SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
Mark One
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the Fiscal Year ended December 31, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
Commission file number: 1-12840
CSL LIGHTING MANUFACTURING, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-4463033
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(State of incorporation) (I.R.S. employer identification No.)
27615 Avenue Hopkins, Valencia, California 91355-3447
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(Address of principal executive offices) (Zip Code)
(805) 257-4155
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(Issuer's telephone number, including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Common, par value $.01 per share NASDAQ
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, par value $.01 per share
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(Title of class)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 |_|
Check if there is no disclosure or delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
form 10-KSB |X|
For the year ended December 31, 1998, the revenues of the Registrant were
$12,386,000.
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant, based on the average bid and ask price on
April 9, 1999, was approximately $540,000.
As of April 12, 1999, the Registrant had a total of 2,376,384 shares of
Common Stock outstanding.
INCORPORATION BY REFERENCE
None.
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CSL LIGHTING MANUFACTURING, INC.
Form 10-KSB
TABLE OF CONTENTS
Page
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PART I.......................................................................4
Item 1. Business .....................................................4
Item 2. Properties ..................................................15
Item 3. Litigation ..................................................15
Item 4. Submissions Of Matters To A Vote Of Security Holders ........15
PART II.....................................................................16
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters .....................................16
Item 6. Management's Discussion and Analysis Of Financial
Conditions and Results of Operations ........................16
Item 7. Financial Statements ........................................21
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure .........................22
PART III....................................................................23
Item 9. Directors and Executive Officers of the Registrant ..........23
Item 10. Executive Compensation.......................................25
Item 11. Security Ownership of Certain Beneficial.....................27
Item 12. Certain Transactions.........................................28
Item 13. Exhibits And Reports On Form 8-K.............................29
FORWARD LOOKING STATEMENT INFORMATION
Certain statements made in this Annual Report on Form 10-KSB are
"forward-looking statements"(within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving judgements with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein particularly in view of the Company's early stage operations, the
inclusion of such information should not be regarded as a statement by the
Company or any other person that the objectives and plans of the Company will be
achieved. Factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements include, but are
not limited to, the factors set forth herein under the headings "Business,"
"Certain Factors That May Affect Future Growth" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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PART I
ITEM 1. BUSINESS
GENERAL
CSL Lighting Manufacturing, Inc., (d.b.a. Creative Systems Lighting) (the
"Company") designs, manufactures and markets mid to high-end lighting fixtures
for both commercial and residential applications on a worldwide basis.
The Company's product offerings consist of four core product categories
including recessed down lighting, accent linear lighting systems, surface system
coordinates, and task lighting. Approximately 60% of the Company's products use
halogen light sources, which are smaller, longer lasting and more energy
efficient light sources in comparison to traditional incandescent light sources.
The balance of the Company's core product categories primarily use compact
fluorescent, incandescent and xenon lamp sources.
The Company's core products are specified for use in new construction and
in the renovation of commercial and residential properties by architects,
engineers, interior designers and lighting designers (the "Specification
Market"). The Company's products are also sold directly to contractors, builders
and to retail customers through electrical distributors, lighting showrooms,
retail specialty stores and Home Centers (the "Consumer Retail Market"). The
Company believes that historically, approximately 80% of the Company's sales
have been made to the Specification Market and 20% to the Consumer Retail
Market.
In an effort to support its expansion overseas the Company established two
factory offices and showrooms in Shanghai, China and in Singapore. During 1997,
the Company entered a distribution agreement in Shanghai, China that resulted in
the distributor taking management and fiscal responsibility for the Shanghai
facility. In addition, during the first quarter of 1999, the Company reevaluated
its Singapore operation and closed its Singapore office. The Company may incur
certain liabilities as a result of the Singapore office closure which management
does not believe will be material to the Company's business and financial
results.
The Company continues to have overseas joint venture and distribution
agreements in China, Hong Kong, Singapore, The Philippines, Vietnam, and Taiwan.
Management believes that its recent entry into these markets together with the
fiscal crisis in Southeast Asia has adversely impacted its ability to penetrate
many of these markets.
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.
Interiors is a leading designer, manufacturer and marketer of a broad
range of decorative accessories for the residential, commercial, institutional
and contract markets. Interior's offerings include a wide range of products
including decorative lighting, table lamps, framed art, mirrors, and decorative
tabletop accessories. Interiors customers include furniture stores and home
furnishings centers, catalogue retailers, home improvement centers, department
stores and lighting retailers.
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The Company is exploring strategic opportunities with Interiors to expand
product sales through cross-marketing arrangements and opportunities to
consolidate administrative and manufacturing functions in an effort to improve
operating efficiencies, achieve profitability and enhance shareholder value.
The Lighting Industry
The domestic lighting industry consists of five major segments:
industrial, outdoor, commercial/institutional, residential and automotive. This
market is estimated to represent approximately $7.0 billion in annual gross
sales. Within each segment of the lighting industry there are many specialized
market segments that may utilize distinct technologies and require specialized
products. Overall sales of lighting products are affected by a variety of
factors, including: (i) general economic conditions; (ii) energy costs and
availability; (iii) governmental programs and regulations; (iv) manufacturing
capacity utilization; (v) new construction and retrofit activity; and (vi)
infrastructure expenditures.
The Company participates in the industrial, commercial/institutional and
residential segments of the lighting industry. While there are a large number of
competitors within each segment, the Company believes that it has an established
reputation and market presence in the segments in which it presently competes.
Product Categories and New Product Offerings
The Company designs, manufactures and markets recessed down lighting,
accent linear lighting systems, surface system coordinates and task lighting
systems. Approximately 60% of the Company's product offerings utilize halogen
lamps. These light fixtures, which are generally smaller in size, produce a
superior quality and intensity of light while not sacrificing style and detail
for size. The balance of the Company's products primarily use compact
fluorescent, incandescent and xenon lamp sources. The Company markets its
lighting products under a variety of proprietary trade names directly and
indirectly to commercial and residential end users for installation in private
residences, office buildings, hotels, restaurants, stores and other public and
private facilities. The Company believes that it has established market niches
offering performance engineered and tasks oriented products. The Company
believes that historically, approximately 80% of the Company's sales have been
made to the Specification Market and 20% to the Consumer Retail Market.
Substantially all of the Company's product offerings are available in both
United States and European/Asian standards.
Recessed Down Lighting. The Company's most successful product offering is
its high-end, low voltage halogen recessed down lighting product line, "Jewel
Light", featuring a complete line of die cast trims. A trim is that portion of
the light fixture that protrudes from the ceiling. As the market evolved and
expanded in this product category, a substantial market for lesser quality
(stamped versus die cast trims) with reduced price points developed. To address
this market need the Company introduced its Echo 21 line of low voltage halogen
recessed down lighting with appropriate price points. Echo 21 specifically
addresses the budget-oriented market and complements the Company's higher
quality and successful "Jewel Light" line. In 1998, the Company continued to
expand this product offering to include a number of new applications.
Additionally, in 1998 the Company acquired substantially all of the assets of
"Ortek" Lighting. Ortek Lighting designs and manufactures
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a complete line of miniature low-voltage recessed downlights. The Company
believes it currently offers the broadest low voltage down light product-line in
the industry.
Accent Linear Lighting Systems. This product category is dominated by the
Company's Invizilite product. The Invizilite product is a continuous, flexible
light source hidden from view to provide an upward or downward lighting or
"wash" part of a wall with light. Invizilite is available utilizing low voltage
halogen, incandescent and xenon bulbs. The Company introduced its third version
of Invizilite, "Invizilite 3" that utilizes xenon lamps allowing for longer
strip lengths between transformers and increased lamp life.
