SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________________ to ____________________
Commission file number 1-9917
CATALINA LIGHTING, INC.
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(Exact name of registrant as specified in its chapter)
FLORIDA
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(State or other jurisdiction of incorporation or organization)
59-1548266
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(I.R.S. Employer Identification Number)
18191 NW 68TH AVENUE, MIAMI, FLORIDA 33015
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(Address of principal executive offices) (Zip Code)
(305) 558-4777
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Registrant's telephone number, including area code
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check / whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ___
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date. OUTSTANDING ON MAY 7, 1996: 7,020,087 SHARES.
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------
Condensed consolidated balance sheets -
March 31, 1996 and September 30, 1995..................... 3-4
Condensed consolidated statements of operations -
Three and six months ended March 31, 1996 and 1995........ 5
Condensed consolidated statements of cash flows -
Six months ended March 31, 1996 and 1995.................. 6-7
Notes to condensed consolidated financial statements........ 8-11
Management's discussion and analysis of financial
condition and results of operations........................ 12-20
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings.................................... 21
ITEM 4 Submission of Matters to a Vote of Security Holders.. 21
ITEM 6 Exhibits and Reports on Form 8-K..................... 21
2
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, SEPTEMBER 30,
ASSETS 1996 1995
---------- ------------- -------------
(Unaudited) *
Current assets
Cash and cash equivalents.................... $ 210 $ 807
Accounts receivable, net of
allowances of $6,545 and $4,934,
respectively............................... 26,745 31,747
Inventories.................................. 38,866 40,306
Other current assets......................... 4,809 3,963
---------- ----------
Total current assets ............... 70,630 76,823
Property and equipment, net.................... 25,494 20,049
Restricted cash equivalents and short-term
investments................................ 2,036 6,339
Goodwill, net.................................. 11,559 11,777
Deferred costs, net............................ 2,107 3,149
Other assets................................... 1,874 1,914
---------- ----------
$ 113,700 $ 120,051
========== ==========
(continued on page 4)
3
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
MARCH 31, SEPTEMBER 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------------------------------ ------------- -------------
(Unaudited) *
Current liabilities
Notes payable - credit lines................. $ 1,478 $ 1,604
Accounts and letters of credit payable....... 18,703 23,295
Current maturities of bonds payable.......... 970 970
Other current liabilities.................... 4,504 4,743
---------- ----------
Total current liabilities.............. 25,655 30,612
Notes payable - credit lines................... 23,566 26,100
Convertible subordinated notes................. 7,600 7,600
Bonds payable.................................. 11,065 10,966
Other liabilities.............................. 2,701 2,644
---------- ----------
Total liabilities...................... 70,587 77,922
---------- ----------
Commitments and contingencies
Stockholders' equity
Common stock................................. 70 70
Additional paid-in capital................... 25,925 25,894
Retained earnings............................ 17,118 16,165
---------- ----------
Total stockholders' equity........... 43,113 42,129
---------- ----------
$ 113,700 $ 120,051
========== ==========
*Condensed from audited financial statements
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................... $ 40,921 $ 41,903 $ 91,101 $ 86,561
Cost of sales........................... 33,369 34,893 75,360 70,866
--------- --------- --------- ----------
Gross profit............................ 7,552 7,010 15,741 15,695
Selling, general and administrative
expenses.............................. 6,324 5,926 12,887 11,732
--------- --------- --------- ----------
Operating income........................ 1,228 1,084 2,854 3,963
--------- --------- --------- ----------
Other income (expenses)
Interest expense...................... (745) (873) (1,541) (1,578)
Other income.......................... 125 138 275 303
--------- --------- --------- ----------
Total other income (expenses)..... (620) (735) (1,266) (1,275)
--------- --------- --------- ----------
Income before income taxes.............. 608 349 1,588 2,688
Income tax provision.................... 243 123 635 947
--------- --------- --------- ----------
Net income.............................. $ 365 $ 226 $ 953 $ 1,741
========= ========= ========= ==========
Weighted average number of
shares outstanding
Primary 7,791 7,870 7,803 7,926
Fully diluted 7,821 7,870 7,803 7,926
Earnings per share
Primary $ .05 $ .03 $ .13 $ .22
Fully diluted $ .05 $ .03 $ .12 $ .22
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
MARCH 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................... $ 953 $ 1,741
Adjustments for non-cash items................................. 4,539 1,251
Change in assets and liabilities............................... (283) (17,304)
-------- --------
Net cash provided by (used in) operating activities.......... 5,209 (14,312)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net...................................... (7,311) (2,943)
Payments for acquisitions...................................... - (462)
Decrease in restricted cash equivalents and short-term
investments.................................................. 4,303 -
Return of funds escrowed in conjunction
with the acquisition of Go-Gro............................... - 1,904
Collection of receivable from shareholder...................... - 1,837
Payment to affiliated company.................................. - (1,837)
-------- --------
Net cash provided by (used in) investing activities............ (3,008) (1,501)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock....................... 31 198
Proceeds from other liabilities.................................. - 1,437
Payments on other liabilities.................................... (268) (358)
Proceeds from issuance of bonds.................................. 99 -
Proceeds from notes payable - credit lines....................... 30,666 19,000
Payments on notes payable - credit lines......................... (33,200) (5,368)
Net payments on notes payable - credit lines
due on demand................................................. (126) (755)
Return of restricted cash........................................ - 477
-------- --------
Net cash provided by (used in) financing activities.............. (2,798) 14,631
-------- --------
Net increase (decrease) in cash and cash equivalents............. (597) (1,182)
Cash and cash equivalents at beginning of period................. 807 3,053
-------- --------
Cash and cash equivalents at end of period....................... $ 210 $ 1,871
======== ========
</TABLE>
(continued on page 7)
6
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
SIX MONTHS ENDED
MARCH 31,
----------------
1996 1995
------ ------
(IN THOUSANDS)
Cash paid for:
Interest $1,619 $1,451
Income taxes $2,183 $1,498
During the six months ended March 31, 1996 and 1995, total capital
lease obligations incurred for new office and warehouse equipment aggregated
$76,000 and $110,000, respectively.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the accounting policies
described in the Company's Annual Report for the fiscal year ended September 30,
1995 and should be read in conjunction with the consolidated financial
statements and notes which appear in that report. These statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, all adjustments, which consist mostly
of normal, recurring accruals, considered necessary for a fair presentation have
been included. The results of operations for the three and six months ended
March 31, 1996 may not necessarily be indicative of operating results to be
expected for the full fiscal year due, in part, to seasonal fluctuations in the
Company's business and changes in economic conditions.
Certain amounts previously presented in the financial statements of
prior periods have been reclassified to conform to the current period's
presentation.
2. INVENTORIES
Inventories consisted of the following:
MARCH 31, SEPTEMBER 30,
1996 1995
------------- -------------
(In thousands)
Raw materials.......................... $ 3,768 $ 3,535
Work-in-progress....................... 1,055 1,030
Finished goods......................... 34,043 35,741
--------- ---------
Total Inventories...................... $ 38,866 $ 40,306
========= =========
8
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. PROPERTY AND EQUIPMENT, NET
During the 1995 fiscal year, the Company began construction of a
475,000 square foot facility located near Tupelo, Mississippi to consolidate
warehouse operations located in leased facilities in Texas and Massachusetts.
The facility became operational on March 15, 1996. The Company completed the
move of all inventory from its Texas facility and ceased operations therein
effective April 30, 1996. The Company anticipates ceasing the warehousing
operations located in Massachusetts by September 30, 1996. As of March 31, 1996,
$8.9 million had been expended for the building and underlying land, and $2.7
million on machinery and equipment for the facility. Total cost for the facility
and related equipment is estimated at $12.3 million. 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) the new warehouse and
machinery and equipment. The bonds have a stated maturity of May 1, 2010 and
require mandatory sinking fund redemption payments, payable monthly, of $900,000
per year from 1996 to 2002, $600,000 per year in 2003 and 2004, and $500,000 per
year from 2005 to 2010. The bonds bear interest at a variable rate (5.6% at
March 31, 1996) 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 $10.8 million direct pay letter of credit
which is not part of the Company's credit line. The unused portion of the $10.5
million bond proceeds and $825,000 in sinking fund payments represent the
restricted cash equivalents and short-term investments reflected in the balance
sheet at March 31, 1996.
Shenzhen Jiadianbao Electrical Products Co., Ltd. (SJE), a subsidiary
of Go-Gro, and the Bureau of National Land Planning Bao-An Branch of Shenzhen
City (BNLP) 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-described
land until January 18, 2042. The land Use Rights are non-transferable. Land
costs approximated $2.6 million of which Go-Gro has paid its 70% proportionate
share of $1.8 million.
Under the terms of this agreement, SJE is obligated to construct
approximately 917,000 square feet of factory buildings and 275,000 square feet
of dormitories and offices, with 40 percent of the construction required to be
completed by April 1, 1997 and the remainder by December 31, 2000. At an
estimated average construction price of $9.00 per square foot, construction
costs should approximate $10,728,000. The $10,728,000 includes approximately
$1,600,000 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 two installments of approximately $800,000 on October 31 and December
31, 1996. Construction on the first phase of the factory (170,000 square feet)
is estimated to be completed in August 1996. SJE plans to file an application to
reduce the amount of square footage required to be constructed by approximately
50% (and reduce the MCFF proportionately). The outcome of the application cannot
be presently determined.
9
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. NOTES PAYABLE - CREDIT LINES
On March 15, 1996 and December 28, 1995 the Company amended its $65
million domestic credit facility with a group of commercial banks. Such
amendments extended the maturity date of the facility through March 31, 1999,
increased the interest rate on loans, provided for quarterly principal payments
of $950,000 commencing June 1, 1997 on the $7.6 million non-revolving loan
portion of the credit facility, revised certain covenants and subjected
borrowings to a borrowing base defined as the aggregate of certain percentages
of the Company's U.S. receivables and inventory. Borrowings under the facility
bear interest, payable monthly, at the Company's preference of either the prime
rate or the LIBOR rate plus 2.2% through June 30, 1996 or subsequent to June 30,
1996, at either the prime rate or the LIBOR rate plus a variable spread based
upon earnings, debt and interest expense levels with the exception of the
non-revolving loan which bears interest, payable monthly, at the prime rate plus
1%.
5. CONTINGENCIES
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, contends 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. On June 11, 1992, the court dismissed
the Complaint and on June 17, 1992, the plaintiff filed an amended Complaint
including claims for damages in excess of $5 million against the Company and
declaratory relief as well as claims for damages in excess of $3 million against
the named directors. On November 24, 1992, the Company filed a Counterclaim in
the action. The Counterclaim alleges damages for in excess of $1 million arising
out of actions which the Company alleges constituted violation of federal and
state securities laws, breach of fiduciary duty, breach of contract, breach of
constructive trust, conversion, civil theft, negligence, fraudulent inducement,
fraud and extortion. On December 21, 1992, Mr. Browder filed his Answer denying
the allegations of the Counterclaim. On March 1, 1993, Mr. Browder voluntarily
dismissed Count II of his Complaint which sought a Declaratory Judgment. In
June, 1995, the Court granted the Company's Motion for Summary Judgment on the
plaintiff's claims of libel which reduced the claims for damages against the
Company to $3,000,000.
The case is presently in the discovery stages. The Company's legal
counsel has opined that, based on their understanding of the facts, the legal
elements necessary to justify a termination of John Browder's employment for
"Cause" existed at the time his employment was terminated. Thus, the Company
believes that the possibility is remote that any amounts claimed to be due by
Mr. Browder will be paid by the Company. Accordingly, no provisions for any
amounts which Mr. Browder claims are owed under his employment agreement nor any
liability that may result from this litigation have been recorded in the
accompanying condensed consolidated financial statements.
On February 23, 1993, Dana Lighting, a subsidiary of the Company, and
Nathan Katz, President of Dana, were served with a copy of the Complaint in a
matter captioned Holmes Products Corp. vs. Dana Lighting, Inc. and Nathan Katz,
Case No. 93-0249 in the Superior Court of the Commonwealth of Massachusetts,
City of Worcester, Massachusetts. The plaintiff in the action alleges that Dana
Lighting engaged in acts constituting tortious interference with contractual
actions, interference with prospective economic relationship with plaintiff's
supplier and unfair competition. Plaintiff seeks injunctive relief and
10
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. CONTINGENCIES (CONTINUED)
damages in excess of $10 million. Dana filed its Answer to the Complaint on
March 15, 1993 denying all allegations, and Plaintiff's request for a temporary
restraining order was denied by the Court. The supplier and Dana's President
have filed affidavits with the court denying that Dana engaged in such acts. In
July 1994, Holmes Products Corp. amended the Complaint to include allegations of
a violation of civil RICO and a violation of the Federal Antitrust laws. On July
22, 1994, Dana Lighting removed the case from State Court to the United States
District Court for the District Court of Massachusetts. Dana believes that the
Complaint is totally without merit and disputes that any of the alleged acts or
damages occurred or that Dana is liable in any matter. Dana intends to defend
this case vigorously. The Company believes that the possibility is remote that
any significant damages will be paid by the Company in connection with this
litigation. Accordingly, no provision for any liability that may result from
this litigation has been recorded in the accompanying condensed consolidated
financial statements.
