UNITED STATES
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 JUNE 30, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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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
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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 AUGUST 5, 1997: 7,079,000 SHARES.
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
-------
Condensed consolidated balance sheets -
June 30, 1997 and September 30, 1996............................. 3-4
Condensed consolidated statements of operations -
Three and nine months ended June 30, 1997 and 1996............... 5
Condensed consolidated statements of cash flows -
Nine months ended June 30, 1997 and 1996......................... 6-7
Notes to condensed consolidated financial statements............... 8-12
Management's discussion and analysis of financial
condition and results of operations.............................. 13-22
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings.......................................... 23
ITEM 4 Submission of Matters to a Vote of Security Holders........ 23
ITEM 6 Exhibits and Reports on Form 8-K........................... 23
2
<PAGE>
<TABLE>
<CAPTION>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, SEPTEMBER 30,
ASSETS 1997 1996
------ ----------- --------------
(Unaudited) *
<S> <C> <C>
Current assets
Cash and cash equivalents $ - $ 1,766
Restricted cash equivalents and short-term
investments 150 378
Accounts receivable, net of allowances
of $10,358 and $7,313, respectively 30,406 29,644
Inventories 38,462 39,648
Other current assets 8,279 5,009
----------- -----------
Total current assets 77,297 76,445
Property and equipment, net 29,246 26,003
Goodwill, net 11,587 11,344
Other assets 5,257 3,670
----------- -----------
$ 123,387 $ 117,462
=========== ===========
</TABLE>
(continued on page 4)
3
<PAGE>
<TABLE>
<CAPTION>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
JUNE 30, SEPTEMBER 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------------------------------ ------------ -------------
(Unaudited) *
<S> <C> <C>
Current liabilities
Notes payable - credit lines $ 3,800 $ 3,963
Accounts and letters of credit payable 23,262 25,289
Current maturities of bonds payable 970 970
Other current liabilities 6,113 5,884
------------ -----------
Total current liabilities 34,145 36,106
Notes payable - credit lines 25,550 17,044
Convertible subordinated notes 7,600 7,600
Bonds payable - real estate related 9,195 10,165
Other liabilities 7,016 2,573
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Total liabilities 83,506 73,488
------------ -----------
Commitments and contingencies
Stockholders' equity
Common Stock 71 71
Additional paid-in capital 26,186 26,135
Retained earnings 13,624 17,768
------------ -----------
Total stockholders' equity 39,881 43,974
------------ -----------
$ 123,387 $ 117,462
============ ===========
</TABLE>
*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 PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
1997 1996 1997 1996
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 56,394 $ 43,882 $ 146,363 $ 134,983
Cost of sales 47,413 36,664 122,977 112,024
--------- --------- ---------- ----------
Gross profit 8,981 7,218 23,386 22,959
Selling, general and administrative
expenses 6,761 6,226 19,203 19,113
Plant closing costs - - 930 -
Litigation settlements and related
professional fees 160 - 7,392 -
--------- --------- ---------- ----------
Operating income (loss) 2,060 992 (4,139) 3,846
--------- --------- ---------- ----------
Other income (expenses)
Interest expense (1,144) (892) (2,965) (2,433)
Other income (expenses) 50 (70) 33 205
--------- --------- ---------- ----------
Total other income (expenses) (1,094) (962) (2,932) (2,228)
--------- --------- ---------- ----------
Income (loss) before income taxes 966 30 (7,071) 1,618
Income tax provision (benefit) 144 12 (2,927) 647
--------- --------- ---------- ----------
Net income (loss) $ 822 $ 18 $ (4,144) $ 971
========= ========= ========== ==========
Weighted average number of
shares outstanding
Primary 7,948 7,816 7,067 7,756
Fully diluted 8,988 7,816 7,067 7,756
Earnings (loss) per share
Primary $ 0.11 $ - $ (0.59) $ 0.13
Fully diluted $ 0.11 $ - (0.59) $ 0.13
</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)
NINE MONTHS ENDED
JUNE 30,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (4,144) $ 971
Adjustments for non-cash items:
Adverse jury verdict 4,366 -
Other 6,794 6,736
Change in assets and liabilities (8,810) 2,204
----------- -----------
Net cash provided by (used in) operating activities (1,794) 9,911
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net (6,419) (8,259)
Payments for acquisitions (632) -
Decrease (increase) in restricted cash equivalents and
short-term investments 228 6,092
----------- -----------
Net cash provided by (used in) investing activities (6,823) (2,167)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 2 132
Payments on other liabilities (524) (408)
Proceeds from issuance of bonds - 99
Payments on bonds (970) (900)
Proceeds from notes payable - credit lines 30,200 36,366
Payments on notes payable - credit lines (19,838) (43,311)
Net proceeds from (payments on) notes payable - credit lines
due on demand (2,019) (63)
----------- -----------
Net cash provided by (used in) financing activities 6,851 (8,085)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,766) (341)
Cash and cash equivalents at beginning of period 1,766 807
----------- -----------
Cash and cash equivalents at end of period $ - $ 466
=========== ===========
</TABLE>
(continued on page 7)
6
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED
JUNE 30,
-------------------------------
1997 1996
----------- -----------
(In thousands)
Cash paid for:
Interest $ 2,697 $ 2,481
Income taxes $ 1,038 $ 2,579
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended June 30, 1997 and 1996, total capital
lease obligations incurred for new office, machinery and warehouse equipment
aggregated $617,000 and $537,000, 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, 1996 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 nine months ended June 30,
1997 may not necessarily be indicative of operating results to be expected for
the full fiscal year due to seasonal fluctuations in the Company's business,
changes in economic conditions and other factors.
Certain amounts previously presented in the financial statements of prior
periods have been reclassified to conform to the current period's presentation.
2. INVENTORIES
Inventories consisted of the following (in thousands):
JUNE 30, SEPTEMBER 30,
1997 1996
----------- -------------
Raw materials $ 5,449 $ 5,075
Work-in-progress 1,368 1,342
Finished goods 31,645 33,231
----------- -----------
Total Inventories $ 38,462 $ 39,648
=========== ===========
3. PROPERTY AND EQUIPMENT, NET
Shenzhen Jiadianbao Electrical Products Co., Ltd. ("SJE"), a cooperative joint
venture subsidiary of the Company's wholly-owned subsidiary Go-Gro Industries
Ltd. ("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 this land until
January 18, 2042. The land use rights are non-transferable. Under the terms of
the SJE joint venture agreement, ownership of the land and buildings of SJE is
divided 70% to Go-Gro and 30% to the other joint venture partner. Land costs,
including the land use rights, approximated $2.6 million of which Go-Gro has
paid its 70% proportionate share of $1.8 million.
8
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. PROPERTY AND EQUIPMENT, NET (CONTINUED)
Under the terms of this agreement, as amended, SJE is obligated to construct
approximately 500,000 square feet of factory buildings and 211,000 square feet
of dormitories and offices, with 40 percent of the construction which was
required to be completed by April 1, 1997 (and was completed) and the remainder
by December 31, 1999. The total construction costs for this project were
estimated at $10.5 million, and included approximately $1.0 million for a
Municipal Coordination Facilities Fee (MCFF). The MCFF was based upon the square
footage to be constructed. The agreement calls for the MCFF to be paid in
installments beginning in January 1997 and continuing through June 1998, with
46% of the total fee due by September 1997.
The construction of a 162,000 square foot factory, a 77,000 square foot
warehouse and a 60,000 square foot dormitory was completed during the quarter
ended March 31, 1997 and these facilities were fully operational in June 1997.
4. ACQUISITION
On July 30,1994, the Company acquired all of the issued and outstanding capital
stock of two Hong Kong companies, Go-Gro Industries Limited ("Go-Gro") and Lamp
Depot Limited ("Lamp Depot"), for an aggregate consideration of $7,500,000 and
750,000 shares of the Company's common stock. The stock of Go-Gro was purchased
by the Company from selling stockholders who represented at the closing that
they were, in fact, the actual stockholders of Go-Gro. Subsequent to the date of
the closing, the Company discovered that part of the Go-Gro stock acquired had
been conveyed to one of the selling stockholders prior to closing by a former
officer of a subsidiary of the Company, who ceased employment with such
subsidiary in 1993. The Company made a claim for indemnification and return of
$1,904,000 of the consideration from Go-Gro, such funds were returned to the
Company in November 1994 and the Company filed a lawsuit against the former
officer in May 1995. The purchase price and resulting goodwill recorded for the
Go-Gro acquisition were reduced accordingly for the return of these funds. The
Company settled all litigation relating to this matter in June 1997 by payment
of $600,000 which was recorded as an increase in the purchase price and goodwill
recorded for the Go-Gro acquisition.
5. BONDS PAYABLE
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% 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. Interest on the bonds is payable semiannually and principal payments are
due annually.