Surface System Coordinates. The Company introduced a systems approach to
surface lighting for suspension pendant applications; surface, wall and ceiling
mounted units. Surface system coordinates is a series of light module holders
with a variety of glass shapes, sizes, colors and lamp sources. The Company also
markets its surface system coordinates products under the tradenames "Optica",
"Versailles" And "Primary Colors". In 1998, the Company introduced "Spotz" a
modular lighting system featuring an array of shades, finishes, holders,
mounting possibilities, and means of support such as cord, stem and flexible
conduit.
Task Lighting. This product category includes many of the companies most
successful product offerings including under-cabinet lighting marketed under the
trade names Sure Task I and II, picture lights marketed under the trade name
"Pictura" and die-cast hockey puck styles light systems marketed under the trade
name "Apollo". In 1998, the Company introduced "Counter Attack" a low or line
voltage halogen dimmable under cabinet light, addressing mounting market demands
for a lower priced, utilitarian, under-counter lighting product. Additionally,
in 1998 the Company introduced a series of architectural accent table lamps
under the trade name "Tableau", offering a high design look at affordable price
points.
Manufacturing, Assembly, Design and Tooling
Substantially all of the Company's products are designed and tooled by the
Company and are either manufactured directly by the Company or specifically on
its behalf. Approximately 50% of the Company's products are manufactured or
assembled in the United States either at its principal facility in Valencia,
California or by local subcontractors. The balance of the Company's products are
manufactured primarily in China, Taiwan and Europe. Additionally, much of the
glass used in the Company's lighting fixtures is made in Venice, Italy, and
Vianne, France.
The Company owns all of the designs with respect to its line of products,
most of which were created by employees of the Company on a work-for-hire basis;
i.e., the design automatically becomes the property of the Company upon
creation. In addition, the Company also from time to time will retain outside
independent contractors to design lighting products. The Company owns such
designs and pays the independent designers on a consulting or royalty basis.
Sales and Marketing
Historically, substantially all of the Company's products were sold in the
United States and Canada. During 1996 and 1997, the Company entered into a
number of joint venture and cooperative agreements outside the United States to
expand its sales and marketing effort worldwide. In 1998, the Company
experienced a significant decrease in foreign sales. In 1998 and 1997, 0.7% and
5.8%, respectively, of the Company's sales were to entities outside of the
United States and Canada.
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Domestically, the Company has over 1,700 customer accounts and is
primarily dependent on independent manufacturer's sales agencies and independent
lighting and electrical distributors in selling its products to retail and
commercial end users. Five distributors or affiliated group of distributors,
individually account for more than 5% of the Company's sales.
The Company maintains business relationships with approximately 40
manufacturer's representatives who are often agencies employing a number of
sales personnel. The Company also has joint ventures and distribution agreements
in China, Hong Kong, Singapore, The Philippines, Vietnam, and Taiwan. With
respect to sale of the Company's products to the Consumer Retail Market, a
distributor generally places an order for the Company's product through a
manufacturer's sales agency, who forwards the order to the Company.
Alternatively, sales of the Company's products to the Specification Market are
typically initiated by a specifier (i.e., an architect, lighting designer,
interior designer or electrical engineer) notifying a contractor who contacts
either a distributor or manufacturer's sales agency to place the specifier's
order with the Company. All products sold to the Consumer Retail Market and the
Specification Market are typically sold on net 30 day terms.
None of the Company's present manufacturer's sales agencies are exclusive
to the Company and any of them could terminate their relationship with the
Company at any time for any reason. In addition, manufacturer's sales agencies
typically represent and distribute competing products. The Company's ability to
expand its operations will depend in significant part on its ability to attract
and retain qualified manufacturer's sales agencies experienced in the sale of
lighting products. The Company presently employs one full-time sales personnel
to supervise its manufacturer's sales agencies.
Product Warranties: Customer Service and Support
All of the Company's products are warranted by the Company from the date
of shipment. The Company's warranty provides that in the event its products as
delivered are defective, the Company has the right, in its sole discretion, to
either repair or replace the product; provided, however that in the event that
the Company's transformers or ballasts are not used in connection with the
product, the warranty is null and void.
The Company presently has five 800 telephone numbers and employs eight
full-time individuals solely in connection with providing customer and technical
support for its customers, distributors and sales manufacturer's agencies. Such
personnel are available five days per week from 7:00 a.m. to 5:00 p.m. Pacific
Coast Time to respond to calls and provide assistance.
Research and Development
The Company expended approximately $121,000 and $9,000 on research and
development during the years ended December 31, 1997 and 1998, respectively. The
Company subcontracts its research and development on an as needed basis.
Product Liability
The manufacture and sale of the Company's products subjects the Company to
the risk of product liability claims. The costs of defending or settling such
claims could have a material adverse effect on the Company, even if the Company
ultimately were to prevail. Although the Company
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presently has an aggregate of $12 million in product liability insurance, there
can be no assurance that such insurance can be maintained at an acceptable cost
to the Company or that any damages assessed against the Company will not exceed
its coverage.
Competition
The lighting industry is intensely competitive with respect to price,
design, quality and reliability. Among its competitors are numerous
international, national and regional manufacturers some of which have equivalent
products including Cooper Industries, Inc., Genlyte Group, Juno Lighting, Inc.,
Hubbell, Inc., Thomas Industries and Lithonia. The majority of the Company's
competitors are well established, and have substantially greater financial,
managerial, technical, marketing and other resources than the Company. The
Company competes based upon price, quality, design and its brand-name
recognition.
Underwriter's Laboratories and Other Testing Laboratories Listing
Substantially all of the Company's products are approved by Underwriters
Laboratories Inc. ("UL"), Electrical Testing Laboratories ("ETL"), or the
Canadian Standards Association ("CSA"). UL and CSA are not-for-profit
independent organizations and ETL is a for profit independent organization, all
of which test a wide variety of consumer and commercial products for compliance
with recognized U.S. and Canadian safety standards. All of the Company's
products that are UL or ETL listed in the United States are CSA approved in
Canada. Listing of a product by UL, ETL and CSA indicates that samples of that
product have been tested according to the respective country's safety standards
and found to be reasonably free from foreseeable risk of fire and electric shock
related hazards. In the United States, the laws of certain states prohibit the
sale of products that have not obtained and maintained a UL or ETL listing. Even
in those states where the Company is not required by law to obtain UL or ETL
listing, if it is unable to obtain and maintain such UL or ETL listing on an
ongoing basis, its ability to market and sell the product may be adversely
affected.
Intellectual Property Rights
Substantially all of the Company's products and their design, as well as
the design of the tooling used in the manufacturing of the Company's products,
are proprietary to the Company. Further, the Company has also sought to
establish certain proprietary rights with respect to the marks under which its
products and product categories are marketed. Consequently, the business of the
Company is dependent, to a certain extent, on the Company's ability to establish
and protect its intellectual property rights with respect to its products,
designs and trademarks and trade names under which it does business. The Company
currently has numerous patents and several patents pending. The Company
considers its patents to be a valuable asset. However, the Company believes that
its business is not dependent to any material extent upon any particular patent
or group of patents. The Company believes that its business is dependent upon
the technical and engineering skills of its employees, product differentiation,
reliability and performance, and on customer support and marketing.
Employees
As of March 31, 1999 the Company had 40 full-time employees. The Company
believes that its relations with its employees are good. None of the Company's
employees are represented by a collective bargaining agreement.
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Recent Developments
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 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.
