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 June 30, 2000
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
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CATALINA LIGHTING, INC
----------------------
(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
------------------------------------------
(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 August 4, 2000: 7,214,912 shares.
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------
Condensed consolidated balance sheets -
June 30, 2000 and September 30, 1999........................ 3
Condensed consolidated statements of operations -
Three and nine months ended June 30, 2000 and 1999.......... 5
Condensed consolidated statements of cash flows -
Nine months ended June 30, 2000 and 1999.................... 6
Notes to condensed consolidated financial statements.......... 8
Management's discussion and analysis of financial
condition and results of operations......................... 15
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings..................................... 24
ITEM 4 Submission of Matters to a Vote of Security Holders... 24
ITEM 6 Exhibits and Reports on Form 8-K...................... 24
2
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
Assets June 30, September 30,
------ 2000 1999
--------------- ---------------
(Unaudited) *
<S> <C> <C>
Current assets
Cash and cash equivalents $ 4,760 $ 7,253
Restricted cash equivalents and short-term investments 1,636 1,721
Accounts receivable, net of allowances
of $5,711 and $8,591, respectively 16,062 20,150
Inventories 26,134 28,668
Other current assets 5,016 6,435
--------------- ---------------
Total current assets 53,608 64,227
Property and equipment, net 24,576 24,737
Goodwill, net 10,218 10,561
Other assets 3,690 2,372
--------------- ---------------
$ 92,092 $ 101,897
=============== ===============
</TABLE>
(continued on page 4)
3
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(In thousands)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity June 30, September 30,
------------------------------------ 2000 1999
--------------- ---------------
(Unaudited) *
<S> <C> <C>
Current liabilities
Accounts and letters of credit payable $ 15,966 $ 14,939
Notes payable - credit lines 406 2,200
Note payable - other 1,402 --
Current maturities of subordinated notes -- 2,500
Current maturities of bonds payable-real estate related 900 2,210
Current maturities of other long-term debt 636 487
Other current liabilities 6,168 6,437
--------------- ---------------
Total current liabilities 25,478 28,773
Notes payable - credit lines 8,300 12,150
Convertible subordinated notes 733 5,100
Bonds payable - real estate related 5,100 6,000
Other long-term debt 1,435 1,524
Other liabilities 695 293
--------------- ---------------
Total liabilities 41,741 53,840
Commitments and contingencies
Stockholders' equity
Common stock, issued and outstanding 7,818
shares and 7,373 shares, respectively 78 74
Additional paid-in capital 27,956 26,927
Retained earnings 24,635 22,266
Treasury stock, 605 shares and 378 shares, respectively (2,318) (1,210)
--------------- ---------------
Total stockholders' equity 50,351 48,057
--------------- ---------------
$ 92,092 $ 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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 46,705 $ 46,315 $ 131,946 $ 131,246
Cost of sales 37,798 36,699 106,143 104,320
------------- ------------- ------------- -------------
Gross profit 8,907 9,616 25,803 26,926
Selling, general and administrative
expenses 6,769 7,465 20,246 21,365
Litigation settlement -- (2,728) -- (2,728)
Executive management reorganization -- -- 788 --
------------- ------------- ------------- -------------
Operating income 2,138 4,879 4,769 8,289
------------- ------------- ------------- -------------
Other income (expenses):
Interest expense (456) (531) (1,564) (1,931)
Reversal of post judgement interest
related to litigation settlement -- 893 -- 893
Other income (expenses) 54 550 426 848
------------- ------------- ------------- -------------
Total other income (expenses) (402) 912 (1,138) (190)
------------- ------------- ------------- -------------
Income before income taxes 1,736 5,791 3,631 8,099
Income tax provision 656 1,918 1,262 2,564
------------- ------------- ------------- -------------
Net income $ 1,080 $ 3,873 $ 2,369 $ 5,535
============= ============= ============= =============
Weighted average number of
shares outstanding
Basic 7,163 6,974 7,022 7,075
Diluted 8,409 8,759 8,674 8,570
Earnings per share
Basic $ 0.15 $ 0.56 $ 0.34 $ 0.78
Diluted $ 0.14 $ 0.45 $ 0.30 $ 0.68
</TABLE>
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>
Nine Months Ended
June 30,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,369 $ 5,535
Adjustments for non-cash items 4,121 3,171
Change in assets and liabilities 7,312 (1,381)
----------- -----------
Net cash provided by (used in) operating activities 13,802 7,325
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net (2,480) (1,353)
Proceeds from sale of facility -- 948
Decrease (increase) in restricted cash equivalents and
short-term investments 738 1,007
----------- -----------
Net cash provided by (used in) investing activities (1,742) 602
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,005 235
Payments to repurchase common stock (1,108) (1,019)
Payments on other long term debt and other liabilities (478) (555)
Payments on bonds payable (2,210) (980)
Payment on convertible subordinated notes (6,867) --
Proceeds from notes payable - credit lines 31,900 25,900
Payments on notes payable - credit lines (35,750) (27,100)
Proceeds from note payable - other 1,402 --
Net proceeds from (payments on) notes payable - credit lines
due on demand (1,794) (1,528)
Sinking fund redemption payments on bonds (653) (675)
----------- -----------
Net cash provided by (used in) financing activities (14,553) (5,722)
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,493) 2,205
Cash and cash equivalents at beginning of period 7,253 1,790
----------- -----------
Cash and cash equivalents at end of period $ 4,760 $ 3,995
=========== ===========
</TABLE>
(continued on page 7)
6
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (continued)
(Unaudited)
Supplemental Cash Flow Information
Nine Months Ended
June 30,
------------------------------------
2000 1999
---------------- ---------------
(In thousands)
Cash paid (received) for:
Interest $ 1,656 $ 1,618
Income taxes $ (382) $ 2,190
During the nine months ended June 30, 2000, total capital lease obligations
incurred for new computer equipment aggregated $427,000.
