of the Company's net sales.
Gross profit increased by $4.6 million in 1999 due to improved margins
earned on direct sales attributable to new product placement, a more profitable
product mix and the increase in net sales. The gross profit percentage increased
from 19.2% in 1998 to 20.2% in 1999. The improvement in the gross profit
percentage from 1998 to 1999 was attributable to the increase in net sales,
which lessened the effect on such percentage of purchasing and warehousing costs
as most of these costs are fixed, and improved margins on direct sales.
Many of the Company's major customers (most notably Home Depot and
Wal-Mart) purchase from the Company primarily on a direct basis, whereby the
merchandise is shipped directly from the factory to the customer, rather than
from the Company's warehouse. Approximately 75% of the Company's sales in 1999
were made on a direct basis as compared to 67% in 1998. Sales made by the
Company on a direct basis typically generate lower per unit margins than sales
of the same items from the Company's warehouses. The amount of the Company's
sales made on a direct basis is dependent upon customer buying preferences,
which are influenced by a number of factors that vary from customer to customer.
Sales from the Company's warehouses declined during the fiscal year ended
September 30, 1998 as compared to the fiscal year ended September 30, 1997, and
such trend has continued during the fiscal year ended September 30, 1999. The
Company lowered its warehousing costs by closing its Los Angeles operation
effective March 31, 1998 and is attempting to compensate for this decline by
pursuing new channels of distribution which will be serviced out of the
Company's U.S. warehouse. However, there can be no assurance these efforts will
be successful, and the Company may experience further declines in sales made
from its U.S. warehouse.
Selling, general and administrative expenses increased by $1.9 million
reflecting an increase in professional and consulting fees ($657,000, of which
approximately $360,000 was related to the implementation of the Company's new
computer system), an increase in bonuses due to executive officers under their
employment agreements ($569,000 in the aggregate), an increase in expenses
related to the Company's operations in Mexico ($387,000) and an increase in the
provision for uncollectible accounts receivable in Mexico ($391,000).
During the 1997 fiscal year the Company recorded a $4.2 million
provision for an adverse jury verdict and judgment arising from litigation with
a former officer. The Company subsequently appealed the jury verdict and
ultimately settled the case in June 1999 for $1.5 million. The settlement
resulted in a reversal in 1999 of $2.7 million of the $4.2 million previously
accrued and the reversal of $893,000 in interest accrued since 1997 on the $4.2
million judgment.
Interest expense decreased to $2.4 million in 1999 from $3.8 million in
1998 due to lower average outstanding borrowings and a lower average interest
rate.
Other income for 1999 consisted primarily of a $194,000 gain on the
sale of the Company's Meridian facility, investment income, equity income,
foreign currency gains and losses and other miscellaneous income.
The effective income tax rates for 1999 and 1998 were 31.2% and 24.9%,
respectively and reflect the impact of foreign income, which is taxed at a
significantly lower rate than U.S. income. The increase in the tax rate from
1998 to 1999 was due to higher proportionate U.S. source income, which is taxed
at a higher rate than foreign source income. The Company's effective income tax
rate is dependent both on the total amount of pretax income generated and the
relative distribution of such total income between domestic and foreign
operations. Consequently, the Company's effective tax rate may vary in future
periods.
Page 14
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
As a result of recent Internal Revenue Service rulings and proposed and
temporary regulations, the Company has restructured its international operations
in order to retain favorable U.S. tax treatment of foreign source income. Should
this restructuring ultimately prove unsuccessful, the Company will likely
experience an increase in its effective consolidated income tax rate for 1999
and future years.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND 1997
Net sales and gross profit for 1998 were $161.9 million and $31.1
million, respectively, as compared to $197 million and $32.5 million,
respectively, for 1997. The Company generated net income of $1.1 million ($.15
per share) in 1998 compared to a net loss of $3.1 million ($.44 per share) in
1997.
The $35.1 million decrease in net sales from the prior year reflects
lower unit sales and is mostly attributable to a $20.1 million decline in sales
of one product class, halogen torchieres, a decrease in European sales of $10.3
million and a decline of $4 million in sales of now discontinued products, the
Meridian lamps and "Hugger" flashlights. The sales decline for the halogen
torchieres continued a trend of declining sales of this product which began in
the first quarter of fiscal 1998 and is attributed in part to media attention
focused on incidents of fire associated with this product. In 1998 halogen
torchiere sales aggregated $14.6 million, as compared to $34.7 million for 1997.
In 1998 sales to European customers were $19.7 million, as compared to $30
million for 1997. Lamp sales decreased by $30.5 million and net sales for the
Company's other principal line of products, lighting fixtures, decreased by $4.6
million. Lamps and lighting fixtures accounted for 63% and 37%, respectively, of
net sales in 1998 compared to 67% and 33%, respectively, in 1997. In 1998 and
1997, Home Depot accounted for 27.5% and 22.1%, respectively, of the Company's
net sales. For the fiscal years ended September 30, 1998 and 1997, net sales to
the Company's ten largest customers represented approximately 66% and 63%,
respectively, of the Company's net sales.
Gross profit decreased by $1.4 million in 1998 due to the decrease in
sales. The gross profit percentage increased to 19.2% in 1998 from 16.5% in
1997. The improvement in the gross profit percentage is attributable to improved
margins earned on direct sales due to a more profitable product mix and
favorable sales returns and incentives experience. The lower gross profit
percentage for 1997 also reflects an $870,000 provision for discontinued
inventory required as a result of management's decision to cease operations at
Meridian.
Many of the Company's major customers (most notably Home Depot)
purchase from the Company primarily on a direct basis, whereby the merchandise
is shipped directly from the factory to the customer, rather than from the
Company's warehouses. Approximately 67% of the Company's sales in 1998 were made
on a direct basis as compared to 61% in 1997. Sales made by the Company on a
direct basis typically generate lower margins per unit than sales from the
Company's warehouses. The amount of the Company's sales made on a direct basis
is dependent upon customer buying preferences, which are influenced by a number
of factors that vary from customer to customer. Sales made from the Company's
U.S. warehouses declined on a quarterly basis and in total from 1997 to 1998.
Selling, general and administrative expenses ("SG&A") increased by
$662,000 due to increased costs in the Orient to support the Company's new
factory's operations ($821,000) and an increase in royalties ($353,000). These
increases were partially offset by a $415,000 decrease in SG&A incurred by
Meridian which ceased operations in June 1997. SG&A expenses were 16.4% of sales
in 1998 compared to 13.1% in 1997. The increase in SG&A as a percentage of sales
is attributable to the factors mentioned above and the decline in sales.
In 1997, in conjunction with the decision to cease Meridian's
operations, the Company recorded a $930,000 charge to write down the plant and
related equipment to fair market value (less disposition costs) and to provide
for severance payments to Meridian's employees.
Litigation charges and related professional fees in 1997 represented
the amount provided for an adverse jury verdict of $4.2 million on litigation
with the Company's former Chief Executive Officer, a payment of $1,000,000 to
settle patent litigation with Black & Decker, and the related professional fees
incurred for these two matters.
Page 15
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest expense decreased from $4.1 million to $3.8 million. A
decrease in interest expense as a result of lower borrowings was offset by a
$165,000 increase in the provision for interest related to the $4.2 million
adverse jury verdict presently under appeal (the provision was for approximately
7 months in 1997 compared to 12 months in 1998).
Other income for 1998 includes a gain of $164,000 on the sale of
marketable equity securities, with the remainder consisting primarily of rental
income on the Meridian facility, interest and other miscellaneous income,
partially offset by foreign exchange losses.
The effective income tax rates for 1998 and 1997 were 24.9% and 46.9%,
respectively. The higher effective tax rate for 1997 was attributable to the
combination of (1) foreign pretax income, which is taxed at a significantly
lower rate than U.S. income, and (2) a pretax loss for U.S. operations, on which
the Company recorded a tax benefit at the applicable U.S. rates. The Company's
effective income tax rate is dependent both on the total amount of pretax income
generated and the relative distribution of such total income between domestic
and foreign operations.
MERIDIAN
The Company ceased manufacturing operations and closed its Meridian
Lamps facility in June 1997. Net sales for 1997 were $2.8 million, cost of sales
was $4.7 million and the pretax loss was $3.5 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its short-term liquidity needs through cash provided
by operations, accounts payable, borrowings under various credit facilities with
banks, and the use of letters of credit from customers to fund certain of its
direct sales activities. Lease obligations, mortgage notes, convertible
subordinated notes, bonds and capital stock are additional sources for the
longer-term liquidity and financing needs of the Company. Management believes
the Company's available sources of cash will enable it to fulfill its known
liquidity requirements for the foreseeable future.
1999 CASH FLOWS
The Company's operating, investing and financing activities resulted in
a net increase in cash and cash equivalents of $5.5 million from September 30,
1998 to September 30, 1999.
The net cash of $8.3 million provided by operating activities and the
$997,000 proceeds resulting primarily from the sale of the Meridian facility
were used primarily to pay for capital expenditures aggregating $1.8 million, to
make sinking fund redemption payments of $900,000 on outstanding bonds and to
repurchase $1.2 million in common stock under the Company's Board-approved stock
repurchase plan. The capital expenditures primarily included the purchase of
computer hardware and software, machinery, molds and equipment.
Management estimates that capital expenditures in fiscal 2000 will
approximate $7.5 million, representing $5.8 million in additional construction
costs and equipment for Go-Gro's manufacturing facilities, and $1.7 million for
computer software and hardware, display fixtures and other miscellaneous capital
additions. These capital expenditures will be financed by leasing facilities
with financial institutions and cash generated from operations.
CREDIT AND LEASING FACILITIES, BONDS, MORTGAGE AND CONVERTIBLE SUBORDINATED
NOTES
The Company has a $25 million credit facility with a group of U.S.
commercial banks. This facility provides credit in the form of revolving loans,
acceptances, and trade and stand-by letters of credit and matures March 31,
2002. Borrowings under the facility bear interest, payable monthly, at the
Company's preference of either the prime rate or the LIBOR rate plus a variable
spread based upon earnings, debt and interest expense levels defined under the
credit agreement (LIBOR plus 1.8% at September 30, 1999). The effective rate for
the borrowings was 7.29% at September 30, 1999. Obligations under this facility
are secured by substantially all of the Company's U.S. assets, including 100% of
the common stock of the Company's U.S. Subsidiaries and 49% of the stock of the
Company's Canadian Subsidiary. The Company is required to comply with various
convenants in connection with this facility. In addition, the agreement
prohibits the payment of any cash dividends or other
Page 16
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CREDIT AND LEASING FACILITIES, BONDS, MORTGAGE AND CONVERTIBLE SUBORDINATED
NOTES (CONT.)
distribution on any shares of the Company's common stock, other than dividends
payable solely in shares of common stock, unless approval is obtained from the
lenders. At September 30, 1999, the Company had used $13.4 million under this
credit facility (loans amounted to $12.2 million) and $11.6 million was
available for additional borrowings.
The Company has a credit facility with a Canadian bank which provides
four million Canadian dollars or U.S. equivalent (approximately U.S. $2.7
million) in revolving demand credit. Canadian dollar advances bear interest at
the Canadian prime rate plus .5% (6.75% at September 30, 1999) and U.S. dollar
advances bear interest at the U.S. base rate of the bank (8.75% at September 30,
1999). The credit facility is secured by substantially all of the assets of the
Company's Canadian subsidiary. The agreement contains certain minimum covenants
to be met by the Canadian subsidiary, prohibits the payment of dividends, and
limits advances by the bank to a borrowing base calculated based upon
receivables and inventory. At September 30, 1999, $335,000 in net assets of the
Company's Canadian subsidiary were restricted under the credit facility and
could not be transferred to the parent Company. This facility is payable upon
demand and is subject to an annual review by the bank. The Company pays a
monthly commitment fee of .25% based on the unused portion of the facility. At
September 30, 1999, total Canadian and U.S. dollar borrowings amounted to U.S.
$2.2 million (included in current notes payable-credit lines) and U.S. $530,000
was available under the borrowing base calculation.
The Company has a 35 million Hong Kong dollars (approximately U.S. $4.5
million) credit facility with a Hong Kong bank. The facility provides credit in
the form of acceptances, trade and stand-by letters of credit, overdraft
protection, and negotiation of discrepant documents presented under export
letters of credit issued by banks. Advances bear interest at the Hong Kong prime
rate plus .25% (8.75% at September 30, 1999). The facility is secured by 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 amount of loans or advances from Go-Gro to the
Company at any time to 50% of Go-Gro's pre-tax profits for the previous 12
months. At September 30, 1999, $20.7 million in net assets of Go-Gro were
restricted under the agreement and could not be transferred to the parent
Company. This facility is repayable upon demand and is subject to an annual
review by the bank. At September 30, 1999, the Company had used $4.1 million of
this line for letters of credit (there were no borrowings) and U.S. $379,000 was
available.
The Company has outstanding $7.6 million of 8% convertible subordinated
notes due March 15, 2002. The notes are convertible into common shares of the
Company's stock at a conversion price of $6.63 per share, subject to certain
anti-dilution adjustments (as defined in the Note Agreement), at any time prior
to maturity. The notes are subordinated in right of payment to all existing and
future senior indebtedness of the Company and the notes are callable at the
option of the Company with certain required premium payments. Principal payments
of approximately $2.5 million are required on March 15 in each of the years 2000
and 2001. The remaining outstanding principal and interest is due in full on
March 15, 2002. Interest is payable semiannually. The Company expects to make
its payments on this debt with funds generated from operations and obtained from
its $25 million U.S. credit facility. The terms of the Note Agreement require
the Company to maintain specific interest coverage ratio levels in order to
increase its credit facilities or otherwise incur new debt and to maintain a
minimum consolidated net worth. In addition, the Note Agreement prohibits the
declaration or payment of dividends on any shares of the Company's capital
stock, except dividends or other distributions payable solely in shares of the
Company's common stock, and limits the purchase or retirement of any shares of
capital stock or other capital distributions.
The Company arranged for the issuance in 1995 of $10.5 million in State
of Mississippi Variable Rate Industrial Revenue Development Bonds to finance
(along with internally generated cash flow and the Company's $1 million leasing
facility) its warehouse located near Tupelo, Mississippi. The bonds have a
stated maturity of May 1, 2010 and require mandatory sinking fund redemption
payments, payable monthly, of $900,000 per year from 1996 to 2002, $600,000 per
year in 2003 and 2004, and $500,000 per year from 2005 to 2010. The bonds bear
interest at a variable rate (5.45% at September 30, 1999) that is adjustable
weekly to the rate the remarketing agent for the bonds deems to be the market
rate for such bonds. The bonds are secured by a lien on the land, building, and
all other property financed by the bonds. Additional security is provided by a
$7.1 million direct pay letter of credit which is not part of the Company's
credit line. The unpaid balance of these bonds was $6.9 million at September 30,
1999. In January 1999, the Company entered into an interest rate swap agreement
maturing May 1, 2004, to manage its exposure to interest rate movements 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.
Page 17
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company financed the purchase and improvements of its Meridian
manufacturing facility through the issuance of a series of State of Mississippi
General Obligation Bonds (Mississippi Small Enterprise Development Finance Act
Issue, 1994 Series GG) with an aggregate available principal balance of
$1,605,000, a weighted average coupon rate of 6.23% and a contractual maturity
of November 1, 2009. In June 1997, the Company ceased manufacturing operations
at Meridian and leased the facility to a non-manufacturing entity and in August
1997 made a $1.5 million payment to escrow on the bonds. The Company redeemed
the bonds on November 1, 1999.
The Company has a $1 million facility with a U.S. financial institution
to finance the purchase of equipment in the United States, of which $477,000 was
available at September 30, 1999. In addition, the Company has a leasing facility
for $9 million Hong Kong dollars (approximately U.S. $1.2 million) with a Hong
Kong financial institution to finance the purchase of equipment for its China
facilities of which U.S. $370,000 was available at September 30, 1999.