The Company is also a defendant in other legal proceedings arising in
the normal course of business. In the opinion of management, based on advice of
legal counsel, the ultimate resolution of these other legal proceedings will not
have an adverse effect on the Company.
6. SUBSEQUENT EVENT
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, 2001. Catalina has an option to extend the agreement for an
additional ten years. The royalty payments are due quarterly and are based on a
percent of the value of net shipments of Westinghouse products. Either party has
the right to terminate the agreement during years three through five of the
agreement if the Company does not meet the minimum net shipments required under
the agreement.
11
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In the following comparison of the results of operations, the three and
six month periods ended March 31, 1996 and 1995 are referred to as 1996 and
1995, respectively.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Net sales and gross profit for 1996 were $40.9 million and $7.6
million, respectively, as compared to $41.9 million and $7.0 million,
respectively, for 1995. The Company generated net income of $365,000 ($.05 per
share) in 1996 compared to net income of $226,000 ($.03 per share) in 1995.
In 1996, Kmart accounted for 2.7% of the Company's net sales while its
affiliate accounted for 8.7% of net sales. In addition, in 1996, Home Depot
accounted for 10.5% of net sales. In 1995, the respective percentages of net
sales for Kmart, the affiliates of Kmart and Home Depot were 3.8%, 12.7% and
7.1%.
DISTRIBUTION
Distribution operations contributed pre-tax income of approximately
$1.2 million in 1996 and $1.5 million in 1995.
Net sales from distribution operations aggregated $35.0 million in
1996, as compared to $36.8 million in 1995. The $1.8 million decrease in net
sales is reflective of the difficult retail environment and results from lower
sales made to certain large customers which are experiencing financial
difficulties and an increase in sales incentives and allowances. The sales
decrease is attributable to a decline in the overall average selling price per
unit, reflecting a shift in the product mix. Sales of functional lighting/lamps
accounted for 60% of sales in 1996 compared to 54% in 1995.
Gross profit from distribution operations increased to $6.3 million in
1996 from $6.2 million in 1995. As a percentage of net sales, gross profit from
distribution operations was 18.1% and 17.0% for 1996 and 1995, respectively. The
increase in gross profit, both as a percentage of net sales and in total
dollars, is due to an improvement in margins earned on warehouse sales of all
products attributable in part to the addition of new product lines which more
than offset the higher sales returns and incentives and lost contribution to
gross profit as a result of decreased sales. Additional sales incentives and
allowances were provided to expand lighting programs with existing customers and
as a result of competitive pressures.
Selling, general and administrative expenses ("SG&A") for distribution
operations amounted to $4.6 million in 1996, as compared to $4.4 million in
1995. The added SG&A reflects $114,000 related to Mexican operations which
commenced during fiscal 1996 and an $87,000 increase in depreciation and
amortization on property and equipment.
Interest expense on distribution-related financing rose to $522,000 in
1996 from $462,000 in 1995 due to additional average outstanding borrowings and
a higher weighted average cost of funds.
12
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
MANUFACTURING
Excluding certain administrative costs incurred at the corporate
headquarters, in 1996 the Company's manufacturing operations recorded a pretax
loss of $638,000. This compares to a pretax loss of $1.1 million in 1995.
GO-GRO
On a pre-tax basis, Go-Gro lost $83,000 in 1996 while reporting a
pretax loss of $565,000 in 1995. Sales by Go-Gro to non-related companies, the
majority of which were made in the European market, increased by $1.2 million,
or 28%, in 1996 to $5.3 million. Intercompany sales by Go-Gro to the Company and
its subsidiaries, which are eliminated for financial statement purposes, were
$4.1 million in 1996 and $4.8 million in 1995. Gross profit increased in total
dollars in 1996 by $307,000 to $1.4 million as a result of increased sales.
SG&A expenses decreased by $54,000 to $1.3 million. Interest expense
declined in 1996 by $151,000 due to lower outstanding borrowings.
MERIDIAN
The pretax loss for Meridian was $555,000 for both 1996 and 1995. Net
sales decreased to $611,000 in 1996 from $952,000 in 1995 due to lower unit
sales. The commencement of sales and the initial roll out of the Meridian
product line in 1995 to its customers' retail outlets enabled Meridian to record
the largest quarterly sales amount in its history during such period. Placements
of Meridian product with retailers (and consequently, sales) in 1996 were at
less than expected levels.
Cost of sales in 1996 was $896,000. The less than expected sales volume
for Meridian during the period contributed to the following factors increasing
costs of sales during 1996:
(1) unplanned manufacturing variances arising principally from
significant underutilization of plant capacity;
(2) unit production that has exceeded unit sales to date,
resulting in additional storage expenses and a provision for
excess inventory;
(3) costs required to develop new products.
Cost of sales exceeded sales by $280,000 in 1995 due entirely to
manufacturing inefficiencies related to the start-up nature of Meridian's
operations during this period.
Other expenses for 1996 and 1995 were $270,000 and $275,000,
respectively, consisting mostly of the amortization of start-up costs, marketing
and merchandising expenses, and interest expense.
13
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAX PROVISION
The effective income tax rates for 1996 and 1995 were 40% and 35.2%,
respectively. The higher effective tax rate for 1996 reflects the impact on
projected pretax income for 1996 of amounts expensed by the Company for
financial statement purposes which are not deductible for tax purposes
(consisting primarily of goodwill amortization and interest incurred by certain
foreign subsidiaries), which have the effect of increasing the effective tax
rate.
COMPARISON OF SIX MONTHS ENDED MARCH 31, 1996 AND 1995
Net sales and gross profit for 1996 were $91.1 million and $15.7
million, respectively, as compared to $86.6 million and $15.7 million,
respectively, for 1995. The Company generated net income of $953,000 ($.12 per
share) in 1996 compared to net income of $1.7 million ($.22 per share) in 1995.
In 1996, Kmart accounted for 3.9% of the Company's net sales while its
affiliate accounted for 8.1% of net sales. In 1995, the respective percentages
of net sales for Kmart, and its affiliates were 4.4% and 11.7%.
DISTRIBUTION
Distribution operations contributed pre-tax income of approximately
$2.8 million in 1996 and $4.1 million in 1995.
Net sales from distribution operations aggregated $78.0 million in
1996, as compared to $75.8 million in 1995. The $2.2 million increase in net
sales reflects additional gross sales in Canada of $1.9 million and increased
unit sales of functional lighting/lamps shipped directly from the Orient to new
and existing customers. The increase in net sales was partially offset by an
increase in sales returns and allowances. Sales of functional lighting/lamps
accounted for 64% of sales in 1996 compared to 55% in 1995.
Gross profit from distribution operations declined to $13.3 million in
1996 from $13.6 million in 1995. As a percentage of net sales, gross profit from
distribution operations was 17.0% and 17.9% for 1996 and 1995, respectively. The
decrease in gross profit, both as a percentage of net sales and in total
dollars, is mostly attributable to increased sales incentives and allowances
which offset the incremental contribution to gross profit of higher sales and
better margins earned on sales of lamps. Such additional sales incentives and
allowances are provided to acquire new customers, to expand lighting programs
with existing customers and as a result of increased competitive pressures. The
provision for sales incentives and allowances increased by approximately $2.7
million from 1995 to 1996.
Selling, general and administrative expenses ("SG&A") for distribution
operations amounted to $9.4 million in 1996, as compared to $8.8 million in
1995. The added SG&A is comprised of increases in merchandising and customer
display costs ($219,000), depreciation and amortization of property and
equipment ($170,000), professional fees ($149,000) and factoring costs related
to the insurance of additional customer accounts ($140,000).
14
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest expense on distribution-related financing rose to $1.1 million
in 1996 from $889,000 in 1995 due to additional average outstanding borrowings
and a higher weighted average cost of funds.
MANUFACTURING
Manufacturing operations began in August 1994 with the acquisition of
Go-Gro Industries Limited ("Go-Gro") and in mid-December 1994 with the
commencement of sales by the Company's wholly-owned subsidiary, Meridian Lamps,
Inc. ("Meridian"). Excluding certain administrative costs incurred at the
corporate headquarters, in 1996 the Company's manufacturing operations recorded
a pretax loss of $1.2 million. This compares to a pretax loss from manufacturing
operations of $1.4 million in 1995.
GO-GRO
On a pre-tax basis, Go-Gro lost $91,000 in 1996 while reporting a
pretax loss of $750,000 in 1995. Sales by Go-Gro to non-related companies
primarily located in Europe, increased by $2.4 million, or 25%, in 1996 to $12.0
million. Intercompany sales by Go-Gro to the Company and its subsidiaries, which
are eliminated for financial statement purposes, were $9.4 million in 1996 and
$10.2 million in 1995. Gross profit increased in total dollars in 1996 by
$526,000 to $3.0 million as a result of increased sales.
SG&A was $2.9 million for 1996, up $177,000 from 1995 due to added
payroll and benefits related to new employees hired to pursue additional sales
in the European market. Interest expense declined in 1996 by $245,000 due to
lower outstanding borrowings while other income increased by $73,000, mostly
reflecting the sale of certain intangible assets.
MERIDIAN
Meridian's pretax loss of $627,000 for 1995 is not comparable to the
pretax loss of $1.1 million for 1996 as Meridian did not commence operations
until mid December 1994. Net sales for Meridian were $1.1 million in 1996 and
1995.
Cost of sales for 1996 was $1.7 million. The less than expected sales volume
for Meridian during the period contributed to the following factors increasing
costs of sales during 1996:
(1) unplanned manufacturing variances arising principally from significant
underutilization of plant capacity;
(2) unit production that has exceeded unit sales to date, resulting in
additional storage expenses and a provision for excess inventory;
(3) costs required to develop new products.
Cost of sales exceeded sales in 1995 by $280,000 due entirely to
manufacturing inefficiencies related to the start up nature of Meridian's
operations during this period.
Meridian's remaining expenses for 1996 increased by $212,000 from
1995 as Meridian was operational for six months in 1996 as compared to only
three months in 1995.
15
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAX PROVISION
The effective income tax rates for 1996 and 1995 were 40% and 35.2%,
respectively. The higher effective tax rate for 1996 is due to the same reasons
cited in the comparison of the three months ended March 31, 1996 and 1995.
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 liquidity
requirements for the remainder of fiscal 1996.
CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 1996
The Company's operating, investing and financing activities resulted in
a net decrease in cash and cash equivalents of $597,000 from September 30, 1995
to March 31, 1996.
Net cash of $5.2 million was provided by operating activities. Such
cash was used to pay down borrowings from credit lines and to pay for certain
capital expenditures.
Capital expenditures during the period aggregated $7.3 million, and
included additional construction costs of $2.2 million for the Tupelo warehouse
and the purchase of $2.7 million in equipment and computer software for such
warehouse (for the most part financed by the issuance in May 1995 of a series of
State of Mississippi Variable Rate Industrial Revenue Development Bonds) and
$1.4 million in costs incurred by Go-Gro for the construction of factory
buildings, dormitories and offices and the purchase of machinery, molds and
equipment.
CREDIT FACILITIES, CONVERTIBLE SUBORDINATED NOTES AND BONDS
The Company has a $65 million credit facility with a group of
commercial banks. This facility provides credit in the form of a $7.6 million
non-revolving loan and $57.4 million in revolving loans, acceptances, and trade
and stand-by letters of credit, matures March 31, 1999 and provides for
quarterly principal payments of $950,000 commencing on June 1, 1997 on the
non-revolving loan. The non-revolving loan bears interest at prime plus 1% and
other borrowings under the facility bear interest, payable monthly, at the
Company's preference of either the prime rate or LIBOR plus 2.2% through June
30, 1996 or subsequent to June 30, 1996 at either prime or the LIBOR rate plus a
variable spread based upon earnings, debt and interest expense levels.
Obligations under this facility are secured by substantially all of the
Company's U.S. assets. The Company is required to comply with various convenants
in connection with this facility and borrowings are subject to a borrowing base
calculated from U.S. receivables and inventory. In addition, the agreement
prohibits the payment of any cash dividends or other distribution on any shares
of the Company's common stock, other than dividends payable solely in shares of
common stock, unless approval is obtained from the lenders. At March 31, 1996,
the Company had used $36 million under its credit facility.
16
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company's Canadian and Hong Kong subsidiaries have credit
facilities with foreign banks of $2.2 million and $4.6 million, respectively.
Borrowings under the Canadian facility are secured by substantially all of the
assets of the Canadian subsidiary and are limited under a borrowing base defined
as the aggregate of certain percentages of accounts receivable and inventory.
