SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1999
Commission file number: 1-12840
CSL LIGHTING MANUFACTURING, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4463033
(State of incorporation) (I.R.S. employer identification No.)
14625 East Clark Avenue, City of Industry, California 91745
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code: 626 336-4511
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,336,769 shares of common
stock, $.01 par value, as of August 23, 1999.
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CSL LIGHTING MANUFACTURING, INC.
INDEX
PART I. - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Balance Sheets at
December 31, 1998 and
June 30, 1999 (Unaudited)..........................................3 - 4
Condensed Statements of Operations
for the six months ended
June 30, 1998 (Unaudited) and
June 30, 1999 (Unaudited).............................................5
Condensed Statements of Operations
for the three months ended
June 30, 1998 (Unaudited) and
June 30, 1999 (Unaudited).............................................6
Condensed Statements of Cash Flows
for the six months ended June 30, 1999 (Unaudited)
and June 30, 1998 (Unaudited)..........................................7
Notes to Unaudited Condensed Financial Statements.................8 - 11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................................................12 - 17
SIGNATURES....................................................................18
2
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CSL LIGHTING MANUFACTURING, INC.
CONDENSED BALANCE SHEETS
ASSETS
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash $ 65,000 $ 61,000
Accounts receivable, net of
allowance for doubtful
accounts of $298,000 at
December 31, 1998, and
$308,000 at June 30, 1999 1,310,000 1,207,000
Inventories 3,492,000 2,939,000
Other current assets 218,000 215,000
---------- ----------
5,085,000 4,422,000
PROPERTY AND EQUIPMENT, at cost,
net of accumulated depreciation and
amortization of $2,128,000 at December 31,
1998 and $1,189,000 at June 30, 1998 1,004,000 577,000
COST IN EXCESS OF NET BOOK VALUE OF
ASSETS PURCHASED, net of accumlated
amortization of $2,000 at December 31, 1998
and $10,000 at June 30, 1999 215,000 214,000
OTHER ASSETS 117,000 118,000
---------- ----------
$6,421,000 $5,331,000
========== ==========
The accompanying notes are an integral part of these condensed balance sheets
3
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CSL LIGHTING MANUFACTURING, INC.
CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(Unaudited)
CURRENT LIABILITIES:
Current portion of long - term debt $ 1,929,000 $ 1,613,000
Notes payable - related parties 268,000 455,000
Accounts payable affiliates -- 678,000
Accounts payable 1,260,000 621,000
Accrued expenses and other current
liabilities 833,000 1,184,000
------------ ------------
4,290,000 4,551,000
------------ ------------
LONG - TERM LIABILITIES:
Long - term debt, net of current portion 92,000 91,000
Subordinated convertible notes 1,452,000 425,000
Deferred rent 179,000 --
------------ ------------
1,723,000 516,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value:
Authorized - 1,000,000 shares
Issued and Outstanding - none -- --
Common stock, $.01 par value:
Authorized - 30,000,000 shares
Issued and Outstanding -
1,145,017 shares at December 31, 1998
and 2,336,769 at June 30, 1999 12,000 23,000
Additional paid-in-capital 16,279,000 18,171,000
Less - Shares held in treasury (1,218,000) (1,218,000)
Deferred compensation (445,000) (103,000)
Retained deficit (14,220,000) (16,609,000)
------------ ------------
408,000 264,000
------------ ------------
$ 6,421,000 $ 5,331,000
============ ============
The accompanying notes are an integral part of these condensed balance sheets
4
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CSL LIGHTING MANUFACTURING, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
1998 1999
----------- -----------
NET SALES $ 6,517,000 $ 4,677,000
COST OF GOODS SOLD 3,854,000 3,102,000
----------- -----------
2,663,000 1,575,000
----------- -----------
OPERATING EXPENSES:
Selling 1,425,000 1,120,000
General and administrative 1,254,000 1,684,000
Plant closure costs -- 700,000
----------- -----------
2,679,000 3,504,000
----------- -----------
Loss from operations (16,000) (1,929,000)
----------- -----------
OTHER INCOME (EXPENSE):
Loss on disposal on fixed assets -- (300,000)
Interest income 1,000 --
Interest expense - financing obligations (163,000) (116,000)