The Company financed its corporate headquarters in Miami, Florida with
a loan payable monthly through 2004, based on a 15-year amortization schedule,
with a balloon payment in 2004. The loan bears interest at 8% and is secured by
a mortgage on the land and building. The unpaid balance of this loan was
$958,000 at September 30, 1999.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The Company has
developed and is currently executing a plan to make its computer systems Year
2000 ready. The plan consists of five phases: (1) an inventory of all systems
and applications, including non-information technology systems; (2) an
assessment of the Year 2000 readiness of these existing systems and
applications; (3) remediation of Year 2000 problems identified in the assessment
phase; (4) testing of all systems to verify the success of the remediation phase
and, if necessary (5) the implementation of contingency plans for all
significant systems and applications.
Phase 1 to 4 of the Company's plan were completed as of July 1, 1999.
The Company is presently engaged in the implementation of its contingency plans.
The Company has determined that its non-information technology systems
are not significantly affected by the Year 2000 Issue. With respect to
information technology systems, the Company, during the normal course of
upgrading its systems to address its business needs and add functionality and
efficiency to its business processes, began implementation in 1997 of a new
enterprise software to replace the business applications supporting sales,
distribution, inventory management, finance and accounting for the Company's
North American business. The implementation was completed in February 1999. The
majority of the remainder of the Company's North American systems have been made
Year 2000 ready through purchased upgrades of commercial third-party software
packages. Go-Gro's systems and applications have been made Year 2000 ready
through a combination of internal reprogramming /modifications and purchased
upgrades of commercial third-party software packages.
The Company has inquired of its customers, suppliers and other
companies important to its business to determine the extent of such parties'
preparations to resolve their own Year 2000 issues.
The Company has utilized both internal and external resources to
implement its Year 2000 plan. The total incremental cost to the Company for the
Year 2000 project (excluding internal resources, the costs associated with the
new enterprise system and scheduled hardware replacements which would have been
incurred regardless of the Year 2000 Issue), all of which will be expensed as
incurred is approximately $150,000. As of September 30, 1999, $100,000 of these
costs had been incurred. The Company is funding these costs with cash flows from
operations. The costs of the Year 2000 project and the timetable in which the
Company expects to finish its Year 2000 project are based on management's best
estimates and are dependent on a number of factors, including the continued
availability of personnel and external resources.
The Company has established contingency plans in the event the
Company's systems and applications are not Year 2000 ready. The Company's new
enterprise software has been represented as Year 2000 ready by its manufacturer.
Contingency plans for the Company's systems and applications contemplate manual
procedures, alternate backup systems and expanded use of external resources in
remediation efforts.
Page 18
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 compliance is critical to the Company due to the importance
of its computer systems and applications to its business. The Company may also
be vulnerable to the failure of significant third parties with which the Company
does business to resolve their own Year 2000 issues. The impact on the Company
of failure by either the Company or the significant third parties with which it
does business to achieve Year 2000 compliance is not reasonably estimable,
however, the Year 2000 Issue could have a material impact on the operations of
the Company.
OTHER
Shenzhen Jiadianbao Electrical Products Co., Ltd. ("SJE"), a
cooperative joint venture subsidiary of Go-Gro, and the Bureau of National Land
Planning Bao-An Branch of Shenzhen City entered into a Land Use Agreement
covering approximately 467,300 square feet in Bao-An County, Shenzhen City,
People's Republic of China on April 11, 1995. The agreement provides SJE with
non-transferable rights to use this land until January 18, 2042. Under the terms
of the SJE joint venture agreement, ownership of the land and buildings of SJE
is divided 70% to Go-Gro and 30% to the other joint venture partner. Land costs,
including the land use rights, approximated $2.6 million of which Go-Gro has
paid its 70% proportionate share of $1.8 million. Under the terms of this
agreement, as amended, SJE is obligated to construct approximately 500,000
square feet of factory buildings and 211,000 square feet of dormitories and
offices, of which 40% was required to be and was completed by April 1, 1997. The
remainder of the construction was to be completed by December 31, 1999; however,
the Company has exercised its rights to extend the construction date to December
31, 2000 by incurring an extension fee. The total cost for this project is
estimated at $16.5 million (of which $10.1 million had been expended as of
September 30, 1999) and includes approximately $1 million for a Municipal
Coordination Facilities Fee (MCFF). The MCFF is based upon the square footage to
be constructed. The agreement calls for the MCFF to be paid in installments
beginning in January 1997 of which $441,000 had been accrued as of September 30,
1999. A 162,000 square foot factory, 77,000 square foot warehouse and 60,000
square foot dormitory became fully operational in June 1997. SJE began
construction of the final phase of this facility in December 1999.
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 agreement terminates on
September 30, 2002. Catalina has an option to extend the agreement for an
additional ten years. The royalty payments are due quarterly and are based on a
percent of the value of the Company's net shipments of Westinghouse branded
products, subject to annual minimum payments due. Commencing September 30, 2000
either party has the right to terminate the agreement during fiscal years 2000
to 2002 if the Company does not meet the minimum net shipments of $25 million
for fiscal 2000, $40 million for fiscal 2001 and $60 million for fiscal 2002.
Net sales of Westinghouse branded products amounted to $20.5 million and $10.9
million for 1999 and 1998, respectively.
As a result of recent Internal Revenue Service ruling and proposed and
temporary regulations, the Company has restructured its international operations
in order to retain favorable U.S. tax treatment of foreign source income. Should
this restructuring ultimately prove unsuccessful, the Company will likely
experience an increase in its consolidated effective income tax rate for 1999
and future years.
On June 3, 1999, the President of the United States extended to the
People's Republic of China "Most Favored Nation" ("MFN") treatment for the entry
of goods into the United States for an additional year, beginning July 3, 1999.
The MFN trade status has been renamed "Normal Trade Relations" because it
applies to all but a handful of U.S. trading partners. In the context of United
States tariff legislation, such treatment means that products are subject to
favorable duty rates upon entry into the United States. On July 27, 1999 the
House of Representatives supported the President's decision and rejected a bill
to impose trade sanctions against China due to alleged human rights abuses,
nuclear proliferation policies and a growing U.S. trade deficit with China.
Members of Congress and the "human rights community" will continue to monitor
the human rights issues in China and adverse developments in human rights and
other trade issues in China could affect U.S. - China relations. As a result of
various political and trade disagreements between the U.S. Government and China,
it is possible restrictions could be placed on trade with China in the future
which could adversely impact the Company's operations and financial position.
Page 19
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company expects to continue to obtain most of its products from
China, and maintains significant capital investments in China. Large
fluctuations in currency rates could have a material effect on the Company's
cost of products, thereby decreasing the Company's ability to compete. All
purchases of finished goods are made in U.S. dollars which limit the Company's
exposure to foreign currency fluctuations with respect to fluctuations that
would impact existing outstanding purchase commitments. However the Company is
subject to foreign currency fluctuations to the extent such fluctuations affect
the cost of products purchased (or manufactured) or the Company's ability to
sell into domestic or foreign markets and could result in exchange losses.
Recently the Company became aware from published reports of the possibility of a
devaluation in the Hong Kong dollar and the Chinese Renminbi. The Company is
presently unable to determine the impact such devaluation would have on its
business.
During fiscal years 1998 and 1999 the Company received a number of
claims relating to halogen torchieres sold by the Company to various retailers.
Management does not currently believe these claims will result in a material
uninsured liability to the Company. The Company experienced an increase in its
liability insurance premiums effective for the 1999 calendar year and has been
self-insuring up to a maximum of $10,000 for each incident occurring after
January 1, 1999. Based upon its experience, the Company does not believe that
this self-insurance provision will have a material adverse impact on the
Company's financial position or annual results of operations. However, 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. See "Legal
Proceedings."
The Company's board of directors has authorized the repurchase of up to
$2 million of common shares of the Company from time to time in the open market
or in negotiated purchases. As of December 15, 1999, the Company had repurchased
449,500 shares for $1.6 million.
Pursuant to a reorganization of the Company's executive management
structure, William D. Stewart, an Executive Vice-President of the Company left
the employ of the Company in December 1999 to pursue other interests. The
Company agreed to settle its contractual employment obligation to Mr. Stewart
for a payment of approximately $800,000. Under the terms of the settlement
agreement, Mr. Stewart will continue to provide consulting services under a
three-year non-compete and consulting agreement. The Company will record a
non-recurring pretax charge of approximately $800,000 during the quarter ending
December 31, 1999 and is obligated to pay $250,000 annually through December
2002 under the non-compete and consulting agreement.
On August 9, 1999 the New York Stock Exchange ("NYSE") notified the
Company that it had changed its rules regarding listing criteria for companies
which have shares traded on the NYSE. The new rules change and increase the
requirements to maintain a NYSE listing. As of September 30, 1999, the Company
does not meet one of the new rules, which requires that any NYSE listed company,
which has a total market capitalization of less than $50 million, maintain
minimum total stockholders' equity of $50 million. The Company's stockholders'
equity as of September 30, 1999 was $48.1 million. The Company believes it can
meet the new listing rules and, as requested by the NYSE, has provided the NYSE
with its plan to meet the new standard by February, 2001 and the Company's plan
was accepted by the NYSE in October 1999. However, no assurances can be given
that the objectives of the plan will be accomplished by February, 2001. If the
Company is unable to achieve the plan's objectives, the Company's shares could
be delisted from the NYSE, however the Company believes other trading venues are
available for its stock.
FOREIGN EXCHANGE FLUCTUATIONS
The Company is subject to foreign currency fluctuations to the extent
such fluctuations affect the cost of products purchased (or manufactured) or the
Company's ability to sell into domestic or foreign markets. The Company's China,
Canadian, Mexican and Chilean subsidiaries are subject to fluctuations between
the U.S. dollar currency in which they purchase goods and the European
currencies, Canadian dollar, Mexican peso and Chilean peso currencies in which
they sell goods. The Company has investments through these subsidiaries in
China, Hong Kong, Canada, Mexico and Chile. If any of the currencies of these
countries was to be devalued against the U.S. dollar the Company could
experience significant changes in its currency translations which could
adversely impact the Company's future earnings. Large fluctuations in currency
exchange rates could have a material effect on the Company's cost of products or
the Company's selling prices thereby decreasing the Company's ability to
compete. During the year ended September 30, 1999, the Company recorded foreign
currency gains (losses) for its China, Canadian, Mexican and Chilean operations
of ($37,000), $15,000, $17,000 and ($20,000), respectively.
Page 20
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
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 recognizes
all derivatives as either assets or liabilities in the balance sheet and
measures those instruments at fair value. This statement is effective for fiscal
years beginning after June 15, 2000. The Company has not determined the effects,
if any, that SFAS No.133 will have on the Company's financial position or
results of operations.
IMPACT OF INFLATION AND ECONOMIC CONDITIONS
In the past Go-Gro 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. The Company believes
that increased prices could have an initial adverse impact on the Company's net
sales and income from continuing operations but that, over time, increased
prices can be passed on to its customers.
Page 21
CATALINA LIGHTING, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS SCHEDULE
PAGE
----
Independent Auditors' Report......................................................................................23
Consolidated Balance Sheets - September 30, 1999 and 1998.........................................................24
Consolidated Statements of Operations - Years Ended September 30, 1999, 1998 and 1997.............................25
Consolidated Statements of Stockholders' Equity - Years Ended September 30, 1999,
1998 and 1997............................................................................................26
Consolidated Statements of Cash Flows - Years Ended September 30, 1999, 1998 and 1997.............................27
Notes to Consolidated Financial Statements........................................................................29
Schedule II - Valuation and Qualifying Accounts - Years ended September 30, 1999, 1998 and 1997...................59
(All other schedules have been omitted as the related information has been
provided in the notes to consolidated financial statements or is not required or
applicable)
Page 22
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 its subsidiaries as of September 30, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1999. Our
audits also included the financial statement schedule listed in Item 14 a(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 its
subsidiaries as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
December 17, 1999
Page 23
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
---------------------
1999 1998
-------- --------
ASSETS (IN THOUSANDS)
Current assets
Cash and cash equivalents $ 7,253 $ 1,790
Restricted cash and short-term investments 1,721 377
Accounts receivable, net of allowances
of $8,591,000 and $8,408,000, respectively 20,150 18,395
Inventories 28,668 28,257
Income taxes receivable 1,049 --
Deferred tax asset 2,247 3,679
Other current assets 3,139 3,218
-------- --------
Total current assets 64,227 55,716
Property and equipment, net 24,737 27,922
Restricted cash equivalents and short-term investments -- 1,430
Goodwill, net 10,561 11,017
Other assets 2,372 2,875
-------- --------
$101,897 $ 98,960
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable - credit lines $ 2,200 $ 3,428
Current maturities of subordinated notes 2,500 --
Accounts and letters of credit payable 14,939 12,423
Current maturities of bonds payable-real estate related 2,210 975
Current maturities of other long-term debt 487 485
Income taxes payable -- 438
Accrued employee compensation and benefits 2,718 1,651
Accrued litigation judgment under appeal -- 4,909
Other current liabilities 3,719 3,738
-------- --------
Total current liabilities 28,773 28,047
Notes payable - credit lines 12,150 10,500
Convertible subordinated notes 5,100 7,600
Bonds payable - real estate related 6,000 8,215
Other long-term debt 1,524 1,909
Other liabilities 293 365
-------- --------
Total liabilities 53,840 56,636
-------- --------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value
authorized 1,000,000 shares; none issued -- --
Common stock, $.01 par value
authorized 20,000,000 shares; issued and outstanding
7,373,013 shares and 7,174,669 shares, respectively 74 72
Additional paid-in capital 26,927 26,475
Retained earnings 22,266 15,777
Treasury stock, 378,200 shares (1,210) --
-------- --------
Total stockholders' equity 48,057 42,324
-------- --------
$101,897 $ 98,960
======== ========
See accompanying notes to consolidated financial statements.
Page 24
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
Net sales $ 176,561 $ 161,860 $ 196,955
Cost of sales 140,906 130,763 164,493
--------- --------- ---------
GROSS PROFIT 35,655 31,097 32,462
Selling, general and administrative expenses 28,554 26,608 25,946
Reversal of provision for litigation (2,728) -- --
Plant closing costs -- -- 930
Litigation charges and related professional fees -- (95) 7,453
--------- --------- ---------
OPERATING INCOME (LOSS) 9,829 4,584 (1,867)
--------- --------- ---------
Other income (expenses)
Interest expense (2,413) (3,801) (4,088)
Reversal of post judgment interest related to
litigation settlement 893 -- --
Other income 1,118 684 128
--------- --------- ---------
Total other expenses (402) (3,117) (3,960)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 9,427 1,467 (5,827)
Income tax (provision) benefit (2,938) (365) 2,734
--------- --------- ---------
NET INCOME (LOSS) $ 6,489 $ 1,102 $ (3,093)
========= ========= =========
EARNINGS (LOSS) PER SHARE
BASIC
Earnings (loss) per share $ 0.92 $ 0.15 $ (0.44)
Weighted average number of shares 7,055 7,128 7,071
DILUTED
Earnings (loss) per share $ 0.80 $ 0.15 $ (0.44)
Weighted average number of shares 8,688 7,477 7,071
See accompanying notes to consolidated financial statements.
