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, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 1-9917
CATALINA LIGHTING, INC
----------------------
(Exact name of registrant as specified in its chapter)
FLORIDA
-------
(State or other jurisdiction of incorporation or organization)
59-1548266
----------
(I.R.S. Employer Identification Number)
18191 NW 68TH AVENUE, MIAMI, FLORIDA 33015
------------------------------------------
(Address of principal executive offices) (Zip Code)
(305) 558-4777
--------------
Registrant's telephone number, including area code
----------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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 4, 2000: 6,929,346 SHARES.
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE NO.
--------
Condensed consolidated balance sheets -
December 31, 1999 and September 30, 1999................................................... 3
Condensed consolidated statements of operations -
Three months ended December 31, 1999 and 1998............................................. 5
Condensed consolidated statements of cash flows -
Three months ended December 31, 1999 and 1998............................................. 6
Notes to condensed consolidated financial statements........................................ 8
Management's discussion and analysis of financial
condition and results of operations....................................................... 13
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings................................................................... 19
ITEM 4 Submission of Matters to a Vote of Security Holders................................. 19
ITEM 6 Exhibits and Reports on Form 8-K.................................................... 19
</TABLE>
2
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, SEPTEMBER 30,
1999 1999
-------- --------
(Unaudited) *
<S> <C> <C>
Current assets
Cash and cash equivalents $ 9,206 $ 7,253
Restricted cash equivalents and short-term investments 2,107 1,721
Accounts receivable, net of allowances
of $8,234 and $8,591, respectively 13,980 20,150
Inventories 29,235 28,668
Other current assets 5,319 6,435
-------- --------
Total current assets 59,847 64,227
Property and equipment, net 24,056 24,737
Goodwill, net 10,447 10,561
Other assets 3,029 2,372
-------- --------
$ 97,379 $101,897
======== ========
</TABLE>
(continued on page 4)
3
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1999
--------- ---------
(Unaudited) *
<S> <C> <C>
Current liabilities
Accounts and letters of credit payable $ 12,652 $ 14,939
Notes payable - credit lines 1,281 2,200
Note payable - other 1,406 --
Current maturities of subordinated notes 2,500 2,500
Current maturities of bonds payable-real estate related 900 2,210
Current maturities of other long-term debt 484 487
Other current liabilities 5,505 6,437
--------- ---------
Total current liabilities 24,728 28,773
Notes payable - credit lines 11,200 12,150
Convertible subordinated notes 5,100 5,100
Bonds payable - real estate related 6,000 6,000
Other long-term debt 1,404 1,524
Other liabilities 897 293
--------- ---------
Total liabilities 49,329 53,840
Commitments and contingencies
Stockholders' equity
Common stock, issued and outstanding 7,401
shares and 7,373 shares, respectively 74 74
Additional paid-in capital 27,012 26,927
Retained earnings 22,803 22,266
Treasury stock, 502 shares and 378, respectively (1,839) (1,210)
--------- ---------
Total stockholders' equity 48,050 48,057
--------- ---------
$ 97,379 $ 101,897
========= =========
</TABLE>
*Condensed from audited financial statements
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1999 1998
--------- ---------
Net sales $ 43,208 $ 42,803
Cost of sales 34,313 34,674
--------- ---------
Gross profit 8,895 8,129
Selling, general and administrative
expenses 6,781 6,811
Executive management reorganization 788 --
--------- ---------
Operating income 1,326 1,318
--------- ---------
Other income (expenses):
Interest expense (544) (729)
Other income (expenses) 7 112
--------- ---------
Total other income (expenses) (537) (617)
--------- ---------
Income before income taxes 789 701
Income tax provision (252) (198)
--------- ---------
Net income $ 537 $ 503
========= =========
Weighted average number of
shares outstanding
Basic 6,986 7,171
Diluted 7,745 7,282
Earnings per share
Basic $ 0.08 $ 0.07
Diluted $ 0.07 $ 0.07
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 537 $ 503
Adjustments for non-cash items 2,171 2,132
Change in assets and liabilities 2,520 403
-------- --------
Net cash provided by (used in) operating activities 5,228 3,038
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net (383) (554)
Decrease (increase) in restricted cash equivalents and
short-term investments (161) 112
-------- --------
Net cash provided by (used in) investing activities (544) (442)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 85 16
Payments to repurchase common stock (629) (153)
Payments on other long term debt and other liabilities (189) (189)
Payments on bonds payable (1,310) (80)
Proceeds from notes payable - credit lines 11,700 10,900
Payments on notes payable - credit lines (12,650) (11,050)
Proceeds from note payable - other 1,406 --
Net proceeds from (payments on) notes payable - credit lines
due on demand (919) (28)
Sinking fund redemption payments on bonds (225) (225)
-------- --------
Net cash provided by (used in) financing activities (2,731) (809)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,953 1,787
Cash and cash equivalents at beginning of period 7,253 1,790
-------- --------
Cash and cash equivalents at end of period $ 9,206 $ 3,577
======== ========
</TABLE>
(continued on page 7)
6
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1999 1998
------- ------
(In thousands)
Cash paid (received) for:
Interest $ 443 $ 487
Income taxes $ (603) $1,334
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
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, 1999 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, the condensed consolidated financial statements
include all adjustments (which consist mostly of normal, recurring accruals)
considered necessary for a fair presentation. The results of operations for the
three months ended December 31, 1999 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.
COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income ("SFAS 130")," which
establishes standards for reporting and display of comprehensive income and its
components. The Company's net income for the three months ended December 31,
1999 and 1998 equals comprehensive income for the same periods.
2. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, SEPTEMBER 30,
1999 1999
------- -------
(In thousands)
Raw materials $ 3,595 $ 4,050
Work-in-progress 804 932
Finished goods 24,836 23,686
------- -------
Total inventories $29,235 $28,668
======= =======
3. PROPERTY AND EQUIPMENT, NET
Shenzhen Jiadianbao Electrical Products Co., Ltd. ("SJE"), a cooperative joint
venture subsidiary of Go-Gro, and the Bureau of National Land Planning Bao-An
Branch of Shenzhen City entered into a Land Use Agreement covering approximately
467,300 square feet in Bao-An County, Shenzhen City, People's Republic of China
on April 11, 1995. The agreement provides SJE with the right to use the above
land until January 18, 2042. The land use rights are non-transferable. Under the
terms of the SJE joint venture agreement, ownership of the land and buildings of
SJE is divided 70% to Go-Gro and 30% to the other joint venture partner. Land
costs, including the land use rights, approximated $2.6 million of which Go-Gro
has paid its 70% proportionate share of $1.8 million. Under the terms of this
agreement, as amended, SJE is obligated to construct approximately 500,000
square feet of factory buildings and 211,000 square feet of dormitories and
offices, of which 40% was required to be and was completed by April 1, 1997. The
remainder of the construction was to be completed by December 31, 1999; however,
the Company has exercised its rights to extend the construction date to December
31, 2000 by incurring an extension fee. The total cost for this project is
estimated at $16.5 million (of which $10.2 million had been expended as of
December 31, 1999) and includes approximately $1 million for a Municipal
Coordination Facilities Fee (MCFF). The MCFF is based upon the square footage to
be constructed. The agreement calls for the MCFF to be paid in installments
beginning in January 1997 of which $441,000 had been accrued as of December 31,
1999. A 162,000 square foot factory, 77,000 square foot warehouse and 60,000
square foot dormitory became fully operational in June 1997. SJE began
construction of the final phase of this facility in December 1999.
8
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. NOTE PAYABLE - OTHER
In October 1999, the Company borrowed 11.7 million in Chinese Renminbi
(approximately U.S. $1.4 million) from a Chinese Bank. The loan bears interest
at 5.85%, payable monthly, and repayment is due in October 2000. The agreement
requires the Company to maintain U.S. $1.5 million in collateral.
5. COMMITMENT
In January 2000, the Company renewed a consulting agreement for a two-year
period beginning April 1, 2000, for an annual fee of $140,000 payable monthly.