Interest expense - conversion discount,
interest and additional stock conversion
bonus for convertible notes (72,000) (43,000)
----------- -----------
(234,000) (459,000)
----------- -----------
Loss before provision for
income taxes (250,000) (2,388,000)
PROVISION FOR INCOME TAXES 1,000 1,000
----------- -----------
NET LOSS $ (251,000) $(2,389,000)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING 1,059,385 1,946,139
=========== ===========
NET LOSS PER COMMON SHARE - BASIC $ (0.24) $ (1.23)
=========== ===========
The accompanying notes are an integral part of these
condensed financial statements
5
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CSL LIGHTING MANUFACTURING, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
(UNAUDITED)
1998 1999
----------- -----------
NET SALES $ 2,989,000 $ 2,085,000
COST OF GOODS SOLD 1,802,000 1,154,000
----------- -----------
1,187,000 931,000
----------- -----------
OPERATING EXPENSES:
Selling 729,000 520,000
General and administrative 607,000 417,000
----------- -----------
1,336,000 937,000
----------- -----------
Loss from operations (149,000) (6,000)
----------- -----------
OTHER INCOME (EXPENSE):
Gain on disposal on fixed assets -- 2,000
Interest income 1,000 --
Interest expense - financing obligations (79,000) (59,000)
Interest expense - conversion discount,
interest and additional stock conversion
bonus for convertible notes (37,000) (11,000)
----------- -----------
(115,000) (68,000)
----------- -----------
Loss before provision for income
taxes (264,000) (74,000)
PROVISION FOR INCOME TAXES -- --
----------- -----------
NET LOSS $ (264,000) $ (74,000)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING 1,076,538 2,336,769
=========== ===========
NET LOSS PER COMMON SHARE - BASIC $ (0.25) $ (0.03)
=========== ===========
The accompanying notes are an integral part of these
condensed financial statements
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CSL LIGHTING MANUFACTURING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
1998 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (251,000) $(2,389,000)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Loss on disposal of property and equipment -- 300,000
Deferred compensation 33,000 342,000
Depreciation and amortization 257,000 228,000
Provision for doubtful accounts 47,000 90,000
Decrease (increase) in assets:
Accounts receivable 329,000 13,000
Inventories (212,000) 553,000
Other 177,000 (69,000)
Increase (decrease) in liabilities:
Bank overdraft 95,000 --
Accounts payable (70,000) (639,000)
Accounts payable affiliates -- 678,000
Accrued expenses (138,000) 678,000
Deferred rent (11,000) (179,000)
----------- -----------
Net cash (used in) provided by
operating activities 256,000 (394,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (21,000) (20,000)
Other assets (6,000) (9,000)
----------- -----------
Net cash used in investing activities (27,000) (29,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable -
related parties -- 186,000
Repayments of long-term debt (361,000) (317,000)
Net proceeds from sale of common stock -- 550,000
----------- -----------
Net cash (used in) provided by
financing activities (361,000) 419,000
----------- -----------
NET DECREASE IN CASH (132,000) (4,000)
CASH, beginning of period 152,000 65,000
----------- -----------
CASH, end of period $ 20,000 $ 61,000
=========== ===========
The accompanying notes are an integral part of these
condensed financial statements
7
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CSL LIGHTING MANUFACTURING, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with the requirements of Form 10-QSB and, therefore, do not include
all information and footnotes which would be presented were such financial
statements prepared in accordance with generally accepted accounting principles.
These statements should be read in conjunction with the Company's Annual report
on Form 10-KSB which contain audited financial information as of December 31,
1998 and 1997. In the opinion of management, these interim financial statements,
when read in conjunction with Management's Discussion and Analysis contained in
this report, reflect all adjustments necessary for a fair presentation of the
financial position and results of operations for the periods presented. The
results of operations and cash flows for such periods are not necessarily
indicative of results to be expected for the full year.
Certain prior year financial information has been reclassified to conform to
current year presentation.