Page 25
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
--------------------- PAID-IN RETAINED --------------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
--------- --------- ---------- --------- --------- --------- -------------
Balance at September 30, 1996 7,063,587 $ 71 $ 26,135 $ 17,768 -- $ -- $ 43,974
Exercise of stock options 17,166 -- 80 -- -- -- 80
Common stock issued under
employment agreement 5,000 -- 9 -- -- -- 9
Common stock issued in settlement
of litigation 2,566 -- 10 -- -- -- 10
Common stock issued as compensation 6,250 -- 19 -- -- -- 19
Stock options issued under sales
agreement -- -- 58 -- -- -- 58
Net loss -- -- -- (3,093) -- -- (3,093)
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1997 7,094,569 71 26,311 14,675 -- -- 41,057
Exercise of stock options 80,100 1 222 -- -- -- 223
Stock options issued under sales agreement -- -- 68 -- -- -- 68
Cancellation of stock options issued
under sales agreement -- -- (126) -- -- -- (126)
Net income -- -- -- 1,102 -- -- 1,102
--------- --------- --------- --------- --------- --------- ---------
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
========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
Page 26
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ 6,489 $ 1,102 $ (3,093)
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Reversal of provision for litigation (2,728) -- --
Reversal of post judgment interest (893) -- --
Provision for impairment of long-lived assets -- -- 735
Provision for litigation judgment under appeal 212 423 4,487
Depreciation and amortization 5,368 5,457 5,276
Deferred income taxes 1,951 705 (1,452)
Loss (gain) on disposition of property and equipment (175) 38 35
Change in assets and liabilities, net of effects of
acquisitions:
Decrease (increase) in accounts receivable (1,755) 5,773 5,475
Decrease (increase) in inventories (411) 6,355 5,036
Decrease (increase) in income taxes receivable (1,049) 2,380 (2,380)
Decrease (increase) in other current assets 21 (769) (393)
Decrease (increase) in other assets (342) (144) (473)
Increase (decrease) in income taxes payable (438) 438 (21)
Increase (decrease) in accrued litigation judgment under appeal (1,500) -- --
Increase (decrease) in accounts and letters of credit payable, accrued
employee compensation and benefits and other liabilities 3,564 (5,873) (7,035)
-------- -------- --------
Total adjustments 1,825 14,783 9,290
-------- -------- --------
Net cash provided by operating activities 8,314 15,885 6,197
-------- -------- --------
Cash flows from investing activities:
Capital expenditures, net (1,833) (1,928) (7,955)
Proceeds from sale of property 997 -- --
Payments for Go-Gro acquisition, net of cash acquired -- -- (626)
Decrease (increase) in restricted cash equivalents and
short-term investments 986 954 878
-------- -------- --------
Net cash provided by (used in) investing activities 150 (974) (7,703)
-------- -------- --------
(Continued on page 28)
Page 27
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable - credit lines 35,300 32,900 35,450
Payments on notes payable - credit lines (35,550) (45,300) (29,594)
Net proceeds from (payments on) notes payable-credit lines due on demand 672 (246) (289)
Sinking fund redemption payments on bonds (900) (878) (879)
Payment into escrow on bonds -- -- (1,504)
Payments on other long-term debt (737) (692) (707)
Payments on bonds payable- real estate related (980) (975) (970)
Payments to repurchase common stock (1,210) -- --
Proceeds from issuance of common stock and
related income tax benefit 404 223 80
-------- -------- --------
Net cash provided by (used in) financing activities (3,001) (14,968) 1,587
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 5,463 (57) 81
Cash and cash equivalents at beginning of year 1,790 1,847 1,766
-------- -------- --------
Cash and cash equivalents at end of year $ 7,253 $ 1,790 $ 1,847
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
YEARS ENDED SEPTEMBER 30,
--------------------------------
1999 1998 1997
------- ------- -------
CASH PAID (REFUNDED) FOR:
Interest $ 2,304 $ 3,435 $ 3,833
======= ======= =======
Income taxes $ 2,439 $(3,210) $ 1,168
======= ======= =======
During the year ended September 30, 1999, the Company issued 1,778 common shares
to each of its seven outside directors as compensation for their services. The
aggregate market value of the stock issued was $50,000.
During the years ended September 30, 1999, 1998 and 1997 capital lease
obligations aggregating approximately $102,000, $438,000 and $781,000,
respectively, were incurred when the Company entered into leases for new
office, computer, machinery and warehouse equipment.
In 1997 the Company issued 5,000 common shares to an employee as salary
pursuant to an employment agreement.
See accompanying notes to consolidated financial statements.
Page 28
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(a) The Business
Catalina Lighting, Inc. ("the Company") is a United States-based wholesaler,
distributor and manufacturer of lamps, lighting fixtures and other lighting
related products. The Company sells principally in the U.S. 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 Europe, Canada, Mexico
and other foreign markets.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. The consolidated statements include the results
of the wholly-owned subsidiaries Catalina Industries, Inc., Go-Gro Industries
Limited ("Go-Gro"), Meridian Lamps, Inc. ("Meridian"), a subsidiary formed by
the Company that commenced operations in fiscal 1995 and ceased operations in
June 1997, Catalina Canada, Catalina Mexico 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 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. In addition, in the
Company's consolidated balance sheet at September 30, 1999 are net assets of
$17.9 million of Company subsidiaries located in China and Hong Kong, a
sovereign territory of 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 bank assumes the
credit risk of certain of the Company's U.S. and Canadian receivables. The
Company pays a fee of .50 percent of billings to customers covered by the
arrangement. In addition, the Company insures certain of its foreign receivables
with an insurance company. Gross accounts receivable secured under such
agreements at September 30, 1999 and 1998 amounted to $10.5 million and $11.3
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, 1999 and 1998 amounted to $12.4 million and $12.5 million,
respectively.
The Company provides allowances against accounts receivable for doubtful
accounts, sales returns and sales incentives.
(g) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
Page 29
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
(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, 1999 and 1998 represented sinking fund payments on bonds issued to
finance the Company's U.S. warehouse and investment income earned on such
payments and a $1.4 million escrow payment made on the bonds which financed the
Meridian facility.
(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 operating
income from the related acquired companies. Should the Company determine it
probable that future estimated undiscounted operating income 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 $2.9 million and $2.4 million at September 30, 1999 and
1998, 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 under the capital lease standards issued by the Financial Accounting
Standards Board. 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, Canadian and Mexican subsidiaries and China
joint venture. The Company follows the asset and liability method of accounting
for income taxes prescribed by Statement of Financial Accounting Standards No.
109 "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 (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" ("SFAS 128") during fiscal 1998. SFAS 128 requires the
presentation of "basic" earnings per share and "diluted" earnings per share on
the face of the statement of operations. Basic earnings per share is computed by
dividing 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. Earnings per share information presented in the
accompanying financial statements for the year ended September 30, 1997 has been
restated to comply with SFAS No. 128.
Page 30
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
(n) Foreign Currency Translation
The accounts of the Company's foreign subsidiaries are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation". For subsidiaries where the functional currency
is the U.S. dollar, monetary balance sheet accounts are remeasured at the
current exchange rate and nonmonetary balance sheet accounts are remeasured at
historical exchange rates. For subsidiaries where the functional currency is
other than the U.S. dollar, all balance sheet accounts are remeasured at the
current exchange rate. Income and expense accounts are translated at the average
exchange rates in effect during the year. Adjustments resulting from the
translation of these entities and gains and losses arising from foreign currency
transactions are included in net income.
(o) Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), in fiscal 1997. As
permitted by SFAS 123, the Company continues to measure compensation costs in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," but provides pro forma disclosures of net income
(loss) and earnings (loss) per share as if the fair value method (as defined in
SFAS 123) had been applied.
(p) Long-Lived Assets
Effective October 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement
requires companies to write down to estimated fair value long-lived assets that
are impaired. 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 cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows is less
than the carrying amount of the assets, an impairment loss is recognized. In
1997, in conjunction with the decision to cease Meridian operations, the Company
recorded a $735,000 charge to write down the plant and equipment to fair market
value (less disposition costs).
(q) Comprehensive Income
Effective October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income ("SFAS 130")," which
establishes standards for reporting and display of comprehensive income and its
components. The Company's net income for the years ended September 30, 1999,
1998 and 1997 equals comprehensive income for the same periods.
(r) Disclosures About Segments and Related Information
Effective October 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way that public companies report selected information about operating
segments in financial statements and requires that those companies report
selected information about segments in interim and annual financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No.
131, which supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise", but retains the requirement to report information about
major customers, requires that a public company report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding
Page 31
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
how to allocate resources to segments. SFAS No. 131 requires that a public
company report a measure of segment profit or loss, certain specific revenue and
expense items, and segment assets. However, SFAS No. 131 does not require the
reporting of information that is not prepared for internal use if reporting it
would be impracticable. SFAS No. 131 also requires that a public company report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period. Upon adoption,
information for prior years is required to be restated. Information presented in
Note 14 has been restated to comply with SFAS 131.
(s) Impact of Recently Issued Accounting Standard
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
was issued in June 1998. SFAS 133 establishes standards for the accounting and
reporting of derivative instruments embedded in other contracts (collectively
referred to as derivatives) and of hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. This statement is effective
for fiscal years beginning after June 15, 2000. The Company has not determined
the effects, if any, that SFAS No.133 will have on the Company's financial
position or results of operations.
(t) Reclassifications
Certain amounts presented in the financial statements of prior years have been
reclassified to conform to the current year presentation.
2. ACQUISITION
On July 30,1994, the Company acquired all of the issued and outstanding capital
stock of two Hong Kong companies, Go-Gro Industries Limited ("Go-Gro") and Lamp
Depot Limited ("Lamp Depot"), for an aggregate consideration of $7.5 million and
750,000 shares of the Company's common stock. The stock of Go-Gro was purchased
by the Company from selling stockholders who represented at the closing that
they were, in fact, the actual stockholders of Go-Gro. Subsequent to the date of
the closing, the Company discovered that part of the Go-Gro stock acquired had
been conveyed to one of the selling stockholders prior to closing by a former
officer of a subsidiary of the Company, who ceased employment with such
subsidiary in 1993. The Company made a claim for indemnification and return of
$1,904,000 of the consideration from Go-Gro, such funds were returned to the
Company in November 1994 and the Company filed a lawsuit against the former
officer in May 1995. The purchase price and resulting goodwill recorded for the
Go-Gro acquisition were reduced accordingly for the return of these funds. The
Company settled all litigation relating to this matter in June 1997 by payment
of $600,000 which was recorded as an increase in the purchase price and goodwill
recorded for the Go-Gro acquisition.
3. INVENTORIES
Inventories consisted of the following:
SEPTEMBER 30,
-------------------
1999 1998
------- -------
(In thousands)
Raw materials $ 4,050 $ 3,777
Work-in-progress 932 713
Finished goods 23,686 23,767
------- -------
$28,668 $28,257
======= =======
Page 32
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
3. INVENTORIES (CONTINUED)
The Company capitalizes certain costs in finished goods inventory associated
with acquiring, storing and preparing inventory for distribution. Such costs
aggregated approximately $8.8 million, $8.2 million and $9.5 million for the
years ended September 30, 1999, 1998 and 1997, respectively, of which $2.2
million remained in inventory at September 30, 1999 and 1998.
Inventory allowances amounted to $2.3 million and $1.7 million at September 30,
1999 and 1998, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment and related depreciable lives were as follows:
SEPTEMBER 30,
------------------- DEPRECIABLE
1999 1998 LIVES
------- ------- -------------
(In thousands)
Land $ 1,354 $ 1,354 --
Land use rights 1,912 1,912 42-50 years
Buildings and improvements 15,352 15,373 5 to 30 years
Leasehold improvements 1,619 1,551 lease terms
Furniture and office equipment 1,151 1,258 5 to 7 years
Computer software and equipment 4,299 4,480 2 to 6 years
Machinery, molds and equipment 13,457 12,836 3 to 11 years
Display fixtures 1,112 901 2 years
Other assets 475 374 4 to 7 years
Property held for sale -- 1,051 5 to 30 years
------- -------
40,731 41,090
Less accumulated depreciation 15,994 13,168
------- -------
Property and equipment, net $24,737 $27,922
======= =======
Depreciation expense for the years ended September 30, 1999, 1998 and 1997 was
approximately $4,297,000, $4,376,000 and $4,061,000, respectively.
5. NOTES PAYABLE - CREDIT LINES
The Company has a $25 million credit facility with a group of U.S. commercial
banks. The facility provides credit in the form of revolving loans, acceptances,
and trade and stand-by letters of credit and matures March 31, 2002. Borrowings
under the facility bear interest, payable monthly, at the Company's preference
of either the prime rate or the LIBOR rate plus a variable spread based upon
earnings, debt and interest expense levels defined under the credit agreement
(LIBOR plus 1.8% at September 30, 1999). The effective rate for the borrowings
was 7.29% at September 30, 1999. Obligations under the facility are secured by
substantially all of the Company's U.S. assets, including 100% of the common
stock of the Company's U.S. subsidiaries and 49% of the stock of the Company's
Canadian subsidiary. The agreement contains covenants requiring that the Company
maintain a minimum level of equity and meet certain debt to adjusted earnings
and fixed charges coverage ratios. The agreement prohibits the payment of cash
dividends or other distribution on any shares of the Company's common stock,
other than dividends payable solely in shares of common stock, unless approval
is obtained
Page 33
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
5. NOTES PAYABLE - CREDIT LINES (CONTINUED)
from the lenders. The Company pays a quarterly commitment fee of .25% based on
the unused portion of the facility. At September 30, 1999, the Company had used
$13.4 million under this credit facility (loans amounted to $12.2 million) and
$11.6 million was available for additional borrowings.
The Company has a credit facility with a Canadian bank which provides four
million Canadian dollars or U.S. equivalent (approximately U.S. $2.7 million) in
revolving demand credit. Canadian dollar advances bear interest at the Canadian
prime rate plus .5% (6.75% at September 30, 1999) and U.S. dollar advances bear
interest at the U.S. base rate of the bank (8.75% at September 30, 1999). The
credit facility is secured by substantially all of the assets of the Company's
Canadian subsidiary. The agreement contains certain minimum covenants to be met
by the Canadian subsidiary, prohibits the payment of dividends, and limits
advances by the bank to a borrowing base calculated based upon receivables and
inventory. At September 30, 1999, $335,000 in net assets of the Company's
Canadian subsidiary were restricted under the credit facility and could not be
transferred to the parent Company. This facility is payable upon demand and is
subject to an annual review by the bank. The Company pays a monthly commitment
fee of .25% based on the unused portion of the facility. At September 30, 1999,
total Canadian and U.S. dollar borrowings amounted to U.S. $2.2 million
(included in current notes payable-credit lines) and U.S. $530,000 was available
under the borrowing base calculation.
Go-Gro has a 35 million Hong Kong dollars (approximately U.S. $4.5 million)
credit facility with a Hong Kong bank. The facility provides credit in the form
of acceptances, trade and stand-by letters of credit, overdraft protection, and
negotiation of discrepant documents presented under export letters of credit
issued by banks. Advances bear interest at the Hong Kong prime rate plus .25%
(8.75% at September 30, 1999). The facility is secured by 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 amount of loans or advances from Go-Gro to the Company at any time to
50% of Go-Gro's pre-tax profits for the previous 12 months. At September 30,
1999, $20.7 million in net assets of Go-Gro were restricted under the agreement
and could not be transferred to the parent Company. This facility is repayable
upon demand and is subject to an annual review by the bank. At September 30,
1999, the Company had used $4.1 million of this line for letters of credit
(there were no borrowings) and U.S. $379,000 was available.
The Company's availability under its credit lines consisted of the following:
SEPTEMBER 30,
----------------------
1999 1998
-------- --------
(In thousands)
Total lines of credit $ 32,248 $ 42,128
Less:
Borrowings (14,350) (13,928)
Stand-by letters of credit (1,213) (1,213)
Open letters of credit and other (4,126) (2,405)
Amount unavailable under borrowing base -- (12,057)
-------- --------
Lines of credit available $ 12,559 $ 12,525
======== ========
The weighted average interest rate on the current portion of notes payable -
credit lines was 8.75% and 9.1% at September 30, 1999 and 1998, respectively.