6. SEGMENT INFORMATION
Information on operating segments and a reconciliation to income before income
taxes for the three months ended December 31, 1999 and 1998 are as follows (in
thousands):
Net Sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1999 1998
------------------------------------------ -------------------------------------------
EXTERNAL EXTERNAL
CUSTOMERS INTERSEGMENT TOTAL CUSTOMERS INTERSEGMENT TOTAL
------------------------------------------ -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 29,377 $ 274 $ 29,651 $ 32,268 $ 459 $ 32,727
------------------------------------------ -------------------------------------------
China 5,667 28,866 34,533 5,282 28,221 33,503
------------------------------------------ -------------------------------------------
Other segments 8,164 121 8,285 5,253 -- 5,253
------------------------------------------ -------------------------------------------
Elimination -- (29,261) (29,261) -- (28,680) (28,680)
------------------------------------------ -------------------------------------------
Total $ 43,208 $ -- $ 43,208 $ 42,803 $ -- $ 42,803
========================================== ===========================================
</TABLE>
Net Sales by Location of External Customers:
THREE MONTHS ENDED
DECEMBER 31,
---------------------
1999 1998
------- -------
United States $29,420 $32,376
Canada 6,960 4,394
Other countries 6,828 6,033
------- -------
Net Sales $43,208 $42,803
======= =======
9
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. SEGMENT INFORMATION (CONTINUED)
SEGMENT CONTRIBUTION: THREE MONTHS ENDED
DECEMBER 31,
------------------------
1999 1998
--------- ---------
United States $ 304 $ 631
China 1,808 1,280
Other segments 373 (570)
--------- ---------
Subtotal for segments 2,485 1,341
Executive management reorganization (788) --
Parent/administrative expenses (908) (640)
--------- ---------
Income (loss) before income taxes $ 789 $ 701
========= =========
INTEREST EXPENSE (1): THREE MONTHS ENDED
DECEMBER 31,
------------------------
1999 1998
--------- ---------
United States $ 157 $ 315
China 234 260
Other segments 146 107
--------- ---------
Subtotal for segments 537 682
Parent interest expense 7 47
--------- ---------
Total interest expense $ 544 $ 729
========= =========
TOTAL ASSETS:
DECEMBER 31, SEPTEMBER 30,
1999 1999
--------- ---------
United States $ 46,649 $ 55,411
China 48,420 47,316
Other segments 13,944 13,776
Eliminations (11,634) (14,606)
--------- ---------
Total assets $ 97,379 $ 101,897
========= =========
10
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (CONTINUED)
6. SEGMENT INFORMATION (CONTINUED)
LONG-LIVED ASSETS (2):
December 31, September 30,
1999 1999
------- -------
United States $12,408 $12,634
China 11,338 11,747
Other segments 310 356
------- -------
Total long-lived assets $24,056 $24,737
======= =======
Expenditures for Additions to Long-Lived Assets:
Three Months Ended December 31,
-------------------------------
1999 1998
------- -------
United States $ 143 $ 316
China 232 192
Other segments 8 48
------- -------
Total expenditures $ 383 $ 556
======= =======
(1) Parent and inter-segment advances bear interest at the U.S. prime rate. The
interest expense shown for each segment is net of interest earned on
inter-segment advances.
(2) Represents property and equipment, net.
MAJOR CUSTOMERS
During the three months ended December 31, 1999 and 1998 one customer (primarily
included in U.S.-based operations) accounted for 24.5% and 28.1%, respectively,
of the Company's net sales.
7. CONTINGENCIES
LEGAL
During fiscal years 1998 and 1999 the Company received a number of claims
relating to halogen torchieres sold by the Company to various retailers.
Management does not currently believe these claims will result in a material
uninsured liability to the Company. The Company experienced an increase in its
liability insurance premiums effective for the 1999 calendar year and is
required to self-insure up to $10,000 per incident occurring after January 1,
1999. Based upon its experience, the Company is presently accruing $120,000
annually for this self-insurance provision and management does not believe that
this self-insurance provision will have a material adverse impact on the
Company's financial position or annual results of operations. However, no
assurance can be given that the number of claims will not exceed historical
experience or that claims will not exceed available insurance coverage or that
the Company will be able to maintain the same level of insurance.
11
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. CONTINGENCIES (CONTINUED)
The Company is also a defendant in other legal proceedings arising in the course
of business. In the opinion of management, the ultimate resolution of these
other legal proceedings will not have a material adverse effect on the Company's
financial position or annual results of operations.
OTHER
As a result of recent Internal Revenue Service rulings and proposed and
temporary regulations, the Company has restructured its international operations
in order to retain favorable U.S. tax treatment of foreign source income. Should
this restructuring ultimately prove unsuccessful, the Company will likely
experience an increase in its consolidated effective income tax rate for its
1999 fiscal year and subsequent years.
On August 9, 1999 the New York Stock Exchange ("NYSE") notified the Company that
it had changed its rules regarding listing criteria for companies which have
shares traded on the NYSE. The new rules change and increase the requirements to
maintain a NYSE listing. As of December 31, 1999, the Company does not meet one
of the new rules, which requires that any NYSE listed company, which has a total
market capitalization of less than $50 million, maintain minimum total
stockholders' equity of $50 million. The Company's stockholders' equity as of
December 31, 1999 was $48.1 million. The Company believes it can meet the new
listing rules and, as requested by the NYSE, has provided the NYSE with its plan
to meet the new standard by February 2001. The Company's plan was accepted by
the NYSE in October 1999. However, no assurances can be given that the
objectives of the plan will be accomplished by February 2001. If the Company is
unable to achieve the plan's objectives, the Company's shares could be delisted
from the NYSE, however the Company believes other trading venues are available
for its stock.