The Hong Kong facility provides credit in the form of acceptances, trade and
stand-by letters of credit, overdraft protection and negotiation of discrepant
documents presented under export letters of credit issued by banks. Each of
these credit facilities are payable upon demand and are subject to annual
reviews by the banks. With respect to the Canadian facility, the Company is
required to comply with various covenants, which effectively restrict the amount
of funds which may be transferred from the Canadian subsidiary to the Company.
The Hong Kong facility limits dividends that may be paid to the Company to 40%
of Go-Gro's earnings but does not limit advances or loans from Go-Gro to the
Company. The aggregate amounts available for borrowing under the Canadian and
Hong Kong facilities at March 31, 1996 were $772,000 and $1.9 million,
respectively.
The Company has outstanding $7.6 million of 8% convertible subordinated
notes due on March 15, 2002. The notes are convertible into common shares of the
Company's stock at a conversion price of $7.31 per share, subject to certain
anti-dilution adjustments as defined in the Note Agreement, at any time prior to
maturity. The notes are subordinated in right of payments 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 on or after March
15, 1996. 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 agreement prohibits the declaration or payment of dividends on any shares of
the Company's capital stock, except dividends or other distributions payable
solely in shares of the Company's common stock, and the purchase or retirement
of any shares of capital stock or other capital distributions.
During the 1995 fiscal year, the Company began construction of a
475,000 square foot facility located near Tupelo, Mississippi to consolidate
warehouse operations located in leased facilities in Texas and Massachusetts.
The facility became operational on March 15, 1996. The Company completed the
move of all inventory from its Texas facility and ceased operations therein
effective April 30, 1996. The Company anticipates ceasing the warehousing
operations located in Massachusetts by September 30, 1996. As of March 31, 1996,
$8.9 million had been expended for the building and underlying land, and $2.7
million on machinery and equipment for the facility. Total cost for the facility
and related equipment is estimated at $12.3 million. 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) the new warehouse and
machinery and equipment. The bonds have a stated maturity of May 1, 2010 and
require mandatory sinking fund redemption payments, payable monthly, of $900,000
per year from 1996 to 2002, $600,000 per year in 2003 and 2004, and $500,000 per
year from 2005 to 2010. The bonds bear interest at a variable rate (5.6% at
March 31, 1996) 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 $10.8 million direct pay letter of credit
which is not part of the Company's credit line. The unused portion of the $10.5
million bond proceeds and $825,000 in sinking fund payments represent the
restricted cash equivalents and short-term investments reflected in the balance
sheet at March 31, 1996.
17
<PAGE>
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 6.36% (as of March 31, 1996), and
a contractual maturity of 15 years. The bonds are secured by a first mortgage on
land, building and improvements and a $1,713,000 standby letter of credit which
is not part of the Company's credit line. Principal and interest on the bonds
are payable semiannually.
The Company has $1 million available under a leasing facility with a
financial institution to finance the purchase of equipment in the United States.
OTHER
Shenzhen Jiadianbao Electrical Products Co., Ltd. ("SJE"), a 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. Land costs
approximated $2.6 million of which Go-Gro has paid its 70% proportionate share
of $1.8 million.
Under the terms of this agreement, SJE is obligated to construct
approximately 917,000 square feet of factory buildings and 275,000 square feet
of dormitories and offices, with 40 percent of the construction required to be
completed by April 1, 1997 and the remainder by December 31, 2000. At an
estimated average construction price of $9.00 per square foot, construction
costs should approximate $10,728,000. The $10,728,000 includes approximately
$1,600,000 for a Municipal Coordination Facilities Fee ("MCFF"). Such MCFF is
based upon the square footage to be constructed. The agreement calls for the
MCFF to be paid in two installments of approximately $800,000 on October 31 and
December 31, 1996. Construction of the first phase of the factory (170,000
square feet) is estimated to be completed in August 1996. SJE plans to file an
application to reduce the amount of square footage required to be constructed by
approximately 50% (and reduce the MCFF proportionately). The outcome of this
application cannot be presently determined.
The Company serves as an exclusive supplier to Kmart for interior and
exterior residential lighting merchandise under an agreement which expires on
June 30, 1997. As consideration for this exclusivity agreement, the Company has
agreed to provide Kmart with sales discounts of up to $5.6 million which are
paid monthly to Kmart based upon prior months' sales. Should aggregate sales to
Kmart exceed $100 million during the agreement term, Kmart will be entitled to
additional discounts at the rate of 5% on all sales in excess of $100 million.
At March 31, 1996, approximately $1.2 million in sales discounts remained
available for utilization against future sales by Kmart under the agreement.
18
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER (CONTINUED)
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, 2001. Catalina has an option to extend the agreement for an
additional ten years. The royalty payments are due quarterly and are based on a
percent of the value of net shipments of Westinghouse products. Either party has
the right to terminate the agreement during years three through five of the
agreement if the Company does not meet the minimum net shipments required under
the agreement.
RENEWAL OF CHINA'S MOST FAVORED NATION STATUS
During the fiscal year ended September 30, 1995, approximately 87%
(including purchases from Go-Gro) of the products purchased for sale by the
Company's distribution operations were imported from China. The continued
importation of these products could be affected by any one of several
significant trade issues that presently impact U.S. - China relations. These
issues and their possible effects are summarized below.
On June 3, 1995, 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, 1995.
In the context of United States tariff legislation, MFN treatment means that
products are subject to favorable duty rates upon entry into the United States.
As occurred last year, in a break with previous years, the Presidential
Determination did not recommend subjecting any future renewal of MFN trade
status for China to various conditions, such as China's compliance with the 1992
bilateral agreement with the United States concerning prison labor and overall
progress with respect to human rights, release and accounting of Chinese
citizens imprisoned or detained for their political and religious beliefs,
humane treatment of prisoners, protecting Tibet's religious and cultural
heritage and permitting international radio and television broadcasts into
China. Various bills have, however, been introduced into Congress to encourage
liberalization and promote the return of human rights in China including one
that provides that China shall not be granted MFN treatment until Congress so
provides by statute. MFN treatment for China was renewed effective July 1995 for
an additional year. There is no assurance that Congress will not enact
legislation terminating China's MFN status or denying or conditioning the grant
of MFN trade status to China in the future. 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.
On November 30, 1993, the United States Trade Representative ("USTR")
placed China on the "priority watch list" under the so-called Special 301
provisions of the Trade Act of 1974 dealing with the protection of intellectual
property rights. On June 30, 1994, USTR announced that China had been designated
a "priority foreign country" under the "special 301" provisions of the Trade Act
of 1974. On February 4, 1995, the USTR announced that the United States would
take retaliatory trade action against China if the government did not agree to
address intellectual property rights issues. The USTR also published a final
list of products comprising $1 billion worth of Chinese exports to the United
States which would be subject to increased duties. Products currently
manufactured by and for the Company were excluded from the list. On February 26,
1995 the United States and China resolved this dispute when China agreed to
close down a number of compact disc plants and take enforcement actions against
copyright piracy which was evidenced by the signing of an Intellectual Property
Enforcement Agreement (the "IPR Agreement"). On April 30, 1996 USTR designated
China as a "priority foreign country" because of its failure to implement the
1995 intellectual
19
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RENEWAL OF CHINA'S MOST FAVORED NATION STATUS - CONTINUED
property enforcement agreement. Because intellectual property enforcement
problems are already the subject of an action under Section 301, a new Section
301 investigation will not be initiated. USTR will continue to monitor China's
implementation of the 1995 agreement and trade sanctions could be imposed for
non-compliance at any time pursuant to a decision by USTR that China is not
satisfactorily implementing the 1995 agreement.
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.
20
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in legal proceedings arising in the normal
course of business. In the opinion of management, based upon advise of legal
counsel, their ultimate resolution will not have a material adverse effect on
the Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the Company's Annual Meeting of Stockholders, held on April 9,
1996, the stockholders of 5,799,327 shares, which represented 82.9% of
issued and outstanding shares, voted on the following matters:
(i) to elect Robert Hersh, Dean Rappaport, William Stewart, Henry
Latimer, Leonard Sokolow, Robert Wachs and Ryan Burrow to serve as
directors of the Company until the 1997 Annual Meeting of Stockholders
by a vote of 5,748,927 (82.17%) shares cast for the proposal in favor
and 50,400 (.72%) shares against and (ii) to ratify the appointment of
Deloitte & Touche LLP to serve as the Company's auditors for the fiscal
year ending September 30, 1996 by a vote of 5,771,803 (82.50%) shares
cast for the proposal in favor, 12,124 (.17%) shares against and 15,400
(.22%) abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.131 Seventh Amendment to third Amended and Restated Credit
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
27, 1996 between Catalina Industries, Inc. d/b/a Dana
Lighting and SunTrust Bank, Central Florida, National
Association f/k/a Sun Bank, National Association.
10.133 Third Amendment to Employment Agreement dated April 1, 1996
between Catalina Lighting, Inc. and Janet P. Ailstock.
10.134 License Agreement dated April 26, 1996 between Westinghouse
Electric Corporation and Catalina Lighting, Inc.
11 Schedule of Computation of Earnings per Share
(b) REPORTS ON FORM 8-K
None.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
/s/ DEAN S. RAPPAPORT
-----------------------------------------
Dean S. Rappaport
Executive Vice President, Chief Financial
Officer and Treasurer
/s/ DAVID W. SASNETT
-----------------------------------------
David W. Sasnett
Vice President of Finance, Controller and
Chief Accounting Officer
Date: May 14, 1996
22
SEVENTH AMENDMENT TO
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
THIS SEVENTH AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT
(the "Seventh Amendment") dated as of March 18, 1996, by and among CATALINA
LIGHTING, INC., a Florida corporation (the "Borrower"), the corporations listed
on ANNEX I thereto (the "Guarantors"), the Banks signatories to the Credit
Agreement (as hereinafter defined) (the "Banks") and SUNTRUST BANK, CENTRAL
FLORIDA, NATIONAL ASSOCIATION, a national banking association, as Agent (the
"Agent").
W I T N E S S E T H:
WHEREAS, the Borrower, the Guarantors, the Banks and the Agent have
entered into that certain Third Amended and Restated Credit Agreement dated as
of May 12, 1994, as amended by that certain First Amendment to Third Amended and
Restated Credit Agreement, Second Amended and Restated Security Agreement, Third
Amended and Restated Stock and Notes Pledge, Third Amended and Restated
Agreement Regarding Factoring Proceeds, Consent and Waiver dated as of August
12, 1994, as further amended by that Second Amendment to Third Amended and
Restated Credit Agreement and Third Amended and Restated Stock and Notes Pledge,
dated as of February 23, 1995, as further amended by that Third Amendment to
Third Amended and Restated Credit Agreement and Consent, dated as of May 1,
1995, as further amended by that Fourth Amendment to the Third Amended and
Restated Credit Agreement, dated as of June 30, 1995, as further amended by that
Fifth Amendment to Third Amended and Restated Credit Agreement, dated as of
December 4, 1995 and as further amended by that Sixth Amendment to Third Amended
and Restated Credit Agreement, Second Amendment to Second Amended and Restated
Security Agreement and Second Amendment to Third Amended and Restated Stock and
Notes Pledge, dated as of December 28, 1995 (as so amended, the "Credit
Agreement"); and
WHEREAS, the Borrower and the Guarantors have requested that the Credit
Agreement be amended to extend the availability of advances under the Credit
Agreement, to revise certain financial covenants and to revise certain other
terms and conditions; and
WHEREAS, the Banks and the Agent have agreed to amend the Credit
Agreement to provide for the foregoing, subject to the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
<PAGE>
1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is hereby amended
as follows:
a. Section 1.1(c) of the Credit Agreement is hereby deleted, and
in lieu thereof, there is substituted the following:
"(c) The sum of (i) the aggregate unpaid principal amount of
all Revolving Borrowings, plus (ii) one hundred thirty-one
percent (131%) of the principal amount of the Non-Revolving
Advance remaining outstanding, plus (iii) the aggregate amount
of all Acceptance Obligations, plus (iv) the aggregate amount
of all Standby Letter of Credit Obligations and Trade Letter
of Credit Obligations shall not exceed at any time
$65,000,000.00 (such amount as reduced from time to time
pursuant to the terms hereof, the "Total Commitment")."
b. Section 1.2 of the Credit Agreement is hereby deleted, and in
lieu thereof, there is substituted the following:
"Section 1.2 OPTIONAL REDUCTIONS OF TOTAL COMMITMENT.
Subject to the following sentence, the Borrower may elect to
reduce permanently the Total Commitment, in whole or in part,
by (i) giving the Agent not less than five Business Days'
prior notice thereof and (ii) paying to the Agent for the
ratable account of the Banks the amount by which the sum of
all Loans, plus all Acceptance Obligations, plus all Letter of
Credit Obligations exceeds the Total Commitment as so reduced.