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 and nine months ended June 30, 2000 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 periods' 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 and nine months ended June
30, 2000 and 1999 equals comprehensive income for the same periods.
2. Inventories
Inventories consisted of the following:
June 30, September 30,
2000 1999
----------------- ----------------
(In thousands)
Raw materials $ 4,712 $ 4,050
Work-in-progress 1,093 932
Finished goods 20,329 23,686
----------------- ----------------
Total inventories $ 26,134 $ 28,668
================= ================
Costs capitalized in finished goods associated with acquiring, storing and
preparing inventory for distribution amounted to approximately $1.7 million and
$2.2 million at June 30, 2000 and September 30, 1999, respectively.
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
8
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
amended, SJE is obligated to construct approximately 500,000 square feet of
factory buildings and 211,000 square feet of dormitories and offices. 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. The remainder of the construction
is required to be completed by December 31, 2000. The total cost for this
project is estimated at $16.5 million (of which $12.2 million had been expended
as of June 30, 2000) 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 $588,000 had been paid or accrued as of June
30, 2000.
4. Notes Payable - Credit Lines
In May 2000, the Company amended its credit facility with a Canadian bank to
increase amounts available for borrowings under the facility from $4.0 million
to $5.5 million Canadian dollars or U.S. equivalent (approximately U.S. $3.7
million).
5. 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 September 2000. The agreement
requires the Company to maintain U.S. $1.5 million in collateral.
6. Convertible Subordinated Notes
On June 30, 2000, the Company prepaid $4.3 million of the $5.1 million
outstanding balance on its 8% convertible subordinated notes and the remaining
$733,000 was prepaid in July 2000. The $5.1 million balance was due in two equal
installments on March 15, 2001 and March 15, 2002. The Company had previously
repaid $2.5 million of these notes in March 2000. The Company's 8% subordinated
notes were convertible at the option of the holder into common shares of the
Company's stock at a conversion price of $6.63 per share at any time prior to
maturity.
7. Stock Options
Stock Options Under Plans
In March 2000, the Company's Board of Directors approved a Stock Option Plan
which provides for the issuance of options to employees to purchase 325,000
shares of the Company's common stock at a purchase price equal to the fair
market value on the date of the grant. In June 2000, the Company issued options
to employees, under this new plan, to purchase 250,000 shares at $3.9375 per
share, the market value on such date. One third of the options becomes
exercisable one year after the date of the grant with one third vesting during
each of the following two years.
Other Stock Options
In July 2000, the Company issued to certain employees options to purchase
210,000 shares at prices ranging from $4.06 to $4.38 per share, the market value
on the date of grant. One third of the options becomes exercisable one year
after the date of the grant with one third vesting during each of the following
two years.
9
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
8. 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.