8. NEW ACCOUNTING PRONOUNCEMENT
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
was issued in June 1998. SFAS 133 establishes standards for the accounting and
reporting of derivative instruments embedded in other contracts (collectively
referred to as derivatives) and of hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. This statement is effective
for fiscal years beginning after June 15, 2000. The Company has not determined
the effects, if any, that SFAS No.133 will have on the Company's financial
position or results of operations.
12
<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 operating results, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Words such as "expects,"
"anticipates," "believes," "plans," "intends," "estimates," variations of such
words and similar expressions are intended to identify such forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company and its subsidiaries to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, the
following: the highly competitive nature of the lighting industry; reliance on
certain key customers; consumer demand for lighting products; dependence on
imports from China; general economic and business conditions; advertising and
promotional efforts; brand awareness; the existence or absence of adverse
publicity; acceptance of new product offerings; changing trends in customer
tastes; availability and cost of raw materials and supplies; the costs and other
effects of legal and administrative proceedings; foreign exchange rates; changes
in the Company's effective tax rate (which is dependent on the Company's U.S.
and foreign source income); and other factors referenced in this Form 10-Q and
in the Company's annual report on Form 10-K for the year ended September 30,
1999. 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, 1999 and 1998 are referred to as 1999 and 1998,
respectively.
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
Net sales and gross profit for 1999 were $43.2 million and $8.9
million, respectively, as compared to $42.8 million and $8.1 million,
respectively, for 1998. The Company generated net income of $537,000 ($.07 per
share) in 1999 compared to $503,000 ($.07 per share) in 1998. In 1999, results
from operations included a $788,000 charge related to the settlement of the
Company's contractual obligation with an Executive Officer who left the employ
of the Company in December 1999 pursuant to a reorganization of the Company's
executive management structure. Diluted earnings per share, as adjusted to
exclude this non-recurring item, was $.14 in 1999 as compared to $.07 in 1998.
The $405,000 increase in net sales from the prior year primarily
reflects higher unit sales to Canadian customers attributable to additions to
core programs, promotional opportunities and new product placements. Lamp sales
increased by $1.2 million and net sales for the Company's other principal line
of products, lighting fixtures, decreased by $831,000. Lamps and lighting
fixtures accounted for 67% and 33% of net sales in 1999 compared to 65% and 35%
in 1998, respectively. In 1999 and 1998, Home Depot accounted for 24.5% and
28.1%, respectively, of the Company's net sales.
Gross profit increased by $766,000 in 1999 due to improved margins
earned on direct sales to U.S. and Canadian customers attributable to new
product placement and a more profitable product mix. The gross profit percentage
increased from 19.0% in 1998 to 20.6% in 1999. The improvement in the gross
profit percentage from 1998 to 1999 was attributable to the improved margins
earned on direct sales.
Many of the Company's major customers (most notably Home Depot and
Wal-Mart) purchase from the Company primarily on a direct basis, whereby the
merchandise is shipped directly from the factory to the customer, rather than
from the Company's warehouse. Approximately 77% of the Company's sales in 1999
were made on a direct basis as compared to 73% in 1998. Sales made by the
Company on a direct basis typically generate lower per unit margins than sales
of the same items from the Company's warehouses. The amount of the Company's
sales made on a direct basis is dependent upon customer buying preferences,
which are influenced by a number of factors that vary from customer to customer.
Sales from the Company's warehouses declined during the last two fiscal years
ended September 30, 1999 as compared to prior fiscal years and such trend has
continued during the quarter ended December 31, 1999. The Company lowered its
warehousing costs by closing its Los Angeles operation effective March 31, 1998
and is attempting to compensate for this decline by pursuing new channels of
distribution which will be serviced out of the Company's U.S. warehouse.
However, there can be no assurance these efforts will be successful, and the
Company may experience further declines in sales made from its U.S. warehouse.
13
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest expense decreased to $544,000 in 1999 from $729,000 in 1998
reflecting a $106,000 decrease in interest accrued on a litigation judgment
settled in June 1999 and lower average outstanding borrowings.
Other income for 1999 consisted primarily of investment and equity
income offset by net foreign currency losses amounting to $171,000. Other income
in 1998 consisted primarily of investment, rental and equity income offset by
net foreign currency losses of $160,000.
The effective income tax rates for 1999 and 1998 were 31.9% and 28.2%,
respectively. The increase in the tax rate from 1998 to 1999 reflects higher
anticipated proportionate U.S. source income, which is taxed at a higher rate
than foreign source income. The Company's effective income tax rate is dependent
both on the total amount of pretax income generated and the relative
distribution of such total income between domestic and foreign operations.