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Management Changes
In April 1999, the Company entered into a settlement and release agreement
(the "Agreement") with Mark Allen, the former Chief Executive Officer and a
Director of the Company following his resignation in March 1999 as Chief
Executive Officer. Pursuant to the Agreement, the Company has agreed to pay 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 have
agreed to exchange general releases in connection with the transaction. In
connection with the payment to Mr. Allen, Interiors has agreed to loan 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 closing price of the Common Stock on
the thirty trading days preceding March 22, 1999, the date the transaction was
approved).
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.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE GROWTH
The following factors may affect the future growth and profitability of
the Company and should be considered by any prospective purchaser of the
Company's securities:
Accumulated Deficit; Operating Losses; Independent Auditor's Comments
Regarding Company's Ability to Continue as a Going Concern
At December 31, 1998, the Company had an accumulated deficit of
$14,220,000. The Company also experienced approximately $2,934,000 and
$2,160,000, of operating losses, respectively, during the years ended December
31, 1997 and 1998. These losses and accumulated deficit was generated primarily
from lower than expected dollar sales on all product lines, expenditures
relating to the start up of overseas offices and operations, and the write-down
of certain assets. Further, the report of the Company's independent auditors in
connection with the Company's financial statements at December 31, 1998 contains
an explanatory paragraph as to Company's ability to continue as a going concern.
Among the factors cited by the independent auditors as to the Company's ability
to continue as a going concern are that the Company has suffered recurring
losses from operations. The Company is exploring opportunities to enhance
product sales and reduce operating expenses in an effort to achieve
profitability. However, no assurance can be given that the Company will not
continue to incur operating losses or that the Company will be able to continue
operations as a going concern.
Limited Liquidity
At December 31, 1998 and March 31, 1999 the Company had working capital of
approximately $876,000 and $862,000. The Company continues to experience severe
working capital shortages which materially impair its ability to continue as a
going concern. The Company's credit facility provides for availability based
upon inventory and account receivable levels and, accordingly, the Company has
experienced limitations on the availability under this facility. If the Company
continues to experience working capital limitations it will materially impact
the Company's financial position and results of operations.
Additional Financing Requirements
To date the Company has met its capital and operating requirements through
public sales of equity and through borrowings. Recently the Company sold
1,191,752 newly issued shares of its common stock, pursuant to which the Company
received $600,000 in cash and the cancellation of $1,400,000 in outstanding
convertible debt. (See "Recent Developments".) In the past the Company has used
convertible debt offerings primary source of funds for working capital and have
included "conversion at a discount" features which have had an adverse affect on
profit and loss. No assurance can be given that future financings will not
include similar "conversion at a discount" features. The Company's continued
operations will depend upon revenues, if any, from operations and the
availability of equity or debt financing. The Company has no commitments for
additional financing. Further, there can be no assurance that the Company will
be able to generate levels of revenues and cash flows sufficient to fund
operations or that the Company will be able to obtain additional financing on
satisfactory terms, if at all, to achieve profitable operations.
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Expansion into New Markets; Need for Additional Financing
The Company believes that a significant portion of its continued growth
and profitability is dependent upon its ability to successfully market and ship
new products for lighting markets domestically and overseas. The exploitation of
these new markets will require working capital in excess of that which the
Company has available. There can be no assurance that the Company will be able
to generate sufficient revenues from its current or proposed business operations
or raise additional moneys necessary to achieve its expansion plan.
No Certainty of New Markets or Market Acceptance of New Product Lines
The Company has recently expanded operations worldwide, revamped its
product offerings and introduced new products for sale to the Specification and
the Consumer Retail lighting markets. Although the Company believes that its
products have been initially accepted by the Specification and the Consumer
Retail lighting markets, there can be no assurance that the Company will be able
to successfully manufacture and sell products for either or both of these
markets in sufficient quantities or at acceptable price levels to operate
profitably.
Highly Competitive Industry
The lighting industry is intensely competitive with respect to pace,
design, quality and reliability. The majority of the Company's competitors are
substantially larger in size and have substantially greater financial,
managerial, technical, marketing and other resources than the Company.
Risk of International Operations
The Company believes that there are material risks attendant to its
international expansion associated with the stability, both political and
economic, of any particular country. Principal among those risks are the
nationalization or privatization of any industry with which the Company does
business in that such changes tend to impact the time period in which
contractual commitments may be honored; currency crises with attendant exchange
rate turbulence; and sudden changes in interest rates which generally effect the
ability of customers to finance their purchases. There is no assurance that such
factors will not have a material adverse effect on the Company's business in the
future.
Risk of Foreign Vendors
A significant portion of the products are manufactured by foreign vendors.
The Company believes that there are material risks attendant to its dependence
on foreign vendors associated with the stability, both political and economic,
of any particular country. Principal among those risks are the time period in
which contractual commitments may be honored; currency crises with attendant
exchange rate turbulence; and sudden changes in interest rates which generally
effect international financial transactions. To date the Company has not
experienced any material impact as a result of its reliance on foreign vendors,
however, there is no assurance that such factors will not have a material effect
on the Company's business in the future.
Dependence on Third Party Manufacturer's Sales Agencies and Distributors
The Company is primarily dependent on independent manufacturer's sales
agencies and independent lighting and electrical distributors in selling the
Company's products to retail and
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commercial end users. Five distributors, or affiliated group of distributors,
independently accounted for more than 5% of the Company's sales during 1998.
Independent sales representative agencies accounted for approximately 34% of the
Company's sales during 1998. The Company is required to sustain relationships
with approximately 50 manufacturer's sales agencies worldwide, none of which are
exclusive to the Company and any of whom could terminate their relationship with
the Company at any time. In addition, manufacturer's sales agencies and
distributors typically represent and distribute competing products. In the event
the Company were to lose a substantial number of its independent distributors or
manufacturer's sales agencies, it could have a material adverse effect on the
Company if the Company were unable to find suitable, experienced replacements.
The Company's ability to expand its operations will depend in significant part
on its ability to attract and retain relationships with qualified manufacturers
sales agencies and independent distributors experienced in the sale of lighting
products. There is no assurance that the Company will be able to engage and
retain qualified manufacturer's sales agencies and independent distributors
capable of successfully marketing the Company's products.
Management Transition
During 1999, the Company has installed a new management team to direct the
day-to-day operations of the Company's business. In addition, in March 1999, the
Board of Directors of the Company was reconstituted and is currently comprised
of a majority of new Directors. The lack of continuity in management of the
Company could adversely impact the Company's relationship with its vendors,
customers and employees. No assurance can be given that the new management team
and reconstituted Board will be successful in implementing the Company's
business plan and achieving profitability.
Intellectual Property Rights
All of the Company's products and their design, as well as the design of
the tooling used in the manufacturing of the Company's products, are proprietary
to the Company. Further, the Company has sought to establish certain proprietary
rights with respect to the marks under which its products and product lines are
marketed. Consequently, the business of the Company is dependent, to a certain
extent, on the Company's ability to establish and protect its intellectual
property rights with respect to its products, designs and trademarks and trade
names under which it does business. The Company's failure or inability to
establish appropriate copyrights, trademarks and patents or to adequately
protect any of its intellectual property rights may have a material effect on
the Company.
Product Obsolescence
The lighting industry has experienced the introduction of numerous new
products in recent years, particularly in the fields of energy efficient and
decorative lighting. As a consequence, the demand for lighting products is
affected by both energy conservation concerns and changing consumer preferences.
Accordingly, there can be no assurance that any or all of the Company's product
lines will be accepted by consumers, or if accepted, that they will not become
obsolete or out of style. In the event that the marketplace does not accept a
significant portion of the Company's products, the Company's sales could be
adversely affected.