9. Segment Information
Information on operating segments as of June 30, 2000 and for the three and nine
months ended June 30, 2000 and 1999 is as follows (in thousands):
Net Sales:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------------------------------
2000 1999
----------------------------------------- ---------------------------------------
External External
customers Intersegment Total customers Intersegment Total
----------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 31,726 $ 166 $ 31,892 $ 35,577 $ 674 $ 36,251
China 7,927 30,578 38,505 4,228 33,554 37,782
Other segments 7,052 48 7,100 6,510 145 6,655
Elimination - (30,792) (30,792) - (34,373) (34,373)
----------------------------------------- ---------------------------------------
Total $ 46,705 $ - $ 46,705 $ 46,315 $ - $ 46,315
========================================= =======================================
<CAPTION>
Nine Months Ended June 30,
---------------------------------------------------------------------------------
2000 1999
----------------------------------------- ---------------------------------------
External External
customers Intersegment Total customers Intersegment Total
----------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 88,359 $ 716 $ 89,075 $ 99,992 $ 1,434 $101,426
China 20,329 82,594 102,923 14,232 88,640 102,872
Other segments 23,258 169 23,427 17,022 306 17,328
Elimination - (83,479) (83,479) - (90,380) (90,380)
----------------------------------------- ---------------------------------------
Total $131,946 $ - $131,946 $131,246 $ - $131,246
========================================= =======================================
</TABLE>
10
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
9. Segment Information (continued)
Net Sales by Location of External Customers:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
United States $ 31,735 $ 35,578 $ 88,474 $ 100,218
Canada 5,954 4,228 19,646 13,207
Other countries 9,016 6,509 23,826 17,821
--------- --------- --------- ---------
Net sales $ 46,705 $ 46,315 $ 131,946 $ 131,246
========= ========= ========= =========
<CAPTION>
Segment Contribution: Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
United States $ 664 $ 1,886 $ 1,739 $ 4,012
China 1,865 1,083 4,669 4,118
Other segments (13) 352 570 (754)
--------- --------- --------- ---------
Subtotal for segments 2,516 3,321 6,978 7,376
Litigation settlement -- 2,728 -- 2,728
Executive management reorganization -- -- (788) --
Reversal of post judgement interest
related to litigation settlement -- 893 -- 893
Parent/administrative expenses (780) (1,151) (2,559) (2,898)
--------- --------- --------- ---------
Income before income taxes $ 1,736 $ 5,791 $ 3,631 $ 8,099
========= ========= ========= =========
<CAPTION>
Interest Expense (1): Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
United States $ 58 $ 204 $ 330 $ 738
China 172 234 630 733
Other segments 86 109 355 324
--------- --------- --------- ---------
Subtotal for segments 316 547 1,315 1,795
Parent interest expense 140 (16) 249 136
--------- --------- --------- ---------
Total interest expense $ 456 $ 531 $ 1,564 $ 1,931
========= ========= ========= =========
<CAPTION>
Total Assets:
June 30, September 30,
2000 1999
------------ ------------
United States $ 44,762 $ 55,411
China 50,408 47,316
Other segments 11,856 13,776
Eliminations (14,934) (14,606)
------------ ------------
Total assets $ 92,092 $ 101,897
============ ============
</TABLE>
11
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
9. Segment Information (continued)
Long-Lived Assets (2):
June 30, September 30,
2000 1999
-------------- --------------
United States $ 12,493 $ 12,634
China 11,790 11,747
Other segments 293 356
-------------- --------------
Total long-lived assets $ 24,576 $ 24,737
============== ==============
Expenditures for Additions to Long-Lived Assets (2):
Nine Months Ended June 30,
-----------------------------------
2000 1999
-------------- --------------
United States $ 537 $ 444
China 1,862 790
Other segments 81 119
-------------- --------------
Total expenditures $ 2,480 $ 1,353
============== ==============
(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 June 30, 2000 and 1999 one customer (with sales
included in United States and other segments) accounted for 30.8% and 26.4%,
respectively, of the Company's net sales and during the nine months ended June
30, 2000 and 1999, accounted for 29.5% and 27.6%, respectively, of the Company's
net sales. One other customer and an affiliate (with sales included in United
States and other segments) accounted for 9.4% and 14.9%, respectively, of net
sales for the three months ended June 30, 2000 and 1999 and for 9.2% and 12.0%,
respectively, for the nine months ended June 30, 2000 and 1999.
10. 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 for this
self-insurance provision and has accrued $170,000 for this contingency as of
June 30, 2000. 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.
12
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
10. 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 continued listing for companies which have
shares traded on the NYSE. The new rules changed and increased the requirements
to maintain a NYSE listing. Through June 30, 2000, the Company did not meet the
new rules, which require a total market capitalization of $50 million and the
maintenance of minimum total stockholders' equity of $50 million. The Company's
stockholders' equity as of June 30, 2000 was $50.4 million. However, the
Company's total market capitalization as of the close of business on August 4,
2000 was only $30.2 million. As requested by the NYSE, the Company had
previously provided the NYSE with its plan to meet the new standards by February
2001. The Company's plan was accepted by the NYSE in October 1999 and continues
to be monitored by the NYSE through the current quarter. However, no assurances
can be given that the objectives of the plan will be accomplished by February
2001. If the Company is ultimately unable to achieve the plan's objectives, the
Company's shares could be suspended from trading, however the Company believes
other trading venues are available for its stock.
11. Acquisition
On July 5, 2000, the Company completed a cash offer of approximately 22 million
British pounds (approximately $33 million) and acquired Ring PLC ("Ring"), a
leading supplier of lighting, automotive after-market products and industrial
consumables in the United Kingdom. Ring had revenues of approximately $127
million and net income of $3.5 million for the year ended March 31, 2000. The
acquisition will be accounted for under the purchase method. The Company is in
the process of valuing the assets acquired and liabilities assumed for purposes
of allocating the purchase price. This process is not complete, but based upon
preliminary estimates the Company anticipates that goodwill of approximately $20
million will be recorded.