Consequently, the Company's effective tax rate may vary in future periods. As a
result of recent Internal Revenue Service ruling and proposed and temporary
regulations, the Company has restructured its international operations in order
to retain favorable U.S. tax treatment of foreign source income. Should this
restructuring ultimately prove unsuccessful, the Company will likely experience
an increase in its effective consolidated income tax rate for the 1999 fiscal
year and subsequent years.
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 forseeable future.
CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
The Company's operating, investing and financing activities resulted in
a net increase in cash and cash equivalents of $2.0 million from September 30,
1999 to December 31, 1999.
The net cash of $5.2 million provided by operating activities was used
primarily to pay for capital expenditures aggregating $383,000, to pay down
credit lines, to make sinking fund redemption payments of $225,000 on
outstanding bonds and to repurchase $629,000 in common stock under the Company's
stock repurchase plan. In addition, $1.3 million, which was held in escrow since
1997, was used to redeem bonds which had financed the Company's purchase and
improvements of the Meridian manufacturing facility.
The Company's cash and cash equivalents were $9.2 million at December
31, 1999, of which $9.1 million was held in Hong Kong. Certain restrictions in
the Company's Hong Kong credit facility limit the Company's ability to transfer
these funds to other operations. The Company currently plans to use a portion of
its Hong Kong cash balance to fund the construction of phase III of its Go-Gro
manufacturing facility.
CREDIT AND LEASING FACILITIES, BONDS, MORTGAGE AND CONVERTIBLE SUBORDINATED
NOTES
The Company has a $25 million credit facility with a group of U.S.
commercial banks. This facility provides credit in the form of revolving loans,
acceptances, and trade and stand-by letters of credit and matures March 31,
2002. Borrowings under the facility bear interest, payable monthly, at the
Company's preference of either the prime rate or the LIBOR rate plus a variable
spread based upon earnings, debt and interest expense levels defined under the
credit agreement (LIBOR plus 1.6% through December 31, 1999and LIBOR plus 1.8%
beginning January 1, 2000). Obligations under this facility are secured by
substantially all of the Company's U.S. assets, including 100% of the common
stock of the Company's U.S. subsidiaries and 49% of the stock of the Company's
Canadian subsidiary. The Company is required to comply with various convenants
in connection with this facility. In addition, the agreement prohibits the
payment of any cash dividends or other 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, 1999, the
Company had used $12.4 million under this credit facility (loans amounted to
$11.2 million) and $12.6 million was available for additional borrowings.
14
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company has a credit facility with a Canadian bank which provides
four million Canadian dollars or U.S. equivalent (approximately U.S. $2.8
million) in revolving demand credit. Canadian dollar advances bear interest at
the Canadian prime rate plus .5% (7% at December 31, 1999) and U.S. dollar
advances bear interest at the U.S. base rate of the bank (9.0% at December 31,
1999). The credit facility is secured by substantially all of the assets of the
Company's Canadian subsidiary. The agreement contains certain minimum covenants
to be met by the Canadian subsidiary, prohibits the payment of dividends, and
limits advances by the bank to a borrowing base calculated based upon
receivables and inventory. This facility is payable upon demand and is subject
to an annual review by the bank. The Company pays a monthly commitment fee of
.25% based on the unused portion of the facility. At December 31, 1999, total
Canadian and U.S. dollar borrowings amounted to U.S. $1.3 million (included in
current notes payable-credit lines) and U.S. $1.5 million was available under
the borrowing base calculation.
The Company has a 35 million Hong Kong dollars (approximately U.S. $4.5
million) credit facility with a Hong Kong bank. The facility provides credit in
the form of acceptances, trade and stand-by letters of credit, overdraft
protection, and negotiation of discrepant documents presented under export
letters of credit issued by banks. Advances bear interest at the Hong Kong prime
rate plus .25% (8.75% at December 31, 1999). The facility is secured by a
guarantee issued by the Company and requires Go-Gro to maintain a minimum level
of equity. This agreement prohibits the payment of dividends without the consent
of the bank and limits the amount of loans or advances from Go-Gro to the
Company at any time to 50% of Go-Gro's pre-tax profits for the previous 12
months. This facility is repayable upon demand and is subject to an annual
review by the bank. At December 31, 1999, the Company had used $3.1 million of
this line for letters of credit (there were no borrowings) and U.S. $1.4 million
was available.
In October 1999, the Company borrowed 11.7 million in Chinese Renminbi
(approximately U.S. $1.4 million) from a Chinese bank. The loan bears interest
at 5.85%, payable monthly, and repayment is due in October 2000. The agreement
requires the Company to maintain U.S. $1.5 million in a bank account as
collateral.