Page 34
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
6. BONDS PAYABLE - REAL ESTATE RELATED
The Company financed the purchase and improvements of its Meridian manufacturing
facility through the issuance of a series of State of Mississippi General
Obligation Bonds (Mississippi Small Enterprise Development Finance Act Issue,
1994 Series GG) with an aggregate available principal balance of $1,605,000, a
weighted average coupon rate of 6.23% and a contractual maturity of November 1,
2009. In June 1997, the Company ceased manufacturing operations at Meridian and
leased the facility to a non-manufacturing entity. As a result, the Company made
a $1.5 million payment to escrow on the bonds, which was included in restricted
cash equivalents and short-term investments in the September 30, 1999 and 1998
balance sheets. The bonds were secured by a first mortgage on land, building and
improvements and a $1,713,000 standby letter of credit, which was not part of
the Company's credit lines. Interest on the bonds was payable semiannually and
principal payments were due annually. The outstanding balance of these bonds was
$1.3 million and $1.4 million, at September 30, 1999 and 1998, respectively. The
Company redeemed the bonds at their earliest redemption date of November 1,
1999.
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, from 1996 to 2002, $600,000 per
year in 2003 and 2004, and $500,000 per year from 2005 to 2010. The bonds bear
interest at a variable rate (5.45% at September 30, 1999) that is adjustable
weekly to the rate the remarketing agent for the bonds deems to be the market
rate for such bonds. The bonds are secured by a lien on the land, building, and
all other property financed by the bonds. Additional security is provided by a
$7.1 million direct pay letter of credit which is not part of the Company's
credit line. The outstanding balance of these bonds was $6.9 million and $7.8
million, at September 30, 1999 and 1998, 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 and sinking fund requirements of bonds payable at
September 30, 1999, are as follows (in thousands):
2000 $ 2,210
2001 900
2002 900
2003 600
2004 600
Thereafter 3,000
-------
$ 8,210
=======
Page 35
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
7. CONVERTIBLE SUBORDINATED NOTES
The Company has outstanding $7.6 million of 8% convertible subordinated notes
due March 15, 2002. The notes are convertible at the option of the holders into
common shares of the Company's stock at a conversion price of $6.63 per share
subject to certain anti-dilution adjustments (as defined in the note agreement),
at any time prior to maturity. The notes are subordinated in right of payment to
all existing and future senior indebtedness of the Company. The notes are
callable at the Company's option with certain required premium payments.
Principal payments of approximately $2.5 million are required on March 15 in
each of the years 2000 and 2001. The remaining outstanding principal and
interest is due in full on March 15, 2002. Interest is payable semiannually. The
terms of the note agreement require the Company to maintain specific interest
coverage ratio levels in order to increase its credit facilities or otherwise
incur new debt and to maintain a minimum consolidated net worth. In addition,
the note agreement prohibits the declaration or payment of dividends on any
shares of the Company's capital stock, except dividends or other distributions
payable solely in shares of the Company's common stock, and limits the purchase
or retirement of any shares of capital stock or other capital distributions.
8. OTHER LONG-TERM DEBT
Other long-term debt consisted of the following:
SEPTEMBER 30,
--------------------
1999 1998
------- -------
(In thousands)
Loan payable monthly through 2004 based on a 15 year
amortization schedule with a balloon payment in 2004,
bearing interest at 8%, secured by a mortgage on land
and building with a net book value of $1.3 million at
September 30, 1999. $ 958 $ 1,015
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 HIBOR rate plus 3.5% (8.69% at
September 30, 1999) maturing at various dates through
2002 and secured by a guarantee issued by the Company
and warehouse equipment with a net book value of
$386,000 at September 30, 1999; $370,000 was available
for future borrowings at September 30, 1999. 443 597
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 2004, bearing interest at 8.75%, and secured by
office, computer and warehouse equipment with a net
book value of $336,000 at September 30, 1999; $477,000
was available for future borrowings at September 30,
1999. 523 591
Other 87 191
------- -------
Subtotal 2,011 2,394
Less current maturities (487) (485)
------- -------
$ 1,524 $ 1,909
======= =======
Page 36
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
8. OTHER LONG-TERM DEBT (CONTINUED)
The aggregate maturities of other long-term debt at September 30, 1999, are as
follows (in thousands):
2000 $ 487
2001 464
2002 259
2003 125
2004 676
-------
$ 2,011
=======
9. 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,
---------------------------------
1999 1998 1997
--------- --------- ---------
Statutory federal income tax rate 34.0 % 34.0 % (34.0)%
Increase (decrease) resulting from:
State income taxes, net of federal
income tax effect 2.8 2.8 (0.5)
Foreign tax rate differential (6.3) (33.2) (17.3)
Goodwill amortization 1.6 10.6 2.6
Adjustment to tax rate applied to U.S.
temporary differences - 8.9 -
Other (0.9) 1.8 2.3
========= ========= =========
31.2 % 24.9 % (46.9)%
========= ========= =========
Page 37
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
9. INCOME TAXES (CONTINUED)
The income tax provision (benefit) consisted of the following:
Current Deferred Total
------- -------------- -------
(In thousands)
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
======= ======= =======
Year ended September 30, 1998
Federal $ (993) $ 453 $ (540)
State 22 341 363
Foreign 631 (89) 542
------- ------- -------
$ (340) $ 705 $ 365
======= ======= =======
Year ended September 30, 1997
Federal $(2,894) $(1,109) $(4,003)
State 15 (333) (318)
Foreign 1,597 (10) 1,587
------- ------- -------
$(1,282) $(1,452) $(2,734)
======= ======= =======
Income (loss) before income taxes by source consisted of the following:
YEARS ENDED SEPTEMBER 30,
-----------------------------------
1999 1998 1997
-------- -------- --------
United States $ 5,046 $ (1,265) $(13,183)
Foreign 4,381 2,732 7,356
-------- -------- --------
$ 9,427 $ 1,467 $ (5,827)
======== ======== ========
The tax effects of each type of temporary difference that gave rise to the
Company's current net deferred tax asset is as follows:
SEPTEMBER 30,
--------------------
1999 1998
------- -------
(In thousands)
Accounts receivable allowances $ 1,337 $ 1,310
Provision for litigation judgment under appeal -- 1,767
Prepaid expenses (175) (162)
Allowances and capitalized costs for inventory 961 665
Accrued expenses 76 77
Other 48 22
------- -------
$ 2,247 $ 3,679
======= =======
Page 38
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
9. INCOME TAXES (CONTINUED)
The tax effects of each type of temporary difference that gave rise to the
Company's net long term deferred tax asset (liability) (included in other long
term assets or other long term liabilities) are as follows:
SEPTEMBER 30,
----------------
1999 1998
----- -----
(In thousands)
Net loss on sublease of facility $ 136 $ 200
Provision for impairment of long-lived assets -- 187
U.S. tax loss and other carryforwards 259 393
Foreign tax loss carryforward 796 517
Depreciation:
U.S. assets (523) (467)
Foreign assets (63) (52)
Other 10 75
Valuation allowance (796) (517)
----- -----
$(181) $ 336
===== =====
The Company has not provided for possible U.S. income taxes on $19.7 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.
Page 39
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
10. EARNINGS 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,
---------------------------------
1999 1998 1997
---------------------------------
BASIC EPS:
Numerator:
Net income (loss) for basic earnings per share $ 6,489 $ 1,102 $(3,093)
---------------------------------
Denominator:
Weighted average shares outstanding during the year 7,252 7,128 7,071
Weighted average of shares repurchased
during the year (197)
---------------------------------
Weighted average shares used for basic EPS 7,055 7,128 7,071
=================================
Basic EPS $ 0.92 $ 0.15 $ (0.44)
=================================
DILUTED EPS:
Numerator:
Net income (loss) $ 6,489 $ 1,102 $(3,093)
Interest on convertible subordinated notes, net of
income taxes 424
---------------------------------
Net income (loss) for diluted earnings per share $ 6,913 $ 1,102 $(3,093)
=================================
Denominator:
Weighted average shares outstanding during the year 7,252 7,128 7,071
Shares upon conversion of convertible subordinated notes 1,138
Effect of stock options 495 349
Weighted average of shares repurchased
during the year (197)
---------------------------------
Weighted average shares used for diluted EPS 8,688 7,477 7,071
=================================
Diluted EPS $ 0.80 $ 0.15 $ (0.44)
=================================
The convertible subordinated notes were not included in the denominator for
diluted EPS for the years ended September 30, 1998 and 1997 because their effect
was anti-dilutive.
Page 40
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
11. COMMON STOCK, STOCK OPTIONS, WARRANTS AND RIGHTS
COMMON STOCK
The Company's board of directors has authorized the repurchase of up to $2
million of common shares of the Company from time to time in the open market or
in negotiated purchases. At September 30, 1999, the Company had repurchased
378,200 shares for $1,210,000.
STOCK OPTIONS UNDER PLANS
In August 1987, the Company adopted the Stock Option/Stock Appreciation Rights
Plan (Employee Plan), which provides for the granting of options to officers and
other key employees. Under the Employee Plan, the Company and its shareholders
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. As of September 30, 1999,
options for approximately 1,491 shares of common stock remained available for
future grants. Options generally vest 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.
In March 1989, the Company adopted the Non-Employee Director Stock Option Plan
(Director Plan), which provides 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 are granted annually 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. As of September 30,
1999, no shares of common stock remained available for future grants. These
options are generally exercisable no later than ten years from the date of
grant.
Page 41
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
11. COMMON STOCK, STOCK OPTIONS, WARRANTS AND RIGHTS (CONTINUED)
Transactions and related information for each plan are as follows:
NUMBER OF WEIGHTED AVERAGE
EMPLOYEE PLAN: OPTIONS PRICE PER SHARE
---------- ----------------
Options outstanding at September 30, 1996 1,340,301 $ 3.98
Options granted 25,700 $ 4.09
Options exercised (17,166) $ 4.04
Options terminated (22,368) $ 4.11
---------- --------
Options outstanding at September 30, 1997 1,326,467 $ 3.98
Options granted 5,000 $ 3.38
Options exercised (25,100) $ 3.03
Options terminated (16,719) $ 4.36
---------- --------
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 exercisable at September 30, 1999 1,029,182 $ 2.77
========== ========
**On December 11, 1998, the exercise price of 784,733 outstanding options was
restated to $2.4375, the market value on such date.
NUMBER OF WEIGHTED AVERAGE
DIRECTOR PLAN: OPTIONS PRICE PER SHARE
------- ----------------
Options outstanding at September 30, 1996 36,000 $ 7.19
Options granted 10,000 $ 3.75
------- ---------
Options outstanding at September 30, 1997
and 1998 46,000 $ 6.59
Options terminated (2,000) $ 12.13
------- ---------
Options outstanding at September 30, 1999 44,000 $ 6.34
======= =========
Options exercisable at September 30, 1999 44,000 $ 6.34
======= =========
OTHER STOCK OPTIONS
The Company has outstanding options for 55,000 shares at an exercise price of
$1.75 per share issued to one of the former shareholders of a subsidiary in
connection with the acquisition of such subsidiary. The options were fully
exercisable at September 30, 1999 and expire on August 24, 2000.
Page 42
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
11. COMMON STOCK, STOCK OPTIONS, WARRANTS AND RIGHTS (CONTINUED)
OTHER STOCK OPTIONS (CONTINUED)
In August 1990, the Company issued options outside its Director Plan to its
non-employee directors to purchase an aggregate of 200,000 shares of common
stock, of which 132,000 remained outstanding on September 30, 1999. The options
have an exercise price of $1.75 per share, were fully exercisable at September
30, 1999 and expire August 24, 2000.
On October 1, 1991, the Company issued options to purchase 20,000 shares at
$3.38 to an employee. On December 11, 1998 the exercise price of these options
was restated to $2.4375, the market value on such date. The options were fully
exercisable at September 30, 1999 and expire 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 on such date. The options were fully exercisable at
September 30, 1999 and expire January 3, 2002.
On January 15, 1993, the Company issued to one of its executives options to
purchase 50,000 shares of common stock at an exercise price of $5.25 per share.
On December 11, 1998, the exercise price of these options was restated to
$2.4375, the market value on such date. The options were fully exercisable at
September 30, 1999. The options expire on January 14, 2003.
At various dates during fiscal 1995, the Company granted to certain new
employees options to purchase 91,000 shares of common stock at prices ranging
from $6.75 to $6.875. In most cases, one-third of the options became exercisable
on October 1, 1995, with one-third vesting on October 1 of each of the following
two years. The options expire in 10 years from the grant date. On October 27,
1995, the exercise price of these options was restated to $4.125, the market
value on such date, and on December 11, 1998, the exercise price of the
remaining 53,500 shares was restated to $2.4375, the market value on such date.
As of September 30, 1999, 50,000 options remained to be exercised and all
options were exercisable.
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, 1999 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 on
such date. The options were fully exercisable at September 30, 1999 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, 1999 and expire
on March 11, 2007.
During fiscal 1999, the Company granted to certain new employees options to
purchase 8,000 shares of common stock at prices ranging from $4.69 to $4.94. One
third of the options becomes exercisable one year after the date of grant with
one-third vesting during each of the following two years.
Page 43
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
11. COMMON STOCK, STOCK OPTIONS, WARRANTS AND RIGHTS (CONTINUED)
OTHER STOCK OPTIONS (CONTINUED)
Transactions and related information relating to other stock options are
summarized as follows:
OPTIONS PRICE PER SHARE
-------- ---------------
Options outstanding at September 30, 1996 680,500 $ 3.63
Options granted 120,000 $ 3.85
-------- --------
Options outstanding at September 30, 1997 800,500 $ 3.69
Options granted 18,000 $ 3.53
Options exercised (55,000) $ 1.75
Options terminated (125,000) $ 3.93
-------- --------
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 exercisable at September 30, 1999 617,000 $ 2.81
======== ========
**On December 11, 1998, the exercise price of 290,000 outstanding options was
restated to $2.4375, the market value on such date.
The following table summarizes information about all stock options outstanding
at September 30, 1999:
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
- ----------------------- ----------- ---------------- -------- ----------- --------
$1.75 to $2.50 1,366,068 3.34 $2.28 1,320,348 $2.29
$3.38 to $4.13 196,334 5.40 $3.84 140,334 $3.77
$4.69 to $6.63 161,000 3.24 $5.06 153,000 $5.07
$6.75 to $10.75 76,500 4.78 $7.13 76,500 $7.13
- ----------------------- ----------- ---------------- -------- ----------- --------
$1.75 to $12.13 1,799,902 3.61 $2.91 1,690,182 $2.88
======================= =========== ================ ======== =========== ========
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 in 1999, 1998 and 1997, respectively: no dividend
yield; expected volatility of 62%, 58% and 56%; risk-free interest rate of 5.2%,
5.4% and 6.4%; and an expected term of six and a half years for options granted
and two years for options repriced during 1999. The weighted average fair value
at date of grant of options granted during 1999, 1998 and 1997 was $1.97 ($.70
for options repriced), $1.89 and $2.05 per option, respectively. Had the
compensation cost been determined based on the fair value at the grant or
repricing date consistent with the provisions of SFAS 123, the Company's net
income (loss) and basic and diluted earnings (loss) per share would have been
reduced to the proforma amounts indicated below (in thousands, except per share
amounts):
Page 44
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
11. COMMON STOCK, STOCK OPTIONS, WARRANTS AND RIGHTS (CONTINUED)
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1999 1998 1997
----------- ------------ ------------
Net income (loss) - as reported $ 6,489 $ 1,102 $ (3,093)
Net income (loss) - proforma $ 5,978 $ 966 $ (3,392)
Basic earnings (loss) per share - as reported $ 0.92 $ 0.15 $ (0.44)
Basic earnings (loss) per share - proforma $ 0.85 $ 0.14 $ (0.48)
Diluted earnings (loss) per share - as reported $ 0.80 $ 0.15 $ (0.44)
Diluted earnings (loss) per share - proforma $ 0.74 $ 0.13 $ (0.48)
STOCK RIGHTS
On November 20, 1990, as amended on January 24, 1991, and on March 16, 1992, the
Company adopted a Shareholders' Rights Plan, and 6,002,278 rights were
distributed as a dividend at the rate of one right for each share of the
Company's common stock. Each right entitles the registered holder to purchase
from the Company one share of common stock at a purchase price of $20 per share,
subject to adjustment. The rights may be exercised beginning 10 days after a
person or group acquires 21 percent or more of the Company's common stock or
announces a tender offer that could result in the person or group owning at
least 21 percent of the Company's common stock. Subject to possible extensions,
the rights may be redeemed by the Company at $0.001 per right at any time until
10 days after 21 percent or more of Catalina's stock is acquired by a person or
group. The rights are also redeemable upon a vote by the stockholders of the
Company if the proposed purchase price for the shares is deemed fair by a
recognized investment banker. In the event the Company is acquired in a merger
or other business combination transaction, the holder of each right would be
entitled to receive common stock of the acquiring company having a value equal
to two times the exercise price of the right. Unless redeemed earlier, the
rights expire on November 30, 2000.