2. SALE OF EQUITY TO INTERIORS, INC.
On March 2, 1999, the Company, consummated the sale of 1,191,752
newly-issued shares of its common stock, par value $0.01 per share (the
"Shares"), to Interiors, Inc., a Delaware corporation ("Interiors"),
representing approximately 51.0% of the outstanding shares of the Company's
Common Stock as of such date (giving effect to such issuance), pursuant to the
terms of a Stock Purchase Agreement, dated as of March 1, 1999 (the "Purchase
Agreement"), by and between the Company and Interiors. Pursuant to the terms of
the Purchase Agreement, Interiors acquired the Shares from the Company in
exchange for (i) the cancellation of approximately $1.4 million of outstanding
Company convertible debt and related obligations and (ii) $600,000 in cash. As
contemplated by the Purchase Agreement, the Company and Interiors entered into a
Standstill Agreement, dated as of March 1, 1999 (the "Standstill Agreement"), at
the time of the purchase of the Shares. Pursuant to the Standstill Agreement,
during a standstill period ending July 28, 1999 (which period is subject to
early termination in certain circumstances set forth in the Standstill
Agreement), Interiors and its "affiliates" (as such term is defined in Rule
12b-2 under the Securities Exchange Act of 1934, as amended), executive officers
and directors (collectively, its "Affiliates") are prohibited from acquiring
additional shares of the Company's Common Stock (except by way of stock
dividends or other distributions or offerings made available to holders of the
Company's Common Stock generally) if the effect of such acquisition would be to
increase the number of shares of the Company's Common Stock then owned by
Interiors and its Affiliates to greater than 51.0% of the shares of the
Company's Common Stock then outstanding. Notwithstanding the foregoing, in the
event Interiors shall own less than 51.0% of the outstanding shares of the
Company's Common Stock during the standstill period, Interiors may acquire
additional shares of the Company's Common Stock during the standstill period,
provided that the effect of such acquisition would not increase the number of
shares of the Company's Common Stock then owned by Interiors and its Affiliates
to greater than 51.0% of the shares of the Company's Common Stock then
outstanding. In addition, pursuant to the terms of the Purchase Agreement, the
Board of Directors of the Company voted to expand the Board of Directors of the
Company from four to seven members and appointed four persons to fill vacancies
on the Board of Directors of the Company resulting from such expansion and the
resignation of one director, three of which persons were designated by the
Company and one of which was mutually designated by the Company and Interiors.
The Purchase Agreement provides that for a period of not less than 150 days
after the closing date of the transaction, six of the seven members of the Board
of Directors of the Company shall consist of (a) three persons designated by the
pre-closing members of the Board of Directors of the Company, and (b) three
persons designated by Interiors. From the date on which the Board of Directors
holds its first meeting following the closing of the transactions contemplated
by the Purchase Agreement to the date which is 150 days following such closing
date, the seventh member of the Board of Directors shall be the person
previously mutually agreed upon by the
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Company's designees and Interior's designees. The terms of the Purchase
Agreement and the Standstill Agreement, and the transactions contemplated
thereby, were determined as a result of arm's-length negotiations between
representatives of both the Company and Interior.
Plant Closure and Management Changes
In connection with the sale of 51% of the Company, the Board of Directors has
determined to close the Company's facility in Valencia, California and relocate
its operations into a facility leased by Interiors. In May 1999, the Company
moved its main operation to a facility leased by Interiors in the City of
Industry, California. The Company estimates that the subsequent rental of the
Valencia facility will take approximately one year. The Company originally
estimated the Valencia plant closure expenditures at approximately $700,000 and
has provided for those expenditures on the Balance Sheet and Statement of
Operations as of and for the six months ended June 30, 1999. In addition, as a
result of the plant closure, during the six months ended June 30, 1999 the
Company wrote off $272,000 of property and equipment.
The Company has entered into an agreement ("Service Agreement") with Interiors
whereby Interiors provides office space, management services, office supplies,
personnel and managerial and administrative services to the Company. Further,
Interiors provides various consulting services in the area of marketing,
production, finance and strategic planning. In addition, the Service Agreement
provides for working capital advances to the Company by Interiors at a
rate of 6.75% per annum. The Company is required to pay Interiors
actual costs for service used plus a $100,000 management fee per quarter. The
term of the service agreement runs from March 1999 to February 2000. The Company
believes that this arrangement will result in significant reduction in the
Company's general and administrative expenses. As of June 30, 1999 the Company
owed Interiors $578,000 pursuant to the Service Agreement.