The Company has outstanding $7.6 million of 8% convertible subordinated
notes due March 15, 2002. The notes are convertible into common shares of the
Company's stock at a conversion price of $6.63 per share, subject to certain
anti-dilution adjustments (as defined in the Note Agreement), at any time prior
to maturity. The notes are subordinated in right of payment to all existing and
future senior indebtedness of the Company and the notes are callable at the
option of the Company with certain required premium payments. Principal payments
of approximately $2.5 million are required on March 15 in each of the years 2000
and 2001. The remaining outstanding principal and interest is due in full on
March 15, 2002. Interest is payable semiannually. The Company expects to make
its payments on this debt with funds generated from operations and obtained from
its $25 million U.S. credit facility. The terms of the Note Agreement require
the Company to maintain specific interest coverage ratio levels in order to
increase its credit facilities or otherwise incur new debt and to maintain a
minimum consolidated net worth. In addition, the Note Agreement prohibits the
declaration or payment of dividends on any shares of the Company's capital
stock, except dividends or other distributions payable solely in shares of the
Company's common stock, and limits the purchase or retirement of any shares of
capital stock or other capital distributions.
The Company arranged for the issuance in 1995 of $10.5 million in State
of Mississippi Variable Rate Industrial Revenue Development Bonds to finance
(along with internally generated cash flow and a $1 million leasing facility)
its warehouse located near Tupelo, Mississippi. The bonds have a stated maturity
of May 1, 2010 and require mandatory sinking fund redemption payments, payable
monthly, of $900,000 per year from 1996 to 2002, $600,000 per year in 2003 and
2004, and $500,000 per year from 2005 to 2010. The bonds bear interest at a
variable rate (6.6% at December 31, 1999) that is adjustable weekly to the rate
the remarketing agent for the bonds deems to be the market rate for such bonds.
The bonds are secured by a lien on the land, building, and all other property
financed by the bonds. Additional security is provided by a $7.1 million direct
pay letter of credit which is not included in the Company's $25 million U.S.
credit line. The unpaid balance of these bonds was $6.9 million at December 31,
1999. In January 1999, the Company entered into an interest rate swap agreement
maturing May 1, 2004, to manage its exposure to interest rate movements by
effectively converting its debt from a variable interest rate to a fixed
interest rate of 5.52%. Interest rate differentials paid or received under the
agreement are recognized as adjustments to interest expense.
15
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company financed the purchase and improvements of its Meridian
manufacturing facility through the issuance of a series of State of Mississippi
General Obligation Bonds (Mississippi Small Enterprise Development Finance Act
Issue, 1994 Series GG) with an aggregate available principal balance of
$1,605,000, a weighted average coupon rate of 6.23% and a contractual maturity
of November 1, 2009. In June 1997, the Company ceased manufacturing operations
at Meridian and leased the facility to a non-manufacturing entity and in August
1997 made a $1.5 million payment to escrow on the bonds. The Company redeemed
the bonds on November 1, 1999.
The Company has a $1 million facility with a U.S. financial institution
to finance the purchase of equipment in the United States, of which $531,000 was
available at December 31, 1999. In addition, the Company has a leasing facility
for $9 million Hong Kong dollars (approximately U.S. $1.2 million) with a Hong
Kong financial institution to finance the purchase of equipment for its China
facilities of which U.S. $370,000 was available at December 31, 1999.
The Company financed its corporate headquarters in Miami, Florida with
a loan payable monthly through 2004, based on a 15-year amortization schedule,
with a balloon payment in 2004. The loan bears interest at 8% and is secured by
a mortgage on the land and building. The unpaid balance of this loan was
$943,000 at December 31, 1999.
OTHER
Shenzhen Jiadianbao Electrical Products Co., Ltd. ("SJE"), a
cooperative joint venture subsidiary of Go-Gro, and the Bureau of National Land
Planning Bao-An Branch of Shenzhen City entered into a Land Use Agreement
covering approximately 467,300 square feet in Bao-An County, Shenzhen City,
People's Republic of China on April 11, 1995. The agreement provides SJE with
non-transferable rights to use this land until January 18, 2042. Under the terms
of the SJE joint venture agreement, ownership of the land and buildings of SJE
is divided 70% to Go-Gro and 30% to the other joint venture partner. Land costs,
including the land use rights, approximated $2.6 million of which Go-Gro has
paid its 70% proportionate share of $1.8 million. Under the terms of this
agreement, as amended, SJE is obligated to construct approximately 500,000
square feet of factory buildings and 211,000 square feet of dormitories and
offices, of which 40% was required to be and was completed by April 1, 1997. The
remainder of the construction was to be completed by December 31, 1999; however,
the Company has exercised its rights to extend the construction date to December
31, 2000 by incurring an extension fee. The total cost for this project is
estimated at $16.5 million (of which $10.2 million had been expended as of
December 31, 1999) and includes approximately $1 million for a Municipal
Coordination Facilities Fee (MCFF). The MCFF is based upon the square footage to
be constructed. The agreement calls for the MCFF to be paid in installments
beginning in January 1997 of which $441,000 had been accrued as of December 31,
1999. A 162,000 square foot factory, 77,000 square foot warehouse and 60,000
square foot dormitory became fully operational in June 1997. SJE began
construction of the final phase of this facility in December 1999 and expects to
fund this construction with cash generated from operations.