STOCK WARRANTS
In connection with the Company's initial public offering of common stock in May
1988, warrants to purchase 92,000 common shares at $4.20 a share were issued to
the underwriters. The warrants are exercisable through December 31, 2000. The
Company registered the shares underlying the warrants effective May 24, 1995. No
common stock has been issued pursuant to these warrants through September 30,
1999.
12. COMMITMENTS
The Company leases offices, warehouse facilities and equipment under
non-cancelable operating leases that expire at various dates through 2008.
Certain leases provide for 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, 1999 by fiscal year,
were as follows (in thousands):
MINIMUM RENTAL MINIMUM
PAYMENTS SUBLEASE RECEIPTS NET
------------------- -------------------- --------------
2000 $ 2,085 $ 923 $ 1,162
2001 1,077 385 692
2002 387 - 387
2003 333 - 333
2004 278 - 278
Thereafter 796 - 796
=================== ==================== ==============
$ 4,956 $ 1,308 $ 3,648
=================== ==================== ==============
Page 45
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
12. COMMITMENTS (CONTINUED)
Total net rental expense for all operating leases (including month-to-month
leases) amounted to approximately $1.3 million, $1.8 million and $3.1 million
for the years ended September 30, 1999, 1998 and 1997, respectively.
Shenzhen Jiadianbao Electrical Products Co., Ltd. ("SJE"), a cooperative joint
venture subsidiary of Go-Gro, and the Bureau of National Land Planning Bao-An
Branch of Shenzhen City entered into a Land Use Agreement covering approximately
467,300 square feet in Bao-An County, Shenzhen City, People's Republic of China
on April 11, 1995. The agreement provides SJE with the right to use the above
land until January 18, 2042. The land use rights are non-transferable. Under the
terms of the SJE joint venture agreement, ownership of the land and buildings of
SJE is divided 70% to Go-Gro and 30% to the other joint venture partner. Land
costs, including the land use rights, approximated $2.6 million of which Go-Gro
has paid its 70% proportionate share of $1.8 million. Under the terms of this
agreement, as amended, SJE is obligated to construct approximately 500,000
square feet of factory buildings and 211,000 square feet of dormitories and
offices, of which 40% was required to be and was completed by April 1, 1997. The
remainder of the construction was to be completed by December 31, 1999; however,
the Company has exercised its rights to extend the construction date to December
31, 2000 by incurring an extension fee. The total cost for this project is
estimated at $16.5 million (of which $10.1 million had been expended as of
September 30, 1999) and includes approximately $1 million for a Municipal
Coordination Facilities Fee (MCFF). The MCFF is based upon the square footage to
be constructed. The agreement calls for the MCFF to be paid in installments
beginning in January 1997 of which $441,000 had been accrued as of September 30,
1999. A 162,000 square foot factory, 77,000 square foot warehouse and 60,000
square foot dormitory became fully operational in June 1997. SJE began
construction of the final phase of this facility in December 1999.
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 agreement terminates on
September 30, 2002. The Company has an option to extend the agreement for an
additional ten years. The royalty payments are due quarterly and are based on a
percent of the value of the Company's net shipments of Westinghouse branded
products, subject to annual minimum payments due. Commencing September 30, 2000
either party has the right to terminate the agreement during fiscal years 2000
to 2002 if the Company does not meet the minimum net shipments of $25 million
for fiscal 2000, $40 million for fiscal 2001 and $60 million for fiscal 2002.
Net sales of Westinghouse branded products amounted to $20.5 million and $10.9
million for the years ended September 30, 1999 and 1998, respectively.
In 1998, the Company entered into a consulting agreement with a former employee
for a two-year period ending March 31, 2000, for an annual fee of $140,000,
payable monthly.
13. RELATED PARTY TRANSACTIONS
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,
$159,000 and $164,000 for the years ended September 30, 1999, 1998 and 1997,
respectively.
Notes and advances receivable from Executive Vice Presidents of the Company
aggregated approximately $284,000 and $259,000 at September 30, 1999 and 1998,
respectively. At September 30, 1999 notes and advances included $220,000 in
notes bearing interest at LIBOR plus 250 basis points which were collaterized by
stock option agreements to purchase 195,000 shares of the Company. A note
amounting to $50,000 matures in January 2000, a $100,000 note matures in
December 2000 and the remaining $70,000 note matures in January 2001.
Page 46
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
14. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
131, Disclosures about Segments of an Enterprise and Related Information
effective October 1, 1998. SFAS No. 131 supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise, replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable operating segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS No. 131 did not affect results of operations or financial position but did
affect the disclosure of segment information.
The Company operates exclusively in the lighting industry with operations based
in the United States and China, and to a lesser extent, Canada and Mexico. The
Company considers its operating segments to be the United States 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 China-based operations are made primarily into Europe and net sales
to external customers by "all other segments" are made primarily into Canada and
to a lesser extent Mexico and Chile. Intersegment sales represent shipments of
finished products sold at prices determined by management. During fiscal 1998,
the Company restructured its operations which resulted in a change in the
pricing of intersegment sales between China and the other segments. Calculation
of the impact of such change on the segment contributions for fiscal years 1998
and 1999 is not practicable.
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 before parent/holding company and certain
administrative expenses, unusual items 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
before income taxes for the years ended September 30, 1999, 1998 and 1997 are as
follows (in thousands):
NET SALES:
YEARS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------------------------
1999 1998 1997 (1)
---------------------------------- --------------------------------- ---------------------------------
EXTERNAL EXTERNAL EXTERNAL
CUSTOMERS INTERSEGMENT TOTAL CUSTOMERS INTERSEGMENT TOTAL CUSTOMERS INTERSEGMENT TOTAL
---------------------------------- --------------------------------- ---------------------------------
United States $133,749 $ 1,559 $ 135,308 $122,286 $ 1,099 $123,385 $146,601 $ 3,197 $149,798
China 19,523 117,422 136,945 21,309 90,035 111,344 33,950 75,729 109,679
Other segments 23,289 517 23,806 18,265 367 18,632 16,404 428 16,832
Elimination -- (119,498) (119,498) (91,501) (91,501) (79,354) (79,354)
--------------------------------- -------------------------------- --------------------------------
Total $176,561 -- $ 176,561 $161,860 -- $161,860 $196,955 -- $196,955
================================= ================================ ================================
NET SALES BY LOCATION OF EXTERNAL CUSTOMERS:
YEARS ENDED SEPTEMBER 30,
----------------------------------
1999 1998 1997(1)
----------------------------------
United States $133,974 $122,509 $147,519
Canada 19,938 16,538 15,545
Other 22,649 22,813 33,891
----------------------------------
Net Sales $176,561 $161,860 $196,955
==================================
Page 47
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
14. SEGMENT INFORMATION (CONTINUED)
SEGMENT CONTRIBUTION:
YEARS ENDED SEPTEMBER 30,
---------------------------------
1999 1998 1997 (1)
---------------------------------
United States $ 6,069 $ 3,664 $ 3,501
China 4,535 1,406 1,942
Other segments (827) (173) (95)
---------------------------------
Subtotal for segments 9,777 4,897 5,348
Reversal of provision for litigation 2,728 -- --
Reversal of post judgment interest
related to litigation settlement 893 -- --
Litigation charges and related professional fees -- -- (7,453)
Plant closing costs -- -- (930)
Parent/administrative expenses (3,971) (3,430) (2,792)
---------------------------------
Income (loss) before income taxes $ 9,427 $ 1,467 $(5,827)
=================================
INTEREST EXPENSE (2):
YEARS ENDED SEPTEMBER 30,
-------------------------------
1999 1998 1997
-------------------------------
United States $ 947 $ 1,569 $ 2,382
China 970 1,176 1,370
Other segments 440 261 388
-------------------------------
Subtotal for segments 2,357 3,006 4,140
Parent interest expense (income) 56 795 (52)
-------------------------------
Total interest expense $ 2,413 $ 3,801 $ 4,088
===============================
TOTAL ASSETS:
SEPTEMBER 30,
------------------------
1999 1998
------------------------
United States $ 55,411 $ 58,305
China 47,316 41,340
Other segments 13,776 9,614
Eliminations (14,606) (10,299)
------------------------
Total assets $ 101,897 $ 98,960
========================
Page 48
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
14. SEGMENT INFORMATION (CONTINUED)
LONG-LIVED ASSETS (3):
SEPTEMBER 30,
-------------------
1999 1998
-------------------
United States $12,634 $14,469
China 11,747 13,192
Other segments 356 261
-------------------
Total long-lived assets $24,737 $27,922
===================
EXPENDITURES FOR ADDITIONS TO LONG-LIVED ASSETS;
YEARS ENDED SEPTEMBER 30,
----------------------------
1999 1998 1997
----------------------------
United States $ 672 $1,138 $1,487
China 1,019 247 7,214
Other segments 244 1,032 35
----------------------------
Total expenditures $1,935 $2,417 $8,736
============================
(1) In 1997 the United States segment included Meridian Lamps, Inc.
("Meridian"), a wholly-owned subsidiary which commenced operations in December
1994 and terminated operations in June 1997. Net sales to external customers in
1997 amounted to $2.8 million and inter-segment sales amounted to $2.4 million.
In 1997, the segment contribution for the United States reflected a $2.6 million
loss related to the Meridian operations.
(2) Parent and inter-segment advances bear interest at the U.S. prime rate. The
interest expense shown for each segment is net of interest earned on
inter-segment advances.
(3) Represents property and equipment, net.
MAJOR CUSTOMERS
During the years ended September 30, 1999, 1998 and 1997 one customer (primarily
included in U.S.-based operations) accounted for 25.8%, 27.5% and 22.1%,
respectively, of the Company's net sales. One other customer and its affiliate
(also primarily included in the U.S. segment) accounted for 14.5%, 5.3% and 4.7%
of the Company's net sales during the years ended September 30, 1999, 1998 and
1997, respectively.
Page 49
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
15. EMPLOYMENT, CHANGE IN CONTROL, CONSULTING AND NON-COMPETE AGREEMENTS
The Company has employment agreements with three executive officers. The
agreements expire on September 30, 2001. All such officers receive compensation
with minimum annual cost of living increases of 5% and acceleration of payments
due under the agreements should there be a change in control of the Company. The
agreements provide for severance at the end of the present three year term
ending September 30, 2001 in an amount equal to two times their base salary and
benefits. Each officer is subject to a non-compete provision through September
30, 2001. Bonuses paid to the Company's C.E.O. and three Executive Vice
Presidents pursuant to their employment agreements totaled $674,000 and $105,000
for fiscal 1999 and 1998, respectively. There was no bonus for fiscal 1997 due
to a pretax loss.
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 approximately $800,000. 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.
Future commitments under employment, consulting and non-compete agreements at
September 30, 1999, by fiscal year, excluding the possible effect of bonuses are
as follows (in thousands):
2000 $ 1,911
2001 1,220
2002 1,268
2003 63
-------
$ 4,462
=======
The Company has entered into Change in Control agreements with the Company's
Chief Financial Officer and its Treasurer. The agreements expire in September
2001. Such Agreements provide that, in the event of a change in control of the
Company, if the Company terminates the employment of either employee within
certain time periods or the Company fails to negotiate an acceptable employment
agreement with the employee, the Company shall pay the employee two times his
annual base salary. In addition, the agreements with these employees provide
that in the event they are terminated "without cause" where there has been no
change in control, they are entitled to a severance payment equal to their
annual base salary.
16. 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
Statements 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.
Page 50
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
16. CONTINGENCIES (CONTINUED)
On December 17, 1996 White Consolidated Industries, Inc. ("White"), which has
acquired certain limited trademark rights from Westinghouse Electric Corp.
("Westinghouse") to market certain household products under the
White-Westinghouse trademark, notified the Company of a lawsuit against
Westinghouse and the Company filed in the United States District Court, for the
Northern District of Ohio. The lawsuit challenged the Company's right to use the
Westinghouse trademarks on its lighting products and alleges trademark
infringement. On December 24, 1996, Westinghouse and the Company served a
Complaint and Motion for Preliminary Injunction against White, AB Electrolux,
Steel City Vacuum Co., Inc., Salton/Maxim Housewares, Inc., Newtech Electronics
Corp., and Windmere Durable Holdings, Inc. in the United States District Court,
Eastern District of Pennsylvania, Case No. 96-2294 alleging that the defendants
had violated Westinghouse's trademark rights, breached the Agreement between
Westinghouse and White and sought an injunction to enjoin White against
interference with their contractual arrangements. In October 1997, the cases
were consolidated in the Pennsylvania case and on November 7, 1997 White filed a
Counterclaim and Third Party Claims against Westinghouse, Catalina and Minami
International Corporation alleging trademark infringement, trademark dilution,
false designation of origin, false advertising and unfair competition and
seeking injunctive relief and damages. Both the Company and Westinghouse
vigorously disputed White's allegations. Pursuant to the License Agreement
between Westinghouse and the Company, Westinghouse defended and indemnified the
Company for all costs and expenses for claims, damages and losses, including the
costs of litigation. The case was settled on June 30, 1999. Catalina made no
payments as part of the settlement. All litigation against the Company was
dismissed and Catalina's license with Westinghouse Electric Company, now CBS,
remains in full force and effect.
During fiscal years 1998 and 1999 the Company received a number of claims
relating to halogen torchieres sold by the Company to various retailers.
Management does not currently believe these claims will result in a material
uninsured liability to the Company. The Company experienced an increase in its
liability insurance premiums effective for the 1999 calendar year and has been
self-insuring up to a maximum of $10,000 for each incident occurring after
January 1, 1999. Based upon its experience, the Company does not believe that
this self-insurance provision will have a material adverse impact on the
Company's financial position or annual results of operations. However, 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.
The Company is also a defendant in other legal proceedings arising in the course
of business. In the opinion of management, the ultimate resolution of these
other legal proceedings will not have a material adverse effect on the Company's
financial position or annual results of operations.
YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company has developed and is
currently executing a plan to make its computer systems Year 2000 ready. The
plan consists of five phases: (1) an inventory of all systems and applications,
including non-information technology systems; (2) an assessment of the Year 2000
readiness of these existing systems and applications; (3) remediation of Year
2000 problems identified in the assessment phase; (4) testing of all systems to
verify the success of the remediation phase and, if necessary (5) the
implementation of contingency plans for all significant systems and
applications.