Ring has employment agreements with eighteen of its officers and key employees
for a total annual salary cost of approximately U.S. $1.8 million. The
agreements contain benefit packages including contributions to Ring's pension
plan ranging from 5% to 10% of salary and provide for notice periods in the case
of termination varying from 6 to 36 months. In addition, the agreements contain
post-termination restrictive covenants.
On July 18, 2000, the Company entered into a five-year $75 million credit
facility with a bank syndication group, in the process repaying and terminating
its existing U.S. credit facility. The new facility consists of two term loans
aggregating $30 million to finance the Ring acquisition and $20 million and $25
million for revolving loans, acceptances, and trade and stand-by letters of
credit for the Company's ongoing operations in the U.S. and the U.K.,
respectively. The facility provides for quarterly payments on the $30 million
term loans aggregating $1,250,000 for fiscal 2000, $5,125,000 for fiscal 2001,
$5,625,000 for fiscal 2002, $6,125,000 for fiscal 2003, $6,625,000 for fiscal
2004 and $5,250,000 for fiscal 2005. Borrowings under the facility bear
interest, payable monthly, at the Company's option of either the prime rate plus
1.75% (11.25% at August 4, 2000) or the LIBOR rate plus a variable spread based
upon earnings, debt and interest expense levels defined under the credit
agreement (9.37% at August 4, 2000). Obligations under the facility are secured
by substantially all of the Company's U.S. and U.K. assets, including 100% of
the common stock of the Company's U.S. subsidiaries and 49% of the stock of the
Company's Canadian and Hong Kong subsidiaries. The agreement contains covenants
requiring that the
13
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Company maintain a minimum level of equity and meet certain debt to adjusted
earnings and fixed charge coverage ratios. Borrowings are subject to a borrowing
base defined as the aggregate of certain percentages of the Company's U.S. and
U.K. receivables and inventory. The agreement prohibits the payment of cash
dividends or other distribution on any shares of the Company's common stock,
other than dividends payable solely in shares of common stock, unless approval
is obtained from the lenders. The Company pays a quarterly commitment fee of
.50% per annum based on the unused portion of the facility.
12. New Accounting Pronouncements
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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101") which summarizes certain of the staff's view in
applying generally accepted accounting principles to revenue recognition in
financial statements. The effective date of SAB 101 for the Company is the
quarter ending December 31, 2000. The Company continues to evaluate the impact
that SAB 101 will have on the timing of revenue recognition in future periods.
Based on the Company's initial evaluation, the Company believes SAB 101 will not
have a material impact on its financial position or results of operations.
14
<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; 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 and
nine months ended June 30, 2000 and 1999 are referred to as 2000 and 1999,
respectively.
Comparison of Three Months Ended June 30, 2000 and 1999
Net sales and gross profit for 2000 were $46.7 million and $8.9
million, respectively, as compared to $46.3 million and $9.6 million,
respectively, for 1999. The Company generated net income of $1.1 million ($.14
per share) in 2000 compared to $3.9 million ($.45 per share) in 1999. In 1999,
results from operations benefited from the reversal of a $2.7 million provision
related to litigation with a former officer of the Company and of an $893,000
provision for post judgement interest. The reversal of these non-recurring items
and related expenses increased diluted earnings per share in 1999 by $.24.
Diluted earnings per share, excluding non-recurring items and related expenses,
was $.14 in 2000 as compared to $.21 in 1999.
The $390,000 increase in net sales from the prior year reflects higher
unit sales to European and Mexican customers, as unit sales to U.S. customers
declined for the period. The increase in international sales is attributable to
additions to core programs and new product placements. In 2000, sales to U.S.
customers and international customers were $31.7 million and $15.0 million,
respectively, and in 1999 such sales were $35.6 million and $10.7 million,
respectively. Approximately 81% of the Company's sales in 2000 were made on a
direct basis as compared to 79% in 1999. Lamp sales decreased by $3.0 million
and net sales for the Company's other principal line of products, lighting
fixtures, increased by $3.4 million. Lamps and lighting fixtures accounted for
57% and 43% of net sales in 2000, respectively, compared to 64% and 36% in 1999,
respectively. In 2000 and 1999, Home Depot accounted for 30.8% and 26.4%,
respectively, of the Company's net sales. Wal-Mart and an affiliate accounted
for 9.4% and 14.9% of net sales in 2000 and 1999, respectively.
Gross profit decreased by $709,000 in 2000 and, as a percentage of
sales, from 20.8% in 1999 to 19.1% in 2000, reflecting a shift in product mix,
less warehouse sales and added product development costs.
Presently, most of the Company's major customers (including 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 to U.S.
customers in 2000 were made on a direct basis as compared to 75% in 1999.
Warehouse sales to U.S. customers declined each fiscal year in the five year
period commencing fiscal 1995, when the Company's present warehouse was
constructed in Tupelo, Mississippi, and warehouse sales were 61% of U.S. sales
compared to the present 23%. This percentage decline represents a significant
15
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
decrease in sales dollars. The Company lowered its warehousing costs by
terminating its other U.S. warehouse operation located in Los Angeles effective
March 31, 1998. The Company is attempting to compensate further for the decline
in U.S. warehouse sales by pursuing new customers for the U.S. warehouse. The
Company is also evaluating other strategic alternatives to reduce overall
warehousing costs. The Company may experience further declines in sales made
from its U.S. warehouse and in its U.S. warehouse inventories and, at least in
the short term, may be unable to reduce its overall U.S. warehousing costs.