On April 26, 1996, the Company entered into a license agreement with
Westinghouse Electric Corporation to market and distribute a full range of
lighting fixtures, lamps and other lighting products under the Westinghouse
brand name in exchange for royalty payments. The agreement terminates on
September 30, 2002. Catalina has an option to extend the agreement for an
additional ten years. The royalty payments are due quarterly and are based on a
percent of the value of the Company's net shipments of Westinghouse branded
products, subject to annual minimum payments due. Commencing September 30, 2000
either party has the right to terminate the agreement if the Company does not
meet the minimum net shipments of $25 million for fiscal 2000, $40 million for
fiscal 2001 and $60 million for fiscal 2002. Net sales of Westinghouse branded
products amounted to $7.7 million and $2.3 million for the three months ended
December 31, 1999 and 1998, respectively.
As a result of recent Internal Revenue Service ruling and proposed and
temporary regulations, the Company has restructured its international operations
in order to retain favorable U.S. tax treatment of foreign source income. Should
this restructuring ultimately prove unsuccessful, the Company will likely
experience an increase in its consolidated effective income tax rate for the
1999 fiscal year and subsequent years.
On June 3, 1999, the President of the United States extended to the
People's Republic of China "Most Favored Nation" ("MFN") treatment for the entry
of goods into the United States for an additional year, beginning July 3, 1999.
The MFN trade status has been renamed "Normal Trade Relations" because it
applies to all but a handful of U.S. trading partners. In the context of United
States tariff legislation, such treatment means that products are subject to
favorable duty rates upon
16
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
entry into the United States. On July 27, 1999 the House of Representatives
supported the President's decision and rejected a bill to impose trade sanctions
against China due to alleged human rights abuses, nuclear proliferation policies
and a growing U.S. trade deficit with China. Members of Congress and the "human
rights community" will continue to monitor the human rights issues in China and
adverse developments in human rights and other trade issues in China could
affect U.S. - China relations. As a result of various political and trade
disagreements between the U.S. Government and China, it is possible restrictions
could be placed on trade with China in the future which could adversely impact
the Company's operations and financial position.
During fiscal years 1998 and 1999 the Company received a number of
claims relating to halogen torchieres sold by the Company to various retailers.
Management does not currently believe these claims will result in a material
uninsured liability to the Company. The Company experienced an increase in its
liability insurance premiums effective for the 1999 calendar year and is
required to self-insure up to $10,000 per incident occurring after January 1,
1999. Based upon its experience, the Company is presently accruing $120,000
annually for this self-insurance provision and management does not believe that
this self-insurance provision will have a material adverse impact on the
Company's financial position or annual results of operations. However, no
assurance can be given that the number of claims will not exceed historical
experience or that claims will not exceed available insurance coverage or that
the Company will be able to maintain the same level of insurance.
The Company's Board of Directors has authorized the repurchase of up to
$2 million of common shares of the Company from time to time in the open market
or in negotiated purchases. As of February 4, 2000, the Company had repurchased
526,900 shares for approximately $1.96 million.
Pursuant to a reorganization of the Company's executive management
structure, William D. Stewart, an Executive Vice-President of the Company left
the employ of the Company in December 1999 to pursue other interests. Under the
terms of the settlement agreement, Mr. Stewart will continue to provide
consulting services under a three-year non-compete and consulting agreement. The
Company has recorded a non-recurring pretax charge of $788,000 during the
quarter ended December 31, 1999 related to the settlement of its contractual
employment obligation to Mr. Stewart and is obligated to pay $250,000 annually
through December 2002 under the non-compete and consulting agreement.
