UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended DECEMBER 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to ___________________
Commission file number 1-9917
CATALINA LIGHTING, INC
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(Exact name of registrant as specified in its chapter)
FLORIDA
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(State or other jurisdiction of incorporation or organization)
59-1548266
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(I.R.S. Employer Identification Number)
18191 NW 68TH AVENUE, MIAMI, FLORIDA 33015
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(Address of principal executive offices) (Zip Code)
(305) 558-4777
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Registrant's telephone number, including area code
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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 FEBRUARY 5, 1998: 7,109,069 SHARES.
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------
Condensed consolidated balance sheets -
December 31, 1997 and September 30, 1997...........................3-4
Condensed consolidated statements of operations -
Three months ended December 31, 1997 and 1996......................5
Condensed consolidated statements of cash flows -
Three months ended December 31, 1997 and 1996......................6-7
Notes to condensed consolidated financial statements.................8-11
Management's discussion and analysis of financial
condition and results of operations................................12-17
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings............................................18
ITEM 4 Submission of Matters to a Vote of Security Holders..........18
ITEM 6 Exhibits and Reports on Form 8-K.............................18
2
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30,
ASSETS 1997 1997
----------- -------------
(Unaudited) *
Current assets
Cash and cash equivalents $ 806 $ 1,847
Accounts receivable, net of allowances
of $8,139 and $8,314, respectively 19,043 24,169
Inventories 32,401 34,612
Income taxes receivable 2,683 2,380
Other current assets 6,076 5,406
-------- --------
Total current assets 61,009 68,414
Property and equipment, net 29,580 29,969
Restricted cash equivalents and short-term
investments 2,005 1,883
Goodwill, net 11,359 11,473
Other assets 4,706 4,842
======== ========
$108,659 $116,581
======== ========
(continued on page 4)
3
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997
------------- -------------
(Unaudited) *
Current liabilities
Notes payable - credit lines $ 4,919 $ 5,574
Accounts and letters of credit payable 12,865 18,099
Current maturities of bonds payable 980 970
Current maturities of other long-term debt 549 476
Other current liabilities 5,527 5,586
-------- --------
Total current liabilities 24,840 30,705
Notes payable - credit lines 19,350 21,000
Convertible subordinated notes 7,600 7,600
Bonds payable - real estate related 9,110 9,195
Other long-term debt 1,866 1,942
Other liabilities 5,132 5,082
-------- --------
Total liabilities 67,898 75,524
-------- --------
Commitments and contingencies
Stockholders' equity
Common stock, issued and outstanding 7,109,069
shares and 7,094,569 shares, respectively 71 71
Additional paid-in capital 26,396 26,311
Retained earnings 14,294 14,675
-------- --------
Total stockholders' equity 40,761 41,057
-------- --------
$108,659 $116,581
======== ========
*Condensed from audited financial statement
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
DECEMBER 31,
------------------------
1997 1996
--------- ---------
Net sales $ 36,983 $ 45,095
Cost of sales 30,408 37,138
--------- ---------
Gross profit 6,575 7,957
Selling, general and administrative
expenses 6,333 7,083
--------- ---------
Operating income 242 874
--------- ---------
Other income (expenses)
Interest expense (1,024) (843)
Other income (expenses) 294 (2)
--------- ---------
Total other income (expenses) (730) (845)
--------- ---------
Income (loss) before income taxes (488) 29
Income tax benefit (provision) 107 (7)
--------- ---------
Net income (loss) $ (381) $ 22
========= =========
Weighted average number of
shares outstanding
Basic 7,105 7,064
Diluted 7,105 7,560
Earnings (loss) per share
Basic $ (0.05) $ --
Diluted $ (0.05) $ --
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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<TABLE>
<CAPTION>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1997 1996
-------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (381) $ 22
Adjustments for non-cash items 1,129 2,101
Change in assets and liabilities 1,432 (1,153)
------- -------
Net cash provided by (used in) operating activities 2,180 970
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net (721) (2,257)
Payments for acquisitions -- (15)
Decrease in restricted cash equivalents and
short-term investments 103 --
------- -------
Net cash provided by (used in) investing activities (618) (2,272)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 57 3
Payments on other liabilities (55) (182)
Payments on bonds (75) (70)
Proceeds from notes payable - credit lines 6,500 6,800
Payments on notes payable - credit lines (8,150) (5,311)
Net proceeds from (payments on) notes payable - credit lines
due on demand (655) (414)
Sinking fund redemption payments on bonds (225) (225)
------- -------
Net cash provided by (used in) financing activities (2,603) 601
------- -------
Net increase (decrease) in cash and cash equivalents (1,041) (701)
Cash and cash equivalents at beginning of period 1,847 1,766
------- -------
Cash and cash equivalents at end of period $ 806 $ 1,065
======= =======
</TABLE>
(continued on page 7)
6
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CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
Cash paid for:
Interest $788 $761
Income taxes $ 78 $229
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the three months ended December 31, 1996, total capital lease obligations
incurred for new office, machinery and warehouse equipment aggregated $607,000.