(1) No optional reduction of the Total Commitment pursuant to
this Section 1.2 shall reduce the Total Commitment below an
amount equal to the sum of all outstanding Acceptances plus
the undrawn face amount of all outstanding Letters of Credit,
and (2) partial reductions of the Total Commitment pursuant to
this Section 1.2 shall be in incremental amounts of
$1,000,000. Each reduction pursuant to this Section 1.2 shall
permanently reduce the Commitment of each Bank by an amount
equal to its Proportionate Share of such reduction."
c. Section 2.1 of the Credit Agreement is hereby deleted, and in
lieu thereof, there is substituted the following:
2
<PAGE>
"Section 2.1 REVOLVING LOAN. Upon the terms and subject to the
conditions of this Agreement, each Bank shall, from time to
time from the Agreement Date to but excluding the Termination
Date, make one or more Revolving Loans (including the
Non-Revolving Advance made to the Borrower on October 31,
1995) to the Borrower in an amount equal to its Proportionate
Share of each Revolving Borrowing. The Non-Revolving Advance
shall not revolve and any payments (to the extent permitted by
Sections 2.4 and 2.5) made thereunder may not be reborrowed as
a Non-Revolving Advance and no payments thereunder may be made
from the proceeds of a Revolving Borrowing hereunder."
d. Section 2.4 of the Credit Agreement is hereby deleted, and in
lieu thereof, there is substituted the following:
"Section 2.4 MANDATORY REPAYMENT OF LOANS. All Loans
outstanding on the Termination Date shall mature and become
immediately due and payable. In addition, the Non-Revolving
Advance, if not sooner paid, shall be due and payable in
quarterly principal payments of $950,000.00 commencing June 1,
1997 and continuing on the first day of each calendar quarter
thereafter."
e. Section 2.5 of the Credit Agreement is hereby deleted, and in
lieu thereof, there is substituted the following:
"Section 2.5 OPTIONAL PREPAYMENTS OF LOANS. Except for the
Non-Revolving Advance, the Borrower may at any time and from
time to time upon one Business Day's notice prepay the Loans
in whole or in part without premium or penalty, except that
any prepayment of Loans by the Borrower shall be in an
aggregate principal amount of at least $100,000 or an integral
multiple thereof, subject, however, to the Borrower's right to
repay all outstanding Revolving Loans in full. Amounts to be
prepaid shall irrevocably be due and payable on the date
specified in the applicable notice of prepayment, together
with interest thereon as provided in Section 2.3(d). Amounts
prepaid in respect of Loans consisting of Revolving Borrowings
may be reborrowed, subject to the terms and conditions hereof.
The Non-Revolving Advance shall not be prepaid without the
prior written consent of all Banks."
3
<PAGE>
f. Section 5.12 of the Credit Agreement is hereby deleted, and in
lieu thereof, there is substituted the following:
"Section 5.12. MINIMUM CONSOLIDATED TANGIBLE NET WORTH PLUS
SUBORDINATED DEBT.
(a) Permit its Minimum Consolidated Tangible Net Worth Plus
Subordinated Debt to be less than $36,000,000.00 from the date
hereof until September 29, 1996; $39,000,000.00 from September
30, 1996 until September 29, 1997; $43,000,000.00 from
September 30, 1997 until September 29, 1998; and
$45,000,000.00 thereafter.
(b) Permit its Minimum Consolidated Tangible Net Worth less
consolidated retained earnings of Foreign Subsidiaries,
accumulated after the date of acquisition by Borrower or any
of its Subsidiaries, and less amounts due to Borrower or
Guarantors from Foreign Subsidiaries, including, but not
limited to, investments, loans or advances, plus Subordinated
Debt to be less than $25,000,000 from the date hereof until
September 29, 1995; $21,000,000 from September 30, 1995 until
September 29, 1996; $22,000,000 from September 30, 1996 until
September 29, 1997; $26,000,000.00 from September 30, 1997
until September 29, 1998; and $27,000,000.00 thereafter."
g. Section 5.14 of the Credit Agreement is hereby deleted, and in
lieu thereof, there is substituted the following:
"Section 5.14. INTEREST COVERAGE RATIO. Permit the ratio of
(a) the sum of (i) Consolidated Pre-tax Income PLUS (ii)
Consolidated Interest Charges to (b) Consolidated Interest
Charges, to be less than 1.0:1 for the one (1) calendar
quarterly period ending December 31, 1995; less than 0.60:1
for the immediately preceding two (2) calendar quarterly
periods ending March 31, 1996; less than 1.25:1 for the
immediately preceding three (3) calendar quarterly periods
ending June 30, 1996; less than 1.75:1 for the immediately
preceding four (4) calendar quarterly period ending September
30, 1996; less than 2.0:1 for the immediately preceding four
(4) calendar quarterly periods ending December 31, 1996, March
31, 1997 and June 30, 1997; less than 2.25:1 for the
immediately preceding four (4)
4
<PAGE>
calendar quarterly periods ending September 30, 1997,
December 31, 1997 and March 31, 1998; and less than 2.50:1
for the immediately preceding four (4) calendar quarterly
periods ending June 30, 1998 and for said immediately
preceding four (4) calendar quarterly periods ending on the
last day of each calendar quarter thereafter."
h. The definition of "Termination Date" as defined in Section
11.1(a) of the Credit Agreement is hereby deleted and, in lieu thereof, there is
substituted the following:
'"TERMINATION DATE" means the earlier of (i) March 31, 1999,
as extended from time to time pursuant to Section 1.4, and
(ii) the date of termination in whole of the Bank's
Commitments pursuant to Section 1.2 or 7.2."
i. The definition of "Borrowing Base Certificate" as defined in
Section 11.1(a) of the Credit Agreement is hereby deleted and, in lieu thereof,
there is substituted the following:
"BORROWING BASE CERTIFICATE" shall mean a separate certificate
for the Borrower and each Guarantor executed and certified
correct by an officer of the Borrower and each Guarantor, and
delivered to the Agent on or before the twenty-fifth (25th)
day of the month in form acceptable to the Agent and the
Banks, setting forth a calculation of the Borrowing Base and
the borrowing availability thereunder as of the last Business
Day of the preceding month."
j. Section 12.5 of the Credit Agreement is hereby deleted, and in
lieu thereof, there is substituted the following:
"Section 12.5 WAIVERS, AMENDMENTS. Any term, covenant,
agreement or condition of this Agreement may be amended with
the consent of the Borrower, the Guarantors and the Required
Banks, or compliance therewith may be waived in writing by the
Required Banks, or by the Agent when authorized by the
Required Banks, and in any such event, the failure to observe,
perform or discharge any such covenant, condition or
obligation (whether such amendment is executed or such consent
or waiver is given before or after such failure) shall not be
construed as breach of such covenant, condition or obligation
or an Event
5
<PAGE>
of Default hereunder, provided that no such amendment, consent
or waiver shall:
(a) affect the amount or extend the time of the
Commitment of any Bank, of the obligation of the
Agent to create Acceptances or to issue Letters of
Credit, or of the obligation of the Agent or any Bank
to pay amounts on account of Loans, Acceptances or
Letters of Credit, and thereby extend credit to the
Borrower, without the prior written consent of all
Banks;
(b) alter the time or times of payment of the
principal of or interest on any Obligation held by a
Bank or with respect to any Bank's participation in
an Acceptance or Letter of Credit or the amount of
the principal of any Note, Acceptance or Letter of
Credit, or the rate of interest, commission or fees
thereon or permit any subordination of the principal
of or interest on any Obligation without the prior
written consent of such Bank as to its interest in
such Obligation;
(c) alter any provision of Article VIII or any
provision requiring the ratable application of
amounts received by the Agent in payment of, or for
application on, indebtedness under this Agreement or
under any of the Notes or any Acceptance, Obligation
or Letter of Credit Obligation, or change the
percentage required to authorize or direct the taking
of any action under this Agreement, without the prior
written consent of all the Banks;
(d) release Collateral or reduce the Security
Interest; or
(e) terminate the Borrowing Base limitations as
provided in Section 1.1(a) without the prior written
consent of all Banks. Upon the Agent receiving prior
written consent of all Banks and upon written notice
thereof by the Agent to the Borrower, the limitations
on the total of (i) the aggregate unpaid principal
amount of the Revolving Loans, (ii) the aggregate
amount of all Acceptance Obligations, and (iii) the
aggregate amount
6
<PAGE>
of all Standby Letter of Credit Obligations based
upon the Borrowing Base as required by Section 1.1(d)
shall terminate and be of no further force or effect.
Thereafter, any reference to Borrowing Base,
Borrowing Base Certificate, Borrowing Base Period,
Qualified Accounts, Qualified Factored Receivables
and Qualified Inventory herein shall be deemed
deleted.
Unless otherwise specified in such waiver or consent, a waiver
or consent given hereunder shall be effective only in the
specific instance and for the specific purpose for which
given."
2. COUNTERPARTS. The Seventh Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original and shall be
binding upon all parties, their successors and permitted assigns.
3. CAPITALIZED TERMS. All capitalized terms contained herein shall have
the meanings assigned to them in the Credit Agreement unless the context herein
otherwise dictates or unless different meanings are specifically assigned to
such terms herein.
4. RATIFICATION OF LOAN DOCUMENTS; MISCELLANEOUS. The Credit Agreement as
amended hereby, and all other Loan Documents shall remain in full force and
effect in this Seventh Amendment to Credit Agreement shall not be deemed a
novation. Each and every reference to the Credit Agreement and any other Loan
Documents shall be deemed to refer to the Credit Agreement as amended by the
Seventh Amendment. The Borrower and the Guarantors hereby acknowledge and
represent that the Loan Documents, as amended, are, as of the date hereof, valid
and enforceable in accordance with their respective terms and are not subject to
any defenses, counterclaims or right of set-offs whatsoever.
5. GOVERNING LAW. THIS SEVENTH AMENDMENT SHALL BE EFFECTIVE UPON ACCEPTANCE BY
THE BANKS IN FLORIDA AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF FLORIDA WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES.
[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Seventh Amendment as
of the day and year first above written.
BORROWER:
CATALINA LIGHTING, INC.
By: /s/ DEAN RAPPAPORT
--------------------------
Dean Rappaport,
Executive Vice President
(CORPORATE SEAL)
GUARANTORS:
EACH OF THE CORPORATIONS LISTED
ON ANNEX I HERETO
CATALINA INDUSTRIES, INC., d/b/a Dana
Lighting
By: /s/ DEAN RAPPAPORT
-----------------------------
Dean Rappaport,
Vice President
CATALINA REAL ESTATE TRUST, INC.
By: /s/ DEAN RAPPAPORT
-----------------------------
Dean Rappaport,
Vice President
ANGEL STATION, INC.
By: /s/ DEAN RAPPAPORT
----------------------------
Dean Rappaport,
Vice President
8
<PAGE>
MERIDIAN LAMPS, INC.
By: /s/ DEAN RAPPAPORT
-----------------------------
Dean Rappaport,
Vice President
MERIDIAN LAMPS DEVELOPMENT, INC.
By: /s/ DEAN RAPPAPORT
-----------------------------
Dean Rappaport,
Vice President
CATALINA ADMINISTRATIVE CORPORATION
By: /s/ DEAN RAPPAPORT
-----------------------------
Dean Rappaport,
Vice President
AGENT:
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION
By: /s/ DAVID E. CROW
------------------------------
David E. Crow
First Vice President
9
<PAGE>
THE BANKS:
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION
By: /s/ DAVID E. CROW
---------------------------
David E. Crow
First Vice President
FIRST UNION NATIONAL BANK OF FLORIDA
By: /s/ CHUCK KLENK
---------------------------
Name: Chuck Klenk
Title: Vice President
NATIONAL CANADA FINANCE CORP.
By: /s/ MICHAEL S. BLOOMENFELD
-------------------------------
Michael S. Bloomenfeld
Vice President
10
THIRD AMENDMENT TO
LETTER OF CREDIT AGREEMENT
THIS THIRD AMENDMENT TO LETTER OF CREDIT AGREEMENT (the "Third
Amendment") dated as of March 27, 1996, by and among CATALINA INDUSTRIES, INC.
D/B/A DANA LIGHTING, a Florida corporation (the "Company"), the corporations
designated as guarantors (collectively, the "Guarantors") and SUNTRUST BANK,
CENTRAL FLORIDA, NATIONAL ASSOCIATION F/K/A SUN BANK, NATIONAL ASSOCIATION, a
national banking association (the "Bank").
W I T N E S S E T H:
WHEREAS, the Company, Guarantors and the Bank have entered into that
certain Letter of Credit Agreement dated as of May 1, 1995, as amended by that
certain First Amendment to Letter of Credit Agreement dated as of June 30, 1995,
and as further amended by that certain Second Amendment to Letter of Credit
Agreement and First Amendment to Security Agreement dated as of December 28,
1995 (the "Letter of Credit Agreement"); and
WHEREAS, the Company and the Guarantors have requested that the Letter
of Credit Agreement be amended to revise certain financial covenants contained
in Annex VI attached to said Letter of Credit Agreement and incorporated therein
by reference; and
WHEREAS, the Bank has agreed to amend the Letter of Credit Agreement to
provide for the foregoing, subject to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. AMENDMENT TO LETTER OF CREDIT AGREEMENT. The Letter of Credit
Agreement is hereby amended by deleting Annex VI attached thereto and, in lieu
thereof, substituting therefore Annex VI attached hereto as Exhibit "A."