In June 1997, the Company ceased manufacturing operations at Meridian. The
Company plans to lease the Meridian facility to a non-manufacturing entity, and,
as a result, is in the process of defeasing the bonds. The Company plans on
redeeming the bonds at their earliest redemption date, approximately November 1,
1999. The Company recognized plant closing costs for Meridian of $930,000 during
the nine months ended June 30, 1997.
6. EMPLOYMENT AGREEMENT
On April 1, 1997, the Company entered into an employment and non-compete
agreement with the previous majority stockholder of Go-Gro, under which such
individual will continue to serve as President of Go-Gro. The term of the
agreement is five years and shall renew for a successive five-year period upon
terms mutually acceptable to the Company and the employee.
7. RELATED PARTY TRANSACTION
On May 1, 1997 the Company entered into a lease agreement for its Hong Kong
office with a Company owned by the President and former majority stockholder of
Go-Gro. The lease expires in March 2001 but may be extended for an additional
year. Annual rent related to this lease is approximately $257,000.
9
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. CONTINGENCIES
LEGAL
On June 4, 1991, the Company was served with a copy of the Complaint in the
matter of Browder vs. Catalina Lighting, Inc., Robert Hersh, Dean S. Rappaport
and Henry Gayer, Case No. 91-23683, in the Circuit Court of the 11th Judicial
Circuit in and for Dade County, Florida. The plaintiff in the action, the former
President and Chief Executive Officer of the Company, contended that his
employment was wrongfully terminated and as such brought action for breach of
contract, defamation, slander, libel and intentional interference with business
and contractual relationships, including claims for damages in excess of $5
million against the Company and $3 million against the named directors. During
the course of the litigation the Company prevailed on its Motions for Summary
Judgment and the Court dismissed the plaintiff's claims of libel and
indemnification. On February 3, 1997, the plaintiff voluntarily dismissed the
remaining defamation claims against the Company and Directors. The breach of
contract claim was tried in February, 1997 and the jury returned a verdict
against the Company for total damages of $2.4 million (including prejudgment
interest). On July 14, 1997, the Court also granted plaintiff's motion for
attorney fees and costs of $1.9 million. A provision of $4.3 million was
recorded by the Company during the quarter ended March 31, 1997 and a $139,000
provision for post-judgment interest was recorded through June 30, 1997. The
Company is appealing the verdict and attorney fee award.
On February 23, 1993, Dana Lighting (now Catalina Industries, Inc.), 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 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. On March 19, 1997, the Court granted
Dana's motion for summary judgment and dismissed the claims against the Company
regarding violation of civil RICO, Federal Antitrust and State unfair
competition. Management 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. The Company 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.
On August 8, 1996, the Company was served with a copy of the Complaint in the
matter of Black & Decker (U.S.), Inc. vs. Catalina Lighting, Inc., Case No.
96-1042-A, and on October 25, 1996 and December 4, 1996, the Company was served
with a second and third complaint entitled Black & Decker vs. Catalina Lighting
and Westinghouse Electric Corp., Case Nos. 96-1577-A and 96-1707-A,
respectively. During
10
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. CONTINGENCIES (CONTINUED)
January 1997, a subsidiary of the Company was served with a Complaint on the
same matter in Hong Kong. The plaintiff in these actions contended that the
Company infringed certain of plaintiff's patents in selling its line of flexible
flashlights. In February, 1997 the Company settled all of these cases by a
payment to Black & Decker of $1,000,000.
On December 17, 1996 White Consolidated Industries, Inc. ("White"), which has
acquired certain limited trademark rights from Westinghouse Electric Corp.
("Westinghouse") to market certain household products under the
White-Westinghouse trademark, notified the Company of a lawsuit against
Westinghouse and the Company . The lawsuit challenges the Company's right to use
the Westinghouse trademarks on its lighting products and alleges trademark
infringement. Both the Company and Westinghouse vigorously dispute White's
allegations and on December 24, 1996, Westinghouse and the Company served a
Complaint and Motion for Preliminary Injunction against White, AB Electrolux,
Steel City Vacuum Co., Inc., Salton/Maxim Housewares, Inc., Newtech Electronics
Corp., and Windmere Durable Holdings, Inc. alleging that the defendants had
violated Westinghouse's trademark rights, breached the Agreement between
Westinghouse and White and seeking an injunction to enjoin White against
interference with their contractual arrangements. Pursuant to the License
Agreement between Westinghouse and the Company, Westinghouse is defending and
indemnifying the Company for all costs and expenses for claims, damages and
losses, including the costs of litigation.
The Company is also a defendant in other legal proceedings arising in the 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 a material
adverse effect on the Company's financial position or annual results of
operations.
OTHER
During the fiscal year ended September 30, 1996, approximately 95% (including
purchases from Go-Gro) of the products purchased for sale by the Company's
distribution operations were imported from China. In addition, Go-Gro sold $28
million in products to unaffiliated entities, of which $3.1 million were shipped
in the U.S. The continued importation into the U.S. of products manufactured in
China could be affected by any one of several significant trade issues that
presently impact U.S. - China relations. On May 29, 1997, 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, 1997. 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. On June 24, 1997 the House of
Representatives supported the President's decision and rejected a bill to impose
trade sanctions against China due to alleged human rights abuses. Members of
Congress and the "human rights community" will continue to monitor the human
rights issues in China and adverse developments in human rights and other trade
issues in China could affect U.S. - China relations. As a result of various
political and trade disagreements between the U.S. Government and China, it is
possible restrictions could be placed on trade with China in the future which
could adversely impact the Company's operations and financial position.
11
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. NEW ACCOUNTING PRONOUNCEMENTs
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 128 "Earnings per Share" ("SFAS 128")
which changes the method of calculating earnings per share. SFAS 128 requires
the presentation of "basic" earnings per share and "diluted" earnings per share
on the face of the income statement. Basic earnings per share is computed by
dividing the net income or loss attributable to common shareholders by the
weighted average common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted earnings per share is computed similarly to fully diluted
earnings per share under APB Opinion No. 15. SFAS 128 is effective for financial
statements for periods ending after December 15, 1997. The Company will adopt
SFAS 128 in the first quarter of the fiscal year ending September 30, 1998, as
early adoption is not permitted. Upon adoption, earnings per share data for
prior periods are required to be restated. The pro forma basic earnings (loss)
per share and diluted earnings (loss) per share calculated in accordance with
SFAS 128 for the three and nine months ended June 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1997 1996 1997 1996
--------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Pro forma Basic Earnings per Share $ 0.12 $ - $ (0.59) $ 0.14
Pro forma Diluted Earnings per Share $ 0.11 $ - $ (0.59) $ 0.13
</TABLE>
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No.130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 requires that a
company (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. SFAS No.130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company has not determined the effects, if any, that SFAS No.130 will have
on its consolidated financial statements.
In June 1997, SFAS No.131, "Disclosures about Segments of an Enterprise and
Related Information," was issued. SFAS No.131 establishes standards for the way
that public companies report selected information about operating segments in
annual financial statements and requires that those companies report selected
information about segments in iterim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No.131, which supersedes
SFAS No.14, "Financial Reporting for Segments of a Business Enterprise", but
retains the requirement to report information about major customers, requires
that a public company report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS No.131 requires that a public company report a measure of segment
profit or loss, certain specific revenue and expense items, and segment assets.
However, SFAS No.131 does not require the reporting of information that is not
prepared for internal use if reporting it would be impracticable. SFAS No.131
also requires that a public company report descriptive information about the way
that the operating segments were determined, the products and services provided
by the operating segments, differences between the measurements used in
reporting segment information and those used in the enterprise's general-purpose
financial statements, and changes in the measurement of segment amounts from
period to period. SFAS No.131 is effective for financial statements for periods
beginning after December 15, 1997. The Company has not determined the effects,
if any, that SFAS No.131 will have on the disclosures in its consolidated
financial statements
12
<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 nine
months ended June 30, 1997 and 1996 are referred to as 1997 and 1996,
respectively.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Net sales and gross profit for 1997 were $56.4 million and $9 million,
respectively, as compared to $43.9 million and $7.2 million, respectively, for
1996. The Company generated net income of $822,000 ($.11 per share) in 1997
compared to net income of $18,000 ($.00 per share) in 1996.
The $12.5 million increase in net sales from the prior year reflects an
increase in units sold. Functional lighting/lamp sales increased by $10.7
million as a result of a large initial order for a new lamp program for Kmart
while net sales for the Company's other principal line of products, lighting
fixtures, increased by $1.8 million. Functional lighting/lamps and lighting
fixtures accounted for 74% and 26%, respectively, of net sales in 1997 compared
to 71% and 29% in 1996, respectively.
In 1997 and 1996, Home Depot accounted for 21.5% and 9.2%,
respectively, of the Company's net sales and Kmart and its affiliate Builder's
Square accounted for 22.8% and 11.5% of net sales in 1997 and 1996,
respectively. In addition, in 1996 another customer accounted for 10.8% of net
sales as a result of large initial orders for new items related to an expansion
of their functional lighting program.