The accompanying notes are an integral part of these condensed onsolidated
financial statements.
7
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CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
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 on Form 10-K for the fiscal year ended September 30, 1997 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 months ended December 31, 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.
Earnings (loss) per Share
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS 128") for the quarter ended December 31, 1997 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. Upon adoption, earnings per share
data for prior periods are required to be restated. Accordingly, the earnings
per share data for the quarter ended December 31, 1996 presented herein has been
restated.
2. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ --------------
(In thousands)
Raw materials $ 3,712 $ 3,569
Work-in-progress 892 1,006
Finished goods 27,797 30,037
======= =======
Total Inventories $32,401 $34,612
======= =======
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
8
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
(UNAUDITED)
3. PROPERTY AND EQUIPMENT, NET (CONTINUED
$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
required to be completed (and was completed) by April 1, 1997 and the remainder
by December 31, 1999. The Company plans to file an application to extend the
completion deadline of December 1999. The total cost for this project is
estimated at $15.5 million (of which $10.4 million had been expended as of
December 31, 1997), and includes approximately $1.0 million for a Municipal
Coordination Facilities Fee (MCFF). The MCFF is based upon the square footage to
be constructed. The agreement calls for the MCFF to be paid in installments
beginning in January 1997. A 162,000 square foot factory, a 77,000 square foot
warehouse and a 60,000 square foot dormitory became operational in June 1997.
4. 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 $364,000
provision for post-judgment interest was recorded through December 31, 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 tortuous
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. Subsequently, the
Federal Court remanded the counts alleging interference with contractual
relations and prospective business relations to the Massachusetts Superior
Court, City of Worcester. Plaintiff has filed an appeal of the Federal Court's
dismissal of the state unfair competition and unjust enrichment claims with the
federal appeals court. 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 and
the outcome of this case cannot presently be determined. No provision for any
liability that may result from this litigation has been recorded in the
accompanying condensed consolidated financial statements.
9
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
(UNAUDITED)
4. CONTINGENCIES (CONTINUED)
On December 17, 1996 White Consolidated Industries, Inc. ("White"), which has
acquired certain limited trademark rights from Westinghouse Electric Corp.
("Westinghouse") to market certain household products under the
White-Westinghouse trademark, notified the Company of a lawsuit against
Westinghouse and the Company filed in the United States District Court, for the
Northern District of Ohio. The lawsuit challenged the Company's right to use the
Westinghouse trademarks on its lighting products and alleges trademark
infringement. On December 24, 1996, Westinghouse and the Company served a
Complaint and Motion for Preliminary Injunction against White, AB Electrolux,
Steel City Vacuum Co., Inc., Salton/Maxim Housewares, Inc., Newtech Electronics
Corp., and Windmere Durable Holdings, Inc. in the United States District Court,
Eastern District of Pennsylvania, Case No. 96-2294 alleging that the defendants
had violated Westinghouse's trademark rights, breached the Agreement between
Westinghouse and White and sought an injunction to enjoin White against
interference with their contractual arrangements. In October 1997, the cases
were consolidated in the Pennsylvania case and on November 7, 1997 White filed a
Counterclaim and Third Party Claims against Westinghouse, Catalina and Minami
International Corporation alleging trademark infringement, trademark dilution,
false designation of origin, false advertising and unfair competition and
seeking injunctive relief and damages. Both the Company and Westinghouse
vigorously dispute White's allegations. 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, accordingly no provision for this matter has been
recorded in the financial statements. Discovery is proceeding and the case could
be tried in late 1998.
The Company has recently received a number of claims relating to halogen
torchieres sold by the Company to various retailers. While the Company is still
in the process of evaluating these claims, management does not currently believe
they will result in a material uninsured liability to the Company.
The Company is also a defendant in other legal proceedings arising in the course
of business. In the opinion of management the ultimate resolution of these other
legal proceedings will not have a material adverse effect on the financial
position or annual results of operations of the Company.
OTHER
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failure or
miscalculations. The Company is in the process of identifying and assessing the
systems that could be affected by the Year 2000 Issue and is developing an
implementation plan to resolve the issue. The Company expects to complete the
assessment, formalize its plan for corrective action and estimate the potential
incremental costs required to address this issue by December 1998. The Company
presently believes that, with modifications to existing software and conversions
to new software, the Year 2000 problem will not pose significant operational
problems for the Company's computer systems as so modified and converted.