2. COUNTERPARTS. The Third Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original and shall be
binding upon all parties, their successors and permitted assigns.
3. CAPITALIZED TERMS. All capitalized terms contained herein shall have
the meanings assigned to them in the Letter of Credit Agreement unless the
context herein otherwise dictates or unless
<PAGE>
different meanings are specifically assigned to such terms herein.
4. RATIFICATION OF LOAN DOCUMENTS; MISCELLANEOUS. The Letter of Credit
Agreement as amended hereby shall remain in full force and effect and this
Third Amendment to Letter of Credit Agreement shall not be deemed a novation.
Each and every reference to the Letter of Credit Agreement and any other
Operative Documents shall be deemed to refer to the Letter of Credit Agreement
as amended by the Third Amendment. The Company and the Guarantors hereby
acknowledge and represent that the Operative Documents, as amended, are, as of
the date hereof, valid and enforceable in accordance with their respective terms
and are not subject to any defenses, counterclaims or right of set-offs
whatsoever.
5. GOVERNING LAW. THIS THIRD AMENDMENT SHALL BE EFFECTIVE UPON
ACCEPTANCE BY THE BANK IN FLORIDA AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF FLORIDA WITHOUT REGARD TO CONFLICT OF LAW
PRINCIPLES.
(BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK)
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Third Amendment as
of the day and year first above written.
COMPANY:
CATALINA INDUSTRIES, INC. d/b/a Dana
Lighting
By: /s/ DEAN RAPPAPORT
----------------------------
Dean Rappaport
Vice President
(CORPORATE SEAL)
GUARANTORS:
CATALINA LIGHTING, INC.
By: /s/ DEAN RAPPAPORT
-----------------------------
Dean Rappaport
Executive Vice President
CATALINA REAL ESTATE TRUST, INC.
By: /s/ DEAN RAPPAPORT
------------------------
Dean Rappaport
Vice President
ANGEL STATION, INC.
By: /s/ DEAN RAPPAPORT
-----------------------
Dean Rappaport
Vice President
3
<PAGE>
MERIDIAN LAMPS, INC.
By: /s/ DEAN RAPPAPORT
---------------------------
Dean Rappaport
Vice President
MERIDIAN LAMPS DEVELOPMENT, INC.
By: /s/ DEAN RAPPAPORT
-------------------------
Dean Rappaport
Vice President
CATALINA ADMINISTRATIVE CORPORATION
By: /s/ DEAN RAPPAPORT
------------------------
Dean Rappaport
Vice President
BANK:
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION f/k/a Sun Bank,
National Association
By: /s/ DAVID E. CROW
-------------------------
David E. Crow
First Vice President
4
<PAGE>
EXHIBIT "A"
ANNEX VI TO
LETTER OF CREDIT AGREEMENT
CREDIT AGREEMENT COVENANTS
ARTICLE 5.
COVENANTS
So long as (i) any Acceptance Obligation or Letter of Credit Obligation
is outstanding or (ii) any indebtedness or obligation is outstanding under this
Agreement or any Loan Document or (iii) the Banks or the Agent shall have any
obligation to make any Extension of Credit,
A. EACH OF THE BORROWER AND THE GUARANTORS SHALL AND THE
BORROWER SHALL CAUSE EACH OF ITS SUBSIDIARIES TO:
Section 5.1. PRESERVATION OF EXISTENCE AND PROPERTIES, SCOPE OF
BUSINESS, COMPLIANCE WITH LAW, PAYMENT OF TAXES AND CLAIMS. (a) Preserve and
maintain its corporate existence and all of its other franchises, licenses,
rights and privileges, (b) preserve, protect and obtain all Patents, and
preserve and maintain in good repair, working order and condition all other
properties, required for the conduct of its business, (c) engage only in the
manufacture, importation, distribution (within the same distribution network)
and warehousing of light fixtures, ceiling fans, security lighting and other
consumer products, (d) comply with all Applicable Laws, (e) pay or discharge
when due all Taxes owing by it or imposed upon its property (for the purposes of
this clause, such Taxes shall be deemed to be due on the date after which they
become delinquent), and all Liabilities which might become a Lien on any of its
properties (other than any Tax or Liability to the extent secured by a Permitted
Lien) and (f) take all action and obtain all consents and Governmental Approvals
required so that its obligations hereunder will at all times be valid and
binding and enforceable in accordance with their respective terms, except that
this Section 5.1 (other than clauses (a), insofar as it requires the Borrower
and the Guarantors to preserve their corporate existence, (c) and (e)) shall not
apply in any circumstance where noncompliance, together with all other
noncompliances, will not have a Materially Adverse Effect on (i) the Borrower
and its Subsidiaries, taken as a whole, or (ii) this Agreement or the other Loan
Documents.
B. THE BORROWER AND THE GUARANTORS SHALL, AND SHALL CAUSE EACH OF
ITS SUBSIDIARIES TO:
Section 5.2. INSURANCE. Maintain insurance with responsible insurance
companies against such risks and in such
i
<PAGE>
amounts as is customarily maintained by similar businesses, or as may be
required by the Security Agreement or by Applicable Law, or as may be reasonably
requested by the Agent.
Section 5.3. USE OF PROCEEDS. Except as otherwise provided in Section
5.6, use any Extension of Credit only (a) for the manufacture, purchase,
importation or shipment of inventory, (b) for refinancing certain Existing Debt,
(c) for working capital purposes, and (d) for interim financing for the Tupelo
Project pending reimbursement from the proceeds of the Mississippi Business
Finance Corporation taxable variable rate industrial development revenue bonds,
Series 1995 (Dana Lighting, Inc. Project). None of the proceeds of any of the
Extensions of Credit shall be used to purchase or carry, or to reduce or retire
or refinance any credit incurred to purchase or carry, any margin stock (within
the meeting of Regulation U and X) or to extend credit or otherwise for the
purpose of purchasing or carrying any margin stock. If requested by the Agent,
the Borrower will furnish to the Agent statements in conformity with the
requirements of Federal Reserve Form U-1 referred to in Regulation U.
C. THE BORROWER AND THE GUARANTORS SHALL NOT, DIRECTLY OR
INDIRECTLY:
Section 5.4. GUARANTIES. Become or remain liable with respect to
any Guaranty of any Liability of any other Person, except that this Section 5.4
shall not apply to (a) Existing Guaranties and (b) Permitted Guaranties.
Section 5.5. LIENS. Without the Required Banks' prior written consent,
create, assume or incur, or permit or suffer to exist or to be created, assumed
or incurred, any Lien upon any of their respective properties or assets of any
character, whether now owned or hereafter acquired, or upon any income or
profits therefrom, except that this Section 5.5 shall not apply to (a) Permitted
Liens, (b) the Security Interest, and (c) Liens in favor of Trust Company Bank
with respect to Factored Receivables; PROVIDED, HOWEVER, that if,
notwithstanding this Section 5.5, any Lien which this Section prohibits shall be
created or arise, all obligations under this Agreement of the Borrower or any
Guarantor or Subsidiary whose property or asset is subject to such Lien shall
automatically be secured by such Lien equally and ratably with the other Debts
secured thereby, and the holder of such other Debt, by accepting such Lien,
shall be deemed to have agreed thereto and to share with the Banks and the Agent
on that basis, the proceeds of such Lien, whether or not the Banks' security
interest shall be perfected, PROVIDED, FURTHER, HOWEVER, that notwithstanding
such equal and ratable securing and sharing, the existence of such Lien shall
constitute a default in the performance or observance of this Section 5.5.
ii
<PAGE>
Section 5.6. MERGER, CONSOLIDATION, ACQUISITIONS AND DISPOSITION OF
ASSETS. Without the Required Banks' prior written consent, (a) merge or
consolidate with any Person, except that, if after giving effect thereto no
Default would exist, this Section 5.6 shall not apply to (i) any merger or
consolidation of the Borrower with any Subsidiary, provided that the Borrower
shall be the continuing entity, or (ii) any merger or consolidation of any
Subsidiary with any other Subsidiary if, after giving effect thereto, the
continuing entity is a Wholly-Owned Subsidiary of the Borrower that has no
Liabilities other than Permitted Debt, (b) except as provided in Section
5.18(g), purchase, lease or otherwise acquire for cash or other consideration
(not including the Capital Securities of Borrower) all or any substantial
portion of the assets of any other Person (which for the purposes of this
Section shall mean more than 10% of the gross assets of such Person or any
business unit), or (c) except as provided in Section 5.10(b), sell, lease,
transfer or otherwise dispose of any assets, except that this Section 5.6 shall
not apply to any creation of a Permitted Lien or any disposition (i) of assets
in the ordinary course of business or (ii) of any retired property not used or
useful in its business, PROVIDED, HOWEVER, that prior to taking any action as
provided in this Section 5.6 which does not require the prior written consent of
the Required Banks, the Agent shall be furnished written notice thereof by the
Borrower or Guarantor.
Section 5.7. TRANSACTIONS WITH AFFILIATES. Effect any transaction with
any Affiliate (except for transactions among the Borrower and Guarantors (a)
involving Inventory at not less than cost or (b) involving Accounts at not less
than the face value thereof) on a basis less favorable to such Borrower,
Guarantor or Subsidiary, as the case may be, than would at the time be
obtainable for a comparable transaction in arms-length dealing with an unrelated
third party, except this Section 5.7 shall not prohibit any transaction
permitted pursuant to Section 5.18(a) or (f).
Section 5.8. TAXES OF OTHER PERSONS. (a) File a consolidated tax
return with any other Person other than the Borrower and its Consolidated
Subsidiaries, or (b) except as required by Applicable Law pay any Taxes owing by
any Person other than the Borrower and its Consolidated Subsidiaries.
Section 5.9. LIMITATION ON RESTRICTIVE COVENANTS. Enter into any
Contract, or otherwise create or cause or permit to exist or become effective
any consensual restriction, limiting the ability (whether by covenant, event of
default or otherwise) of any of their respective Subsidiaries to (a) pay
dividends or make any other distributions on shares of their capital stock held
by the Borrower or any of its Subsidiaries, (b) pay any obligation owed to the
Borrower or any of its Subsidiaries, (c) make any loans or advances to or
investments in the Borrower or
iii
<PAGE>
in any of its Subsidiaries, (d) transfer any of their respective properties or
assets to the Borrower or any of its Subsidiaries, or (e) create any Lien upon
their respective properties or assets whether now owned or hereafter aquired or
upon any income or profits therefrom, except that this Section 5.9 shall not
apply to Permitted Restrictive Covenants or the Security Interest.
Section 5.10. ISSUANCE OR DISPOSITION OF CAPITAL SECURITIES. Issue any
of their respective Capital Securities or sell, transfer or otherwise dispose of
any Capital Securities of any of their respective Subsidiaries, except that this
Section 5.10 shall not apply to: (a) any issuance by the Borrower of any of its
Capital Securities; (b) any issuance by a Subsidiary of its Capital Securities
to the Borrower provided that such shares are promptly delivered to the Agent in
pledge pursuant to the terms of the Pledge Agreement; provided, however, that
except for Catalina Canada, in which case 51% of its outstanding Capital
Securities must be delivered to the Agent pursuant to the Pledge Agreement, no
such Capital Securities of any other Foreign Subsidiary must be so delivered in
pledge and the Borrower, the Guarantors or any other Subsidiary may sell or
dispose of shares of a Foreign Subsidiary so long as (i) any such issuance or
sale shall occur within one hundred twenty (120) days after the creation and
acquisition of such Foreign Subsidiary, (ii) at the time of the issuance or
sale, no Default or Event of Default shall exist hereunder, and (iii) any such
Foreign Subsidiary shall not at the time of such sale or thereafter own any
shares of the Capital Securities of any other Subsidiary other than Capital
Securities of Foreign Subsidiaries acquired by the Borrower, a Guarantor or
another Subsidiary from a third party or created after the date of this
Agreement; and (c) any disposition by any Guarantor of any Capital Securities of
a Subsidiary to the Borrower or another Guarantor, provided that, except as
otherwise provided in (b) above, such shares shall continue to be subject to the
pledge under the Pledge Agreement.