On March 9, 1999, at a Special Meeting of the Board of Directors, the Board
terminated Scott Searle as President of the Company. On March 12, 1999, the
Company received a letter from Mr. Searle's counsel alleging certain claims
against the Company in the amount of $377,600 in connection with his affiliation
with the Company. The Company believes the claims are without merit and/or that
it has defenses to such allegations and intends to defend itself vigorously. In
association with Mr. Searle's termination the Company has expensed, for the six
months ended June 30, 1999, approximately $109,000 of unamortized deferred
compensation in connection with a 1995 deferred stock grant.
In April 1999, the Company entered into a settlement and release agreement (the
"Agreement") with Mark Allen, the former Chief Executive Officer and then a
Director of the Company. Pursuant to the Agreement, the Company paid to Mr.
Allen the sum of $205,000 in full satisfaction of the Company's obligations
pursuant to Mr. Allen's employment agreement. The Company and Mr. Allen
exchanged general releases in connection with the transaction. In connection
with the payment to Mr. Allen, Interiors has loaned to the Company $205,000
pursuant to a convertible note bearing interest at 6.75% per annum due April 30,
2001. The note will be convertible on or after July 28, 1999, at the election of
the holder, into shares of Company Common Stock at a conversion price of $0.345
per share (the average closing price of the Common Stock on the thirty trading
days preceding March 22, 1999, the date the transaction was approved). As of
March 31, 1999 the Company had recorded an accrued liability of $250,000 on the
statement of financial conditions in connection with its settlement with Mr.
Allen. During the six months ended June 30, 1999, The Company has expensed
approximately $217,000 of unamortized deferred compensation in connection with
Mr. Allen's 1995 deferred stock grant.
3. WEIGHTED AVERAGE NUMBER OF SHARES
Net income or loss per share is based upon the weighted average number of shares
outstanding during the period in accordance with SFAS 128 "Earnings Per Share".
Due to the net losses for the three and six months ended June 30, 1999, stock
options and warrants were not included as common stock equivalents as the effect
would be anti-dilutive.
9
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4. INVENTORIES
Inventories include costs of materials, labor and manufacturing overhead, and
are stated at the lower of cost (weighted average) or market and consist of the
following at December 31, 1998 and June 30, 1999:
December 31, June 30,
1998 1999
---- ----
Raw Material $1,067,000 $ 961,000
Finished Goods 2,425,000 1,978,000
---------- ----------
$3,492,000 $2,939,000
========== ==========
5. INCOME TAXES
Under FASB Statement No. 109, Accounting for Income Taxes, deferred tax assets
may be recognized for temporary differences that will result in deductible
amounts in future periods and for loss carry-forwards. A valuation allowance is
recognized if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax asset will not be realized.
Based on the Company's operating history, and inception to date accumulated
deficit, all of the Company's deferred tax assets are offset by a valuation
allowance.
The current provision for income taxes for the three and six months ended June
30, 1999 consists of the minimum state tax.
6. STATEMENTS OF CASH FLOWS
Supplemental cash flows disclosures at June 30, 1998 and 1999 are as follows:
1998 1999
---- ----
Interest paid $154,000 $113,000
======== ========
Income taxes paid $ 1,000 $ 1,000
======== ========
In conjunction with the sale of 51% of its common stock to Interiors, the
Company has recorded $1,355,000 of subordinated debt and associated penalties
and interest as a non-cash transaction on the statement of cash flows for the
six months ended June 30, 1999.
10
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7. DEBT
Bank Debt
At June 30, 1999, the Company had an outstanding balance of $1,598,000 on its
bank line of credit and term loan. On July 15, 1999 the Company was notified by
its bank that it was in default of certain provisions of its agreement and
therefore interest rates pertaining to the Company's line of credit had
increased from prime plus 2.75% per annum to prime plus 5.75 per annum, the
default interest rate. Further, the Company's term loan interest rate increased
from prime plus 3% to prime plus 6%. The terms of the Bank debt also require
that the Company maintain a tangible net worth of at least $1,000,000. As of
June 30, 1999 the Company is out of compliance with this covenant. The line of
credit and term loans are due in October 2000.