During the fiscal year ended September 30, 1997, approximately 94% of the total
products either purchased or manufactured by the Company were imported from
China. 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.
10
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. SFAS
No. 130 establishes standards for the 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 interim 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, with disclosures in interim financial
statements not required in the year of adoption. The Company has not determined
the effects, if any, that SFAS No. 131 will have on the disclosures in its
consolidated financial statements.
11
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, including without limitation expectations
as to future sales and profitability, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company and its subsidiaries to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, but are not limited to,
the following: the highly competitive nature of the lighting industry; reliance
on certain key customers; consumer demand for lighting products; dependence on
imports from China; general economic and business conditions; operating costs;
advertising and promotional efforts; brand awareness; the existence or absence
of adverse publicity; acceptance of new product offerings; changing trends in
customer tastes; changes in business strategy; availability, terms and
deployment of capital; availability and cost of raw materials and supplies; the
costs and other effects of legal and administrative proceedings; and other
factors referenced in this Form 10-Q and in the Company's annual report on Form
10-K for the year ended September 30, 1997. The Company will not undertake and
specifically declines any obligation to update or correct any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
In the following comparison of the results of operations, the three
months ended December 31, 1997 and 1996 are referred to as 1997 and 1996,
respectively.
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
Net sales and gross profit for 1997 were $37 million and $6.6 million,
respectively, as compared to $45.1 million and $8.0 million, respectively, for
1996. The Company incurred a net loss of $381,000 ($.05 per share) in 1997
compared to net income of $22,000 ($.00 per share) in 1996.
The $8.1 million decrease in net sales from the prior year reflects a
decrease in the average selling price per unit and, to a lesser extent, a
decrease in units sold. Lamp sales decreased by $6.2 million and net sales for
the Company's other principal line of products, lighting fixtures, decreased by
$1.9 million. Lamps and lighting fixtures accounted for 59% and 41%,
respectively, of net sales in 1997 compared to 63% and 37% in 1996,
respectively. In 1997 and 1996, Home Depot accounted for 26.1% and 13.8%,
respectively, of the Company's net sales. Approximately $3.5 million of the
sales decline is attributable to a decrease in unit sales of one product class,
halogen torchieres. The sales decline for the halogen torchieres is attributed
in part to media attention focused on incidents of fire associated with this
product. Current versions of the halogen torchiere sold by the Company
incorporate new safety devices exceeding the new safety requirements for this
product recently promulgated by Underwriters Laboratory. During fiscal 1998 the
Company expects to introduce new versions of the torchiere incorporating new
technologies to address the declining sales of this product category. However,
there can be no assurance these versions will be as successful as the previous
models and torchiere sales for the balance of fiscal 1998 are not expected to
equal fiscal 1997 sales levels. Another $2.1 million of the decline related to
sales of Meridian lamps and "Hugger" flashlights, which have been discontinued.
Management believes the remainder of the sales decrease is due to a variety of
factors including the consolidation of the customer base, delayed new product
placement in Europe and the purchasing patterns of the Company's customers in
general, which can vary from quarter to quarter. Sales during the second quarter
of fiscal 1998 could continue to be adversely affected by these factors.
Gross profit decreased by $1.4 million in 1997 due to lower overall
sales. The gross profit percentage of 17.8% for 1997 represented an increase
from 1996, which was 17.2% after eliminating the impact of the $2.1 million in
sales of discontinued products. The slight improvement in the gross profit
percentage from 1996 to 1997 was attributable to improved margins earned on
direct sales.
Many of the Company's major customers (most notably Home Depot and
Kmart) are currently purchasing from the Company primarily on a direct basis,
whereby the merchandise is shipped directly from the factory to the customer,
rather than from the Company's warehouses. Approximately 63% of the Company's
sales in 1997 were made on a direct basis as compared to 54% in 1996. Sales made
by the Company on
12
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
a direct basis typically generate lower margins than sales from the Company's
warehouses, and a higher relative proportion of direct sales could negatively
affect the gross profit percentage. The amount of the Company's sales made on a
direct basis is dependent upon customer buying preferences, which are influenced
by a number of factors that vary from customer to customer. The Company believes
that the majority of any future sales growth will most likely be comprised of
direct sales made to the Company's larger customers.