Phase 1 to 4 of the Company's plan were completed as of July 1, 1999. The
Company is presently engaged in the implementation of its contingency plans.
Page 51
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
16. CONTINGENCIES (CONTINUED)
The Company has determined that its non-information technology systems are not
significantly affected by the Year 2000 Issue. With respect to information
technology systems, the Company, during the normal course of upgrading its
systems to address its business needs and add functionality and efficiency to
its business processes, began implementation in 1997 of a new enterprise
software to replace the business applications supporting sales, distribution,
inventory management, finance and accounting for the Company's North American
business. The implementation was completed in February 1999. The majority of the
remainder of the Company's North American systems have been made Year 2000 ready
through purchased upgrades of commercial third-party software packages. Go-Gro's
systems and applications have been made Year 2000 ready through a combination of
internal reprogramming /modifications and purchased upgrades of commercial
third-party software packages.
The Company has inquired of its customers, suppliers and other companies
important to its business to determine the extent of such parties' preparations
to resolve their own Year 2000 issues.
The Company has utilized both internal and external resources to implement its
Year 2000 plan. The total incremental cost to the Company for the Year 2000
project (excluding internal resources, the costs associated with the new
enterprise system and scheduled hardware replacements which would have been
incurred regardless of the Year 2000 Issue), all of which will be expensed as
incurred, is approximately $150,000. As of September 30, 1999, $100,000 of these
costs had been incurred. The Company is funding these costs with cash flows from
operations. The costs of the Year 2000 project and the timetable in which the
Company expects to finish its Year 2000 project are based on management's best
estimates and are dependent on a number of factors, including the continued
availability of personnel and external resources.
The Company has established contingency plans in the event the Company's systems
and applications are not Year 2000 ready. The Company's new enterprise software
has been represented as Year 2000 ready by its manufacturer. Contingency plans
for the Company's systems and applications contemplate manual procedures,
alternate backup systems and expanded use of external resources in remediation
efforts.
Year 2000 compliance is critical to the Company due to the importance of its
computer systems and applications to its business. The Company may also be
vulnerable to the failure of significant third parties with which the Company
does business to resolve their own Year 2000 issues. The impact on the Company
of failure by either the Company or the significant third parties with which it
does business to achieve Year 2000 compliance is not reasonably estimable,
however, the Year 2000 Issue could have a material impact on the operations of
the Company.
OTHER
As a result of recent Internal Revenue Service rulings and proposed and
temporary regulations, the Company has restructured its international operations
in order to retain favorable U.S. tax treatment of foreign source income. Should
this restructuring ultimately prove unsuccessful, the Company will likely
experience an increase in its consolidated effective income tax rate for 1999
and future years.
On August 9, 1999 the New York Stock Exchange ("NYSE") notified the Company that
it had changed its rules regarding listing criteria for companies which have
shares traded on the NYSE. The new rules change and increase the requirements to
maintain a NYSE listing. As of September 30, 1999, the Company does not meet one
of the new rules, which requires that any NYSE listed company, which has a total
market capitalization of less than $50 million, maintain minimum total
stockholders' equity of $50 million. The Company's stockholders' equity as of
September 30, 1999 was $48.1 million. The Company believes it can meet the new
listing rules and, as requested by the NYSE, has provided the NYSE with its plan
to meet the new standard by February, 2001 and the Company's plan was accepted
by the NYSE in October 1999. However, no assurances can be given that the
objectives of the plan will be accomplished by February, 2001. If the Company is
unable to achieve the plan's objectives, the Company's shares could be delisted
from the NYSE, however the Company believes other trading venues are available
for its stock.
Page 52
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
17. 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.
BONDS PAYABLE AND OTHER LONG-TERM DEBT:
The fair value of the Company's bonds payable 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,
-------------------------------------------
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------- ------- ------- -------
Cash and cash equivalents $ 7,253 $ 7,253 $ 1,790 $ 1,790
Accounts receivable, net $20,150 $20,150 $18,395 $18,395
Restricted cash equivalents and
short-term investments $ 1,721 $ 1,721 $ 1,807 $ 1,807
Accounts and letters of credit payable $14,939 $14,939 $12,423 $12,423
Bonds payable $ 8,210 $ 8,160 $ 9,190 $ 9,142
Other long-term debt $ 2,011 $ 2,002 $ 2,394 $ 2,454
It is not practicable to estimate the fair value of the Company's $7.6 million
in convertible subordinated notes.
Page 53
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
18. CONDENSED FINANCIAL INFORMATION
The Company's China and Canada subsidiaries have credit facilities which
restrict the amount of assets that may be transferred by these subsidiaries to
the parent or other Company subsidiaries. These restricted net assets totalled
$20.7 million and $335,000 for the China and Canada subsidiaries, respectively,
at September 30, 1999. The financial information for the Company has been
adjusted in this footnote to report the China and Canada subsidiaries on the
equity basis of accounting. No cash dividends were paid by the China or Canada
subsidiaries during the three years ended September 30, 1999.
BALANCE SHEETS SEPTEMBER 30,
----------------------
ASSETS 1999 1998
-------- --------
Current assets (In thousands)
Cash and cash equivalents $ -- $ 124
Restricted cash and short-term investments 1,721 377
Accounts receivable, net of allowances
of $8,095,000 and $7,863,000, respectively 12,980 10,619
Inventories 18,690 20,318
Income taxes receivable 1,805 1,148
Deferred tax asset 2,204 3,661
Other current assets 2,708 2,638
-------- --------
Total current assets 40,108 38,885
Property and equipment, net 12,658 14,475
Restricted cash equivalents and short-term investments -- 1,430
Investment in and net advances to/from China and Canada subsidiaries 23,316 21,319
Goodwill, net 4,839 5,000
Other assets 1,723 2,544
-------- --------
$ 82,644 $ 83,653
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable - credit lines $ 401 $ 1,900
Current maturities of subordinated notes 2,500 --
Accounts payable 1,219 2,005
Current maturities of bonds payable-real estate related 2,210 975
Current maturities of other long-term debt 308 325
Accrued litigation judgment under appeal -- 4,909
Other current liabilities 3,377 3,121
-------- --------
Total current liabilities 10,015 13,235
Notes payable - credit lines 12,150 10,500
Convertible subordinated notes 5,100 7,600
Bonds payable - real estate related 6,000 8,215
Other long-term debt 1,209 1,414
Other liabilities 113 365
-------- --------
Total liabilities 34,587 41,329
-------- --------
Stockholders' equity
Common Stock 74 72
Additional paid-in capital 26,927 26,475
Retained earnings 22,266 15,777
Treasury stock (1,210) --
-------- --------
Total stockholders' equity 48,057 42,324
-------- --------
$ 82,644 $ 83,653
======== ========
Page 54
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
18. CONDENSED FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
Net sales $ 137,415 $ 124,054 $ 147,460
Cost of sales 116,553 106,524 130,597
--------- --------- ---------
Gross profit 20,862 17,530 16,863
Selling, general and administrative expenses 18,949 16,877 17,309
Reversal of provision for litigation (2,728) -- --
Plant closing costs -- -- 930
Litigation charges and related professional fees -- (95) 7,453
--------- --------- ---------
Operating income (loss) 4,641 748 (8,829)
--------- --------- ---------
Other income (expenses)
Interest expense (1,657) (2,966) (2,859)
Reversal of post judgment interest related to litigation settlement 893 -- --
Equity in income of China and Canada subsidiaries 4,246 2,820 4,156
Other income 302 323 118
--------- --------- ---------
Total other income (expenses) 3,784 177 1,415
--------- --------- ---------
Income (loss) before income taxes 8,425 925 (7,414)
Income tax (provision) benefit (1,936) 177 4,321
--------- --------- ---------
Net income (loss) $ 6,489 $ 1,102 $ (3,093)
========= ========= =========
Page 55
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
18. CONDENSED FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
----------------------------------
1999 1998 1997
------- ------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,489 $ 1,102 $(3,093)
------- ------- -------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Reversal of provision for litigation (2,728) -- --
Reversal of post judgment interest (893) -- --
Provision for impairment of long-lived assets -- -- 735
Provision for litigation judgment under appeal 212 423 4,487
Equity in income of China and Canada subsidiaries (4,246) (2,820) (4,156)
Depreciation and amortization 1,977 2,405 2,857
Deferred income taxes 1,953 794 (1,442)
(Gain) loss on disposition of property and equipment (175) (5) 1
Change in assets and liabilities:
Decrease (increase) in accounts receivable (2,361) 1,839 8,657
Decrease (increase) in inventories 1,628 5,452 3,838
Decrease (increase) in income taxes receivable (657) 2,224 (3,271)
Decrease (increase) in other current assets 342 (619) (388)
Decrease (increase) in other assets (152) 20 (511)
Increase (decrease) in accrued litigation judgment under appeal (1,500) -- --
Increase (decrease) in accounts
payable and other liabilities (530) (5,551) (3,515)
------- ------- -------
Total adjustments (7,130) 4,162 7,292
------- ------- -------
Net cash provided by (used in) operating activities (641) 5,264 4,199
------- ------- -------
Cash flows from investing activities:
Capital expenditures, net (604) (831) (1,425)
Proceeds from sale of property 997 -- --
Investment in and net advances to/from China and Canada subsidiaries 2,249 7,721 (1,679)
Decrease (increase) in restricted cash equivalents and
short-term investments 986 954 878
------- ------- -------
Net cash provided by (used in) investing activities 3,628 7,844 (2,226)
------- ------- -------
(Continued on page 57)
Page 56
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
18. CONDENSED FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Cash flows from financing activities:
Proceeds from notes payable - credit lines 35,701 32,900 35,450
Payments on notes payable - credit lines (35,550) (45,300) (29,550)
Sinking fund redemption payments on bonds (900) (878) (879)
Payment into escrow on bonds -- -- (1,504)
Payments on other long-term debt (576) (581) (703)
Payments on bonds payable - real estate related (980) (975) (970)
Payments to repurchase common stock (1,210) -- --
Proceeds from issuance of common stock and
related income tax benefit 404 223 80
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,111) (14,611) 1,924
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (124) (1,503) 1,809
Cash and cash equivalents at beginning of year 124 1,627 (182)
-------- -------- --------
Cash and cash equivalents at end of year $ -- $ 124 $ 1,627
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
YEARS ENDED SEPTEMBER 30,
--------------------------------
1999 1998 1997
------- ------- -------
(in thousands)
CASH PAID (REFUNDED) FOR:
Interest $ 2,228 $ 3,251 $ 3,451
======= ======= =======
Income taxes $ 612 $(3,512) $ 636
======= ======= =======
During the year ended September 30, 1999, the Company issued 1,778 common shares
to each of its seven outside directors as compensation for their services. The
aggregate market value of the stock issued was $50,000.
During the years ended September 30, 1999, 1998 and 1997 capital lease
obligations aggregating approximately, $102,000, $314,000 and $111,000
respectively, were incurred when the Company entered into leases for new office,
computer, machinery and warehouse equipment.
In 1997 the Company issued 5,000 common shares to an employee as salary pursuant
to an employment agreement.
Page 57
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
1ST QUARTER 2ND QUARTER 3RD QUARTER* 4TH QUARTER
- ----------------------------------------------------------------------------------------
FISCAL 1999
- ----------------------------------------------------------------------------------------
Net Sales $ 42,803 $ 42,128 $ 46,315 $ 45,315
- ----------------------------------------------------------------------------------------
Gross Profit $ 8,129 $ 9,181 $ 9,616 $ 8,729
- ----------------------------------------------------------------------------------------
Operating Income $ 1,318 $ 2,092 $ 4,879 $ 1,540
- ----------------------------------------------------------------------------------------
Net Income $ 503 $ 1,159 $ 3,873 $ 954
- ----------------------------------------------------------------------------------------
Earnings Per Share:
- ----------------------------------------------------------------------------------------
Basic $ 0.07 $ 0.16 $ 0.56 $ 0.14
- ----------------------------------------------------------------------------------------
Diluted $ 0.07 $ 0.15 $ 0.45 $ 0.12
- ----------------------------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- ----------------------------------------------------------------------------------------
FISCAL 1998
- ----------------------------------------------------------------------------------------
Net Sales $ 36,983 $ 40,246 $ 45,037 $ 39,594
- ----------------------------------------------------------------------------------------
Gross Profit $ 6,575 $ 8,287 $ 8,780 $ 7,455
- ----------------------------------------------------------------------------------------
Operating Income (loss) $ 242 $ 1,622 $ 1,977 $ 743
- ----------------------------------------------------------------------------------------
Net Income (loss) $ (381) $ 536 $ 833 $ 114
- ----------------------------------------------------------------------------------------
Earnings (loss) Per Share:
- ----------------------------------------------------------------------------------------
Basic $ (0.05) $ 0.08 $ 0.12 $ 0.02
- ----------------------------------------------------------------------------------------
Diluted $ (0.05) $ 0.07 $ 0.11 $ 0.02
- ----------------------------------------------------------------------------------------
*Reflects the reversal of a $2.7 million provision related to litigation with a
former officer of the Company and the reversal of an $893,000 provision for post
judgment interest.
Page 58
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
- ------------------------------------- ----------- -------------- ------------- -------------- ------
Accounts receivable allowances -
deducted from accounts
receivable in the balance sheet:
Year ended September 30, 1999 $ 8,408 $ 11,575 $ -- $ (11,392) $8,591
=========== ============== ============= ============== ======
Year ended September 30, 1998 $ 8,314 $ 10,327 $ -- $ (10,233) $8,408
=========== ============== ============= ============== ======
Year ended September 30, 1997 $ 7,313 $ 17,357 $ -- $ (16,356) $8,314
=========== ============== ============= ============== ======
Inventory allowances - deducted from
inventory in the balance sheet:
Year ended September 30, 1999 $ 1,656 $ 971 $ -- $ (309) $2,318
=========== ============== ============= ============== ======
Year ended September 30, 1998 $ 2,390 $ 193 $ -- $ (927) $1,656
=========== ============== ============= ============== ======
Year ended September 30, 1997 $ 1,533 $ 2,032 $ -- $ (1,175) $2,390
=========== ============== ============= ============== ======
Allowance for impairment of
long-lived assets - deducted
from property and equipment
in the balance sheet:
Year ended September 30, 1999 $ 519 $ -- $ -- $ (519) $ --
=========== ============== ============= ============== ======
Year ended September 30, 1998 $ 519 $ -- $ -- $ -- $ 519
=========== ============== ============= ============== ======
Year ended September 30, 1997 $ -- $ 735 $ -- $ (216) $ 519
=========== ============== ============= ============== ======
Page 59
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 1999 Annual Meeting of
Stockholders or the Company's Form 10K/A, which will be filed within 120 days of
September 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the definitive proxy statement for the Company for its 1999 Annual Meeting of
Stockholders or the Company's Form 10K/A, which will be filed within 120 days of
September 30, 1999.
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 1999 Annual Meeting of
Stockholders or the Company's Form 10K/A, which will be filed within 120 days of
September 30, 1999.
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 1999 Annual Meeting of
Stockholders or the Company's Form 10K/A, which will be filed within 120 days of
September 30, 1999.