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Underwriter's Laboratories and Other Testing Laboratories Listing
Substantially all of the Company's products are approved by Underwriter's
Laboratories Inc. ("UL"), Electrical Testing Laboratories ("ETL"), or the
Canadian Standards Association ("CSA"). These organizations test a wide variety
of consumer and commercial products for compliance with United States and
Canadian recognized safety standards. In the United States, the laws of certain
states prohibit the sale of products that have not obtained and maintained a UL
or ETL listing. Even in those states where the Company is not required by law to
obtain UL or ETL listing, if it is unable to obtain and maintain such UL or ETL
listing on an ongoing basis, its ability to market and sell its products may be
adversely affected.
Product Liability
The manufacture and sale of the Company's products subjects the Company to
the risk of product liability claims. The costs of defending or settling such
claims could have a material adverse effect on the Company, even if the Company
ultimately were to prevail. Although the Company presently has product liability
insurance, there can be no assurance that such insurance can be maintained at an
acceptable cost to the Company or that any damages assessed against the Company
will not exceed its coverage.
Control by Principal Stockholders
In March 1999, Interiors acquired 51.0% of the outstanding shares of the
Company's Common Stock. In conjunction therewith, Messrs. Munn, Belenski and
Schwartz, designees of Interiors, were appointed to the Board of Directors of
the Company. As a result of its ownership interest, Interiors may be able to
elect all of the Company's directors and generally control the affairs of the
Company.
Limited Trading Market
During 1998, the Company's Common Stock was delisted from the Nasdaq
SmallCap market for failure to comply with the minimum listing maintenance
requirements. As a result thereof, the Company's Common Stock is traded on the
OTC Bulletin Board of the National Association of Security Dealers, Inc. (the
"OTC Bulletin Board") and there is a limited trading market in the Common Stock
and limited information is available on trading in the Company's Common Stock.
No assurances can be given that the Company's Common Stock will continue to
trade on the OTC Bulletin Board or that an orderly trading market will be
maintained for the Company's common stock.
"Penny Stock" Regulations May Impose Certain Restrictions on Marketability of
Common Stock.
The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
(as defined) of less than $5.00 per share, subject to certain exceptions. The
Company's Common Stock is subject to rules that impose additional sales practice
requirements on broker-dealers who sell such Common Stock to persons other than
established customers and accredited investors (generally, those persons with
assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with their spouse). For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase of
the Common Stock and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a
penny stock, unless exempt, the
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<PAGE>
rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Common Stock and accordingly
the market for the Company's Common Stock.
ITEM 2. PROPERTIES
The Company occupies 52,663 square feet of space at its principal
executive offices and manufacturing facility located at 27615 Avenue Hopkins,
Valencia, California 91355, for $22,645 per month pursuant to a lease that
expires in May 2003. The Company is in discussions and negotiations with the
landlord of the property and has informed employees that it may be closing its
principal executive offices and manufacturing facility located in Valencia,
California. The Company is currently exploring alternative locations for its
operations, including the possibility of sharing space and certain
administrative functions with Interiors. The Company also leases a showroom at
the Dallas Trade Market, in Dallas, Texas occupying 855 square feet for $1,592
per month.
ITEM 3. LITIGATION
The Company is not a party to any legal proceedings the result of which,
in the opinion of management, will have a material adverse effect on the
Company.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
15
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The following table sets forth, for the periods indicated, the high and
low closing prices in the over-the-counter market for the common stock of the
Company, as reported by the National Association of Securities Dealers. On
September 3, 1998, the Company effected a one-for-thirteen reverse split of its
Common Stock, and the information set forth below gives effect thereto for all
periods subsequent to September 3, 1998. Through September 22, 1998 the
Company's stock was traded on the NASDAQ Small Cap Market under the symbol
"CSLX." Effective September 23, 1998 the common stock was delisted from the
SmallCap Market for failure to meet the $1.00 minimum bid price listing
maintenance standard and has since traded on the OTC Bulletin Board of the
National Association of Securities Dealers, Inc. under the symbol "CSLX". At
March 31, 1999 the Company believes that it had approximately 850 beneficial
holders of its common stock. The over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
Calendar 1997 High Low
------------- ---- ---
First Quarter 1 9/16 11/16
Second Quarter 15/16 1/2
Third Quarter 5/8 1/4
Fourth Quarter 7/16 1/8
Calendar 1998 High Low
------------- ---- ---
First Quarter 1/4 1/8
Second Quarter 15/16 1/8
Third Quarter 1/8 1/8
Fourth Quarter 5/16 2/32
Dividend Policy
The Company has not paid any cash dividends in the past and has no present
intention of doing so in the immediate future. The Company's Board of Directors
intends for the foreseeable future to retain any earnings to finance the future
growth of the Company. Additionally, certain of the Company's credit agreements
with its lending institution prohibit the payment of dividends during their
term.
ITEM 6. 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
16
<PAGE>
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:
The Company's strategy during 1998 was to exploit new markets for its
product offering, increase the size and scope of its product offerings and
maximize the efficiencies of its manufacturing and distribution network on a
worldwide basis. During 1996 and 1997 the Company 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. The Company may incur certain liabilities
as a result of the Singapore office closure which management does not believe
will be material to the Company's business and financial results. During the
year ended December 31, 1998 the Company developed four new product offerings,
"Spotz", "Tableau", "Primary Colors" and "Counter Attack" for release in the
third and fourth quarters of 1998 and in the first quarter of 1999. The Company
also purchased substantially all of the assets of "Ortek" Lighting thereby
expanding its low-voltage downlight product offerings. Additionally, management
continued to implement cost cutting procedures pertaining to general, selling
and administrative expenses. The Company is currently evaluating its core
product categories. For the year ended December 31, 1998 the Company realized
benefits from its cost cutting measures. As a result of these cost cutting
measures and continued management of its accounts receivables, accounts payables
and inventory for the year ended December 31, 1998 the Company generated cash
flow from operations of $619,000.
The Company currently has overseas joint venture or distribution
agreements in China, Hong Kong, Singapore, The Philippines, and Taiwan.
Management believes that its recent entry into these markets together with the
current fiscal crisis in Asia has adversely impacted its ability to penetrate
many of these markets. As such, during 1998 the Company refocused its sales
effort into the domestic marketplace.
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.
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<PAGE>
The Company is exploring strategic opportunities with Interiors to expand
product sales through cross-marketing arrangements and opportunities to
consolidate administrative and manufacturing functions in an effort to improve
operating efficiencies, achieve profitability and enhance shareholder value.
Going Concern Consideration
The Company has suffered recurring losses from operations and had an
accumulated deficit at December 31, 1998 of $14,220,000 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 1998. 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. If
the Company is unable to generate profits and unable to continue to obtain
financing 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:
o The sale of a 51% interest in the Company to Interiors Inc., as a
strategic investor (See "Recent Developments").
o To reduce general and administrative expense, including management
expense.
o To evaluate its current product offerings and distribution arrangements.
o To negotiate with vendors for reductions in unpaid balances and more
favorable credit terms.
o To evaluate its physical plant requirements.
o To explore cross-marketing opportunities with Interiors and synergistic
savings through the consolidation of certain administrative and
manufacturing functions 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 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 $774,000 from $13,160,000 for the year ended December
31, 1997, to $12,386,000 for the year ended December 31, 1998. The decrease in
sales for the year ended December 31, 1998 as compared to December 31, 1997 is
attributable to the Company's decrease in foreign sales primarily in Asia as
well as the Company's decision to discontinue its business with certain large
retailers.