Declines in warehouse sales could also adversely impact the Company's gross
profits in the future.
Selling, general and administrative expenses ("SG&A") decreased by
$696,000 reflecting a decrease in professional fees ($461,000) and a decrease in
bonuses for U.S. employees ($360,000).
Interest expense decreased to $456,000 in 2000 from $531,000 in 1999
primarily reflecting a decrease in average outstanding borrowings.
Other income for 2000 consisted primarily of interest income
($123,000), income from joint ventures ($72,000) and other miscellaneous income
($41,000). Other income in 2000 was reduced by a net foreign currency loss of
$182,000. Other income in 1999 consisted primarily of a gain on sale of the
Company's Meridian facility ($194,000), interest income ($108,000), income from
joint ventures ($57,000), a net foreign currency gain ($48,000) and
miscellaneous income ($143,000).
The effective income tax rates for 2000 and 1999 were 37.8% and 33.1%,
respectively. The increase in the tax rate from 1999 to 2000 reflects higher
anticipated proportionate Canadian source income, which is taxed at a higher
rate than other 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.
Comparison of Nine Months Ended June 30, 2000 and 1999
Net sales and gross profit for 2000 were $131.9 million and $25.8
million, respectively, as compared to $131.2 million and $26.9 million,
respectively, for 1999. The Company generated net income of $2.4 million ($.30
per share) in 2000 compared to $5.5 million ($.68 per share) in 1999. In 2000,
results from operations included a $788,000 charge related to the settlement of
the Company's contractual obligation with a former executive officer who left
the employ of the Company in December 1999 pursuant to a reorganization of the
Company's executive management structure. In 1999, results from operations
benefited from the reversal of a $2.7 million provision related to litigation
with a former officer of the Company and the reversal of the related $893,000
provision for post judgement interest. Diluted earnings per share, as adjusted
to exclude these non-recurring items, was $.36 in 2000 as compared to $.45 in
1999.
The $700,000 increase in net sales from the prior year primarily
reflects higher unit sales to Canadian, European and Mexican customers
attributable to additions to core programs and new product placements. These
higher sales offset lower unit sales and an overall sales decline to U.S.
customers. In 2000, sales to U.S. customers and international customers were
$88.5 million and $43.4 million, respectively, and in 1999 such sales amounted
to $100.2 million and $31.0 million, respectively. Approximately 77% and 76% of
the Company's sales were made on a direct basis in 2000 and 1999, respectively.
Lamp sales decreased by $3.7 million and net sales for the Company's other
principal line of products, lighting fixtures, increased by $4.4 million. Lamps
and lighting fixtures accounted for 61% and 39% of net sales in 2000 compared to
64% and 36% in 1999, respectively. In 2000 and 1999, Home Depot accounted for
29.5% and 27.6%, respectively, of the Company's net sales. Wal-Mart and an
affiliate accounted for 9.2% and 12% of net sales in 2000 and 1999,
respectively.
Presently, most of the Company's major customers (including 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 to U.S.
customers in 2000 were made on a direct basis as compared to 75% in 1999.
Warehouse sales to U.S. customers declined each fiscal year in the five-year
16
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
period commencing fiscal 1995, when the Company's present warehouse was
constructed in Tupelo, Mississippi, and warehouse sales were 61% of U.S. sales
compared to the present 23%. This percentage decline represents a significant
decrease in sales dollars. The Company lowered its warehousing costs by
terminating its other U.S. warehouse operation located in Los Angeles effective
March 31, 1998. The Company is attempting to compensate further for the decline
in U.S. warehouse sales by pursuing new customers for the U.S. warehouse. The
Company is also evaluating other strategic alternatives to reduce overall
warehousing costs. The Company may experience further declines in sales made
from its U.S. warehouse and in its U.S. warehouse inventories and, at least in
the short term, may be unable to reduce its overall U.S. warehousing costs.
Declines in warehouse sales could also adversely impact the Company's gross
profits in the future.
Selling, general and administrative expenses ("SG&A") decreased by $1.1
million reflecting a decrease in bonuses for U.S. employees ($641,000), a
decrease in merchandising and tradeshow expenses ($279,000) and a decrease in
professional fees ($190,000).
Interest expense decreased to $1.6 million in 2000 from $1.9 million in
1999 reflecting a $212,000 decrease in interest accrued on a litigation judgment
settled in June 1999 and lower average outstanding borrowings.