Section 5.11. PERMITTED DEBT. Without the Required Banks' prior
written consent, create, incur, assume or suffer to exist any Debt, other than:
(a) Debt arising under this Agreement or the other Loan
Documents,
(b) Existing Debt,
(c) Purchase Money Debt and Capitalized Lease Obligations
incurred in the ordinary course of business after the Agreement Date which does
not exceed $1,000,000 in the aggregate for all such entities at any time
outstanding,
(d) Debt evidenced by an Intercompany Note pledged to
the Agent under the Pledge Agreement,
iv
<PAGE>
(e) Subordinated Debt in form and substance acceptable
in all respects to the Agent and the Required Banks and evidenced
by their written consent thereto, and
(f) in the case of the Borrower, any other unsecured
Debt which does not exceed $200,000 in the aggregate for the Borrower at any
time outstanding.
(g) mortgage loan of Meridian Lamps, Inc. in conjunction
with the issuance of tax exempt bonds by the State of Mississippi in an amount
not to exceed One Million Eight Hundred Thousand Dollars ($1,800,000.00),
payable to the Bank of Mississippi, as servicing Trustee, and to the Agent as
issuer of a Direct-Pay Letter of Credit issued to secure said bonds.
(h) mortgage loan of Borrower in an amount not to exceed
One Million Five Hundred Thousand Dollars ($1,500,000.00) payable to the Agent
in conjunction with the refinancing of Borrower's headquarters facility in Dade
County, Florida.
(i) mortgage loan of Dana Lighting, Inc. in conjunction
with the issuance of taxable variable rate industrial development revenue bonds
by the Mississippi Business Finance Corporation in an amount not to exceed Ten
Million Five Hundred Thousand Dollars ($10,500,000.00), payable to the Agent as
issuer of a direct pay letter of credit to secure said bonds.
D. THE BORROWER SHALL NOT AT ANY TIME:
Section 5.12. MINIMUM CONSOLIDATED TANGIBLE NET WORTH PLUS SUBORDINATED
DEBT.
(a) Permit its Minimum Consolidated Tangible Net Worth
Plus Subordinated Debt to be less than $36,000,000.00 from the date hereof until
September 29, 1996; $39,000,000.00 from September 30, 1996 until September 29,
1997; $43,000,000.00 from September 30, 1997 until September 29, 1998; and
$45,000,000.00 thereafter.
(b) Permit its Minimum Consolidated Tangible Net Worth
less consolidated retained earnings of Foreign Subsidiaries, accumulated after
the date of acquisition by Borrower or any of its Subsidiaries, and less amounts
due to Borrower or Guarantors from Foreign Subsidiaries, including, but not
limited to, investments, loans or advances, plus Subordinated Debt to be less
than $25,000,000 from the date hereof until September 29, 1995; $21,000,000 from
September 30, 1995 until September 29, 1996; $22,000,000 from September 30, 1996
until September 29, 1997; $26,000,000.00 from September 30, 1997 until September
29, 1998; and $27,000,000.00 thereafter.
v
<PAGE>
Section 5.13. CONSOLIDATED TOTAL LIABILITIES LESS SUBORDINATED DEBT
TO CONSOLIDATED TANGIBLE NET WORTH PLUS SUBORDINATED DEBT.
Permit the ratio of (A) Consolidated Total Liabilities less
Subordinated Debt and less the Mississippi Business Finance Corporation Taxable
Variable Rate Industrial Development Revenue Bonds, Series 1995 (Dana Lighting,
Inc. Project) not to exceed $10,500,000.00 to (B) Consolidated Tangible Net
Worth plus Subordinated Debt, to exceed 2.0:1.0.
Section 5.14. INTEREST COVERAGE RATIO. Permit the ratio of (a) the sum
of (i) Consolidated Pre-tax Income PLUS (ii) Consolidated Interest Charges to
(b) Consolidated Interest Charges, to be less than 1.0:1 for the one (1)
calendar quarterly period ending December 31, 1995; less than 0.60:1 for the
immediately preceding two (2) calendar quarterly periods ending March 31, 1996;
less than 1.25:1 for the immediately preceding three (3) calendar quarterly
periods ending June 30, 1996; less than 1.75:1 for the immediately preceding
four (4) calendar quarterly period ending September 30, 1996; less than 2.0:1
for the immediately preceding four (4) calendar quarterly periods ending
December 31, 1996, March 31, 1997 and June 30, 1997; less than 2.25:1 for the
immediately preceding four (4) calendar quarterly periods ending September 30,
1997, December 31, 1997 and March 31, 1998; and less than 2.50:1 for the
immediately preceding four (4) calendar quarterly periods ending June 30, 1998
and for said immediately preceding four (4) calendar quarterly periods ending on
the last day of each calendar quarter thereafter.
Section 5.15. MINIMUM ADJUSTED CURRENT RATIO. Permit the ratio of (a)
current assets (not more than 70% of which will consist of Inventory, valued at
the lower of cost or fair market value, for more than two (2) consecutive fiscal
quarters) to (b) the sum of (i) current liabilities plus (ii) the sum of the
undrawn face amount of each Trade Letter of Credit for which the shipping
documents described therein have not been accepted by the Agent plus (iii) the
sum of the undrawn face amount of each Standby Letter of Credit plus (iv)
Revolving Debt to be less than 1.0:1.0.
Section 5.16. RESTRICTED PAYMENTS. Declare or make any Restricted
Payment. This Section 5.16 shall not prohibit the acquisition of the capital
stock of Catalina Canada as provided in Section 5.18(f) hereof or transactions
permitted by Section 5.18(g) hereof.
E. THE BORROWER SHALL NOT, AND SHALL NOT PERMIT ANY GUARANTOR TO:
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<PAGE>
Section 5.17. ENVIRONMENTAL COMPLIANCE. (a) Fail to be in material
compliance with all the Environmental Laws, and with any rules, regulations and
administrative orders of any governmental agency, and with any judgment, decrees
or orders of any court of competent jurisdiction with respect thereto, or (b)
allow any of the representations contained in Section 4.8 to become untrue.
Section 5.18. LIMITATIONS ON INVESTMENTS, LOANS AND ADVANCES. Make any
advances, loans or other extensions of credit to, or equity or other investments
in, any Person, except that, so long as at the time of such transaction, and
immediately after giving effect thereto, no Default would exist:
(a) (i) any Subsidiary may make payments to the Borrower, (ii)
any Subsidiary may make loans, advances, or other extensions of credit to, or
equity investments in, the Borrower or any Guarantor, provided that any loans to
the Borrower or any such Guarantor shall be subordinated to the payment of the
Obligations on terms satisfactory to the Banks or, in the case of loans,
advances or other extensions of credit made by a Guarantor to the Borrower,
shall be evidenced by an Intercompany Note, and (iii) the Borrower may make
loans, advances and extensions of credit to any Guarantor provided that such
loans, advances and extensions of credit are evidenced by an Intercompany Note;
(b) the Borrower or any of its Subsidiaries may acquire and
hold investments in any entity if, (i) (1) the prior written consent from the
Required Banks is obtained, (2) immediately after the acquisition, the entity is
a Wholly-Owned Subsidiary of the Borrower or, subject to the conditions in
Section 5.6, is merged into the Borrower or with or into any Wholly-Owned
Subsidiary of the Borrower, (3) such entity is engaged in substantially the same
line of business as the Borrower, and (4) prior to such acquisition the Board of
Directors or similar governing body of such entity consents to such acquisition,
or (ii) as otherwise provided in Section 5.6;
(c) the Borrower or any of its Subsidiaries may create and
hold receivables owing to it if such receivables are created in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms (provided that nothing in this clause (c) shall prevent the Borrower
or any of its Subsidiaries from offering such concessionary trade terms in
accordance with past practice, as management deems reasonable in the
circumstances);
(d) the Borrower may make loans to its officers, all of which
loans shall not exceed in aggregate principal amount at any time outstanding
$300,000; and
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<PAGE>
(e) the Borrower and any of its Subsidiaries may acquire and
hold any of the following:
(i) debt securities if (a) such securities are
long-term securities and rated "A" or higher by Moody's Investors Service, Inc.
("Moody's"), or "A" or higher by Standard & Poor's Corporation ("S&P") or have
been given an equivalent investment grade rating by another nationally
recognized statistical rating agency, or (b) such securities have been issued or
fully guaranteed as to principal and interest by the United States of America or
any agency or instrumentality thereof whose obligations are backed by the full
faith and credit of the United States of America;
(ii) commercial paper if such commercial paper is
rated "Prime-1" or higher by Moody's or "A-1" or higher by S&P or has been given
an equivalent rating by another nationally recognized statistical rating agency;
(iii) certificates of deposit of, or demand or time
deposits in, Banks, National Bank of Canada, Hong Kong and Shanghai Banking
Corporation Limited and Standard Chartered Bank;
(iv) demand deposits for the payment of payroll
expenses, and other demand deposits not to exceed $100,000 in the aggregate,
domestic or foreign banks;
(v) demand deposits constituting Lockbox Accounts in
domestic banks meeting the criteria set forth in clause (iv) above;
(vi) repurchase contracts covering securities that
are described in clause (i) above, and which contracts have a maturity not
exceeding the date fourteen days from the date of acquisition thereof and which
contracts are entered into with a bank meeting the requirements of clause (iv)
above;
(vii) investments in money market funds,
substantially all of whose assets are securities meeting the criteria set forth
in clauses (i) and (ii) above;
(viii) certificates of deposit maturing within
one (1) year from the date of issuance thereof, issued by a bank organized under
the law of any jurisdiction other than the United States, any State thereof or
Canada, having capital, surplus and undivided profits (or its equivalent)
aggregating at least $100,000,000.00 and whose long term certificates of deposit
are accorded a rating of AA or better by Standard & Poor's Corporation or Aa or
better by Moody's Investor Service Inc. or, if neither of the rating agencies
referred to herein is rating financial institutions in a foreign jurisdiction in
which a particular bank or trust company is organized, then certificates
viii
<PAGE>
of deposit of banks or trust companies which have received a rating which is
substantially equivalent to the rating required herein by an internationally
recognized rating agency shall qualify under this clause (viii); provided the
aggregate amount invested in such banks pursuant to this clause (viii) shall not
at any time exceed $10,000,000.00;
(ix) swap agreements, cap agreements, collar
agreements, forward contracts, options and other similar agreements and
arrangements designed to protect the Borrower and its Subsidiaries against
fluctuations in interest rates or currency exchange rates, entered into by the
Borrower or any Subsidiary with Banks or National Bank of Canada or any bank or
trust company organized under the laws of the United States or any State thereof
or the District of Columbia, having capital, surplus and undivided profits
aggregating at least $100,000,000.00 and whose long-term certificates of
deposits are rated as provided in clause (viii) above.
(f) [RESERVED]; and
(g) the Borrower and any of its Subsidiaries may make other
investments, loans and advances in addition to those permitted by the foregoing
provisions of this Section 5.18 from time to time, provided that the aggregate
amount of such investments, loans and advances made after September 30, 1994
shall not exceed $5,000,000.00 without the prior written consent of all Banks
and, further provided that not more than $2,500,000.00 of said aggregate amount
shall represent the aggregate amount of investments, loans and advances made
either before or after September 30, 1994 to Catalina Lighting Mexico, S.A. DE
C.V.
F. THE BORROWER SHALL:
Section 5.19. ADDITIONAL GUARANTORS. Cause each Subsidiary (other than
a Foreign Subsidiary) which becomes a Subsidiary after the date hereof to become
a Guarantor hereunder and to become a party to the Security Agreement and the
Pledge Agreement, and the Borrower shall, or shall cause its Subsidiaries to,
immediately pledge 100% of the capital stock of such Subsidiary owned by it, and
all notes from such Subsidiary to the Borrower and/or any of its Subsidiaries,
and all notes from the Borrower and any Subsidiary to such Subsidiary, to the
Bank to secure the Obligations.
Section 5.20. SUBSTANTIVE CONSOLIDATION. Maintain and cause the
Guarantors to maintain separate books, records and accounts from those of any
Foreign Subsidiary such that: (i) the revenues of the Foreign Subsidiary will be
credited to such Foreign Subsidiary's account only; (ii) all expenses incurred
by the Foreign Subsidiary shall be paid only from the accounts of
ix
<PAGE>
the Foreign Subsidiary; (iii) only officers and employees of the Foreign
Subsidiary shall have the authority to make disbursements with respect to the
accounts of the Foreign Subsidiary; (iv) there shall occur no sharing of
accounts or funds between the Borrower and the Guarantors, on the one hand, and
any Foreign Subsidiary, on the other hand; and (v) all cash and funds of the
Foreign Subsidiary shall be managed separately from those of the Borrower and
the Guarantors, and there shall not occur any commingling, including for
investment purposes, of funds or assets of the Borrower and its Guarantors with
the funds or assets of any Foreign Subsidiary.