In June 1998 Interiors Inc. signed an unconditional continuing guaranty of the
Company's bank debt.
Subordinated Convertible Notes
During 1996 and 1997, the Company raised operating capital through the placement
of six different series of Subordinated Convertible Notes bearing interest at
rates ranging from six to twelve percent. Each series could be converted into
common stock commencing 90 days after issuance at discounted conversion prices
based on 75 or 80 percent of the average bid price for the five days preceding
the notice of conversion.
The Company's 8% subordinated convertible notes of $1,027,500 were cancelled as
part of consideration of the Company sale of 51% of its common stock (See Note 2
"Sale of Common Stock to Interiors and Management Change"). In addition
approximately $327,000 of accrued interest and penalties were also cancelled as
part of this stock transaction.
The twelve percent Subordinated Convertible Note of $325,000 at March 31, 1998
became due and payable on November 27, 1997. The Company has informed the debt
holder that the $325,000 of debt is subordinate to the Company's line of credit
and term financing with its bank.
8. RELATED PARTY TRANSACTIONS
The Company issued to Interiors two Convertible Notes due April 30, 2001 in the
aggregate amount of $355,000 bearing interest at 6.75% per annum. The
Convertible Notes are convertible at $.345 per share and are accounted for as
Notes payable - related parties on the Balance Sheet as of June 30, 1999.
In connection with the Service Agreement, the Company owes Interiors and
subsidiaries $578,000 for facilities used and services rendered.
The Company has a note payable to a shareholder for $70,000.
In connection with the purchase of Ortek, the Company has a non interest bearing
note payable to an employee for $130,000. The note is payable in monthly
installments of $10,000.
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Item 2 - Management's Discussion and Analysis of Financial Conditions and
Results of Operations:
Cautionary Statement Identifying Important Factors That Could Cause The
Company's Actual Results to Differ From Those Projected in Forward Looking
Statements. Pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this report are advised that this
document contains both statements of historical facts and forward looking
statements. Forward looking statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
indicated by the forward looking statements. Examples of forward looking
statements include, but are not limited to (i) projections of revenues, income
or loss, earnings per share, capital expenditures, dividends, capital structure
and other financial items, (ii) statements of the plans and objectives of the
Company or its management or Board of Directors, including product offerings,
and market opportunities, or estimates or predictions of actions by customers,
suppliers, competitors or regulatory authorities, (iii) statements of future
economic performance, and (iv) statements of assumptions underlying other
statements and statements about the Company and its business. This report also
identifies important factors which could cause actual results to differ
materially from those indicated by the forward looking statements. These risks
and uncertainties include the factors discussed under the heading "Certain
Factors That May Affect Future Growth" beginning at page 11 of this report. The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto appearing elsewhere in
this report.
Overview:
In March 1999, the Company completed a private placement of 1,191,752 shares of
its common stock, representing 51% of its outstanding shares, to Interiors, Inc.
("Interiors") for total consideration of approximately $2 million. In
conjunction with the transaction, Interiors and the Company entered into a
Standstill Agreement and the Company expanded its Board of Directors to seven
members, including three designees of Interiors.
In connection with the Company's private placement, the Board of Directors
installed a new management team, which has relocated the Company's operations
within a facility leased by Interiors (See Note 2 "Sole of Equity to Interiors
Inc."). The Company has entered into an agreement with Interiors whereby
Interiors will provide office space, management services, office supplies,
personnel, managerial and administrative services. Further, Interiors will
provide various consulting services in the area of marketing, production,
finance and strategic planning. In addition, the agreement provides for working
capital advances to the Company by Interiors at an interest rate of 6.75 per
annum.
The Company continues to explore strategic opportunities with Interiors and its
subsidiaries to expand product sales through cross-marketing arrangements.
Management believes that the consolidation of administrative and manufacturing
functions will improve operating efficiencies, yield profitability and,
accordingly, enhance shareholder value.