Other income for 2000 consisted primarily of interest income
($346,000), income from joint ventures ($178,000) and other miscellaneous income
($20,000). Other income in 2000 was reduced by a net foreign currency loss of
$118,000. Other income in 1999 consisted primarily of a gain on sale of the
Company's Meridian facility ($194,000), interest income ($260,000), income from
joint ventures ($113,000) and miscellaneous income ($405,000). Other income in
1999 was reduced by a net foreign currency loss of $124,000.
The effective income tax rates for 2000 and 1999 were 34.8% and 31.7%,
respectively. The increase in the tax rate from 1999 to 2000 reflects higher
anticipated proportionate Canadian source income, which is taxed at a higher
rate than other 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.
Cash Flows and Financial Condition
The Company's operating, investing and financing activities resulted in
a net decrease in cash and cash equivalents of $2.5 million from September 30,
1999 to June 30, 2000.
The Company's operating activities provided $13.8 million in net cash
for the nine months ended June 30, 2000, as the Company earned $2.4 million for
the period and inventories and accounts receivable decreased by $2.5 million and
$4.1 million, respectively, from September 30, 1999. The decrease in
consolidated inventories reflects a $4.2 million planned reduction in U.S.
inventories consistent with a decline in U.S. warehouse sales for the nine
months ended June 30, 2000 of approximately $4.6 million.
The Company used the net cash provided by operations for the nine
months ended June 30, 2000 for capital expenditures and to pay down outstanding
obligations. Capital expenditures for the period totaled almost $2.5 million, of
17
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
which $1.9 million related to the planned expansion of the Go-Gro manufacturing
facility and Go-Gro equipment purchases. In addition to a $2.5 million scheduled
repayment, the Company elected to make a $4.3 million prepayment on its
convertible subordinated notes. Borrowings under U.S. and Canadian credit
facilities were reduced by $5.6 million, and $1.1 million in common stock was
repurchased under a stock repurchase plan.
As discussed in the following paragraphs, in July 2000 the Company
completed a major acquisition and funded this acquisition with a new credit
facility.
Acquisition and Credit Facilities
At June 30, 2000 the Company maintained a $25 million credit facility
with a group of U.S. commercial banks. This facility provided credit in the form
of revolving loans, acceptances, and trade and stand-by letters of credit and
matured March 31, 2002. Borrowings under the facility bore 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 June 30, 2000 and
LIBOR plus 1.8% beginning July 1, 2000). Obligations under this facility were
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 was required to comply with various
convenants in connection with this facility. In addition, the agreement
prohibited 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 was obtained from the lenders. At June 30, 2000,
the Company had used $8.3 million under this credit facility and $12.0 million
was available for additional borrowings.
On July 5, 2000 the Company acquired Ring Plc ("Ring"), a leading
supplier of lighting, automotive after-market products and industrial
consumables in the United Kingdom. Ring had revenues of approximately $127
million and net income of $3.5 million for the year ended March 31, 2000. The
acquired business has one major facility and 6 minor ones and employs
approximately 475 people. The transaction will be accounted for as a purchase.
The Company is in the process of valuing the assets acquired and liabilities
assumed for purposes of allocating the purchase price. This process is not
complete, but based upon preliminary estimates the Company anticipates that
goodwill of approximately $20 million will be recorded.
The Company funded the Ring purchase price of approximately 22 million
British pounds (approximately $33 million) by entering into a new five year $75
million credit facility with a group of banks, in the process repaying and
terminating its previous $25 million U.S. credit facility. The new facility
consists of two term loans aggregating $30 million to finance the Ring
acquisition and $20 million and $25 million for revolving loans, acceptances,
and trade and stand-by letters of credit for the Company's ongoing operations in
the U.S. and the U.K., respectively. Borrowings under the facility bear
interest, payable monthly, at the Company's option of either the prime rate plus
1.75% (11.25% at August 4, 2000) or the LIBOR rate plus a variable spread based
upon earnings, debt and interest expense levels defined under the credit
agreement (9.37% at August 4, 2000). Obligations under the facility are secured
by substantially all of the Company's U.S. and U.K. assets, including 100% of
the common stock of the Company's U.S. subsidiaries and 49% of the stock of the
Company's Canadian and Hong Kong subsidiaries. The agreement contains covenants
requiring that the Company maintain a minimum level of equity and meet certain
debt to adjusted earnings and fixed charge coverage ratios. Borrowings are
subject to a borrowing base defined as the aggregate of certain percentages of
the Company's U.S. and U.K. receivables and inventory. The agreement prohibits
the payment of cash dividends or other distribution on any shares of the
Company's common stock, other than dividends payable solely in shares of common
stock, unless approval is obtained from the lenders. The Company pays a
quarterly commitment fee of .50% per annum based on the unused portion of the
facility. Scheduled principal repayments for the $30 million in term loans by
fiscal year ending September 30 are as follows:
2000 $1,250,000
2001 $5,125,000
2002 $5,625,000
2003 $6,125,000
2004 $6,625,000
2005 $5,250,000
18
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Company's Canadian subsidiary has a credit facility with a Canadian
bank which provides $5.5 million Canadian dollars or U.S. equivalent
(approximately U.S. $3.7 million) in revolving demand credit. Canadian dollar
advances bear interest at the Canadian prime rate plus .5% (8.0% at June 30,
2000) and U.S. dollar advances bear interest at the U.S. base rate of the bank
(10.0% at June 30, 2000). 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. An annual commitment fee of .25% is
payable on the unused portion of the facility. At June 30, 2000, total Canadian
and U.S. dollar borrowings amounted to U.S. $406,000 (included in current notes
payable-credit lines) and U.S. $2.1 million was available under the borrowing
base calculation.