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<PAGE>
Gross Profit
Gross profit decreased by $1,242,000 from $5,172,000 for the year ended
December 31, 1997, to $3,930,000 for the year ended December 31, 1998. Gross
profit as a percentage of net sales decreased 7.6% from 39.3% for the year ended
December 31, 1997, to 31.7% for the year ended December 31, 1998. The decrease
in the Company's gross profit as a percentage of sales and value for the year
ended December 31, 1998 versus the year ended December 31, 1997 is due decreased
sales volume and the write down of approximately $830,000 related to the
Company's inventory. Specifically, the Company reserved for its energy efficient
lighting products for approximately $600,000. In addition, the Company
reevaluated the process by which it allocates overhead to inventory and as such
reduced its overhead pool by approximately $230,000.
Selling Expense
Selling expenses decreased by $822,000, or 5% from $3,503,000 for the year
ended December 31, 1997, to $2,681,000 for the year ended December 31, 1998.
Selling expenses as a percentage of net sales for the years ended December 31,
1997 and 1998 were 26.7% and 21.6%, respectively.
The decrease in selling expense for the year ended December 31, 1998
compared to the year ended December 31, 1997, is attributable to reduced
expenditures for the Company's foreign operations, primarily in China, and the
reduction of certain sales and advertising personnel and associated payroll and
benefit expense.
General and Administrative Expenses
General and administrative expenses decreased by $133,000 or 4.0% from
$3,303,000 for the year ended December 31, 1997, to $3,170,060 for the year
ended December 31, 1998. The decrease in general and administrative expenses for
the year ended December 31, 1998 as compared to December 31, 1997 is
attributable to lower travel costs, reductions in staffing and associated costs.
These decreases were offset by increases in reserves for notes receivable -
related parties, foreign accounts receivable and penalties relating to common
stock registration requirements in connection with the company's outstanding
subordinated debt.
Other Income and (Expense)
Other income and expense as a percentage of net sales for the year ended
December 31, 1997 and 1998 were 9.9% and 3.6%, respectively. For the year ended
December 31, 1997 and 1998 other income and expense were $1,300,000 and $439,000
respectively. The decrease in other income and expense for the year ended
December 31, 1998 as compared to the same prior period is primarily due to the
Company, in 1997, recognizing $899,000 of interest expense from the issuance of
6% subordinated notes convertible into common stock at a 25% discount. In
accordance with generally accepted accounting principles the Company was
required to account for the discount conversion feature of these subordinated
convertible notes as interest expense. The Company has not issued any
convertible subordinated notes in fiscal 1998. In addition, in 1998 the Company
has reduced its bank borrowings by approximately $636,000, which has in turn
lowered its interest expense.
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<PAGE>
Provision for Income Taxes
The provision for income taxes for the year ended December 31, 1997 and
1998 reflects the minimum state tax due.
Liquidity and Capital Resources
During 1998, the Company provided cash flow from operations of $619,000.
The net cash provided from operations is primarily attributable to the Company's
earnings before depreciation, amortization, non-cash interest, and other
non-cash expenses. In addition, the Company has aggressively pursued the
collections of its accounts receivable and managed its accounts payable and
accrued expenses.
During 1998, net cash used in investing activities of $70,000, consists
primarily of costs relating to the purchase of equipment and costs relating to
secure trademarks and patents.
During 1998, net cash used in financing activities of $636,000, consisted
primarily of mandatory payments on the Company's bank line of credit.
On December 31, 1998 the Company had an outstanding balance of $1,902,000
on its bank line of credit and term loan. The line of credit and term loan bear
interest at 11.25 percent and 11.5 percent, respectively. On October 22, 1998
the Company renewed its line of credit and term loan with its bank through
October 2000. The terms of the Company's refinanced bank line call for a maximum
borrowing of $4,000,000 primarily based on a formula consisting of a percentage
of accounts receivable and inventory. The Company was also successful in
reducing its interest rate associated with this facility to prime plus 2.5
percent.
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, 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 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
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<PAGE>
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 problem and reduce the possibility of
significant interruptions of normal business operations.
New Authoritative Pronouncements
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," is effective for financial statements with fiscal years beginning
after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not expect
adoption of SFAS No. 133 to have a material effect, if any, on its financial
position or results of operations.
SFAS 134 "Accounting or Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by Mortgage Banking Enterprises,"
is effective for financial statements with the fiscal quarter beginning after
December 15, 1998. The Company does not expect adoption of SFAS No. 134 to have
a material effect, if any, on its financial position or results of operations.
SFAS No. 135, "Recission of FASB Statement No. 75 and Technical
Corrections," is effective for financial statements with fiscal years beginning
February 1999. This statement is not applicable to the Company.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Financial Statements, the report thereon and
notes thereto, commencing on page F-1 to this report.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On January 18, 1999, Arthur Andersen LLP was dismissed by the Company as
its independent accountants and Singer, Lewak, Greenbaum & Goldstein, LLP was
retained by the Company as its independent accountants. The report of Arthur
Andersen LLP included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 included a "going concern qualification".
The decision to change accountants was approved by the Audit Committee of
the Board of Directors as well as the Board of Directors of the Company. During
the Company's two most recent fiscal years and the interim period preceding
dismissal, there were no disagreements between the Company and Arthur Andersen
LLP on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure. Arthur Andersen LLP has advised the
Company by letter dated January 19, 1999 that it agrees with the foregoing
statement.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
Name Age Position
- ---- --- --------
Max Munn 55 Chairman of the Board; Chief
Operating Officer; Executive Vice
President
Mark Allen 37 Director
Richard Belenski 44 Director
Sylvan Gerber 71 Director
David Schwartz 31 Director
Michael Smith 44 Director
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Executive officers are
elected annually by the Board of Directors and, subject to existing employment
agreements, serve at the discretion of the Board.
Background of Executive Officers and Directors
Max Munn has been Chairman of the Board, Chief Operating Officer and
Executive Vice President of the Company since March 1999. Since March 1994, Mr.
Munn has been a director of Interiors, Inc., a designer, manufacturer and
marketer of home furnishing accessories ("Interiors"), and Chairman of the
Board, President and intermittently Chief Financial Officer of Interiors since
September 1995. Since June 1996, Mr. Munn has been Chairman of the Board of
Decor Group, Inc.
Mark Allen was the Vice President/Finance of the Company from October 1994
until March 1995. In March 1995, Mr. Allen was appointed Chief Operating
Officer, Executive Vice President/Finance and was elected to the Board of
Directors. In December 1997, Mr. Allen was appointed Chief Executive Officer. In
March 1999, Mr. Allen resigned as an officer of the Company. From 1984 to 1994,
Mr. Allen was employed at various investment banking firms. Mr. Allen received a
B.S. in finance from Syracuse University.
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Richard Belenski has been a director of the Company since March 1999.
Since October 1998, Mr. Belenski has been the Chief Financial Officer and Vice
President of Finance and Administration of Interiors. Mr. Belenski served as
Vice President and Chief Financial Officer of Petals, Inc., which was acquired
by Interiors in March 1999, from December 1996 until October 1998. From October
1986 until April 1996, Mr. Belenski served as Vice President of Finance and
Chief Financial Officer for the operating divisions of the J. Crew Group, Inc.
Sylvan Gerber has been a director of the Company since inception. Mr.
Gerber had been the Chief Executive Officer of the Company from February 1995 to
December 1997, President from inception to August 1, 1995. From 1974 to 1986,
Mr. Gerber was the President and Chief Executive Officer of Capri Lighting
Manufacturing Company ("Capri Lighting") which Mr. Gerber co-founded in 1974.
Capri Lighting was sold in 1984 to Thomas Industries, Inc., although Mr. Gerber
continued to manage the day-to-day operations of Capri Lighting until 1986.