Beginning in 1999, the Company's marketing strategy was to continue to exploit
new markets with its new product offerings and maximize the efficiencies of its
manufacturing and distribution network on a worldwide basis. During the year
ended December 31, 1998 the Company developed four new product offerings,
"Spotz", "Tableau", "Primary Colors" and "Counter Attack" which were released in
the third and fourth quarters of 1998 and in the first quarter of 1999. In 1998,
the Company also purchased substantially all of the assets of "Ortek" Lighting
thereby expanding its low-voltage downlight product offerings. During 1996 and
1997 the Company
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expanded its operations to include a presence in Asia, Europe and Africa. In
1997 and 1998, due in part to the Asian fiscal crisis, the Company reduced its
exposure overseas by closing its Shanghai office and by focusing on domestic
sales. In March 1999, the Company closed its Singapore office.
During the second quarter of 1999 the Company's experienced significant staff
and manufacturers representative turnover. Several product lines were evaluated
and discontinued. In addition, the relocation of the operations of the Company
hindered production and hence sales in the second quarter of 1999.
Going Concern Consideration
The Company has suffered recurring losses from operations and had an accumulated
deficit at June 30, 1999 of $16,609,000 that raises substantial doubt about the
Company's ability to continue as a going concern. In addition, the Company's
common stock has been delisted from the Nasdaq SmallCap Market for failure to
meet the minimum bid price maintenance listing requirement. The Company's common
stock is currently traded on the OTC Bulletin Board of the National Association
of Securities Dealers, Inc. under the symbol CSLX. As a consequence, it may be
more difficult to sell or obtain quotations as to prices of the Company's common
stock, which may adversely impact the liquidity thereof. In the past, the
Company's cash flow requirements have been met by the generation of capital
through public sales of equity borrowings and the issuance of convertible
debentures issued with "conversion at a discount" features, although no such
securities were issued during the first half of 1999. No assurance can be given
that this source of financing will continue to be available and demand for the
Company's equity instruments will be sufficient to meet its capital needs. The
Company has been meeting its capital needs through cash infusions by Interiors.
However, there can be no assurance that the Company may continue to be supported
by Interiors.
The Company has received notification from its Bank that it's in default of
certain provisions of its loan agreements (See Note 7 "Debt"). This default
has lead to an increase in the interest rate applicable to the Company's
outstanding bank debt and may require the Company to refinance its debt should
the Bank accelerate the maturity date of the facility.
If the Company's credit facility is terminated and or the Company is unable to
generate significant profits and or continue to obtain financing or support from
Interiors or other parties for its working capital requirements, it may have to
curtail its business sharply or cease business altogether.
Management has evaluated its current operations and has focused the Company's
efforts and developed plans to generate operating income and continue the
Company's operations through fiscal 1999. Management's plan includes the
following:
The relocation of operations within a facility leased by Interiors and the
implementation of a service agreement with Interiors for various financial
and marketing consulting services
To enhance its credit facility with its bank by obtaining a guarantee from
Interiors of the Company's bank debt.
To evaluate its current product offerings and distribution arrangements.
To explore cross-marketing opportunities with Interiors.
If, however, the Company experiences losses from operations, it may be required
to raise additional working capital to support its operations. Further, there
can be no assurance that the
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Company will be able to generate sufficient cash flows from operations, or raise
additional funding to support the Company's operations, the failure of which
would have a material effect on the Company's operations and financial position.
Sales
Sales decreased by $1,840,000 or 28.2% from $6,517,000 for the six months ended
June 30, 1998, to $4,677,000 for the six months ended June 30, 1999, and sales
decreased by $904,000 or 30.2% from $2,989,000 for the three months ended June
30, 1998, to $2,085,000 for the three months ended June 30, 1999. In the first
quarter of 1998 the Company had generated sales from specific high profile jobs
in Las Vegas. In the first quarter of 1999 the Company did not replace those
jobs. In addition, the relocation of the operations of the Company hindered
production and hence sales in the second quarter of 1999.
Gross Profit
Gross profit decreased by $1,088,000 or 40.9% from $2,663,000 for the six months
ended June 30, 1998, to $1,575,000 for the six months ended June 30, 1999, and
gross profit decreased by $256,000 or 21.6% from $1,187,000 for the three months
ended June 30, 1998, to $931,000 for the three months ended June 30, 1999. The
decrease in margin as a percentage of net sales of 7.2% from 40.9% to 33.7% for
the six months ended June 30, 1998 and 1999, respectively, is attributable to an
increase in an inventory obsolescence and overstock reserves of $300,000 in the
first quarter of 1999. The increase in margin as a percentage of net sales of
5.0% from 39.7% to 44.7% for the three months ended June 30, 1998 and 1999,
respectively, is attributable to lower overhead costs associated with the
relocation of the Company's operations into Interiors. The decrease in gross
profit dollars for the three and six months ended June 30, 1999 is attributable
to lower sales volume during the comparable period.