Go-Gro, the Company's Hong Kong subsidiary, 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% (9.75% at June 30, 2000). 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 June 30, 2000, Go-Gro had used $1.5 million of
this line for letters of credit (there were no borrowings) and U.S. $3.0 million
was available.
The Company's credit facilities, as well as U.S. income tax
considerations, impact the flow of the Company's funds between its major
subsidiaries. The Hong Kong credit facility prohibits the payment of dividends
without the consent of the bank and limits the amount of loans or advances from
Go-Gro to other Company subsidiaries to 50% of Go-Gro's pretax profits for the
previous twelve months. Go-Gro typically maintains relatively low outstanding
borrowings under this facility and management believes Go-Gro could repay and
terminate this facility on relatively short notice, eliminating this legal
restriction on the transfer of Go-Gro funds. However, any loan made or dividends
paid either directly or indirectly by Go-Gro to the Company or its U.S.
subsidiaries could be considered by U.S. taxing authorities as a repatriation of
foreign source income subject to taxation in the U.S. at a higher rate than that
assessed in Hong Kong. The net impact of such a funds transfer from Go-Gro could
be an increase in the Company's U.S. income taxes payable and its effective tax
rate. The U.S./U.K. credit facility prohibits loans to Go-Gro from either Ring
or the Company other than normal intercompany payables arising from trade. This
facility permits loans from the Company to Ring, but restricts the flow of funds
from Ring to the Company to payments constituting dividends or a return of
capital.
The Company believes that cash generated from operations and funds
available from its credit facilities will be sufficient to meet its expected
operating needs and planned capital expenditures for the foreseeable future.
However, the acquisition of Ring and the related new $75 million credit facility
greatly increase the Company's outstanding borrowings and debt service
requirements and also raise the Company's overall costs of borrowings. Any
material need for cash above current expectations or a significant decline in
the Company's profitability could require the Company to take actions such as
curtailing capital expenditures, cost-cutting, incurring additional indebtedness
and related costs, issuing additional equity securities or selling assets, any
or all of which actions could reduce the Company's liquidity and earnings and
the scope of its competitive options.
19
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Other Borrowings
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 September 2000. The agreement
requires the Company to maintain U.S. $1.5 million in a bank account as
collateral.
On June 30, 2000, the Company prepaid $4.3 million of the $5.1 million
outstanding balance on its 8% convertible subordinated notes and the remaining
$733,000 was prepaid in July 2000. A principal payment of approximately $2.5
million was required on March 15, 2001 and the remaining $2.6 million payment
was due on March 15, 2002. The notes were convertible into common shares of the
Company's stock at a conversion price of $6.63 per share at any time prior to
maturity. The notes were subordinated in right of payment to all existing and
future senior indebtedness of the Company and were callable at the option of the
Company with certain required premium payments. Interest was payable
semiannually. The payments were made from funds generated from operations. The
terms of the Note Agreement required 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 prohibited 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 limited 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 (6.7% at June 30, 2000) 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 million at June 30, 2000.
In January 1999, the Company entered into an interest rate swap agreement
maturing May 1, 2004, to manage its exposure to interest rate movements by
effectively converting its debt from a variable interest rate to a fixed
interest rate of 5.52%. Interest rate differentials paid or received under the
agreement are recognized as adjustments to interest expense.
The 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 $645,000 was
available at June 30, 2000.
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
$912,000 at June 30, 2000.
Capital Expenditures
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
20
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
approximately 500,000 square feet of factory buildings and 211,000 square feet
of dormitories and offices. A 162,000 square foot factory, 77,000 square foot
warehouse and 60,000 square foot dormitory became fully operational in June
1997. The remainder of the construction is required to be completed by December
31, 2000. The total cost for this project is estimated at $16.5 million (of
which $12.2 million had been expended as of June 30, 2000) 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 $588,000
had been paid or accrued as of June 30, 2000. SJE began construction of the
final phase of this facility in December 1999 and expects to fund this
construction with cash generated from operations.