Selling, general and administrative expenses ("SG&A") were 17.1% of
sales in 1997 compared to 15.7% in 1996. The increase as a percentage of sales
is attributable to the decline in sales. The $750,000 decrease in SG&A is
primarily attributable to a decrease in professional fees of $1.2 million (1996
included approximately $900,000 in legal fees for patent litigation) and
$148,000 in SG&A incurred by Meridian which ceased operations in June 1997.
These decreases were partially offset by increased costs in the Orient to
support the Company's growth and restructuring of operations ($272,000) and
higher U.S. personnel costs ($247,000).
Interest expense increased to $1 million in 1997 from $843,000 in 1996
reflecting a $106,000 provision for interest related to the $4.3 million adverse
jury verdict presently under appeal (see Note 4 of Notes to Condensed
Consolidated Financial Statements) and increased borrowings to finance capital
expenditures.
The effective income tax rates for 1997 and 1996 were 21.9% and 24.1%,
respectively. The lower effective tax rate for 1997 reflects the projected
impact for the fiscal year ended September 30, 1998 of high proportionate
foreign income, which is taxed at a significantly lower rate than U.S. income.
Other income for 1997 includes a gain of $164,000 on the sale of
marketable equity securities. The remainder consists primarily of rental income
on the Meridian facility.
MERIDIAN
The Company ceased manufacturing operations and closed its Meridian Lamps
facility in June 1997. Net sales for 1996 were $696,000, cost of sales was $1.1
million and the pretax loss was $571,000.
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.
CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
The Company's operating, investing and financing activities resulted in
a net decrease in cash and cash equivalents of $1 million from September 30,
1997 to December 31, 1997.
Net cash of $2.2 million was provided by operating activities and used
primarily to pay for capital expenditures aggregating $721,000 and to pay down
credit lines. Capital expenditures included $530,000 in costs incurred by Go-Gro
for the purchase of machinery, molds and equipment.
13
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CREDIT AND LEASING FACILITIES, CONVERTIBLE SUBORDINATED NOTES, MORTGAGE 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 on the non-revolving loan which
commenced on June 1, 1997. 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% at December 31, 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 December 31, 1997, the
Company had used $36.4 million under its credit facility and $602,000 was
available for additional borrowings under the borrowing base calculation.
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 bear interest at the Canadian prime rate plus .5% (6.5% at December 31,
1997). At December 31, 1997, borrowings amounted to U.S. $1.1 million and U.S.
$883,000 million was available for additional borrowings under the borrowing
base calculation. 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%
(10% at December 31, 1997). At December 31, 1997, there were no borrowings under
this facility and $3.5 million was available for borrowings. 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
limits the payment of dividends that may be paid to the Company but does not
limit advances or loans from Go-Gro to the Company.
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 (6.15% at December 31, 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 an
$8.9 million direct pay letter of credit which is not part of the Company's
credit line.
14
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CREDIT AND LEASING FACILITIES, CONVERTIBLE SUBORDINATED NOTES, MORTGAGE 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 and leased the facility to a
non-manufacturing entity and in August 1997 made a $1.5 million payment to
escrow on the bonds. The Company plans to redeem 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
$621,000 was available at December 31, 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
December 31, 1997.
The Company financed its corporate headquarters in Miami, Florida with
a loan payable monthly through 1999, based on a 15 year amortization schedule,
with a balloon payment in 1999, bearing interest at 8% and secured by a mortgage
on the land and building.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was
issued. SFAS No. 130 establishes standards for the 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 interim 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, with disclosures in interim financial statements not required in the year
of adoption. The Company has not determined the effects, if any, that SFAS No.
131 will have on the disclosures in its consolidated financial statements.
15
<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 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. 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
required to be completed (and was completed) by April 1, 1997 and the remainder
by December 31, 1999. The Company plans to file an application to extend the
completion deadline of December 1999. The total cost for this project is
estimated at $15.5 million (of which $10.4 million had been expended as of
December 31, 1997), and includes approximately $1.0 million for a Municipal
Coordination Facilities Fee (MCFF). The MCFF is based upon the square footage to
be constructed. The agreement calls for the MCFF to be paid in installments
beginning in January 1997. A 162,000 square foot factory, a 77,000 square foot
warehouse and a 60,000 square foot dormitory became 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. Net sales of Westinghouse branded products amounted to $1.7
million and $1.1 million for the quarter ended December 31, 1997 and 1996,
respectively.