Selling Expense
Selling expenses decreased by $305,000 or 21.4% from $1,425,000 for the six
months ended June 30, 1998, to $1,120,000 for the six months ended June 30,
1999, and selling expense decreased by $209,000 or 28.7% from $729,000 for the
three months ended June 30, 1998, to $520,000 for the three months ended June
30, 1999.
The increase in selling expense as a percentage of sales for the six and three
months ended June 30, 1998 and 1999 of 2.1% and .6%, respectively, is
attributable to increased freight costs and commissions. The dollar decrease in
selling expenses for the three and six months ended June 30, 1998 versus the
three and six months ended June 30, 1999 is attributable to lower sales
commissions due to lower sales volume, and reduced expenditure from oversea
operations primarily in Singapore.
General and Administrative Expenses
General and administrative increased by $430,000 or 34.3% from $1,254,000 for
the six months ended June 30, 1998, to $1,684,000 for the six months ended June
30, 1999, and general and administrative expense decreased by $190,000 or 31.3%
from $607,000 for the three months ended June 30, 1998, to $417,000 for the
three months ended June 30, 1999.
The increase in general and administrative expenses for the six months ended
June 30, 1998 versus the six months ended June 30, 1999 of $430,000 is
attributable to Mr. Allen's settlement agreement and the write-off of the
unamortized deferred compensation associated with the 1995 stock grant for Mr.
Allen and Mr. Searle. In addition, the Company recorded $200,000 of
14
<PAGE>
management fee in accordance with its Service Agreement. The increase in general
and administrative costs were offset by decreases in management salaries and
related payroll taxes, legal expenses, and telephone expenses.
The decrease in general and administrative expenses for the three months ended
June 30, 1998 versus the three months ended June 30, 1999 is attributable to the
realignment of the Company's cost structure with its Service Agreement with
Interiors. Overall, the Company through its Service Agreement has reduced its
insurance, payroll, and other related benefits expense.
Plant Closure Costs
In connection with the sale of 51% of the Company the Board of Directors has
determined to close the Company's facility in Valencia, California and relocate
its operations into a facility leased by Interiors. The Company estimates that
the move and subsequent rental of the Valencia facility will take approximately
one year. The Company has estimated the plant closure expenditures at
approximately $700,000 and has provided for those expenditures on the Balance
Sheet and Statement of Operations as of and for the six months ended June 30,
1999.
Other Income and (Expense)
Other Income and expense increased by $225,000 or 96.2% from $234,000 for the
six months ended June 30, 1998, to $459,000 for the six months ended June 30,
1999, and other income and expense decreased by $47,000 or 40.9% from $115,000
for the three months ended June 30, 1998, to $68,000 for the three months ended
June 30, 1999. The increase in other income and expense for the six months ended
June 30, 1999 versus the six months ended June 30, 1998 is attributable to the
write off of $302,000 of certain fixed assets in the first quarter of 1999 in
connection with the 51% sale of the Company. The decrease in other income and
expense as a percentage of net sales and dollars for the three months ended June
30, 1999 versus the three months ended June 30, 1998, is primarily due to
reduced interest expense from lower bank borrowing and subordinate debt
holdings.
Provision for Income Taxes
The provision for income taxes for the six months ended June 30, 1998 and 1999
reflects the minimum state tax due.
15
<PAGE>
Liquidity and Capital Resources
During the first half of 1999, the Company used cash from operations of
$394,000. The net cash used in operations is primarily attributable to the
Company's net loss. In addition, the Company used cash from its Notes Payable to
Related Parties to pay down its accounts payable.
During the first half of 1999, net cash used in investing activities, of
$29,000, consists primarily of costs relating to trademarks and purchases of
small fixed assets.