David Schwartz has been a director of the Company since March 1999. Since
February 1999, Mr. Schwartz has been the General Counsel, Secretary and
Executive Vice President of Interiors. Mr. Schwartz served as Corporate Counsel
and Assistant Secretary of Complete Management, Inc. from April 1997 until
January 1999. From May 1994 until March 1997, Mr. Schwartz was an associate at
the law firm Skadden, Aprs, Slate, Meagher & Flom, LLP.
Michael S. Smith became a director of the Company in 1995 and is a member
of the Audit and Compensation Committee. Mr. Smith is the President and CEO of
Micropub Systems International, Inc., a brewery system manufacturer, and is a
principal of International Capital & Management, Inc., a merchant banking firm.
From October 1992 through January 1997, Mr. Smith was the Managing Director of
corporate Finance of H.J. Meyers & Co. an investment banking firm and was
general counsel of such firm from May 1991 through May 1995. Mr. Smith serves on
the Board of Directors of Infinite Group, Inc. Mr. Smith was associated with the
law firm of Harter, Secrest & Emery from 1987 until 1991. Mr. Smith received a
B.A. from Cornell University and a J.D. magna cum laude from Cornell University
School of Law.
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ITEM 10 EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
annual and long-term compensation of the Company's Chief Executive Officer, and
the other two most highly paid executive officers of the Company who earned more
than $100,000 during the fiscal years ended December 31, 1998 (the "Named
Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------------
Annual Compensation Awards Payout
------------------- ---------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Year Other All
Ending Annual Restricted Other
December Annual Compen- Stock Options/ LTIP Compen
Name and Principal Position 31, Salary Bonus sation Awards(1) SARS Payouts sation
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark Allen (1) 1998 $165,000 $32,500 $16,000
Chief Executive Officer, 1997 159,000 -- -- 32,500 -- -- --
Vice President--Finance 1996 180,125 -- -- 32,500 -- -- --
Scott Searle (2) 1998 $193,000 $16,250
President 1997 247,515 -- -- 16,250 -- -- --
1996 299,030 -- -- 16,250 -- -- --
</TABLE>
- ----------------------
(1) Mr. Allen and the Company entered into a Settlement Agreement in April
1999 pursuant to which he resigned as Chief Executive Officer of the
Company, effective March 8, 1999.
(2) Mr. Searle was terminated as President of the Company in March 1998.
Employment Agreements
In October 1999, the Company entered into an employment agreement with
Mark Allen, for a term expiring in September 2003, providing for his services as
Chief Executive Officer. Mr. Allen's agreement provided for a base salary of
$175,000 and for the payment to him upon a "change of control" (as defined in
the agreement) of an amount equal to the greater of $200,000 or the compensation
remaining due to him for the balance of the employment term.
The employment agreement contained strict confidentiality provisions and
non-competition covenants. Compensation was subject to annual increases and
bonuses at the discretion of the Board of Directors. The agreements also
entitled Mr. Allen to participate in any employee benefit plans, such as group
life, health, hospitalization and life insurance offered by the Company. Under
the agreement, Mr. Allen's employment would terminate upon his death or
disability and could be terminated by the Company for "cause," which is defined
as, among other things, an act of fraud or embezzlement, material gross
misconduct, conviction of a felony involving moral turpitude and breach of the
employee's non-competition or confidentiality covenants.
In April 1999, following Mr. Allen's resignation as Chief Executive
Officer in March 1999, the Company and Mr. Allen entered into an agreement
terminating his employment agreement, and related matters, in consideration for
a payment of $205,000.
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Option Grants in Fiscal Year 1998 and Fiscal Year-End Option Values
Option Grants in Last Fiscal Year
Individual Grants
Percent of
Number of Total
Shares Options/Granted
Underlying to Employees
Options in Fiscal Exercise Expiration
Name Granted Year Price Date
- ---- ------------- -------------- -------- ---------
Mark Allen 110,000 100% $0.15 12/31/01
Aggregate 1998 Year End Option Values
Number of Shares of
Common Stock
Underlying Value of Unexercised
Unexercised Options In-The Money Options at
At 12/31/98 (#) 12/31/98 (1) ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
Mark Allen 55,000/110,000 (2) 0/0
- ----------
(1) Based on the December 31, 1998 Nasdaq closing price of $0.0781.
(2) In connection with Mr. Allen's resignation in March 1999, options covering
55,000 shares expired unvested.
Directors' Compensation
The Company pays a fee of $500 per meeting to outside Directors as
compensation for their services rendered as directors. Each Director is
reimbursed by the Company for expenses incurred in attending Director's meetings
and meetings of its committees.
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ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table, together with the accompanying footnotes, sets forth
information, as of March 31, 1999 regarding stock ownership of all persons known
by the Company to own beneficially 5% or more of the Company's outstanding
Common Stock, all directors, each of the Named Executive Officers and directors
and executive officers of the Company as a group:
Number of
Shares
Beneficially Percent of
Name of Beneficial Owner Owned Ownership
- ------------------------ --------------- -------------
Directors and Officers
Max Munn --(1) --
Mark Allen 78,346(2) 3.2%
Richard Belenski --(1) --
Sylvan Gerber 100,000 4.2%
David Schwartz --(1) --
Michael Smith 11,540(3) *
Directors and Officers as
a Group (7 persons) 189,886(4) 7.8%
5% Stockholders
Interiors, Inc. (5)
320 Washington Street
Mt. Vernon, NY 10553 1,191,752 51.0%
- -----------
* less than 1%
(1) Excludes 1,191,752 shares held of record and beneficially by Interiors,
Inc. ("Interiors") as to which beneficial ownership is disclaimed. Each of
Messrs. Munn, Belenski and Schwartz is a director of Interiors. In
addition, Mr. Munn's wife beneficially owns shares in Interiors
representing 9.6% of its outstanding shares and 34.7% of its voting power
as of March 2, 1999.
(2) Includes 57,462 shares subject to currently exercisable options and
warrants.
(3) Includes (i) 5,770 shares subject to currently exercisable warrants
including 1,923 held by Mr. Smith as custodian for his minor nieces, and
(ii) 1,923 shares held by Mr. Smith as custodian for the same minors. Mr.
Smith disclaims beneficial ownership of the securities held for the
benefit of such minors.
(4) Includes 63,232 shares subject to currently exercisable warrants.
(5) The information with respect to this stockholder was derived from the
stockholder's Schedule 13D as filed with the Securities and Exchange
Commission.
27
<PAGE>
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on review of the copies of such forms
furnished to the Company, or written representations that no Forms 5 were
required, the Company believes that all Section 16(a) filing requirements
applicable to its officers and directors were complied with.
ITEM 12 CERTAIN TRANSACTIONS
During 1998, the Company paid approximately $160,000 to Gilderman, Johnson
& Co., LLP, an accounting firm, as fees for accounting services performed. Scott
Gilderman, a former director of the Company, is a partner in such firm.
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
28
<PAGE>
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 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.
In April 1999, the Company entered into a settlement and release agreement
(the "Agreement") with Mark Allen, the former Chief Executive Officer and
Director of the Company. Pursuant to the Agreement, the Company has agreed to
pay 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 agreed to loan 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 of a
conversion price of $0.345 per share (the average closing bid price of the
Common Stock on the thirty trading days preceding March 22, 1999, the date the
transaction was approved).