On December 17, 1996 White Consolidated Industries, Inc. ("White"),
which has acquired certain limited trademark rights from Westinghouse Electric
Corp. ("Westinghouse") to market certain household products under the
White-Westinghouse trademark, notified the Company of a lawsuit against
Westinghouse and the Company filed in the United States District Court, for the
Northern District of Ohio. The lawsuit challenged the Company's right to use the
Westinghouse trademarks on its lighting products and alleges trademark
infringement. On December 24, 1996, Westinghouse and the Company served a
Complaint and Motion for Preliminary Injunction against White, AB Electrolux,
Steel City Vacuum Co., Inc., Salton/Maxim Housewares, Inc., Newtech Electronics
Corp., and Windmere Durable Holdings, Inc. in the United States District Court,
Eastern District of Pennsylvania, Case No. 96-2294 alleging that the defendants
had violated Westinghouse's trademark rights, breached the Agreement between
Westinghouse and White and sought an injunction to enjoin White against
interference with their contractual arrangements. In October 1997, the cases
were consolidated in the Pennsylvania case and on November 7, 1997 White filed a
Counterclaim and Third Party Claims against Westinghouse, Catalina and Minami
International Corporation alleging trademark infringement, trademark dilution,
false designation of origin, false advertising and unfair competition and
seeking injunctive relief and damages. Both the Company and Westinghouse
vigorously dispute White's allegations. 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, accordigly no provision for this matter has been
recorded in the financial statements. Discovery is proceeding and the case could
be tried in late 1998.
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations. The Company is in the process of identifying and
assessing the systems that could be affected by the Year 2000 Issue and is
developing an implementation plan to resolve the issue. The Company expects to
complete the assessment, formalize its plan for corrective action, and estimate
the potential incremental costs required to address this issue by December 1998.
The Company presently believes that, with modifications to existing software and
conversions to new software, the Year 2000 problem will not pose significant
operational problems for the Company's computer systems as so modified and
converted.
16
<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, 1997, approximately 94% of
the total products either purchased or manufactured by the Company were imported
from China. 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.
ECONOMIC CONDITIONS
During late 1997 various countries in Southeast Asia (including
Thailand, South Korea, Malaysia, the Philippines and Indonesia) were involved in
an emerging crisis impacting their economies and characterized by currency
devaluations, rising interest rates, deteriorating economic growth and declining
capital markets. The Company does not conduct business with, or have a
significant investment in, any of these countries. However, this crisis could
have serious adverse repercussions on the financial stability of all countries
in the region, including Hong Kong and China, and has implications for the
global financial system as well, including the United States. The Company is
presently unable to determine what impact, if any, this Asian economic crisis
will have on its business.
17
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11 Schedule of Computation of Diluted Earnings (loss) per Share
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
18
<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/ ROBERT HERSH
----------------
Robert Hersh
Chief Executive Officer and
President
/s/ DAVID W. SASNETT
--------------------
David W. Sasnett
Chief Financial Officer and
Chief Accounting Officer
Date: February 13, 1998
19
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
11 Schedule of Computation of Diluted Earnings (loss) per Share
27 Financial Data Schedule
<TABLE>
<CAPTION>
EXHIBIT 11
CATALINA LIGHTING, INC. AND SUBSIDIARIES
EXHIBIT 11
SCHEDULE OF COMPUTATION OF DILUTED EARNINGS (LOSS) PER SHARE
THREE MONTHS ENDED
DECEMBER 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net income (loss) for diluted earnings per share $ (381,000) $ 22,000
=========== ===========
Weighted average number of common shares
outstanding during the period 7,105,000 7,064,000
Add: common equivalent shares determined
using the Treasury Stock method
representing shares issuable upon exercise
of stock options and warrants and shares
issuable under contractual agreements -- 496,000
----------- -----------
Weighted average number of shares
used in calculation of diluted earnings per share 7,105,000 7,560,000
=========== ===========
Diluted earnings (loss) per share $ (0.05) $ --
=========== ===========
</TABLE>
NOTE
Subordinated notes convertible into 1,040,000 common shares were not included
for 1997 and 1996 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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 806
<SECURITIES> 0
<RECEIVABLES> 19,043
<ALLOWANCES> 8,139
<INVENTORY> 32,401
<CURRENT-ASSETS> 61,009
<PP&E> 29,580
<DEPRECIATION> 0
<TOTAL-ASSETS> 108,659
<CURRENT-LIABILITIES> 24,840
<BONDS> 9,110
0
0
<COMMON> 71
<OTHER-SE> 40,690
<TOTAL-LIABILITY-AND-EQUITY> 108,659
<SALES> 36,983
<TOTAL-REVENUES> 36,983
<CGS> 30,408
<TOTAL-COSTS> 30,408
<OTHER-EXPENSES> 6,333
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,024
<INCOME-PRETAX> (488)
<INCOME-TAX> (107)
<INCOME-CONTINUING> (381)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (381)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