On August 9, 1999 the New York Stock Exchange ("NYSE") notified the
Company that it had changed its rules regarding listing criteria for companies
which have shares traded on the NYSE. The new rules change and increase the
requirements to maintain a NYSE listing. As of December 31, 1999, the Company
does not meet one of the new rules, which requires that any NYSE listed company,
which has a total market capitalization of less than $50 million, maintain
minimum total stockholders' equity of $50 million. The Company's stockholders'
equity as of December 31, 1999 was $48.1 million. The Company believes it can
meet the new listing rules and, as requested by the NYSE, has provided the NYSE
with its plan to meet the new standard by February 2001. The Company's plan was
accepted by the NYSE in October 1999. However, no assurances can be given that
the objectives of the plan will be accomplished by February 2001. If the Company
is unable to achieve the plan's objectives, the Company's shares could be
delisted from the NYSE, however the Company believes other trading venues are
available for its stock.
The Company maintains investments in subsidiaries in Canada, Mexico and
Chile and sells its products into these foreign countries. The Company also
sells into Europe and maintains major capital investments in manufacturing
facilities in China and supporting administrative offices in Hong Kong. Due to
the significance of its international sales and operations, the Company's
business and operating results are impacted by fluctuations in foreign currency
exchange rates. If any of the currencies of the foreign countries in which it
conducts business was to be devalued against the U.S. dollar the Company could
experience significant changes in its translations of assets, liabilities and
transactions denominated in foreign currencies which could adversely impact the
Company's future earnings. Large fluctuations in currency exchange rates could
have a material adverse effect on the Company's cost of goods purchased (or
manufactured) or on the Company's selling prices thereby harming the Company's
competitive position. While the Company periodically borrows in Canadian
dollars, Hong Kong dollars and Chinese Renminbi, and will increase or decrease
these foreign borrowings for various business reasons (including anticipated
movements in foreign exchange rates) the Company does not otherwise hedge its
foreign currency exposure. During the quarter ended December 31, 1999 the
Company recorded foreign currency losses for its China, Canadian, Mexican and
Chilean operations of $90,000, $32,000, $34,000 and $15,000, respectively.
17
<PAGE>
Go-Gro has periodically experienced price increases in the costs of
raw materials, which reduced Go-Gro's profitability due to an inability to
immediately pass on such price increases to its customers. The Company believes
that increased raw materials prices could have an initial adverse impact on the
Company's net sales and income from continuing operations but that, over time,
increased prices can be passed on to its customers.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") was issued in June
1998. SFAS 133 establishes standards for the accounting and reporting of
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and of hedging activities. It requires that an entity recognizes
all derivatives as either assets or liabilities in the balance sheet and
measures those instruments at fair value. This statement is effective for fiscal
years beginning after June 15, 2000. The Company has not determined the effects,
if any, that SFAS No.133 will have on the Company's financial position or
results of operations.
18
<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 per Share.
(b) REPORTS ON FORM 8-K
None.
19
<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, Chairman, President,
Chief Executive Officer and Director
/s/ David W. Sasnett
-----------------------------------------------
David W. Sasnett
Chief Financial Officer, Senior Vice President,
Chief Accounting Officer
Date: February 11, 2000
20
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
11 Schedule of Computation of Diluted Earnings per Share.
27 Financial Data Schedule
EXHIBIT 11
CATALINA LIGHTING, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF DILUTED EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
DECEMBER 31,
----------------------------
1999 1998
----------- -----------
Net income for diluted earnings
per share $ 537,000 $ 503,000
=========== ===========
Weighted average number of common shares
outstanding during the period 7,386,000 7,171,000
Weighted average number of shares repurchased
during the period (400,000) --
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 759,000 111,000
----------- -----------
Weighted average number of shares
used in calculation of diluted earnings
per share 7,745,000 7,282,000
=========== ===========
Diluted earnings per share $ 0.07 $ 0.07
=========== ===========
NOTE
Subordinated notes convertible into 1,146,000 common shares and 1,040,000 common
shares for 1999 and 1998, respectively, were not included because their effect
was 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-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,206
<SECURITIES> 0
<RECEIVABLES> 13,980
<ALLOWANCES> 8,234
<INVENTORY> 29,235
<CURRENT-ASSETS> 59,847
<PP&E> 24,056
<DEPRECIATION> 0
<TOTAL-ASSETS> 97,379
<CURRENT-LIABILITIES> 24,728
<BONDS> 6,000
0
0
<COMMON> 74
<OTHER-SE> 47,976
<TOTAL-LIABILITY-AND-EQUITY> 97,379
<SALES> 43,208
<TOTAL-REVENUES> 43,208
<CGS> 34,313
<TOTAL-COSTS> 34,313
<OTHER-EXPENSES> 7,569
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 544
<INCOME-PRETAX> 789
<INCOME-TAX> 252
<INCOME-CONTINUING> 537
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 537
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.07
</TABLE>