Westinghouse License
On April 26, 1996, the Company entered into a license agreement with
Westinghouse Electric Corporation to market and distributes a full range of
lighting fixtures, lamps and other lighting products under the Westinghouse
brand name in exchange for royalty payments. The agreement terminates on
September 30, 2002. The Company has an option to extend the agreement for an
additional ten years. The royalty payments are due quarterly and are based on a
percent of the value of the Company's net shipments of Westinghouse branded
products, subject to annual minimum payments due. Commencing September 30, 2000
either party has the right to terminate the agreement if the Company does not
meet the minimum net shipments of $25 million for fiscal 2000, $40 million for
fiscal 2001 and $60 million for fiscal 2002. Net sales of Westinghouse branded
products amounted to $20.0 million and $14.0 million for the nine months ended
June 30, 2000 and 1999, respectively.
NYSE Listing
On August 9, 1999 the New York Stock Exchange ("NYSE") notified the
Company that it had changed its rules regarding continued listing for companies
which have shares traded on the NYSE. The new rules changed and increased the
requirements to maintain a NYSE listing. Through June 30, 2000, the Company did
not meet the new rules, which require a total market capitalization of $50
million and the maintenance of minimum total stockholders' equity of $50
million. The Company's stockholders' equity as of June 30, 2000 was $50.4
million. However, the Company's total market capitalization as of the close of
business on August 4, 2000 was only $30.2 million. As requested by the NYSE, the
Company had previously provided the NYSE with its plan to meet the new standards
by February 2001. The Company's plan was accepted by the NYSE in October 1999
and continues to be monitored by the NYSE through the current quarter. However,
no assurances can be given that the objectives of the plan will be accomplished
by February 2001. If the Company is ultimately unable to achieve the plan's
objectives, the Company's shares could be suspended from trading, however the
Company believes other trading venues are available for its stock.
Foreign Currency Risk and Raw Materials Prices
The Company maintains investments in subsidiaries in Canada, Mexico and
Chile and sells its products into these foreign countries. The Company sells
into Europe and maintains major capital investments in manufacturing facilities
in China and supporting administrative offices in Hong Kong. With the
acquisition of Ring in July 2000, the Company has a major capital investment and
significant operations in the United Kingdom. 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 borrows in British pounds, 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 nine months ended June 30, 2000 the Company recorded foreign currency
gains or (losses) for its China, Canadian, Mexican and Chilean operations of
($118,000), $66,000, ($75,000) and $9,000, respectively.
21
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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. Significant increases
in raw materials prices could have an adverse impact on the Company's net sales
and income from continuing operations.
Impact of New Accounting Pronouncements
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") which summarizes certain of the staff's
view in applying generally accepted accounting principles to revenue recognition
in financial statements. The effective date of SAB 101 for the Company is the
quarter ending December 31, 2000. The Company continues to evaluate the impact
that SAB 101 will have on the timing of revenue recognition in future periods.
Based on the Company's initial evaluation, the Company believes SAB 101 will not
have a material impact on its financial position or results of operations.
Other Matters
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.
The People's Republic of China currently enjoys normal trading
relations ("NTR"). In the context of United States tariff legislation, such
treatment means that products are subject to favorable duty rates upon entry
into the United States. The United States annually reconsiders the renewal of
NTR trading status for the PRC. Members of Congress and the "human rights
community" also 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 for this
self-insurance provision and has accrued $170,000 for this contingency as of
June 30, 2000. 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
22
<PAGE>
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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.
In November 1998 the Company's Board of Directors 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. Subsequently the Company received
authorization from its Board to repurchase an additional $700,000. As of August
4, 2000, the Company had repurchased 604,900 shares for approximately $2.3
million.
On March 21, 2000, the Company's Board of Directors approved a Stock
Option Plan which provides for the issuance of options to purchase 325,000
shares of the Company's common stock at a purchase price equal to the fair
market value on the date of grant. In June 2000, the Company issued to certain
employees, under the new plan, options to purchase 250,000 shares at $3.9375 per
share, the market value on such date. One third of the options becomes
exercisable one year after the date of the grant with one third vesting during
each of the following two years. In July 2000, the Company also issued to other
employees, outside of its option plans, options to purchase 210,000 shares at
prices ranging from $4.06 to $4.38 per share, the market value on such date. One
third of the options becomes exercisable one year after the date of the grant
with one third vesting during each of the following two years.
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.
23
<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
10.196 Third Amendment to Financing Agreement between Catalina
Lighting Canada (1992), Inc. and National Bank of Canada
dated May 15, 2000.
11 Schedule of Computation of Diluted Earnings per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On June 7, 2000, a form 8-K was filed concerning the commencement of a
cash offer of approximately $33 million to acquire all of the
outstanding ordinary and convertible preference shares of U.K.- based
Ring PLC.
On July 20, 2000, a form 8-K was filed concerning the completion of a
cash offer for all of the outstanding ordinary and convertible
preference shares of U.K.- based Ring PLC.
24
<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: August 11, 2000
25
<PAGE>
Exhibit Index
Exhibit No. Exhibit Description
----------- -------------------
10.196 Third Amendment to Financing Agreement between Catalina
Lighting Canada (1992), Inc. and National Bank of Canada
dated May 15, 2000.
11 Schedule of Computation of Diluted Earnings per Share.
27 Financial Data Schedule.