Gross profit increased by $1.8 million in 1997 due to the added sales
volume but decreased as a percentage of net sales. Certain major domestic
retailers accounted for a larger percentage of the Company's sales in 1997 than
1996 due to the Company's sales focus on these major retailers and economic
difficulties experienced by other customers. Many of these major retailers (most
notably Home Depot and Kmart) are currently purchasing from the Company
primarily on a direct basis, rather than from the Company's warehouses.
Approximately 69% of the Company's sales in 1997 were made on a direct basis, as
compared to 55% in 1996. Sales made by the Company on a direct basis typically
generate lower margins than sales from the Company's warehouses, and the higher
relative proportion of direct sales was a contributing factor to the decline in
the gross profit percentage to 15.9% in 1997 from 16.4% in 1996. The lower gross
profit percentage for 1997 also reflects a less profitable product mix. The
impact of these factors lowering the gross profit percentage was partially
offset by increased sales, which lessened the effect on such percentage of
purchasing and warehousing costs as most of these costs are fixed.
Selling, general and administrative expenses ("SG&A") were 12% of sales
in 1997 compared to 14.2% in 1996. The decrease as a percentage of sales is
attributable to higher sales. SG&A increased by $535,000 reflecting an increase
in consulting and professional fees and additional costs to support the
Company's growth. These increases were partially offset by lower SG&A incurred
by Meridian as a result of the decision to cease Meridian's operations (see
separate discussion below). In addition, the Company also recorded $160,000 in
legal expenses relating to litigation settled in the previous quarter.
13
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest expense increased to $1.1 million in 1997 from $892,000 in
1996 reflecting $139,000 in interest related to the Browder jury verdict
presently under appeal (see Note 7 of Notes to Condensed Consolidated Financial
Statements) and increased borrowings to finance capital expenditures.
The effective income tax rates for 1997 and 1996 were 15% and 40%,
respectively. The lower effective tax rate for 1997 reflects the projected
impact for the fiscal year ended September 30, 1997 of high proportionate
foreign income, which is taxed at a significantly lower rate than U.S. income.
MERIDIAN
In March 1997, the Company committed to a plan to cease manufacturing
operations and close its Meridian Lamps, Inc. ("Meridian") facility. The pretax
loss for Meridian was $432,000 for 1997 and $544,000 for 1996. Net sales
decreased to $570,000 in 1997 from $1 million in 1996 as unit sales decreased.
Cost of sales in 1997 was $813,000 and exceeded sales by $243,000, as
sales volume was insufficient to avoid significant underutilization of plant
capacity resulting in manufacturing variances and the Company was required to
record significant provisions for inventory and sales returns due primarily to
the decision to terminate Meridian's operations. Cost of sales exceeded sales by
$191,000 in 1996 mainly due to manufacturing variances arising principally from
underutilization of plant capacity, a provision for inventory, research and
development costs and additional storage expenses.
Other expenses for 1997 were $189,000 consisting mostly of
administrative payroll and benefits, marketing and merchandising expenses and
interest expense. In 1996, such expenses amounted to $354,000, and consisted
mostly of administrative payroll and benefits, marketing and merchandising
expenses, amortization of start up costs and interest expense.
As of June 30, 1997, the Company had ceased operations at Meridian and
closed the facility.
COMPARISON OF NINE MONTHS ENDED JUNE 30, 1997 AND 1996
Net sales and gross profit for 1997 were $146.4 million and $23.4
million, respectively, as compared to $135 million and $23 million,
respectively, for 1996. The Company incurred a net loss of $4.1 million ($.59
per share) in 1997 due to plant closing costs and litigation costs, as compared
to net income of $971,000 ($.13 per share) in 1996.
Net sales increased by $11.4 million from the prior year. The increase
in sales is attributable to strong sales generated in the third quarter
reflecting the benefits of the Company's strategy to strengthen its
relationships with certain major US retailers. Functional lighting/lamp sales
increased by $??? million while net sales for the Company's other principal line
of products, lighting fixtures, decreased by $???. Functional lighting/lamps and
lighting fixtures accounted for ??% and ??%, respectively, of distribution sales
in 1997 as compared to ??% and ??%, respectively, in 1996.
In 1997 and 1996, Home Depot accounted for 18.2% and 9.3%,
respectively, of the Company's net sales. In addition, in 1997 and 1996, Kmart
and its affiliate Builder's Square accounted for 14% and 11.9% of net sales,
respectively.
14
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Gross profit increased by $427,000 in 1997 due to added sales volume
but decreased as a percentage of net sales from 17% to 16%. Certain major
domestic retailers accounted for a larger percentage of the Company's sales in
1997 than 1996 due to the Company's sales focus on these major retailers and
economic difficulties experienced by other customers. Many of these major
retailers (most notably Home Depot and Kmart) are currently purchasing from the
Company primarily on a direct basis, rather than from the Company's warehouses.
Approximately 61% of the Company's sales in 1997 were made on a direct basis, as
compared to 49% in 1996. Sales made by the Company on a direct basis typically
generate lower margins than sales from the Company's warehouses, and the higher
relative proportion of direct sales was a contributing factor to the decline in
the gross profit percentage. The lower gross profit percentage for 1997 also
reflects a less profitable product mix and an $870,000 provision for
discontinued inventory required as a result of management's decision to cease
operations at its Meridian factory - see separate discussion below. The impact
of these factors lowering the gross profit percentage was partially offset by
lower provisions for sales incentives as a percentage of sales, stemming from
favorable incentive experience and increased sales, which lessened the effect on
the gross profit percentage of purchasing and warehousing costs which decreased
in dollars as a result of the consolidation of the Company's warehousing
operations during fiscal 1996.
Selling, general and administrative expenses ("SG&A") were 13.1% of
sales in 1997 compared to 14.2% in 1996. The decrease in these expenses as a
percentage of net sales is attributable to higher sales. SG&A increased by
$90,000 from 1996 reflecting an increase in costs incurred in the Orient to
support the Company's growth ($711,000) and an increase in consulting and
professional fees ($457,000). These increases were partially offset by lower
depreciation expense ($474,000) principally attributable to the accelerated
depreciation of the Company's computer system during the prior year in
connection with the purchase of a new system during fiscal 1997, lower
merchandising and display costs ($252,000), and lower costs incurred at the
Meridian facility ($398,000) as a result of the decision to cease Meridian's
operations.
In 1997, in conjunction with the decision to cease Meridian's
operations, the Company recorded a $930,000 charge to write down the plant and
related equipment to fair market value (less disposition costs) and to provide
for severance payments to Meridian's employees.
Litigation settlements and related professional fees aggregated $7.4
million and represent the amount provided for an adverse jury verdict of $4.3
million on litigation with the Company's former Chief Executive Officer
(currently under appeal), a payment of $1,000,000 to settle patent litigation
with Black & Decker, and the related professional fees incurred for these
matters (see Note 8 of Notes to Condensed Consolidated Financial Statements and
Item 1 - Legal Proceedings).
Interest expense increased from $2.4 million in 1996 to $3 million in
1997 due to increased borrowings to finance capital expenditures and a $139,000
provision for interest related to the $4.3 million adverse jury verdict
mentioned above.
Other income of $205,000 in 1996 consisted primarily of gains on the sale of
intangible assets and investment income.
15
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
MERIDIAN
In March 1997, the Company committed to a plan to cease manufacturing
operations and close its Meridian Lamps, Inc. ("Meridian") facility by September
30, 1997. The pretax loss for Meridian was $3.5 million for 1997 and $1.7
million for 1996.Net sales remained the same at $2.1 million.
Cost of sales in 1997 was $4.1 million and exceeded sales by $2 million. The
following factors negatively affected gross profit during 1997:
(i) a provision for discontinued inventory amounting to $870,000 required as a
result of management's decision to cease operations at Meridian;
(ii) a sales volume insufficient to avoid significant underutilization of plant
capacity resulting in manufacturing variances; and
(iii) provisions for sales returns.
Cost of sales exceeded sales by $745,000 in 1996 mainly due to
unplanned manufacturing variances arising principally from underutilization of
plant capacity, a provision for inventory, research and development costs and
additional storage expenses.
In 1997, in conjunction with the decision to cease Meridian's
operations, the Company recorded a $930,000 charge to write down the plant and
related equipment to fair market value (less disposition costs) and to provide
for severance payments to Meridian's employees.
Other expenses for 1997 and 1996 were $623,000 and $914,000,
respectively, consisting mostly of administrative payroll and benefits,
marketing and merchandising expenses, interest expense and the amortization of
start up costs in 1996.
As of June 30, 1997, the Company had ceased operations at Meridian and
closed the facility.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its short-term liquidity needs through cash provided
by operations, accounts payable, borrowings under various credit facilities with
banks, and the use of letters of credit from customers to fund certain of its
direct import sales activities. Lease obligations, mortgage notes, convertible
subordinated notes, bonds and capital stock are additional sources for the
longer-term liquidity and financing needs of the Company. Management believes
the Company's available sources of cash will enable it to fulfill its liquidity
requirements for the next year.