During the first half of 1999, net cash provided by financing activities, of
$419,000, consisted primarily from the cash proceeds from the sale of 51% of the
Company's common stock and cash advances from Interiors. Financing activities
were offset by payments on the Company's bank debt and capital leases.
At June 30, 1999, the Company had an outstanding balance of $1,598,000 on its
bank line of credit and term loan. On July 15, 1999 the Company was notified by
its bank that it was in default of certain provisions of its agreement and
therefore interest rates pertaining to the Company's line of credit had
increased from prime plus 2.75% per annum to prime plus 5.75 per annum, the
default interest rate. Further, the Company's term loan interest rate increased
from prime plus 3% to prime plus 6%. The terms of the Bank debt also require
that the Company maintain a tangible net worth of at least $1,000,000. As of
June 30, 1999 the Company is out of compliance with this covenant. This default
may require the Company to refinance its debt should the Bank accelerate the
maturity date of the facility. In June 1999 Interiors Inc. signed an
unconditional continuing guaranty for the Company's bank debt. As of June 30,
1999 the line of credit and term loans are due in October 2000.
During 1999, the Company has received $933,000 of from Interiors through
$355,000 of 6.75% due on demand notes payable and $578,000 of non interest
bearing operating advances. In accordance with the Service Agreement the Company
may request additional financing, however there can be no assurances that this
type of financing will continue. As such, the elimination of this continued
support will have a material adverse effect on the Company's financial position.
The Company's common stock has been delisted from the Nasdaq SmallCap Market for
failure to meet the minimum bid price maintenance listing requirement. The
Company's common stock is currently traded on the OTC Bulletin Board of the
National Association of Securities Dealers, Inc. under the symbol CSLX. As a
consequence, it may be more difficult to sell or obtain quotations as to prices
of the Company's common stock, which may adversely impact the liquidity thereof.
With the implementation of its 1999 fiscal plan, the Company believes that it
will be able to generate sufficient cash flows to support its operations through
fiscal 1999. If, however, the Company experiences continued losses from
operations, bank default or loss of support from Interiors it may be required to
raise additional working capital to support its operations. Further, there can
be no assurance that the Company will be able to generate sufficient cash flows
from operations, or raise additional funding to support the Company's
operations, the failure of which would have a material adverse effect on the
Company's operations and financial position.
The Company believes that inflation has not had a material impact on it
operations.
Year 2000 Compliance
The Company is on schedule with a project that addresses the Year 2000 (Y2K)
issue of computer systems and other equipment with embedded chips or processors
not being able to properly recognize and process date-sensitive information
after December 31, 1999. Many
16
<PAGE>
systems use only two digits rather than four to define the year and these
systems will not be able to distinguish between the year 1900 and the year 2000.
This may lead to disruptions in the operations of business and governmental
entities resulting from miscalculations or system failures. The project is
designed to ensure the compliance of all of the Company's applications,
operating systems and hardware platforms, and to address the compliance of key
business partners. Key business partners are those customers and vendors that
have a material impact on the Company's operations. All phases of the project
should by completed by mid 1999 thus minimizing the impact of the Y2K problem on
the Company's operations.
The total estimated cost of the required modifications to become Y2K compliant
should not be material to the Company's financial position.
Failure to make all internal business systems Y2K compliant could result in an
interruption in, or a failure of, some of the Company's business activities or
operations. Y2K disruptions in customer operations could result in one or more
customers missing scheduled payments which could impact the Company's cash flow.
Y2K disruptions in the operations of key vendors could impact the Company's
ability to obtain components necessary for the manufacture of products and
fulfillment of contractual obligations. If one or more of these situations
occur, the Company's results of operations, liquidity and financial condition
could be materially and adversely affected. The Company is unable to determine
the readiness of its key business partners at this time and is therefore unable
to determine whether the consequences of Y2K failures will have a material
impact on the Company's results of operations, liquidity or financial condition.
The Y2K project is expected to significantly reduce the Company's level of
uncertainty about the Y2K.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly authorized and caused the undersigned to sign this Report on
the Registrant's behalf.
CSL LIGHTING MANUFACTURING, INC.
By: /s/ Max Mum
-------------------------------
Max Mum,
Chief Executive Officer
Dated: August 23, 1999
18
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 61,000
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