Section 5.21. TRANSFER OF COLLATERAL. Neither the Borrower nor any
Guarantor shall transfer possession of or title to any Collateral to a Foreign
Subsidiary on a basis less favorable to such Borrower or Guarantor, as the case
may be, than would at the time be obtainable for a comparable transaction in
arms-length dealing with an unrelated third party, without the express written
consent of the Banks.
x
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
THIS ADDENDUM is entered into as of the 1st day of April, 1996, by and
between CATALINA LIGHTING, INC., a Florida Corporation, (the "Company"), and
Janet P. Ailstock (the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and the Employee have entered into an Employment
Agreement dated April 1, 1992 (the "Employment Agreement");
WHEREAS, the Company and the Employee desire to amend the Employment
Agreement as set forth in this Addendum;
NOW, THEREFORE, the parties agree as follows:
1. Article 2 of the Agreement is deleted in its entirety and
shall be replaced by the following Article 2:
ARTICLE 2
EMPLOYMENT
Subject to the provision of Article 5 below, the term of this Agreement
shall be for the period commencing on April 1, 1992, and terminating on March
31, 1998 (the "Term").
2. Section 3.1(a) of the Agreement is deleted in its entirety
and shall be replaced by the following Section 3.1(a).
3.1 SALARY.
(a) In payment for the obligations to be performed by the
Employee during the Term, the Company shall pay to the Employee (subject to any
applicable payroll and/or other taxes required to be withheld) annual
compensation equal to (i) a salary of One Hundred Thousand Dollars ($100,000) in
cash for the year commencing April 1, 1992 and (ii) for each succeeding year
during the Term, a salary equal to that of the previous year increased by the
greater of (A) 5% or (B) the percentage increase calculated pursuant to Section
3.1(b); and (iii) on April 1 of 1996 and 1997 the issuance of Five Thousand
(5,000) shares of the Company's common stock, par value $.01 per share ("Common
Stock"), provided however that the Company shall have the option of prepayment
of such shares of Common Stock after December 31, 1996.
<PAGE>
3. Section 3.2 of the Agreement shall be deleted in its entirety
and replaced by the following Section 3.2.
3.2 PAYMENT OF SALARY.
Payments of salary (not including the issuance of Common
Stock) shall be made to the Employee in installments from time to time on the
same dates that payments of salary are generally made to all senior management
employees of the Company.
4. Except as modified by this Third Amendment, the Employment
Agreement shall remain unaffected by this Amendment and shall remain in full
force and effect.
IN WITNESS WHEREOF, each of the Company and the Employee have executed
and delivered this Amendment as of the date first above written.
CATALINA LIGHTING, INC.
By: /s/ ROBERT HERSH
------------------------------
Robert Hersh, President and
Chief Executive Officer
/s/ JANET P. AILSTOCK
-------------------------------
Janet P. Ailstock
LICENSE AGREEMENT
This agreement dated April 26, 1996 by and between Westinghouse
Electric Corporation, a Pennsylvania corporation of 11 Stanwix Street,
Pittsburgh, Pennsylvania 15222 ("Westinghouse") and Catalina Lighting, Inc., a
Florida corporation of 18191 N.W. 68th Avenue, Miami, Florida 33015
("Licensee").
Licensee has requested and Westinghouse is willing to grant the license
described herein to use certain of Westinghouse's trademarks on certain of
Licensee's manufactured articles in accordance with the terms set forth in this
Agreement.
Accordingly, the parties agree as follows:
1. GRANT OF LICENSE.
(a) Westinghouse hereby grants Licensee a license to use the
trademark(s) described in Exhibit A (the "Trademarks"), only in connection with
the use or sale of Licensee's Lighting Fixtures, Portable Lights, Flashlights
(the "Products") as specified ln Exhibit B manufactured by or for Licensee.
Licensee shall also have a right of first refusal on the License by Westinghouse
of the Lighting Related Products also set forth on Exhibit B offered to third
parties. Licensee shall use the Trademarks as set forth in Exhibit A, with no
departures in appearance or treatment without Westinghouse's prior written
consent. Licensee may not use the Trademarks in any territory other than as set
forth in Exhibit C (the "Territory") or on any other goods or merchandise of any
kind other than the Products.
(b) This license is exclusive in the Territory for the Products.
However, during the term of this Agreement and for one year thereafter,
Westinghouse shall not grant to any third party a right to use nor use
themselves the Trademarks in the Territory in
<PAGE>
connection with the distribution or sale of any product which is substantially
similar to the Products.
(c) Except as otherwise approved in writing by Westinghouse, no rights
are granted for the distribution of Products as premiums, promotions or
giveaways.
(d) The license granted is personal to Licensee, and is not assignable
for any reason without Licensor's prior written consent, provided however,
Licensee may grant a sub-license to wholly-owned subsidiary of Licensee.
(e) Nothing in this Agreement is to be construed as an assignment or
grant to Licensee of any right, title or interest in the Trademarks or in any
copyright, design, trademark, trade dress or other property right beyond the
limited license expressly granted hereby.
2. QUALITY STANDARDS AND INSPECTION.
(a) Licensee undertakes that the Products shall all be of a style,
appearance and quality satisfactory to Westinghouse. Licensee will, before the
first sale or distribution of any particular Product, furnish to Westinghouse,
for Westinghouse's written approval, such samples of each style of the Products
as Westinghouse shall reasonably require for Westinghouse's inspection and
testing, together with all tags, labels and other packaging materials to be used
with the Products. Once Westinghouse has approved samples of the Products and
packaging materials, Licensee will not materially depart from the approved
samples without Westinghouse's prior written consent. Westinghouse shall notify
Licensee of its approval (which shall not be unreasonably withheld) within 21
days after its receipt of the samples, including packaging, advertising and
promotional material submitted in
2
<PAGE>
accordance with this section. Products bearing the Trademarks or any component
thereof, but not meeting these standards, including "seconds and irregulars,"
are not to be sold or distributed under any circumstances without Westinghouse's
prior written consent. Notwithstanding the foregoing, provided Licensee gives
Westinghouse prior notice, Licensee may from time to time revise packaging for
the Products solely to include or change statements or other information which
may be required by the rules of the Underwriters' Laboratories, Inc. or laws or
regulations of any jurisdiction where the Products are sold.
(b) Westinghouse at its own expense has the right at reasonable times
on notice to Licensee to inspect Licensee's manufacturing facilities directly
related to Products.
(c) To enable Westinghouse to monitor the quality of Products which
were previously approved hereunder, Licensee shall provide Westinghouse with a
reasonable quantity of samples of same annually, by not later than July 1st of
each year during the term hereof.
3. ROYALTIES.
(a) Licensee shall pay to Westinghouse for the rights granted hereunder
royalties as set forth on Exhibit D (the "Earned Royalties"). The Earned
Royalties shall be remitted in accordance with Section 5(a) of this Agreement.
(b) As used throughout this Agreement, the term "Net Shipments" shall
mean the aggregate invoiced amounts of Products sold by Licensee, less (i)
refunds, credits and allowances actually made or allowed to customers with
respect to Products, (ii) freight charges charged to customers, and (iii) sales
and excise taxes. For the purposes of
3
<PAGE>
computing royalties, "Net Shipments" shall be regarded as made when payments are
due under Licensee's normal commercial terms of sale.
(c) All Earned Royalties are payable in United States dollars, with no
deduction or offset of any kind. Sales of Products in currencies other than U.S.
dollars shall be converted to U.S. dollars at the foreign official conversion
rate effective when payment is made to Licensee.
4. INITIAL AND MINIMUM ANNUAL ROYALTY PAYMENTS.
Notwithstanding anything to the contrary set forth herein, Licensee
will pay to Westinghouse Minimum Royalties during the Contract Period and any
exercised Extension Period as per Exhibit C.
5. STATEMENTS, PAYMENTS AND RECORDS.
(a) Not later than 45 days following each calendar quarter during the
term of this Agreement and within 45 days after termination or expiration of
this Agreement, Licensee will furnish Westinghouse with a full and accurate
statement showing Licensee's distribution of Products during the calendar
quarter, including an itemized list of the styles, quantities and total sales by
style of Product sold or otherwise distributed. Licensee agrees to pay
Westinghouse at the same time the royalties that are due in accordance with the
statement. All statements and royalty payments are to be addressed to
Westinghouse Electric Corporation' at Westinghouse's address given above.
Licensee shall furnish a statement for each such quarter whether or not any
payment is due.
4
<PAGE>
(b) Licensee shall keep for at least two years after expiration or
termination of this Agreement full and accurate books of account and records
covering all sales or other distribution of Products. Licensee also shall permit
Westinghouse or its authorized representative on reasonable notice during
regular business hours to conduct reasonable audits of Licensee's books, records
and inventories of Products to verify Licensee's performance under this
Agreement, including the accuracy of the Royalties paid and statements or
reports delivered pursuant to this Agreement. If any audit of Licensee's books
and records shows a discrepancy that is both five percent (5%) and at least
$5,000 from payments made and reports previously furnished to Westinghouse,
Licensee shall bear the cost of the audit. Licensee shall pay any unpaid amounts
due Westinghouse as disclosed by the audit and, if applicable, the audit costs
within ten days of Westinghouse's demand.
6. OWNERSHIP AND PROTECTION OF RIGHTS.
(a) Licensee acknowledges that the Trademarks and their components are
the sole, unique and original property of Westinghouse and that Westinghouse has
acquired a substantial and valuable goodwill in the Trademarks. Licensee shall
take all reasonable measures to maintain and protect Westinghouse's proprietary
rights including placing any reasonable notice of such ownership that
Westinghouse shall require. Licensee shall cooperate with Westinghouse and
execute any documents reasonably required by Westinghouse to protect the
Trademarks. Licensee shall not take any action, or by its knowing inaction allow
any event to occur which would injure or impair Westinghouse's proprietary
rights in and to the Trademarks.
5
<PAGE>
(b) Licensee shall clearly indicate on all Products and related
advertising materials that the Products are manufactured and distributed by or
for Licensee.
(c) Licensee acknowledges that all graphic designs and other creative
works prepared by or for Licensee depicting the Trademarks for use in connection
with the sale or use of the Products are "work made for hire" within the meaning
of the U.S. Copyright Law and, as such, all rights including copyright in the
designs and works belong to Westinghouse. If such designs and works are not
deemed to be "work made for hire," Licensee shall without charge assign
Westinghouse all rights in same, provided however, Licensee shall be entitled to
utilize Licensor's Trademarks in conjunction with certain Trademarks of Licensee
and in the event Licensee uses its own Trademarks such Trademarks and copyrights
shall remain the property of Licensee.
(d) Licensee shall comply with proper use instructions as Westinghouse
from time to time may issue with respect to the Trademarks. Licensee shall
promptly notify Westinghouse of any infringement or suspected infringement of
any of the Trademarks and shall cooperate with Westinghouse as Westinghouse
shall reasonably require in any action taken against such infringement. Licensee
shall have no right and no obligation to prosecute any claims against any party
for infringement of the Trademarks.
7. WARRANTIES AND REPRESENTATIONS.
(a) Westinghouse warrants and represents to Licensee as follows:
(i) Westinghouse owns and possesses the full and exclusive
right, title, and interest in and to the Trademarks in the U.S.A., Canada and
Mexico, and to the knowledge of Westinghouse in all other countries in the
Territory. Westinghouse has the
6
<PAGE>
full right to license the Trademarks to Licensee hereunder, and has not granted
any other person or entity any license or other rights respecting the use of the
Trademarks for products similar to the Products.
(ii) Westinghouse is not now the subject of any claim for
breach or infringement of any copyrights, trademarks or other industrial or
intellectual property rights which relate to the Trademarks. There are no
actions or proceedings pending, or to the knowledge of Westinghouse, threatened
involving any claims by any person or entity that the use or publication of the
Trademarks infringes upon any copyrights, trademarks or other intellectual
property rights of any other person or entity.
(iii) Westinghouse Is a corporation duly organized, validly
existing, and in good standing under the laws of the Commonwealth of
Pennsylvania, with full power and authority to conduct its business as now
conducted, own the Trademarks and enter into and perform its obligations under
this Agreement. The execution, delivery, and performance of this Agreement by
Westinghouse have been duly authorized by all requisite corporate action on its
part, and this Agreement constitutes the legal, valid, and binding obligation of
Westinghouse, enforceable against it in accordance with its terms.
(iv) The execution and delivery of this Agreement by
Westinghouse and performance of its obligations hereunder will not conflict with
or violate any agreement, instrument or other contract to which Westinghouse is
a party or by which Licensee's right to use the Trademarks in the manner
contemplated hereby will be challenged or impaired in anyway.
7
<PAGE>
(b) Licensee warrants and represents to Westinghouse as follows:
(i) Licensee is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Florida, with full
power and authority to conduct its business as now conducted and to enter into
and perform its obligations under this Agreement. Licensee's execution,
delivery, and performance of this Agreement have been duly authorized by all
requisite corporate action on its part, and this Agreement constitutes
Licensee's legal, valid, and binding obligation, enforceable against Licensee in
accordance with its terms.
(ii) Licensee's execution and delivery of this Agreement and
performance of its obligations hereunder, including the payment of Royalties
hereunder, do not and will not conflict with, violate, or result in any default
under any agreement, instrument or other contract to which Licensee is a party
or by it is bound.