17
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 1997
The Company's operating, investing and financing activities resulted in
a net decrease in cash and cash equivalents of $1.8 million from September 30,
1996 to June 30, 1997.
Net cash of $1.8 million was used by operating activities. Borrowings
under the Company's credit lines were used primarily to pay for capital
expenditures aggregating $6.4 million. Capital expenditures included $5.2
million in costs incurred by Go-Gro for the construction of a factory, warehouse
and a dormitory and the purchase of machinery, molds and equipment. In addition,
machinery for the Go-Gro factory amounting to $506,000 was acquired and financed
by one of the Company's leasing facilities with a Hong Kong financial
institution.
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 which commenced 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 the LIBOR rate plus a variable
spread based upon earnings, debt and interest expense levels defined under the
credit agreement (LIBOR + 2.5 basis point at June 30, 1997). Obligations under
this facility are secured by substantially all of the Company's U.S. assets. The
Company is required to comply with various convenants in connection with this
facility and borrowings are subject to a borrowing base calculated from U.S.
receivables and inventory. In addition, the agreement prohibits the payment of
any cash dividends or other distribution on any shares of the Company's common
stock, other than dividends payable solely in shares of common stock, unless
approval is obtained from the lenders. At June 30, 1997, the Company had used
$38.9 million under its credit facility.
18
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CREDIT FACILITIES, CONVERTIBLE SUBORDINATED NOTES AND BONDS (CONTINUED)
The Company's Canadian and Hong Kong subsidiaries have credit
facilities with foreign banks of $2.9 million and $4.5 million, respectively.
Borrowings under the Canadian facility are secured by substantially all of the
assets of the Canadian subsidiary and are limited under a borrowing base defined
as the aggregate of certain percentages of accounts receivable and inventory.
Advances up to $1.1 million bear interest at the Canadian prime rate (4.75% at
June 30, 1997) while advances in excess of $1.1 million bear interest at the
Canadian prime rate plus .5%. Borrowings under the Hong Kong facility are
secured by substantially all the assets of Go-Gro. The facility provides credit
in the form of acceptances, trade and stand-by letters of credit, overdraft
protection and negotiation of discrepant documents presented under export
letters of credit issued by banks. Advances bear interest at the Hong Kong prime
rate plus .25% (8.75% at June 30, 1997). 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 agreement prohibits the payment of dividends and
the Company is required to comply with various covenants, which effectively
restrict the amount of funds which may be transferred from the Canadian
subsidiary to the Company. The Hong Kong facility prohibits the payment of
dividends 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 June 30, 1997 were $2.9 million and $644,000, 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 payment to all existing and
future senior indebtedness of the Company and the notes are callable at the
option of the Company with certain required premium payments. Principal payments
of approximately $2.5 million are required on March 15 in each of the years 2000
and 2001. The remaining outstanding principal and interest is due in full on
March 15, 2002. Interest is payable semiannually. The terms of the Note
Agreement require the Company to maintain specific interest coverage ratio
levels in order to increase its credit facilities or otherwise incur new debt
and to maintain a minimum consolidated net worth. In addition, the note
agreement prohibits the declaration or payment of dividends on any shares of the
Company's capital stock, except dividends or other distributions payable solely
in shares of the Company's common stock, and the purchase or retirement of any
shares of capital stock or other capital distributions.
The Company arranged for the issuance in 1995 of $10.5 million in State
of Mississippi Variable Rate Industrial Revenue Development Bonds to finance
(along with internally generated cash flow and the Company's $1 million leasing
facility) a new warehouse located near Tupelo, Mississippi. The bonds have a
stated maturity of May 1, 2010 and require mandatory sinking fund redemption
payments, payable monthly, of $900,000 per year from 1996 to 2002, $600,000 per
year in 2003 and 2004, and $500,000 per year from 2005 to 2010. The bonds bear
interest at a variable rate (5.65% at June 30, 1997) 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.
19
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CREDIT FACILITIES, CONVERTIBLE SUBORDINATED NOTES AND BONDS (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% 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. Interest on the bonds is payable semiannually and
principal payments are due annually.
In June 1997, the Company ceased manufacturing operations at Meridian.
The Company plans to lease the Meridian facility to a non-manufacturing entity,
and, as a result, is in the process of defeasing the bonds. The Company plans on
redeeming the bonds at their earliest redemption date, approximately November 1,
1999.
The Company has a $1 million leasing facility with a financial
institution to finance the purchase of equipment in the United States, of which
$577,000 was available at June 30, 1997. In addition, the Company has a leasing
facility for $9 million Hong Kong dollars (U.S. $1.2 million) with a Hong Kong
financial institution to finance the purchase of machinery and equipment for its
China facilities of which U.S. $699,000 was available at June 30, 1997.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 128 "Earnings per Share" ("SFAS 128")
which changes the method of calculating earnings per share. SFAS 128 requires
the presentation of "basic" earnings per share and "diluted" earnings per share
on the face of the income statement. BasiC earnings per share is computed by
dividing the net income or loss attributable to common shareholders by the
weighted average common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted earnings per share is computed similarly to fully diluted
earnings per share under APB Opinion No. 15. SFAS 128 is effective for financial
statements for periods ending after December 15, 1997. The Company will adopt
SFAS 128 in the first quarter of the fiscal year ending September 30, 1998, as
early adoption is not permitted. Upon adoption, earnings per share data for
prior periods are required to be restated. The pro forma basic earnings (loss)
per share and diluted earnings (loss) per share calculated in accordance with
SFAS 128 for the three and nine months ended June 30, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1997 1996 1997 1996
--------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Pro forma Basic Earnings per Share $ 0.12 $ - $ (0.59) $ 0.14
Pro forma Diluted Earnings per Share $ 0.11 $ - $ (0.59) $ 0.13
</TABLE>
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No.130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 requires that a
company (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. SFAS No.130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company has not determined the effects, if any, that SFAS No.130 will have
on its consolidated financial statements.
In June 1997, SFAS No.131, "Disclosures about Segments of an Enterprise and
Related Information," was issued. SFAS No.131 establishes standards for the way
that public companies report selected information about operating segments in
annual financial statements and requires that those companies report selected
information about segments in iterim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No.131, which supersedes
SFAS No.14, "Financial Reporting for Segments of a Business Enterprise", but
retains the requirement to report information about major customers, requires
that a public company report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is availabe that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS No.131 requires that a public company report a measure of segment
profit or loss, certain specific revenue and expense items, and segment assets.
However, SFAS No.131 does not require the reporting of information that is not
prepared for internal use if reporting it would be impracticable. SFAS No.131
also requires that a public company report descriptive information about the way
that the operating segments were determined, the products and services provided
by the operating segments, differences between the measurements used in
reporting segment information and those used in the enterprise's general-purpose
financial statements, and changes in the measurement of segment amounts from
period to period. SFAS No.131 is effective for financial statements for periods
beginning after December 15, 1997. The Company has not determined the effects,
if any, that SFAS No.131 will have on the disclosures in its consolidated
financial statements.
20
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER
Shenzhen Jiadianbao Electrical Products Co., Ltd. ("SJE"), a
cooperative joint venture subsidiary of Go-Gro, and the Bureau of National Land
Planning Bao-An Branch of Shenzhen City entered into a Land Use Agreement
covering approximately 467,300 square feet in Bao-An County, Shenzhen City,
People's Republic of China on April 11, 1995. The agreement provides SJE with
the right to use this land until January 18, 2042. The land use rights are
non-transferable. Under the terms of the SJE joint venture agreement, ownership
of the land and buildings of SJE is divided 70% to Go-Gro and 30% to the other
joint venture partner. Land costs, including the land use rights, approximated
$2.6 million of which Go-Gro has paid its 70% proportionate share of $1.8
million.
Under the terms of this agreement, as amended, SJE is obligated to construct
approximately 500,000 square feet of factory buildings and 211,000 square feet
of dormitories and offices, with 40 percent of the construction which was
required to be completed by April 1, 1997 (and was completed) and the remainder
by December 31, 1999. The total construction costs for this project were
estimated at $10.5 million, and included approximately $1.0 million for a
Municipal Coordination Facilities Fee (MCFF). The MCFF was based upon the square
footage to be constructed. The agreement calls for the MCFF to be paid in
installments beginning in January 1997 and continuing through June 1998, with
46% of the total fee due by September 1997.
The construction of a 162,000 square foot factory, a 77,000 square foot
warehouse and a 60,000 square foot dormitory was completed during the quarter
ended March 31, 1997 and these facilities were fully operational in June 1997.
On April 26, 1996, the Company entered into a license agreement with
Westinghouse Electric Corporation ("Westinghouse") 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 the Company's net shipments of Westinghouse
branded products, subject to annual minimum payments due. 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.