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Company.(1)
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company.(3)
3.3 By-Laws of the Company.(1)
4.1 Form of Securities Purchase Agreement, Convertible Note and
Registration Rights Agreement entered into in February 1997.(3)
4.2 Form of Securities Purchase Agreement, Convertible Note and
Registration Rights Agreement entered into in August 1997.(4)
10.3 Employment Agreement by and between the Company and Mark Allen. *
10.5 1994 Stock Option Plan.(1)
10.6 1995 Stock Option Plan.(2)
10.7 1994 Non-Employee Director Stock Option Plan.(1)
10.8 Lease for Company's principal offices located at 27615 Avenue
Hopkins, Valencia, California 91355.(1)
10.9 Stock Escrow Agreement by and among the Company, H. J. Meyers & Co.,
Inc. (formerly Thomas James Associates, Inc.) and certain principal
stockholders of the
29
<PAGE>
Company.(1)
10.10 Loan and Security Agreement between Coast Business Credit and the
Company dated October 9, 1996.(3)
10.11 Indemnification Agreement between the Company and its officers and
directors.(1)
10.12 Form of Restricted Stock Grant Agreements between the Company and
Sylvan Gerber, Scott Searle and Mark Allen.(2)
10.13 Form of Promissory Note and Warrant Agreement issues to Sylvan
Gerber(2).
10.14 Stock Purchase Agreement, dated as of March 1, 1999, by and between
Interiors, Inc. and CSL Lighting Manufacturing, Inc.(6)
10.15 Standstill Agreement, dated as of March 1, 1999, by and between
Interiors, Inc. and CSL Lighting Manufacturing, Inc.(6)
10.16 Asset Purchase Agreement dated October 1, 1998 between the Company
and Ortek Corporation *
10.17 Employment Agreement dated October 1, 1998 between the Company and
Miron Skegin*
10.18 Form of Note to be issued to Interiors, Inc.*
10.19 Form of Settlement Agreement and Release between the Company and
Mark Allan*
23.1 Consent of Arthur Andersen LLP*
27.1 Financial Data Schedule. *
- ----------
* Filed herewith
(1) Filed as an Exhibit to the Company's Registration Statement on Form
SB-2 (Registration No 33-72678) and incorporated herein by
reference.
(2) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995
(3) Filed as an Exhibit to the Company's Annual Report on form 10-KSB
for the fiscal year ended December 31, 1996.
(4) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996.
(5) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997.
(6) Filed as an Exhibit to the Company's Current Report on (6) Form 8-K
dated March 2, 1999.
30
<PAGE>
(b) Reports on Form 8-K
(i) January 18, 1999 -- Change in Independent Public Accountants
(ii) March 4, 1999 -- Sale of Common Stock to Interiors, Inc.
Financial Statements
The financial statements listed in the accompanying index to financial
statements on page F-1 are filed as part of this Report.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned hereunto duly authorized on the 13th day of April
1999.
CSL LIGHTING MANUFACTURING, INC.
By: /s/ Max Munn
-------------------------------------
Max Munn
Chairman and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 14th day of April 1999.
Signatures
/s/ Max Munn
- ------------------------------------ Chairman of the Board,
Max Munn Director and Acting Principal
Financial and Accounting Officer
/s/ Mark Allen
- ------------------------------------ Director
Mark Allen
/s/ Richard Belenski
- ------------------------------------ Director
Richard Belenski
/s/ Sylvan Gerber
- ------------------------------------ Director
Sylvan Gerber
/s/ David Schwartz
- ------------------------------------ Director
David Schwartz
/s/ Michael Smith
- ------------------------------------ Director
Michael Smith
32
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
CONTENTS
December 31, 1998
- ------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets 2 - 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6 - 7
Notes to Consolidated Financial Statements 8 - 24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
CSL Lighting Manufacturing, Inc. and subsidiary
We have audited the accompanying consolidated balance sheet of CSL Lighting
Manufacturing, Inc. and subsidiary as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CSL Lighting
Manufacturing, Inc. and subsidiary as of December 31, 1998, and the consolidated
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. During the two years ended
December 31, 1998 and 1997, the Company incurred a net loss of $2,361,000 and
$2,935,000, respectively. In addition, the Company's accumulated deficit was
$14,220,000 as of December 31, 1998. Recovery of the Company's assets is
dependent upon future events, the outcome of which is indeterminable. In
addition, successful completion of the Company's transition, ultimately, to the
attainment of profitable operations is dependent upon obtaining adequate
financing to fulfill its development activities and achieving a level of sales
adequate to support the Company's cost structure. These factors, among others,
as discussed in Note 2 to the financial statements, raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 5, 1999
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
ASSETS
1998 1997
---------- ----------
Current assets
Cash $ 65,000 $ 152,000
Accounts receivable, less allowance for doubtful
accounts of $298,000 and $194,000 1,310,000 2,228,000
Notes receivable - related parties -- 107,000
Inventories 3,492,000 4,346,000
Prepaid and other current assets 218,000 471,000
---------- ----------
Total current assets 5,085,000 7,304,000
Property and equipment, net of accumulated deprecation 1,004,000 1,365,000
Cost in excess of net book value of assets purchased,
net of accumulated amortization 215,000 --
Other assets 117,000 116,000
---------- ----------
Total assets $6,421,000 $8,785,000
========== ==========
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Continued)
December 31,
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
------------ ------------
Current liabilities
Accounts payable $ 1,260,000 $ 1,038,000
Current portion of long-term debt 1,929,000 2,483,000
Notes payable - related parties 268,000 78,000
Accrued expenses and other current liabilities 833,000 712,000
------------ ------------
Total current liabilities 4,290,000 4,311,000
Long-term debt, net of current portion 92,000 119,000
Subordinated convertible debt 1,452,000 1,525,000
Deferred rent 179,000 206,000
Total liabilities 6,013,000 6,161,000
------------ ------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.01 par value
1,000,000 shares authorized
none issued and outstanding -- --
Common stock, $0.01 par value
30,000,000 shares authorized
1,140,000 and 1,042,000 shares issued and
outstanding 12,000 10,000
Treasury stock at cost
515,000 shares held (1,218,000) (1,218,000)
Additional paid-in capital 16,279,000 16,201,000
Deferred compensation (445,000) (510,000)
Accumulated deficit (14,220,000) (11,859,000)
------------ ------------
Total stockholders' equity 408,000 2,624,000
------------ ------------
Total liabilities and stockholders'
equity $ 6,421,000 $ 8,785,000
============ ============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
1998 1997
------------ ------------
Net sales $ 12,386,000 $ 13,160,000
Cost of sales 8,456,000 7,988,000
------------ ------------
Gross profit 3,930,000 5,172,000
------------ ------------
Operating expenses
Selling expenses 2,681,000 3,503,000
General and administrative expenses 3,170,000 3,303,000
------------ ------------
Total operating expenses 5,851,000 6,806,000
------------ ------------
Loss from operations (1,921,000) (1,634,000)
------------ ------------
Other income (expense)
Interest income 1,000 3,000
Interest expense (304,000) (302,000)
Interest expense on subordinated debt (136,000) (947,000)
Loss on disposition of property and equipment -- (62,000)
Other income, net -- 8,000
------------ ------------
Total other income (expense) (439,000) (1,300,000)
------------ ------------
Loss before provision for income taxes (2,360,000) (2,934,000)
Provision for income taxes 1,000 1,000
------------ ------------
Net loss $ (2,361,000) $ (2,935,000)
============ ============
Basic loss per share $ (2.18) $ (3.45)
============ ============
Diluted loss per share $ (2.18) $ (3.45)
============ ============
Weighted-average shares outstanding 1,082,000 851,000
============ ============
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
------------------ Treasury Paid-in Deferred Accumulated
Shares Amount Stock Capital Compensation Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 482,000 $ 4,000 $(1,218,000) $11,781,000 $(575,000) $ (8,924,000) $ 1,068,000
Issuance of common stock for conversion
of debentures 560,000 6,000 3,620,000 3,626,000
Deferred compensation amortization 65,000 65,000
Fixed conversion discount interest
expense 800,000 800,000
Net loss -- -- -- (2,935,000) (2,935,000)
------------ -----------
Balance, December 31, 1997 1,042,000 10,000 (1,218,000) 16,201,000 (510,000) (11,859,000) 2,624,000
Issuance of common stock for conversion
of debentures and accrued interest 98,000 2,000 78,000 80,000
Deferred compensation amortization 65,000 65,000
Net loss -- -- -- (2,361,000) (2,361,000)
------------ -----------
Balance, December 31, 1998 1,140,000 $12,000 $(1,218,000) $16,279,000 $(445,000) $(14,220,000) $ 408,000