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, 1999 and 1998
Consolidated Statements of Operations
for the years ended September 30, 1999, 1998 and
1997
Consolidated Statements of Stockholders' Equity
for the years ended September 30, 1999, 1998 and
1997
Consolidated Statements of Cash Flows
for the years ended September 30, 1999, 1998 and
1997
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES. The following
financial statement schedule is included in this
Report:
Schedule II - Valuation and Qualifying Accounts for
the years ended September 30, 1999, 1998 and 1997
Page 60
3. EXHIBITS. The following exhibits are filed with this
Report or incorporated by reference:
EXHIBIT FILING IN WHICH EXHIBIT
NUMBER DESCRIPTION IS INCORPORATED BY REFERENCE
- ------------ ----------------------------------------------------------- -------------------------------------------------
3 - Amended and Restated Articles of Incorporated Registration Statement on Form S-1, Number
33-27861
3.3 - By-Laws, as amended Filed herewith
4 - Certificate Common Shares, par value $.01 Registration Statement on Form S-18, Number
33-17409-A
4.2 - Werbel Roth Warrant Registration Statement on Form S-18, Number
33-17409-A
4.3 - Convertible Debentures Form 8-K, dated August 31, 1989
4.4 - Convertible Debentures Amendment No. 1 to Registration
Statement No. 33-34444 on Form S-1
4.5 - Shareholders' Rights Plan Form 10-K dated January 14, 1990
4.6 - Second Amendment to Rights Agreement dated as of November Form 10-Q for the Quarter Ended March 31, 1992
20, 1990
10.46 - Employment Agreement between the Company and Robert Hersh, Form 10-K dated December 28, 1989
dated as of October 1, 1989
10.47 - Employment Agreement between the Company and Dean S. Form 10-K dated December 28, 1989
Rappaport, dated as of October 1, 1989
10.48 - Employment Agreement between the Company and William D. Form 10-K dated December 28, 1989
Stewart, dated as of October 1, 1989
10.49 - Leases dated September 27, 1989 between the Company and Form 10-K dated December 28, 1989
MP-1989-1 Ltd. Partnership
10.50 - Promissory Note from Nathan Katz to the Company, dated Form 10-K dated December 28, 1989
November 1989
10.51 - Promissory Note from David Hauser to the Company, dated Form 10-K dated December 28, 1989
November 1989
10.52 - Amendment to Agreement and Option Agreement between the Form 10-K dated December 28, 1989
Company and Windmere dated December 14, 1989
10.53 - Amendment No. 2 to Credit Agreement dated as of January Registration Statement No. 33-34444
31, 1990 on Form S-1
10.54 - Agreement dated as of January 1,1990 between the Company, Registration Statement No. 33-34444
Dana, David Hauser and Nathan Katz on Form S-1
10.55 - Promissory Note executed in favor of Nathan Katz by the Registration Statement No. 33-34444
Company dated as of January 1, 1990 on Form S-1
10.56 - Promissory Note executed in favor of David Hauser by the Registration Statement No. 33-34444
Company dated as of January 1, 1990 on Form S-1
10.57 - Amendment to 1987 Stock Option Plan Registration Statement No. 33-34444 on
Form S-1
10.58 - Amendment No. 1 dated May 7, 1990 to Employment Agreement Form 10-Q dated August 17,1990
between the Company and Robert Hersh
10.59 - Amendment No. 3 to Credit Agreement dated as of March 9, Form 10-Q dated August 17, 1990
1990
10.60 - Amendment No. 4 to Credit Agreement dated as of May 31, Form 10-Q dated August 17, 1990
1990
10.61 - Assignment of Credit Agreement dated as of May 1, 1990; Form 10-Q dated August 17,1990
Credit Facility between the Company and SunTrust
Page 61
10.62 - Lease between Dana and H & K Realty Trust dated as of Form 10-Q dated August 17, 1990
April 1, 1990
10.63 - Lease between the Company and Paragon regarding the Dallas Form 10-Q dated August 17, 1990
Facility, dated October 16, 1989
10.64 - Amendment dated as of April 1, 1990 to Employment Amendment No. 1 to Registration Statement No.
Agreement between Dana, the Company and Nathan Katz 33-34444 on Form S-1
10.65 - Amendment dated as of April 1, 1990 to Employment Amendment No. 1 to Registration Statement No.
Agreement between Dana, the Company and David Hauser 33-34444 on Form S-1
10.66 - Amendment dated as of August 27, 1990 to Employment Amendment No. 1 to Registration Statement No.
Agreement between the Company and John H. Browder 33-34444 on Form S-1
10.67 - Amendment dated as of August 27, 1990 to Employment Amendment No. 1 to Registration Statement No.
Agreement between the Company and Robert Hersh 33-34444 on Form S-1
10.68 - Amendment dated as of August 27, 1990 to Employment Amendment No. 1 to Registration Statement No.
Agreement between the Company and Dean S. Rappaport 33-34444 on Form S-1
10.69 - Amendment dated as of August 27, 1990 to Employment Amendment No. 1 to Registration Statement No.
Agreement between the Company and William D. Stewart 33-34444 on Form S-1
10.70 - Amendment to 1987 Stock Option and Stock Appreciation Form 10-K dated January 14, 1990
Rights Plan
10.71 - Amendment to dated October 1, 1990 to Employment Agreement Form 10-K dated January 14, 1990
between the Company and Dean S. Rappaport
10.72 - First Amendment to Credit Agreement dated November 1, 1990 Form 10-K dated January 14, 1990
between the Company and Sun Bank
10.73 - Second Amendment to Credit Agreement dated January 11, Form 10-K dated January 14, 1990
1991 between the Company and Sun Bank
10.74 - Third Amendment to Credit Agreement dated March 7, 1991 Form 10-Q for the quarter ended March 31, 1991
between the Company and Sun Bank
10.75 - Amendment to Employment Agreement dated April 8, 1991 Form 10-Q for the quarter ended March 31, 1991
between the Company and Robert Hersh
10.76 - Amended and Restated Credit Agreement dated September 30, Form 8 Amendment No. 2 to Form 10-Q dated June
1991 between the Company and Sun Bank 30, 1991
10.77 - Certain equipment leases between the Company and various Form 10-K dated December 18, 1991
equipment leasing companies
10.78 - First Amendment to Amended and Restated Credit Agreement Form 10-K dated December 18, 1991
dated December 1, 1991
10.79 - Joint Venture Agreement dated as of January 14, 1992 Form 10-Q for the quarter ended March 31, 1992
between Catalina Lighting, Inc. O'Design Ceramics, Inc.
Catalina Canada Lighting Inc. and Danny Lavy, as amended
10.80 - Employment Agreement dated April 1, 1992 between Catalina Form 10-Q for the quarter ended March 31, 1992
Lighting, Inc. and Janet P. Ailstock
10.81 - Second Amended and Restated Credit Agreement among the Form 10-Q for the quarter ended March 31, 1992
Company and Sun Bank, National Association dated as of
June 19, 1992
10.82 - Amendments to Employment Agreements between the Company Form 10-K dated December 10, 1992
and Messrs Hersh, Rappaport and Stewart dated as of
October 1, 1992
10.83 - Amendment, dated January 26, 1993 between the Company and Form 10-Q for the quarter ended December 31,
David Moss 1992
10.84 - First Amendment to Second Amended and Restated Credit Form 10-Q for the quarter ended December 31,
Facility dated as of June 19, 1992 1992
Page 62
10.85 - Second Amendment to Second Amended and Restated Credit Form 10-Q for the quarter ended
Agreement Among the Company and Sun Bank, National March 31, 1993
Association, dated April 30, 1993
10.86 - Amendment dated as of October 1, 1993 to Employment Form 10-K dated December 28, 1993
Agreement between the Company and Robert Hersh
10.87 - Amendment dated as of October 1, 1993 to Employment Form 10-K dated December 28, 1993
Agreement between the Company and Dean Rappaport
10.88 - Amendment dated as of October 1, 1993 to Employment Form 10-K dated December 28, 1993
Agreement between the Company and William D. Stewart
10.89 - Agreement dated September 29, 1993 between Catalina Form 10-K dated December 28, 1993
Lighting, Inc. and Shunde No. 1 Lamp Factory
10.90 - Agreement dated October 1, 1993 between Dana Lighting, Form 10-Q for the quarter ended December 31,
Inc., Catalina Lighting, Inc., and Nathan Katz terminating 1993
the 1989 Employment Agreement
10.91 - The Employment Agreement dated October 1, 1993 between Form 10-Q for the quarter ended December 31,
Dana Lighting, Inc., Catalina Lighting, Inc., and Nathan 1993
Katz
10.92 - Note Agreement dated March 15, 1994 among the Company and Form 10-Q for the quarter ended March 31, 1994
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.
10.93 - Second Amended Employment Agreement among the Company and Form 10-Q for the quarter ended March 31, 1994
Janet P. Ailstock dated April 1, 1994.
10.94 - Agreement dated December 30, 1993 among the Company, Danny Form 10-Q for the quarter ended March 31, 1994
Lavy, Susan Lavy and Les Investissements Lavy, Inc.
10.95 - Third amended and restated credit agreement among Catalina Form 10-Q for the quarter ended June 30, 1994
Lighting, Inc. and Sun Bank, National association, dated
May 12, 1994
10.96 - Letter of commitment between Catalina Lighting Canada Form 10-Q for the quarter ended June 30, 1994
(1992), Inc. and National bank of Canada dated May 19, 1994
10.97 - Consulting Agreement between Catalina Lighting, Inc. and Form 10-Q for the quarter ended June 30, 1994
Henry Gayer dated July 6, 1994
10.98 - Purchase Agreement among Catalina Lighting, Inc. and the Form 8-K dated August 9, 1994
Stockholders of Go-Gro Industries, Ltd.
10.99 - Employment Agreement by and among Go-Gro Industries and Form 8-K dated August 9, 1994
Mr. Lau
10.100.1 - Financial statements of Go-Gro Industries Ltd. for the Amendment No.2 to Form 8-K filed December 15,
year ended July 31, 1994 1994
10.100.2 - Financial statements of Go-Gro Industries Ltd. for the Amendment No.1 to Form 8-K filed October 13,
years ended July 31, 1993 and 1992 1994
10.100.3 - Financial statements of CIPEL Development Ltd. for the Amendment No.1 to Form 8-K filed October 13,
year ended July 31, 1994 1994
10.100.4 - Financial Statements of CIPEL Development Limited for the Amendment No.1 to Form 8-K filed October 13,
years ended July 31, 1993 and 1992 1994
10.100.5 - Financial Statements of Lamp Depot Limited for the period Amendment No.1 to Form 8-K filed October 13,
from September 23, 1994 (date of incorporation) to July 1994
31, 1994
10.100.6 - Amended Financial Statements of Go-Gro Industries Limited Amendment No. 2 to Form 8-K/A dated December
15, 1994
Page 63
10.101 - First amendment to third amended and restated credit Form 10-K dated December 28, 1994
agreement among Catalina Lighting, Inc. and Sun Bank,
National Association, dated August 12, 1994
10.102 - Contract for the Sale and Purchase of Real Estate by and Form 10-K dated December 28, 1994
between Lauderdale County Economic Development District,
Meridian Lamps, Inc. and Jansko, Inc. dated November 1,
1994
10.103 - Mississippi Small Enterprise Development Finance Act Loan Form 10-K dated December 28, 1994
Agreement among Mississippi Business Finance Corporation
(acting for and on behalf of the State of Mississippi),
Bank of Mississippi (as Servicing Trustee) and Meridian
Lamps, Inc. dated November 1, 1994
10.104 - $1,200,000 Mortgage Deed and Security Agreement and Form 10-K dated December 28, 1994
Mortgage Note issued by the Company in favor of
Mississippi Business Finance Corporation dated September
28, 1994
10.105 - Agreement of Lease by and between Anker Construction Ltd. Form 10-K dated December 28, 1994
and Catalina Lighting Canada (1992), Inc. dated October
20, 1994
10.106 - Sub-Lease Agreement dated September 23, 1994 by and Form 10-K dated December 28, 1994
between the Company and Shippers Warehouse, Inc.
10.107 - Plan Administration Support Services Agreement dated Form 10-K dated December 28, 1994
September 12, 1994 by and between Catalina Lighting, Inc.
and Sun Bank, National Association
10.108 - Amended Complaint in the Matter of Holmes Products Form 10-K dated December 28, 1994
Corporation versus Dana Lighting, Inc. and Nathan Katz
10.109 - Financing agreements between Go-Gro Industries Limited and Form 10-K dated December 28, 1994
Standard Chartered Bank dated May 27, 1994
10.110 - Financing Agreement between Go-Gro Industries Limited and Form 10-K dated December 28, 1994
The Hong Kong and Shanghai Banking Corporation Limited
dated May 31, 1993
10.111 - Letter of Credit Agreement dated as of November 1, 1994 Form 10-K dated December 28, 1994
between Meridian Lamps, Inc., the Company and Sun Bank,
National Association
10.112 - Second Amendment to Third Amended and Restated Credit Form 10-Q for the quarter ended March 31, 1995
Agreement and Third Amended and Restated Stock and Notes
Pledge between Sun Bank National Association and the
Company dated February 23, 1995
10.113 - Financing Agreement between Go-Gro Industries, Ltd. and Form 10-Q for the quarter ended March 31, 1995
Standard Chartered Bank dated October 4, 1994 and amendment to
Financing Agreement dated January 5, 1995
10.114 - Third Amendment to Third Amended and Restated Credit Form 10-Q for the quarter ended June 30, 1995
Agreement and Consent dated May 1, 1995 between Catalina
Lighting and Sun Bank, National Association
10.115 - Fourth Amendment to Third Amended and Restated Credit Form 10-Q for the quarter ended June 30, 1995
Agreement and Consent dated June 30, 1995 between Catalina
Lighting and Sun Bank, National Association
10.116 - First Amendment to Note Agreement between Catalina Form 10-Q for the quarter ended June 30, 1995
Lighting 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
10.117 - Loan Agreement between Mississippi Business Finance Form 10-Q for the quarter ended June 30, 1995
Corporation and Dana Lighting, dated May 1, 1995
10.118 - Letter of Credit Agreement between Dana Lighting, Inc. and Form 10-Q for the quarter ended June 30, 1995
Sun Bank, National Association dated May 1, 1995, and as
amended on June 30, 1995
Page 64
10.119 - Shenzhen Municipal Agreement to transfer rights to use Form 10-Q for the quarter ended June 30, 1995
land dated April 11, 1995
10.120 - Construction Loan Agreement between Sun Bank, National Form 10-Q for the quarter ended June 30, 1995
Association and Dana Lighting dated May 1, 1995
10.121 - Indenture of Trust dated May 1, 1995, relating to $10.5 Form 10-Q for the quarter ended June 30, 1995
million Mississippi Business Finance Corporation Taxable
Variable Rate Industrial Development Revenue Bonds Series
1995
10.122 - Shenzhen Municipal Construction Contract dated January 4, Form 10-Q for the quarter ended June 30, 1995
1995
10.123 - Final Design and Construction Contract between Catalina Form 10-Q for the quarter ended June 30, 1995
Industries, Inc., d/b/a Dana Lighting and Jesco, Inc. dated June 20, 1995
10.124 - Sublease Agreement between Catalina Lighting, Inc. and Form 10-Q for the quarter ended June 30, 1995
Shippers Warehouse and Agreement between Catalina
Lighting, Inc. and Shippers Warehouse, Inc. and S & W Warehouse, Inc. effective June 15, 1995 as to sell warehouse
equipment.
10.125 - Land purchase Agreement dated March 31, 1995 between Form 10-Q for the quarter ended June 30, 1995
Community Development Foundation and Dana Lighting, Inc.