On December 17, 1996 White Consolidated Industries, Inc. ("White"),
which has acquired certain limited trademark rights from Westinghouse to market
certain household products under the White-Westinghouse trademark, notified the
Company of a lawsuit against Westinghouse and the Company . The lawsuit
challenges the Company's right to use the Westinghouse trademarks on its
lighting products and alleges trademark infringement. Both the Company and
Westinghouse vigorously dispute White's allegations and on December 24, 1996,
Westinghouse and the Company served a Complaint and Motion for Preliminary
Injunction against White, AB Electrolux, Steel City Vacuum Co., Inc.,
Salton/Maxim Housewares, Inc., Newtech Electronics Corp., and Windmere Durable
Holdings, Inc. alleging that the defendants had violated Westinghouse's
trademark rights, breached the Agreement between Westinghouse and White and
seeking an injunction to enjoin White against interference with their
contractual arrangements. Pursuant to the License Agreement between Westinghouse
and the company, Westinghouse is defending and indemnifying the Company for all
costs and expenses for claims, damages and losses, including the costs of
litigation.
21
<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
During the fiscal year ended September 30, 1996, approximately 95%
(including purchases from Go-Gro) of the products purchased for sale by the
Company's distribution operations were imported from China. In addition, Go-Gro
sold $28 million in products to unaffiliated entities, of which $3.1 million
were shipped in the U.S. The continued importation into the U.S. of products
manufactured in China could be affected by any one of several significant trade
issues that presently impact U.S. - China relations. On May 29, 1997, 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, 1997. 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. On June 24, 1997 the House of
Representatives supported the President's decision and rejected a bill to impose
trade sanctions against China due to alleged human rights abuses. Members of
Congress and the "human rights community" will continue to monitor the human
rights issues in China and adverse developments in human rights and other trade
issues in China could affect U.S. - China relations. As a result of various
political and trade disagreements between the U.S. Government and China, it is
possible restrictions could be placed on trade with China in the future which
could adversely impact the Company's operations and financial position.
22
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 4, 1991, the Company was served with a copy of the Complaint in the
matter of Browder vs. Catalina Lighting, Inc., Robert Hersh, Dean S. Rappaport
and Henry Gayer, Case No. 91-23683, in the Circuit Court of the 11th Judicial
Circuit in and for Dade County, Florida. The plaintiff in the action, the former
President and Chief Executive Officer of the Company, contended that his
employment was wrongfully terminated and as such brought action for breach of
contract, defamation, slander, libel and intentional interference with business
and contractual relationships, including claims for damages in excess of $5
million against the Company and $3 million against the named directors. During
the course of the litigation the Company prevailed on its Motions for Summary
Judgment and the Court dismissed the plaintiff's claims of libel and
indemnification. On February 3, 1997, the plaintiff voluntarily dismissed the
remaining defamation claims against the Company and Directors. The breach of
contract claim was tried in February, 1997 and the jury returned a verdict
against the Company for total damages of $2.4 million (including prejudgment
interest). On July 14, 1997, the Court also granted plaintiff's motion for
attorney fees and costs of $1.9 million. A provision of $4.3 million was
recorded by the Company during the quarter ended March 31, 1997 and a $139,000
provision for post-judgment interest was recorded through June 30, 1997. The
Company is appealing the verdict and attorney fee award.
See notes 2 and 8 (legal) of Notes to condensed consolidated financial
statements.
The Company is a defendant in legal proceedings arising in the normal course of
business. In the opinion of management, based upon advice 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
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.146 Financing Agreement between Go-Gro Industries, Ltd. and
Standard Chartered Bank dated May 12, 1997.
10.147 Employment and non-compete agreement dated April 1, 1997
between Go-Gro Industries Ltd. and Wai Check Lau.
11 Schedule of Computation of Earnings (loss) per Share
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
23
<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/ DAVID W. SASNETT
-----------------------------
Vice President
/s/ DAVID W. SASNETT
-----------------------------
David W. Sasnett
Chief Financial Officer, and
Chief Accounting Officer
Date: August 14, 1997
24
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.146 Financing Agreement between Go-Gro Industries, Ltd. and
Standard Chartered Bank dated May 12, 1997.
10.147 Employment and non-compete agreement dated April 1, 1997
between Go-Gro Industries Ltd. and Wai Check Lau.
11 Schedule of Computation of Earnings (loss) per Share
27 Financial Data Schedule
25
EXHIBIT 10.146
STANDARD CHARTERED
CORPORATE BANKING GROUP
DATE: 12th May 1997 9/F Miramar Tower
1-23 Kimberley Road
OUR REF: CBG/KLN/GM&T/BFD Tsimshatsui
Kowloon
Hong Kong
CONFIDENTIAL
- ------------ Telephone (852) 2820 3333
Go-Gro Industries, Ltd. Telegrams STANCHARTH
6/F., Kenning Industrial Building, Telex 73230
19 Wang Hoi Road,
Kowloon Bay, Kowloon Direct telephone
Fax
ATTN: MR. RICHARD LAU, PRESIDENT
- ---------------------------------
Dear Sirs,
BANKING FACILITIES: GO-GRO INDUSTRIES LTD.
We are pleased to confirm that the Bank is willing to make available to your
company (the "Company") the following working capital facilities up to the
amounts indicated.
1. CURRENT ACCOUNT OVERDRAFT - HKD5,000,000.-
2. TRADE FINANCE GROUP 1 - HKD30,000,000.-
3. TRADE FINANCE GROUP 2 - HKD20,000,000.-
4. TRADE FINANCE GROUP 3 - HKD20,000,000.-
The above Trade Finance Groups 1, 2 and 3 are complementary and the combined
outstandings are not to exceed HKD30,000,000.- Similarly the combined
outstandings of Groups 2 and 3 are not to exceed HKD20,000,000.- For product
availability, please see the attachment to this letter.
Prior evidence of insurance is required for all "free on board" and "cost and
freight" shipments under import letters of credit.
Combined usance and loan period of any one transaction under import facilities
is not to exceed 120 days.
Usance period of export facilities is not to exceed 120 days.
<PAGE>
STANDARD CHARTERED
------------------
GO-GRO INDUSTRIES, LTD. PAGE 2
Packing credits allowed with 70% advance for up to 120 days or the expiry date
of the related letters of credit, whichever is earlier.
For Back to Back/Quasi Back to Back Letters of Credit opened with the Back, the
Company undertakes not to accept any amendments to the master letters of credit
without the prior written consent of the Bank.
5. GUARANTEE FACILITY - HKD600,000.-
For the issuance of guarantees to secure utility supplies.
INTEREST, COMMISSSIONS AND FEES
Unless otherwise specified, interest on all sums advanced will be payable
monthly in arrears at Prime plus 0.25% per annum. A default rate of Prime plus
8% per annum will apply to amounts not paid when due or in excess of agreed
facility amounts. "Prime" means the rate which we announce or apply from time to
time as our prime rate for lending Hong Kong Dollars. Commissions will be
charged at our standard rates unless otherwise stipulated. Export bills will be
discounted and import bills will be financed at our standard bills finance rates
minus 0.25% per annum. All past due bills shall bear interest at 3% per annum
above the rates charged on your regular bills outstandings.
LETTERS OF CREDIT OPENING COMMISSION & COMMISSION IN LIEU OF EXCHANGE
- ---------------------------------------------------------------------
First USD50,000.- 1/4%
USD50,001.- to USD200,000.- 1/12%
Balance 1/16%
An arrangement fee of HKD20,000.- will be payable upon our receipt of your
acceptance of this letter. A handling fee in an amount to be mutually agreed
will be payable on each anniversary of the date of this letter if the facilities
are continuing. The fees will be debited to your current account.
You will reimburse the Bank for all legal fees and other expenses incurred in
arranging the above facilities.
AVAILABILITY AND REPAYMENT
The above facilities are subject to the Bank's periodic review, and it is
expressly agreed that they will at all times be available at the sole discretion
of the Bank. Notwithstanding any other provisions contained in this letter or in
any other document, the Bank will at all times have the right to require
immediate payment and/or cash collateralisation of all or part of any sums
actually or contingently owing to it.
<PAGE>
STANDARD CHARTERED
------------------
GO-GRO INDUSTRIES, LTD. PAGE 3
DOCUMENTATION
Before the above facilities may be used, the enclosed copy of this letter must
be signed and returned to us together with a certified copy of appropriate
authorising board resolutions.
The following documentation are held/will also be required:
/bullet/ General Customer Agreement executed by the Company.
/bullet/ All monies debenture with a specific charge over the Company's
plant/machinery and a floating charge over all the assets
including book debts, stock and uncalled capital. Insurance for
the full insurable value is to be arranged through Sedgwick
Limited or other insurers acceptable to the Bank and assigned to
and held by the Bank. If not otherwise paid, we will have the
right to pay the premiums and debit your current account.
/bullet/ Corporate guarantee by Catalina Lighting, Inc., limited to the
principal amount of USD4,000,000.- plus interest and other
charges.