(iii) There are no claims, actions, suits, or other
proceedings pending, or to the knowledge of Licensee, threatened, which, if
adversely determined, would adversely affect the ability of Licensee to
consummate the transactions contemplated by this Agreement or perform its
obligations hereunder.
(iv) Licensee is now in compliance with and shall continue to
comply with all applicable laws and regulations in its manufacture, sale and
distribution of the Products.
(v) Licensee shall cause Westinghouse to be an additional
insured on Licensee's general liability, product liability, and umbrella
liability policies with respect to liability in connection with (a) any alleged
defect(s) in the Products, or (b) the use, manufacture or distribution of the
Products by or for Licensee. Such insurance shall
8
<PAGE>
include Products manufactured by or for Licensee bearing the Trademarks. Such
insurance shall, at a minimum, provide $1,000,000 per occurrence/$2,000,000
annual aggregate with a commercial umbrella of $25,000,000 per occurrence
insuring against liability for bodily injury (including death), property damage,
and associated defense costs. The insurance shall be provided by Liberty Mutual
or such other insurance companies reasonably acceptable to Westinghouse.
Licensee shall furnish Westinghouse with certificates of insurance within 30
days after execution of this Agreement, and annually thereafter. Such
certificates will stipulate that coverage will not be canceled or substantially
reduced without 30 days prior written notice to Westinghouse. The requirements
of this insurance clause will survive the Agreement, and will remain in effect
for at least the expected life of the last Product manufactured or distributed
by Licensee.
8. INDEMNIFICATION.
(a) Subject to Section 8(c), Westinghouse shall defend, indemnify and
hold Licensee and its officers, directors, agents, employees and permitted
assigns, harmless from and against any and all claims, suits, damages,
liabilities, costs and expenses including, but not limited to court costs and
reasonable attorneys fees, arising out of or based on the breach of any
representation, warranty or obligation of Westinghouse under this Agreement.
(b) Subject to Section 8(c), Licensee shall defend, indemnify and hold
Westinghouse and its officers, directors, agents, employees and permitted
assigns, harmless from and against any and all claims, suits, damages,
liabilities, costs and expenses including, but not limited to court costs and
reasonable attorneys fees, arising out of or based on (i) the breach of any
representation, warranty or obligation of Licensee
9
<PAGE>
under this Agreement, (ii) any use by Licensee of the Trademarks which is not
permitted by or not in accordance with the terms of this Agreement, (iii) any
defect or alleged defect in the Products, or (iv) any claim against Westinghouse
arising out of this Agreement which is not the subject of Westinghouse's
indemnity, as provided in Section 8(a).
(c) A party (the "Notifying Party") shall promptly notify the other
party (the "Indemnifying Party") of the existence of any claim, demand or other
action giving rise to a claim for indemnification under this Agreement which
involves a third party (a "Third Party Claim") and shall give the Indemnifying
Party a reasonable opportunity to defend the same at its own expense and with
its own counsel, provided that the Notifying Party shall at all times have the
right to participate in such defense at its own expense. If, within a reasonable
time after receipt of notice of a Third Party Claim, the Indemnifying Party
fails to so defend, the Notifying Party shall have the right, but not the
obligation, to defend and to compromise or settle (exercising reasonable
business judgment) the Third Party Claim for the account and at the risk and
expense of the Indemnifying Party. Except as provided in the foregoing sentence,
an Indemnifying Party may not settle a Third Party claim without the Notifying
Party's consent.
(d) Each party shall make available to the other, at the other's
expense, such information and assistance as the other shall reasonably request
in connection with the defense of a Third Party Claim threatened or filed in
connection with any activities conducted hereunder.
10
<PAGE>
9. TERM.
(a) The initial term of this agreement (the "Contract Period") shall be
for a period of approximately 66 months commencing as of April 1, 1996 and
ending on September 30, 2001; provided however, if Licensee fails to meet the
minimum net shipments set forth on Exhibit D during years 3, 4 and 5, either
party shall have the right to terminate this License Agreement.
(b) Westinghouse hereby grants to Licensee the option to extend the
term of this agreement for up to two (2) five (5) year periods (the "Extension
Periods") commencing on September 30, 2001 unless sooner terminated. Such
Extension Periods are subject to the same terms and conditions as provided
herein. Such options to extend the term of this Agreement must be exercised by
Licensee, lf at all, by giving written notice to Westinghouse at least 90 days
(90) prior the expiration of the then preceding Contract or Extension Period.
10. TERMINATION.
(a) Subject to earlier termination as provided below and in Section
9(b), this Agreement shall remain effective during the Contract Period and any
Extension Period.
(b) The following shall constitute a default on the part of a party:
(i) If a party fails timely to perform any material
obligation under this Agreement, and Licensee's failure to meet the Product
quality standards of Section 2(a) shall be deemed material for this purpose; or
11
<PAGE>
(ii) If (A) a party becomes insolvent, ceases to pay its debts
as they mature, makes an arrangement with or for the benefit of its creditors,
consents to or acquiesces in the appointment of a receiver, trustee or
liquidator for all or any substantial part of its property, or if such party
approves, consents to or acquiesces in any such proceeding, (B) a party
institutes a bankruptcy, winding up, reorganization, insolvency arrangement or
similar proceeding, if any such proceeding is instituted against a party that
has not been stayed or dismissed within 60 days, or if such party approves,
consents to or acquiesces in any such proceeding or (C) there is a levy or
execution upon any property of a party which materially interferes with such
party s performance obligations hereunder.
(c) In addition to the foregoing, the failure of Licensee to pay
amounts due to Westinghouse under the terms of this Agreement shall constitute a
default on the part of Licensee.
(d) If within 60 days after a party gives notice that a default has
occurred under Section 10(b)(i) describing in reasonable detail the nature of
such default, the defaulting party has not remedied such default, the party
giving notice may terminate this Agreement upon ten days further notice. If
within 30 days after Westinghouse gives notice that a default has occurred under
Section 10(c), Licensee has not remedied such default, Westinghouse may
terminate this Agreement immediately on notice. If any of the events described
in Section 10(b)(ii) has occurred with respect to a party, the other party may
terminate this Agreement immediately upon notice.
12
<PAGE>
11. RIGHTS ON TERMINATION.
(a) Except as provided in Section 11(b), all licenses and permissions
granted by Westinghouse hereby shall cease upon any expiration or termination of
this Agreement for any reason, but Licensee nevertheless shall continue
thereafter to be liable to Westinghouse for unpaid Royalties and each party
shall be obligated to perform the other obligations set forth herein which are
incurred prior to such termination or expiration. Promptly upon expiration or
termination of this Agreement t except as provided in Section 11(b), Licensee
shall discontinue all use and sale of Products incorporating the Trademarks and
any materials using the Trademarks or any other statement or material which
associates or identifies Westinghouse with the Products. Upon expiration or
termination, Westinghouse shall have the option to purchase from Licensee, at
Licensee's cost, its balance of inventory of Products remaining after
termination or expiration and any sell-off period described in Section 11(b).
(b) If this Agreement expires, or if it terminates other than by
Westinghouse in accordance with Section 10(b) or 10(c), for a period of one year
following the date of termination, Licensee shall be permitted to sell (i) its
inventory of Products existing at the date of termination, (ii) Products ordered
from Licensee's suppliers which, at the date of termination, cannot be canceled
without penalty or loss to Licensee and (iii) Products necessary to fill
customer orders received by Licensee prior to the date of termination or up to
60 days after the date on which termination occurs. In any case, the provisions
of this Agreement, excepting those relating to its term or termination, shall
continue to apply to both parties for as long as Licensee continues to sell or
distribute the Products. Upon
13
<PAGE>
the later of termination of this Agreement or the end of the sell off period,
Licensee shall furnish to Westinghouse a written description (including quantity
and location) of Licensee's inventory of Products then ln existence.
12. MISCELLANEOUS.
(a) Nothing in this Agreement is to be construed as an assignment or
grant to Licensee of any right, title or interest in the Trademarks or any
copyright, design, trademark, trade dress or other property right beyond the
limited license expressly granted hereby.
(b) Licensee may not use Westinghouse's name except as expressly
permitted by this Agreement. This Agreement shall not be construed as
constituting any joint venture, partnership or principal/agent relationship.
(c) The failure or delay of a party to enforce a provision of this
Agreement will not be a waiver of that party is right to enforce that or any
other provision at a later time.
(d) This Agreement shall inure to the benefit of the parties hereto and
the respective assigns and successors in interest to the business of either
party.
(e) All notices, consents, approvals and other communications required
or permitted under this Agreement shall be in writing and shall be delivered
personally to the party, sent by any major national overnight courier or mailed
first class certified mail, return receipt requested. Notices shall be addressed
to a party as follows:
14
<PAGE>
Counsel for Westinghouse: John K. Williamson, Esq.
Westinghouse Electric Corporation
11 Stanwix Street
Pittsburgh, PA 15222
Counsel for Licensee: Janet P. Ailstock, Esq.
Catalina Lighting, Inc.
18191 N.W. 68th Avenue
Miami, FL 33015
Any item delivered in accordance with the provisions of this Section shall be
deemed to have been delivered (i) on the date of personal delivery, (ii) on the
business day following the date sent by overnight courier or (iii) on the fifth
day following the date on which it was so mailed, as the case may be.
(f) This Agreement constitutes the complete agreement between the
parties and all prior agreements with respect to the subject matter hereof are
merged herein. No waiver or modification of any provision of this Agreement
shall be effective unless ln writing and signed by both parties.
(g) This Agreement is to be construed according to the laws of the
Commonwealth of Pennsylvania applicable to agreements entered into and performed
in Pennsylvania.
Westinghouse Electric Corporation Catalina Lighting, Inc.
By: /s/ [ILLEGIBLE] By: /s/ DEAN S. RAPPAPORT
------------------------------- -------------------------------
Name: Name: Dean S. Rappaport
Title: Title: Executive Vice President
15
<TABLE>
<CAPTION>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
EXHIBIT 11
SCHEDULE OF COMPUTATION OF PRIMARY EARNINGS PER SHARE
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------------ -----------------------------------
1996 1995 1996 1995
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income $ 365,000 $ 226,000 $ 953,000 $ 1,741,000
Add: Interest on debt assumed to
be repaid 9,000 - 38,000 -
------------ ------------ ----------- ------------
Net income for primary earnings per common
share $ 374,000 $ 226,000 $ 991,000 $ 1,741,000
============ ============ =========== ============
Weighted average number of common shares
outstanding during the period 6,995,000 6,947,000 6,995,000 6,939,000
Add: Common equivalent shares determined
using the "Modified Treasury Stock"
method representing shares issuable upon
exercise of stock options, warrants and
shares issuable under contractual
agreements 796,000 923,000 808,000 987,000
------------ ------------ ----------- ------------
Weighted average number of shares used in
calculation of primary earnings per share 7,791,000 7,870,000 7,803,000 7,926,000
============ ============ =========== ============
Primary earnings per common share $ .05 $ .03 $ .13 $ .22
============ ============ =========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
EXHIBIT 11
(CONTINUED)
SCHEDULE OF COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------------ -----------------------------------
1996 1995 1996 1995
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income $ 365,000 $ 226,000 $ 953,000 $ 1,741,000
Add: Interest on debt assumed to be repaid - - 1,000 -
------------ ------------ ----------- ------------
Net income for fully diluted
earnings per common share $ 365,000 $ 226,000 $ 954,000 $ 1,741,000
============ ============ =========== ============
Weighted average number of
common shares outstanding
during the period 6,995,000 6,947,000 6,995,000 6,939,000
Add: Common equivalent shares determined
using the "Modified Treasury Stock"
method representing shares issuable upon
exercise of stock options, warrants and
shares issuable under contractual
agreements 826,000 923,000 808,000 987,000
------------ ------------ ----------- ------------
Weighted average number of
shares used in calculation of
fully diluted earnings per share 7,821,000 7,870,000 7,803,000 7,926,000
============ ============ =========== ============
Fully diluted earnings per common share $ .05 $ .03 $ .12 $ .22
============ ============ =========== ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 210
<SECURITIES> 0
<RECEIVABLES> 26,745
<ALLOWANCES> 6,545
<INVENTORY> 38,866
<CURRENT-ASSETS> 70,630
<PP&E> 25,494
<DEPRECIATION> 0
<TOTAL-ASSETS> 113,700
<CURRENT-LIABILITIES> 25,655
<BONDS> 11,065
0
0
<COMMON> 70
<OTHER-SE> 43,043
<TOTAL-LIABILITY-AND-EQUITY> 113,700
<SALES> 91,101
<TOTAL-REVENUES> 91,101
<CGS> 75,360
<TOTAL-COSTS> 75,360
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,541
<INCOME-PRETAX> 1,588
<INCOME-TAX> 635
<INCOME-CONTINUING> 953
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 953
<EPS-PRIMARY> .13
<EPS-DILUTED> .12
</TABLE>