10.126 - Fifth amendment to Third Amended and Restated Credit Form 10-K dated December 27, 1995
Agreement dated December 4, 1995 between Catalina Lighting
and SunTrust Bank, Central Florida, National Association
f/k/a SunTrust, National Association
10.127 - Contract to amend Cooperative Joint Venture Contract Form 10-K dated December 27, 1995
between Shenzhen Baoanqu Fuda Industries Co. (SJE) and
Go-Gro Industries, Ltd. dated May 27, 1995
10.128 - Second Amendment to Note Agreement between Catalina Form 10-K dated December 27, 1995
Lighting 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
10.129 - Sixth Amendment to third Amended and Restated Credit Form 10-Q for the Quarter ended December 31,
Agreement dated December 28, 1995, between Catalina 1995
Lighting, Inc. and Sun Trust Bank, Central Florida,
National Association f/k/a SunTrust, National Association
10.130 - Second Amendment to Letter of Credit Agreement and First Form 10-Q for the Quarter ended December 31,
Amendment to Security Agreement between Catalina 1995
Industries, Inc. d/b/a Dana Lighting and SunTrust Bank,
Central Florida, National Association f/k/a SunTrust,
National Association
10.131 - Seventh Amendment to third Amended and Restated Credit Form 10-Q for the Quarter ended March 31, 1996
Agreement dated March 18, 1996, between Catalina Lighting,
Inc. and Sun Trust Bank, Central Florida, National
Association
10.132 - Third Amendment to Letter of Credit Agreement dated March Form 10-Q for the Quarter ended March 31, 1996
27, 1996 between Catalina Industries, Inc. d/b/a Dana
Lighting and SunTrust Bank, Central Florida, National
Association f/k/a SunTrust, National Association
10.133 - Third Amendment to Employment Agreement dated April 1, Form 10-Q for the Quarter ended March 31, 1996
1996 between Catalina Lighting, Inc. and Janet P. Ailstock
10.134 - License Agreement dated April 26, 1996 between Form 10-Q for the Quarter ended March 31, 1996
Westinghouse Electric Corporation and Catalina Lighting,
Inc.
10.135 - Press Release dated July 18, 1996 Form 8-K dated July 18, 1996
10.136 - Complaint in the matter of BLACK & DECKER (U.S.), INC., Form 10-Q for the Quarter ended June 30, 1996
BLACK & DECKER INC. VS. CATALINA LIGHTING, INC., Case No.
96-1042-A, in the United States District Court, Eastern
Division of Virginia
Page 65
10.137 - Financing Agreement between Catalina Lighting Canada Form 10-K dated December 27, 1996
(1992), Inc. and National Bank of Canada dated May 1, 1996
10.138 - Lease Financing Agreement between Go-Gro Industries Ltd. Form 10-K dated December 27, 1996
and The Hong Kong and Shanghai Banking Corporation
Limited dated October 30, 1996
10.139 - Eighth Amendment to Third Amended and Restated Credit Form 10-Q for the Quarter ended December 31,
Agreement, third Amendment to second Amended and Restated 1996
Security Agreement, and Fourth Amendment to Third Amended
and Restated stock and Notes Pledge dated October 4, 1996
between Catalina Lighting, Inc. and SunTrust Bank,
Central Florida, national Association.
10.140 - Ninth Amendment to Third Amended and Restated Credit Form 10-Q for the Quarter ended March 31, 1997
Agreement dated December 30, 1996 between Catalina
Lighting, Inc. and SunTrust Bank, Central Florida,
National Association.
10.141 - Fourth Amendment to Letter of Credit Agreement dated Form 10-Q for the Quarter ended March 31, 1997
December 30, 1996 between Catalina Industries, Inc. and
SunTrust Bank, Central Florida, National Association.
10.142 - Tenth Amendment to Third Amended and Restated Credit Form 10-Q for the Quarter ended March 31, 1997
Agreement dated March 31, 1997 between Catalina Lighting,
Inc. and SunTrust Bank, Central Florida, National
Association.
10.143 - Fifth Amendment to Letter of Credit Agreement dated March Form 10-Q for the Quarter ended March 31, 1997
31, 1997 between Catalina Industries, Inc. and SunTrust
Bank, Central Florida, National Association.
10.144 - Restated Articles of Association for Shenzhen Jiadianbao Form 10-Q for the Quarter ended March 31, 1997
Electrical Products Co., Ltd., a Cooperative Joint
Venture Company dated October 18, 1996
10.145 - Contract to Amend Cooperative Joint Venture Contract Form 10-Q for the Quarter ended March 31, 1997
between Shenzhen Baoanqu Fuda Industries Co., and
Go-Gro Industries, Ltd. dated October 18, 1996
10.146 - Financing Agreement between Go-Gro Industries, Ltd. and Form 10-Q for the Quarter ended June 30, 1997
Standard Chartered Bank dated May 12, 1997.
10.147 - Employment and non-compete agreement dated April 1, 1997 Form 10-Q for the Quarter ended June 30, 1997
between Go-Gro Industries Ltd. and Wai Check Lau.
10.148 - Amendment to Financing Agreement between Catalina Form 10-K dated December 24, 1997
Lighting Canada (1992), Inc. and National Bank of Canada
dated October 17, 1997
10.149 - Eleventh Amendment to Third Amended and Restated Credit Form 10-K dated December 24, 1997
Agreement dated September 30, 1997 between Catalina
Lighting, Inc. and SunTrust bank, Central Florida,
National Association.
10.150 - Sixth Amendment to Letter of Credit Agreement dated Form 10-K dated December 24, 1997
September 30, 1997 between Catalina Industries, Inc. and
SunTrust bank, Central Florida, National Association.
10.151 - First Amendment to Shenzhen Municipal Construction Form 10-K dated December 24, 1997
Contract dated January 30, 1996.
10.152 - First Amendment to the Loan Agreement among Mississippi Form 10-K dated December 24, 1997
Business Finance Corporation, Bank of Mississippi,
SunTrust Bank and Meridian Lamps, Inc. dated August 28,
1997.
10.153 - Escrow Agreement between Mississippi Business Finance Form 10-K dated December 24, 1997
Corporation, Meridian Lamps, Inc. and Bank of Mississippi
dated August 28, 1997.
10.154 - Seventh Amendment to Letter of Credit Agreement between Form 10-Q for the Quarter ended March 31, 1998
Catalina Industries, Inc. and SunTrust Bank, Central
Florida, N.A. dated December 31, 1997.
Page 66
10.155 - Twelfth Amendment to Third Amended and Restated Credit Form 10-Q for the Quarter ended March 31, 1998
Agreement between Catalina Lighting, Inc. and SunTrust
Bank, Central Florida, N.A. dated December 31, 1997.
10.156 - Second Amendment to Financing Agreement between Catalina Form 10-Q for the Quarter ended March 31, 1998
Lighting Canada (1992), Inc. and National Bank of Canada
dated December 19, 1997.
10.157 - Eighth Amendment to Letter of Credit Agreement between Form 10-Q for the Quarter ended March 31, 1998
Catalina Industries, Inc. and SunTrust Bank, Central
Florida, N.A. dated March 31, 1998.
10.158 - Thirteenth Amendment to Third Amended and Restated Credit Form 10-Q for the Quarter ended March 31, 1998
Agreement between Catalina Lighting, Inc. and SunTrust
Bank, Central Florida, N.A. dated March 31, 1998.
10.159 - Lease Agreement between Dana Realty Trust and Catalina Form 10-Q for the Quarter ended June 30, 1998
Industries dated July 23, 1998.
10.160 - Offer to Lease from Catalina Lighting Canada, Inc. to TAG Form 10-Q for the Quarter ended June 30, 1998
Quattro Inc dated March 12, 1998.
10.161 - Change in Control Agreement between Thomas M. Bluth and Form 10-Q for the Quarter ended June 30, 1998
Catalina Lighting dated May 7, 1998.
10.162 - Change in Control Agreement between David W. Sasnett and Form 10-Q for the Quarter ended June 30, 1998
Catalina Lighting dated May 7, 1998.
10.163 - Ninth Amendment to Letter of Credit Agreement between Filed herewith
Catalina Industries, Inc. and SunTrust Bank, Central
Florida, N.A. dated September 30, 1998.
10.164 - Fourteenth Amendment to Third Amended and Restated Credit Filed herewith
Agreement between Catalina Lighting, Inc. and SunTrust
Bank, Central Florida, N.A. dated September 30, 1998.
10.165 Renewal Mortgage Note between Catalina Lighting, Inc., and Form 10-Q for the Quarter ended December 31,
SunTrust Bank, Central Florida, N.A. dated October 5, 1998. 1998
10.166 Amended and Restated By-Laws of Catalina Lighting, Inc. Form 10-Q for the Quarter ended March 31, 1999
10.167 Agreement, dated as of April 30, 1999, among Catalina Form 10-Q for the Quarter ended March 31, 1999
Lighting, Inc., David M. Moss and DMM Investments Ltd.
10.168 Fifteenth Amendment to Third Amended and Restated Credit Form 10-Q for the Quarter ended June 30, 1999
Agreement between Catalina Lighting, Inc. and SunTrust
Bank, Central Florida, N.A. dated March 31, 1999.
10.169 Tenth Amendment to Letter of Credit Agreement between Form 10-Q for the Quarter ended June 30, 1999
Catalina Industries, Inc. and SunTrust Bank, Central
Florida, N.A. dated March 31, 1999.
10.170 Amendment No. 1 to Change in Control Agreement between Form 10-Q for the Quarter ended June 30, 1999
Thomas M. Bluth and Catalina Lighting, Inc., dated March
3, 1999.
10.171 Amendment No. 1 to Change in Control Agreement between Form 10-Q for the Quarter ended June 30, 1999
David W. Sasnett and Catalina Lighting, Inc., dated March
3, 1999.
10.172 First Amendment to License Agreement between CBS Form 10-Q for the Quarter ended June 30, 1999
Corporation (formerly Westinghouse Electric Corporation)
and Catalina Lighting, Inc., dated March 1, 1999.
10.173 Lease Agreement dated April 30, 1999 between Catalina Form 10-Q for the Quarter ended June 30, 1999
Industries, Inc. and Dana Realty Trust.
10.174 Purchase and Sale Contract dated May 6, 1999, between Form 10-Q for the Quarter ended June 30, 1999
Meridian Lamps, Inc., and Saunders of Meridian, LLC.
Page 67
10.175 Form of Amendment to Employment Agreement, dated June 4, Form 10-Q for the Quarter ended June 30, 1999
1999 with Executive officers Hersh, Katz, Rappaport and
Stewart.
10.176 Sixteenth Amendment to third Amended and Restated Credit Filed herewith
Agreement between Catalina Lighting, Inc. and SunTrust
Bank, Central Florida, N.A. dated September 30, 1999.
10.177 Eleventh Amendment to Letter of Credit Agreement between Filed herewith
Catalina Industries, Inc. and SunTrust Bank, Central
Florida, N.A. dated September 30, 1999.
10.178 Consulting and Non-competition Agreement effective Filed herewith
December 24, 1999 between Catalina Lighting, Inc. and
William D. Stewart.
10.179 General Release and Severance Agreement effective December Filed herewith
23, 1999 between Catalina Lighting, Inc. and William D.
Stewart.
10.180 - Third Amendment to Employment Agreement dated September Filed herewith
30, 1999 between Catalina Lighting, Inc. and Nathan Katz
10.181 - Consulting and Non-competition Agreement dated September Filed herewith
30, 1999 between Catalina Lighting, Inc. and Nathan Katz
10.182 - Amended and Restated Change-in-Control and Severance Filed herewith
Agreement dated July 26, 1999 between Catalina Lighting,
Inc. and Thomas M. Bluth
10.183 First Amendment to Amended and Restated Change-in-Control Filed herewith
and Severance Agreement dated September 30, 1999 between
Catalina Lighting, Inc. and Thomas M. Bluth
10.184 Amended and Restated Change-in-Control and Severance Filed herewith
Agreement dated June 4, 1999 between Catalina Lighting,
Inc. and David W. Sasnett
10.185 First Amendment to Amended and Restated Change-in-Control Filed herewith
and Severance Agreement dated July 26, 1999 between
Catalina Lighting, Inc. and David W. Sasnett
10.186 Second Amendment to Amended and Restated Change-in-Control Filed herewith
Agreement dated September 30, 1999 between Catalina
Lighting, Inc. and David W. Sasnett
10.187 Consulting Agreement dated September 30, 1999 between Filed herewith
Catalina Lighting, Inc. and David W. Sasnett
10.188 Form of Seventh Amendment to Employment Agreement with Filed herewith
Executive officers Hersh, Rappaport and Stewart
11 - Computation of Diluted Earnings (Loss) Per Share Filed herewith
21 - Subsidiaries of the Registrant Filed herewith
23 - Consent of Deloitte & Touche LLP Filed herewith
27 - Financial Data Schedule Filed herewith
Page 68
(b) REPORTS ON FORM 8-K:
None.
(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 69
SIGNATURES
Pursuant to the requirements of Section 13 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/ ROBERT HERSH
------------------------------------
Robert Hersh, Chairman, President,
Chief Executive Officer and Director
December 29, 1999
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.
By:/s/ DAVID W. SASNETT December 29, 1999
----------------------------
David W. Sasnett,
Chief Financial Officer,
Senior Vice President,
Chief Accounting Officer
By:/s/ RYAN BURROW December 29, 1999
----------------------------
Ryan Burrow, Director
By:/s/ HENRY LATIMER December 29, 1999
----------------------------
Henry Latimer, Director
By:/s/ JESSE LUXTON December 29, 1999
----------------------------
Jesse Luxton, Director
By:/s/ ROY OPPENHEIM December 29, 1999
-----------------------------
Roy Oppenheim, Director
By:/s/ LEONARD SOKOLOW December 29, 1999
----------------------------
Leonard Sokolow, Director
By:/s/ HOWARD STEINBERG December 29, 1999
----------------------------
Howard Steinberg, Director
By:/s/ BRION WISE December 29, 1999
----------------------------
Brion Wise, Director
Page 70
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.176 Sixteenth Amendment to third Amended and Restated Credit Filed herewith
Agreement between Catalina Lighting, Inc. and SunTrust
Bank, Central Florida, N.A. dated September 30, 1999.
10.177 Eleventh Amendment to Letter of Credit Agreement between Filed herewith
Catalina Industries, Inc. and SunTrust Bank, Central
Florida, N.A. dated September 30, 1999.
10.178 Consulting and Non-competition Agreement effective Filed herewith
December 24, 1999 between Catalina Lighting, Inc. and
William D. Stewart.
10.179 General Release and Severance Agreement effective December Filed herewith
23, 1999 between Catalina Lighting, Inc. and William D.
Stewart.
10.180 - Third Amendment to Employment Agreement dated September Filed herewith
30, 1999 between Catalina Lighting, Inc. and Nathan Katz
10.181 - Consulting and Non-competition Agreement dated September Filed herewith
30, 1999 between Catalina Lighting, Inc. and Nathan Katz
10.182 - Amended and Restated Change-in-Control and Severance Filed herewith
Agreement dated July 26, 1999 between Catalina Lighting,
Inc. and Thomas M. Bluth
10.183 First Amendment to Amended and Restated Change-in-Control Filed herewith
and Severance Agreement dated September 30, 1999 between
Catalina Lighting, Inc. and Thomas M. Bluth
10.184 Amended and Restated Change-in-Control and Severance Filed herewith
Agreement dated June 4, 1999 between Catalina Lighting,
Inc. and David W. Sasnett
10.185 First Amendment to Amended and Restated Change-in-Control Filed herewith
and Severance Agreement dated July 26, 1999 between
Catalina Lighting, Inc. and David W. Sasnett
10.186 Second Amendment to Amended and Restated Change-in-Control Filed herewith
Agreement dated September 30, 1999 between Catalina
Lighting, Inc. and David W. Sasnett
10.187 Consulting Agreement dated September 30, 1999 between Filed herewith
Catalina Lighting, Inc. and David W. Sasnett
10.188 Form of Seventh Amendment to Employment Agreement with Filed herewith
Executive officers Hersh, Rappaport and Stewart
11 - Computation of Diluted Earnings (Loss) Per Share Filed herewith
21 - Subsidiaries of the Registrant Filed herewith
23 - Consent of Deloitte & Touche LLP Filed herewith
27 - Financial Data Schedule Filed herewith