/bullet/ All monies subordination of loan to the Company from Catalina
Lighting Inc. to the Bank in an amount of not less than
USD2,000,000.-
/bullet/ Signed original copies of audited financial statements of the
Company and Catalina Lighting Inc. within 9 months after their
financial year end. Signed original copies of quarterly stock and
debtor list and quarterly management accounts within 60 days
after the end of the relevant accounting period. A signed
original copy of quarterly financial report (i.e. 10Q) of
Catalina Lighting Inc. within 90 days after each relevant period.
Such other information as the Bank may request from time to time.
UNDERTAKINGS
The Company undertakes to the Bank that it will:
/bullet/ Maintain a minimum consolidated net worth at not less than
HKD60,000,000.- after deducting all intangibles including
patents, trademarks, etc.
/bullet/ Not declare any dividends without the prior written conset of the
Bank.
/bullet/ Immediately inform the Bank of any change of the Company's
directors or beneficial shareholders or amendment of its
memorandum or articles of association.
<PAGE>
STANDARD CHARTERED
------------------
GO-GRO INDUSTRIES, LTD. PAGE 4
Please sign the enclosed copy of this letter and return it to the Bank's Credit
Operations at its Kowloon Main Office, 9th Floor, Miramar Tower, 1-23 Kimberley
Road, Tsimshatsui, Kowloon, for the attention of Ms. Miu Yue, within one month
after the date of this letter, after which this offer will lapse. When accepted,
this letter will supersede any previous facility letter which the Bank has
issued to the Company. This letter will be governed by Hong Kong law.
We enclose a set of documents which should also be completed and returned to the
Bank at the above mentioned address. If you have any queries regarding the
completion of the required documents, please contact Ms. Miu Yue, whose
telephone number is 2378-6436. With regard to queries on banking arrangements,
you can contact your Senior Relationship Manager Mr. Kant Tong, whose telephone
number is 2378-6321.
We are pleased to be of service to you and take this opportunity to thank you
for your custom.
Yours faithfully,
For and on behalf of STANDARD CHARTERED BANK
/s/ FRANKIE LAM
- ------------------------------------
Frankie Lam
Senior Credit Documentation Manager
FL/MY/pl
Encl.
Agreed.
For and on behalf of GO-GRO INDUSTRIES LTD.
- ------------------------------------
<PAGE>
STANDARD CHARTERED
------------------
GO-GRO INDUSTRIES LTD.
----------------------
ATTACHMENT REGARDING TRADE FINANCE PRODUCTS
- -------------------------------------------
This attachment forms an integral part of our banking facility letter dated 12th
May 1997.
You may use any product or aggregate of products in any one group up to the
limit shown in the attached banking facility letter.
TRADE FINANCE GROUP 1
- ---------------------
/bullet/ Discrepant Credit Bills Negotiated - with recourse
/bullet/ Purchase of Documents Against Payment Bills of Exchange
/bullet/ Purchase of Documents Against Acceptance Bills of Exchange with
ECIC cover
/bullet/ Back to Back Letters of Credit
/bullet/ Import Letters of Credit - sight and usance
- secured by goods
/bullet/ Loans Against Import
TRADE FINANCE GROUP 2
- ---------------------
/bullet/ Purchase of Documents Against Acceptance Bills of Exchange
without ECIC cover
/bullet/ Quasi Back to Back Letters of Credit - unsecured by goods
/bullet/ Import Letters of Credit - sight and usance
- unsecured by goods
/bullet/ Shipping Guarantees
TRADE FINANCE GROUP 3
- ---------------------
/bullet/ Pre-shipment Loan - i.e. Packing Credit
/bullet/ Acceptance of draft under Import Letters of Credit
/bullet/ Release of Documents Against Acceptance or Trust Receipt
/bullet/ Loans Against Trust Receipt
/bullet/ Post Import Loan
EXHIBIT 10.147
GO-GRO INDUSTRIES LTD.
6/F. KENNING INDUSTRIAL BUILDING, 19 WANG HOI ROAD, KOWLOON BAY, HONG KONG
TEL: 27989128 (12 LINES) FAX: 27980869
EMPLOYMENT AND NON-COMPETE AGREEMENT
THIS EMPLOYMENT AND NON-COMPETE AGREEMENT ("Agreement") is entered into by
and between Wai Check LAU ("Mr. Lau") and Go-Gro Industries Limited, ("GGI"), a
corporation organized under the laws of Hong Kong, as of the 1st day of April,
1997.
WHEREAS GGI, itself and through its subsidiaries and affiliates, is in the
business of the manufacturing and distribution of lighting products, flashlights
and/or cordless hand tools and related products;
WHEREAS in view of Mr. Lau's service as the President of GGI for the last
ten years and his business experience, industry expertise, business contacts,
and his credentials and resources, GGI wishes to secure the continued services
of Mr. Lau and Mr. Lau wishes to commit his services to GGI in such capacity for
the period and on the terms hereinafter set forth;
NOW, THEREFORE, GGI and Mr. Lau mutually agree and convenant as follows:
I. APPOINTMENT
GGI hereby appoints Mr. Lau and Mr. Lau hereby accepts the appointment as
the President of GGI on the terms and conditions hereinafter set forth.
II. TERMS OF EMPLOYMENT
The term of Mr. Lau's employment under this Agreement commenced on April
1, 1997 and shall continue for five years, unless Mr. Lau is terminated pursuant
to the provisions hereunder. This Agreement shall renew for a successive
five-year period upon terms mutually acceptable to GGI and Mr. Lau.
1
<PAGE>
GO-GRO INDUSTRIES LTD.
6/F. KENNING INDUSTRIAL BUILDING, 19 WANG HOI ROAD, KOWLOON BAY, HONG KONG
TEL: 27989128 (12 LINES) FAX: 27980869
III. DUTIES OF MR. LAU
Mr. Lau's duties and responsibilities shall be those customarily
associated with the position of the President and chief executive officer of GGI
or those other duties and responsibilities prescribed by from time to time by
GGI's Board of Directors ("Board"). Mr. Lau agrees to devote his full time and
best efforts to these duties and responsibilities and shall render his services
exclusively to GGI and shall not be engaged in any other business activity or
such other activities as would reasonably conflict with his duties hereunder,
whether or not such activity is pursued for gain, profit, or other pecuniary
advantages.
Such duties and responsibilities shall include, but shall not be limited
to, the purchase, construction and/or lease of any existing or proposed factory
site or factory building in the People's Republic of China ("PRC") or elsewhere
for the manufacturing of lighting products, flashlights and cordless hand tools
and related products. Mr. Lau agrees that he shall not engage in such activity
except for or on behalf of GGI, and that any opportunity to develop such a
building shall be the sole right of GGI. Mr. Lau shall assist GGI as its
President and without additional compensation in securing the purchase,
construction and/or lease of any such factory sites or factory building,
including securing governmental approvals and permits, construction contracts
and architectural plans, quality assurance, planning and coordination of
equipment installation, and oversight of said project.
IV. LOCATION OF EMPLOYMENT.
Except for business travels in the ordinary course of business of GGI
necessitating Mr. Lau's temporary assignment in other countries, Mr. Lau's
location of employment shall either be Hong Kong or southern China.
V. COMPENSATION
The salary to be paid by GGI (a portion of said salary may be paid by
Shenzhen Jiaodianbao Electrical Products Co. Ltd.) to Mr. Lau hereunder for his
services rendered shall be a total of U.S.$206,388 for the year ending March 31,
1998 with an additional fixed bonus of two months salary to be paid pro-rata
over each twelve (12) month period (April 1 - March 31) during the term of this
Agreement. Said salary and fixed bonus shall increase at eight percent (8%) per
annum during the term of this Agreement.
2
<PAGE>
GO-GRO INDUSTRIES LTD.
6/F. KENNING INDUSTRIAL BUILDING, 19 WANG HOI ROAD, KOWLOON BAY, HONG KONG
TEL: 27989128 (12 LINES) FAX: 27980869
In addition, during the term of this Agreement, if GGI's pre-tax income
exceeds Two Million U.S. Dollars (U.S.$2,000,000), Mr. Lau shall be entitled to
a bonus of two (2) months salary (or portion thereof) for each One Million U.S.
Dollars ($1,000,000) of GGI's pre-tax income between Two Million U.S. Dollars
(U.S.$2,000,000) and Four Million U.S. Dollars (U.S.$4,000,000). All bonuses
shall be calculated based upon a twelve (12) month period ending December 31st
(the first bonus period being from January 1, 1997 to December 31, 1997) during
the term of this Agreement (the last bonus period shall be January 1, 2001 to
December 31, 2001). In addition, all such bonuses shall be paid within seventy
five (75) days after the date of the bonus period.
If in any such accounting year, GGI's pre-tax income exceeds Four Million
U.S. Dollars (U.S.$4,000,000), in addition to the bonus as provided in the
preceding sentence, Mr. Lau shall be entitled to a bonus of one (1) months
salary (or portion thereof) for each One Million U.S. ($1,000,000) of GGI's
pre-tax income between Four Million U.S. Dollars (U.S.$4,000,000) and Six
Million U.S. Dollars ($6,000,000).
If in any such accounting year, GGI's pre-tax income exceeds Six
Million U.S. Dollars (U.S.$6,000,000), in addition to the bonuses as provided in
the preceding sentences, Mr. Lau shall be entitled to a bonus of one-half (1/2)
months salary for each One Million U.S. Dollars ($1,000,000) of GGI's pre-tax
income between Six Million U.S. Dollars (U.S.$6,000,000) and Twelve Million U.S.
Dollars ($12,000,000).
If in any such accounting year, GGI's pre-tax income exceeds Twelve
Million U.S. Dollars (U.S.$12,000,000), in addition to the bonuses as provided
in the preceding sentences, Mr. Lau shall be entitled to a bonus of one-fourth
(1/4) months salary for each One Million U.S. Dollars ($1,000,000) of GGI's
pre-tax income that exceeds Twelve Million U.S. Dollars (U.S.$12,000,000).
In the event of termination of employment hereunder, all accrual of
compensation ceases except for any termination compensation specifically
provided for herein. At the option of Mr. Lau, the bonus provided in this
section shall be paid either in cash or in Catalina common stock calculated at
the average closing price on the New York Stock Exchange or other stock
exchanges for the nearest five successive trading days prior to the payment date
of the bonus or at such other rate as mutually agreed to by Mr. Lau and the
Board.
3
<PAGE>
GO-GRO INDUSTRIES LTD.
6/F. KENNING INDUSTRIAL BUILDING, 19 WANG HOI ROAD, KOWLOON BAY, HONG KONG
TEL: 27989128 (12 LINES) FAX: 27980869
NOTWITHSTANDING anything contained in this Agreement, it is agreed that
Mr. Lau's salary and related bonuses, for any employment year, shall not be in
excess of the salary and related bonuses of Catalina Lighting, Inc.'s most
highly compensated Executive Vice President for the same twelve month period. In
calculating the salary and related bonuses of either Mr. Lau or of Catalina's
most highly compensated Executive Vice President for any period, compensation
income resulting from any exercise of the individual's Catalina stock options
shall not be included in said calculation.
VI. FRINGE BENEFITS AND REIMBURSEMENT OF EXPENSES
Mr. Lau shall be entitled to receive such benefits and to participate in
such benefit plans as are generally provided from time to time by the Company to
its senior management employees; provided, however, that nothing contained in
this Section VI shall be construed to obligate the Company to provide any
specific benefits to its employees generally.
In addition to the compensation and benefits listed above, GGI shall
reimburse Mr. Lau for all reasonable, ordinary and necessary business expenses,
including travel, food, lodging and entertainment expenses, to the extent
pre-approved by the Board and actually incurred.
VII. VACATION
Mr. Lau shall be entitled to five weeks' paid vacation during each full
year of employment, with vacation prorated for employment for any period less
than a full year. However, unused vacation time cannot be carried over to the
following year and cannot be taken as additional compensation in lieu of using
the vacation days.
VIII. TERMINATION OF EMPLOYMENT
(a) DEATH In the event of the death of Mr. Lau, this Agreement shall
terminate and GGI shall have no further obligation or duties under this
Agreement except for the payment of any compensation already accrued but
4
<PAGE>
GO-GRO INDUSTRIES LTD.
6/F. KENNING INDUSTRIAL BUILDING, 19 WANG HOI ROAD, KOWLOON BAY, HONG KONG
TEL: 27989128 (12 LINES) FAX: 27980869
unpaid under Section V above and for expenses unreimbursed under Section VI
above.
(b) TERMINATION WITH CAUSE BY GGI Mr. Lau's employment shall be terminated
for cause upon a Board resolution to that effect which termination if so
determined by the Board consistently herewith may take effect immediately. If
the termination is for cause, GGI shall pay Mr. Lau termination compensation
equal to thirty (30) calendar days' salary at the rate in effect on the date of
termination as described in Section V above, together with any compensation
already accrued but unpaid and reimbursement of any proper expenses incurred
before termination but unreimbursed under Section VI. For purpose of this
Agreement, the term "for cause" shall mean any action or any inaction by Mr. Lau
which is reasonably believed by the Board to constitute:
(i) fraud, embezzlement, misappropriation, dishonesty or breach
of trust;
(ii) a felony or moral turpitude;
(iii) material breach or violation of any of the covenants,
agreements and obligations of Mr. Lau set forth in this
Agreement;
(iv) a willful or knowing failure or refusal by Mr. Lau to
perform any or all of his material duties and
responsibilities as an officer of GGI; or
(v) gross negligence by Mr. Lau in the performance of any or
all of his material duties and responsibilities as an
officer of GGI;
provided, however, that in the event that the basis for any termination of Mr.
Lau's employment by GGI as set forth in the Board resolution is any or all of
the definitions of "for cause" set forth in Section VIII(b)(iii) or Section
VIII(b)(iv) of this Agreement, then, in such event, Mr. Lau shall have thirty
(30) days from and after the date of his receipt of such termination notice to
cure the action or inaction specified therein to the reasonable satisfaction of
GGI.
5
<PAGE>
GO-GRO INDUSTRIES LTD.
6/F. KENNING INDUSTRIAL BUILDING, 19 WANG HOI ROAD, KOWLOON BAY, HONG KONG
TEL: 27989128 (12 LINES) FAX: 27980869
(c) TERMINATION WITHOUT CAUSE BY GGI Mr. Lau's employment shall be
terminated without cause upon a Board resolution to that effect, which if so
determined by the Board may take effect immediately. In the event of such
termination, GGI shall pay to Mr. Lau at the regularly accrued payroll rate
termination compensation equal to the annual base salary for the remaining term
of this Agreement or three-year's annual base salary, whichever is less,
together with compensation accrued but unpaid and reimbursement of any proper
expenses incurred before termination but unreimbursed under Section VI.
IX. CONFIDENTIAL INFORMATION AND MATERIALS
(a) During the term of his employment, Mr. Lau will receive, create, or
have access to records, files, correspondence, contracts, memoranda, studies,
analyses, surveys, drawings, documents, microfilms, audio and video recordings,
computer tapes, disks and programs, customer lists, trade secrets, customer
contact lists, contracts, training and operations manuals, reports, research
data and analyses, financial, marketing, and other information and
communications of GGI and/or its customers, prospective customers, or service
providers. Mr. Lau agrees and admits that these confidential information and
materials are the sole property of GGI and/or its customers, prospective
customers, or service providers; are obtained by Mr. Lau in confidence as a
fiduciary; and will not be used in competition with or to the detriment of GGI
or its customers, prospective customers, or service providers, or for any
purpose other than in the furtherance of GGI's business. In furtherance of these
ends, Mr. Lau also agrees not to develop, distribute, or use (except in
furtherance of GGI's business) any materials which are similar to, derived in
whole or in part from, or competitive with said confidential information and
materials.
(b) Mr. Lau will not attempt to or use, directly or indirectly, except
solely in furtherance of GGI's business, any confidential information and
materials of GGI or its customers, prospective customers, or service providers,
nor will Mr. Lau disclose, disseminate, or make available any of this
confidential information and materials to any other person or entity, nor allow
other persons or entities to inspect, copy, or have access to this confidential
information and materials. Mr. Lau agrees to take all necessary and reasonable
precautions to preserve and protect such confidential information and materials.
6
<PAGE>
GO-GRO INDUSTRIES LTD.
6/F. KENNING INDUSTRIAL BUILDING, 19 WANG HOI ROAD, KOWLOON BAY, HONG KONG
TEL: 27989128 (12 LINES) FAX: 27980869
(c) Mr. Lau acknowledges that the common stock of Catalina is publicly
traded and agrees to abide by all Catalina policies, including its insider
trading policy with respect to any purchases or sales of Catalina common stock
by Mr. Lau and purchases and sales of the stock any other company that is
engaged in transactions with Catalina. A copy of said policy is attached hereto
as Exhibit A.
X. NON-COMPETE
(a) For a period of sixty months after the termination of this Agreement
or any renewal hereof, or termination of employment prior to the term of this
Agreement, Mr. Lau, either directly or indirectly, for himself or as employee,
agent or representative for, on behalf of, in concert with or through any other
persons or entities except GGI, shall not (i) engage in the manufacture,
distribution of lighting products or other business relating to the lighting
industry in Asia, Europe or North America; (ii) induce or attempt to induce any
customer or prospective customer of GGI to withdraw, curtail, divert, or cancel
its business with GGI or in any manner modify or fail to enter into any actual
or potential business relationship with GGI; or (iii) hire, solicit, include, or
attempt to hire, solicit or induce any employee, agent, representative, or
consultant of GGI or to render services directly or indirectly to Mr. Lau or
any person or entity with which Mr. Lau has any ownership or business
relationship.
(b) Mr. Lau understands that the provisions of Subsection X(a) above may
limit his ability to earn a livelihood in a business similar to the business of
GGI but nevertheless agrees and hereby acknowledges that the consideration
provided under this Agreement is sufficient to justify the restrictions and
non-compete provisions contained herein.
XI. ENFORCEMENT
Mr. Lau acknowledges that in the event of a breach or threatened breach of
any of the agreements and covenants contained herein, the damage resulting
would be difficult and perhaps impossible to accurately ascertain, and that, in
any event, there would not be an adequate remedy at law to protect against or
remedy any damage, although money damages may be awarded. Mr. Lau further
acknowledges that, because of the sensitivity of customer relationships
7
<PAGE>
GO-GRO INDUSTRIES LTD.
6/F. KENNING INDUSTRIAL BUILDING, 19 WANG HOI ROAD, KOWLOON BAY, HONG KONG
TEL: 27989128 (12 LINES) FAX: 27980869
and confidential information, any such breach or threatened breach would result
in immediate and irreparable injury. Therefore, Mr. Lau agrees that GGI, in
addition to any money damages which may be proved, will be entitled to
immediately restrain and enjoin him from any activity in breach of this
Agreement, if such a breach occurs or is eminent or threatened, without need for
any bond or other security, and further agrees not to assert any claim that an
adequate remedy at law exists for such breach.
XII. ENTIRE AGREEMENT
This Agreement embodies the entire agreement and understanding between the
parties hereto with respect to the subject matter hereof and supersedes all
prior or contemporaneous agreements and understandings, whether or oral or
written, relating to such subject matter.
XIII. AMENDMENT OR MODIFICATION
No change or modification of this Agreement shall be valid or binding upon
the parties hereto, nor shall any waiver of any term or condition in the future
be so binding, unless such change or modification or waiver be in writing and
signed by the parties hereto.
XIV. GOVERNING LAW
This Agreement shall in all respects be governed by and construed under
the laws of Florida.
In the event any suit, action, or other proceeding is brought at law or in
equity, including a suit for declaratory relief, to enforce or interpret the
provisions of this Agreement, the prevailing party shall be entitled to recover
attorney's fees from the other party.
XV. ARBITRATION
At GGI's option, any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, may be settled by arbitration in
accordance
8
<PAGE>
GO-GRO INDUSTRIES LTD.
6/F. KENNING INDUSTRIAL BUILDING, 19 WANG HOI ROAD, KOWLOON BAY, HONG KONG
TEL: 27989128 (12 LINES) FAX: 27980869
with the rules of the Hong Kong International Arbitration Centre. The arbitrator
or arbitrators shall be deemed to possess the powers to issue mandatory orders
and restraining orders in connection with such arbitration; provided, however,
that nothing in this Section shall be construed so as to deny GGI the right and
power to seek and obtain money damages or injunctive relief in a court for any
breach or threatened breach by Mr. Lau.
XVI. SEVERABILITY
All clauses of this Agreement are distinct and severable, and if any
clause shall be held to be invalid, unenforceable, failed for want of
consideration or illegal, the validity and enforceability of the remainder of
this Agreement shall not be affected, and the remainder contains sufficient
consideration to cause the parties to have entered into this Agreement
notwithstanding the severed clause or clauses.
The waiver by either party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent breach
by any party.
XVII. EFFECT OF HEADINGS
Headings are for convenience only and are not to be construed as a part of
the Agreement.
XVIII. SET OFF
In the event of Mr. Lau's breach of any provision hereof, GGI shall be
entitled, at its option and not in lieu of any other remedies to which it may be
entitled, to set off any amounts due GGI or any affiliate of GGI against any
amount due and payable by GGI or any subsidiary or affiliate of GGI to Mr. Lau
pursuant to this Agreement or otherwise.
XIX. IRREVOCABLE PROXY
Mr. Lau has granted and will continue to abide by an irrevocable proxy
appointing Catalina Asia, a general partnership organized under the laws of Hong
Kong, and its successors, of which GGI is a wholly-owned subsidiary, as
9
<PAGE>
GO-GRO INDUSTRIES LTD.
6/F. KENNING INDUSTRIAL BUILDING, 19 WANG HOI ROAD, KOWLOON BAY, HONG KONG
TEL: 27989128 (12 LINES) FAX: 27980869
his irrevocable proxy for the purposes of voting or acting by written consent of
all the shares of Catalina common stock which is legally or beneficially owned
by him. No provision of this Employment and Non-Compete Agreement shall prevent
Mr. Lau from purchasing and/or selling the Common Stock of Catalina Lighting,
Inc,; however, Mr. Lau agrees to abide by Catalina's policies with respect to
insider trading (per Section IX(c) of this Agreement) and all applicable federal
security laws of the United States.
XX. ASSIGNABILITY
This agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, representatives, successors, and
assigns, except that Mr. Lau may not assign any of this rights hereunder to any
party except with the prior written consent of the Board in the form of a Board
resolution.
XXI. ACKNOWLEDGMENT
Mr. Lau acknowledges that he has consulted with or has had the opportunity
to consult with independent counsel of his own choice concerning this Agreement
and has been advised to do so by GGI, and that he understands this Agreement and
has entered into it freely based on his own judgment.
IN WITNESS WHEREOF this Agreement has been entered by the parties hereto
as of the day and year first above written.
GO-GRO INDUSTRIES LIMITED WAI CHECK LAU
/s/ ILLEGIBLE /s/ WAI CHECK LAU
- ------------------------------- ----------------------------
Authorized Signatory Wai Check LAU
Director
10
EXHIBIT 11
<TABLE>
<CAPTION>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
EXHIBIT 11
SCHEDULE OF COMPUTATION OF PRIMARY EARNINGS (LOSS) PER SHARE
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
---------------------------------- -------------------------------
1997 1996 1997 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ 822,000 $ 18,000 $ (4,144,000) $ 971,000
Interest on debt assumed to be repaid ,net $ 50,000 $ - $ - $ 25,000
of income taxes
----------- ------------ ----------- -----------
Net income (loss) for primary earnings
(loss) per common share $ 872,000 $ 18,000 $(4,144,000) $ 996,000
=========== ============ =========== ===========
Weighted average number of common shares
outstanding during the period 7,069,000 7,016,000 7,067,000 7,002,000
Common equivalent shares determined
using the "Modified Treasury Stock"
method representing shares issuable upon
exercise of stock options and warrants 879,000 800,000 - 754,000
----------- ------------ ----------- -----------
Weighted average number of shares used in
calculation of primary earnings (loss) per share 7,948,000 7,816,000 7,067,000 7,756,000
=========== ============ =========== ===========
Primary earnings (loss) per common share $ 0.11 $ - $ (0.59) $ 0.13
=========== ============ =========== ===========
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
EXHIBIT 11
(CONTINUED)
SCHEDULE OF COMPUTATION OF FULLY DILUTED EARNINGS (LOSS) PER SHARE
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
---------------------------------- --------------------------------
1997 1996 1997 1996
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net income (loss) $ 822,000 $ 18,000 $ (4,144,000) $ 971,000
Interest on debt assumed to be repaid, net of
income taxes 45,000 - - 20,000
Interest on convertible subordinated notes,
net of income taxes 103,000 - - -
Net income (loss) for fully diluted earnings
----------- ------------ ------------ -----------
(loss) per common share $ 970,000 $ 18,000 $ (4,144,000) $ 991,000
=========== ============ ============ ===========
Weighted average number of common shares
outstanding during the period 7,069,000 7,016,000 7,067,000 7,002,000
Common equivalent shares determined
using the "Modified Treasury Stock"
method representing shares issuable upon
exercise of stock options and warrants 879,000 800,000 - 754,000
Shares issuable upon conversion of convertible
subordinated notes 1,040,000 - - -
----------- ------------ ----------- -----------
Weighted average number of shares used in
calculation of fully diluted earnings (loss)
per share 8,988,000 7,816,000 7,067,000 7,756,000
=========== ============ ============ ===========
Fully diluted earnings (loss) per common share $ 0.11 $ - $ (0.59) $ 0.13
=========== ============ ============ ===========
</TABLE>
NOTE
Subordinated notes convertible into 1,040,000 common shares were not included
for all periods in 1996 and for the nine months ended June 30, 1997 because
their effect is anti-dilutive.
<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> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 30,406
<ALLOWANCES> 10,358
<INVENTORY> 38,462
<CURRENT-ASSETS> 77,297
<PP&E> 29,246
<DEPRECIATION> 0
<TOTAL-ASSETS> 123,387
<CURRENT-LIABILITIES> 34,145
<BONDS> 9,195
0
0
<COMMON> 71
<OTHER-SE> 39,810
<TOTAL-LIABILITY-AND-EQUITY> 123,387
<SALES> 146,363
<TOTAL-REVENUES> 146,363
<CGS> 122,977
<TOTAL-COSTS> 122,977
<OTHER-EXPENSES> 27,525
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,965
<INCOME-PRETAX> (7,071)
<INCOME-TAX> (2,927)
<INCOME-CONTINUING> (4,144)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,144)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
</TABLE>