========= ======= =========== =========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
1998 1997
----------- -----------
Cash flows from operating activities
Net loss $(2,361,000) $(2,935,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Provision for loss on notes receivable -
related parties 108,000 --
Depreciation and amortization 434,000 600,000
Loss on disposition of property and equipment -- 62,000
Deferred compensation 65,000 65,000
Interest expense associated with fixed
conversion discounts and additional
stock bonus -- 800,000
(Increase) decrease in
Accounts receivable 918,000 (617,000)
Inventories 854,000 (174,000)
Other 285,000 283,000
Increase (decrease) in
Accounts payable 222,000 (309,000)
Accrued expenses 121,000 (65,000)
Deferred rent (27,000) (14,000)
----------- -----------
Net cash provided by (used in)
operating activities 619,000 (2,304,000)
----------- -----------
Cash flows from investing activities
Purchases of property and equipment (70,000) (152,000)
----------- -----------
Net cash used in investing activities (70,000) (152,000)
----------- -----------
Cash flows from financing activities
Notes payable to related parties (60,000) (100,000)
Additions to debt -- 688,000
Repayment of debt (576,000) (85,000)
Net proceeds from issuance of subordinated
convertible debt -- 2,125,000
Costs relating to the registration of shares
underlying the subordinated convertible notes -- (27,000)
----------- -----------
Net cash provided by (used in) financing
activities (636,000) 2,601,000
----------- -----------
Net increase (decrease) in cash during year (87,000) 145,000
Cash, beginning of year 152,000 7,000
----------- -----------
Cash, end of year $ 65,000 $ 152,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
- --------------------------------------------------------------------------------
1998 1997
----------- ----------
Supplemental disclosures of cash flow information
Interest paid $ 327,000 $ 342,000
=========== ==========
Income taxes paid $ 1,000 $ 1,000
=========== ==========
Supplemental schedule of non-cash investing and financing activities
During the year ended December 31, 1998, the Company entered into the following
non-cash transactions:
o $73,000 of convertible notes payable and accrued interest of $5,000 were
converted into 98,000 shares of common stock.
o The Company purchased the net assets of ORTEK, Inc. in exchange for a
promissory note of $250,000.
During the year ended December 31, 1997, the Company entered into the following
non-cash transactions:
o The Company converted $3,853,000 of debt to equity.
o The Company acquired $44,000 worth of property and equipment through the
issuance of debt.
o $164,000 of other long-term assets were reclassified to property and
equipment.
o $198,000 of accrued interest was written off in connection with the
conversion of subordinated convertible notes to common stock.
o $398,000 of issuance costs were written off in connection with the
conversion of subordinated convertible notes to common stock.
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS
CSL Lighting Manufacturing, Inc., a Delaware corporation, and subsidiary
(collectively, the "Company"), designs, manufacturers, and markets a line
of lighting fixtures utilizing both "low voltage" and standard "line
voltage" halogen light sources for sale directly and indirectly to
commercial and residential end users.
NOTE 2 - GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in
the financial statements, during the two years ended December 31, 1998 and
1997, the Company incurred losses of $2,361,000 and $2,935,000,
respectively. In addition, the Company's cash flow requirements have been
met by the generation of capital through convertible debentures issued
with below market conversion features. No assurance can be given that this
source of financing will continue to be available to the Company and
demand for the Company's equity instruments will be sufficient to meet its
capital needs. If the Company is unable to generate profits and unable to
continue to obtain financing for its working capital requirements, it may
have to curtail its business sharply or cease business altogether.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to retain
its current financing, to obtain additional financing, and ultimately to
attain profitability.
Management has evaluated its current operations, and it has focused the
Company's efforts and developed plans to generate operating income to
continue the Company's operations through the year ended December 31,
1999. Management's plans include the following:
o The sale of a 51% interest in the Company to Interiors, Inc., as a
strategic investor.
o To reduce general and administrative expense, including management
expense.
o To evaluate its current product offerings and distribution
arrangements.
o To negotiate with vendors for reductions in unpaid balances and more
favorable credit terms.
o To evaluate its physical plant requirements.
o To explore cross-marketing opportunities with Interiors, Inc. and
synergistic savings through the consolidation of certain
administrative and manufacturing functions with Interiors, Inc.
8
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 2 - GOING CONCERN MATTERS (Continued)
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 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.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
As described in Note 2, the accompanying financial statements have been
prepared in conformity with generally accepted accounting principles which
contemplate the continuation of the Company as a going concern. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or amounts
and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Principles of Consolidation
The consolidated financial statements include the accounts of CSL Lighting
Manufacturing, Inc. and its wholly-owned subsidiary. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Concentrations
The Company sells its products to electrical distributors, lighting
showrooms, and retailers primarily throughout the United States and
Canada. The Company does not obtain collateral to secure its accounts
receivable, but evaluates its accounts receivable on a regular basis for
collectability and provides for an allowance for potential credit losses
as deemed necessary.
Inventories
Inventories include raw materials and finished goods and are stated at the
lower of cost (weighted-average) or market.
9
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful
lives of the assets as follows:
Computer equipment 5 years
Displays and showrooms 3 years
Factory machinery and equipment 2 to 15 years
Furniture and fixtures 3 to 12 years
Office machinery and equipment 3 to 5 years
Vehicles 4 years
Leasehold improvements 3 to 13 years
The Company capitalizes expenditures that materially increase asset lives
and charges ordinary repairs and maintenance to operations as incurred.
When assets are sold or otherwise disposed of, the cost and related
depreciation is removed from the accounts, and any resulting gain or loss
is included in other income (expense) in the accompanying statements of
operations.
Trademarks and Patents
Costs associated with the establishment of trademarks and patents have
been capitalized and are being amortized over ten years using the
straight-line method.
Deferred Rent
The lease for the Company's facility includes certain rent relief in its
early months and scheduled increasing monthly payments thereafter. In
accordance with generally accepted accounting principles, the Company has
accounted for the lease to provide for even charges to operations over the
life of the lease.
Stock Split
During the year ended December 31, 1998, the Company effected a 1-for-13
reverse stock split. All share and per share data have been retroactively
restated to reflect the reverse split.
Treasury Stock
The Company accounts for its treasury stock under the cost method, whereby
purchases of treasury stock are recorded at cost.
Revenue Recognition
Revenue on product sales and a provision for warranty is recognized at the
time of shipment.
10
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
The Company measures financial assets and liabilities in accordance with
generally accepted accounting principles. For the Company's financial
instruments, including cash, accounts receivable, accounts payable, and
accrued expenses, the carrying amounts approximate fair value due to their
short maturities. The amounts shown for notes payable also approximate
fair value because current interest rates offered to the Company for notes
payable of similar maturities are substantially the same.
Stock-Based Compensation
The Company's policy is to account for stock-based compensation in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation." As allowed by SFAS No.
123, the Company has elected to continue to measure compensation cost
under Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and comply with the pro forma disclosure
requirements of the standard.
Net Loss per Share
The Company accounts for loss per share in accordance with SFAS No. 128,
"Earnings per Share." All prior periods were restated to be consistent
with the presentation requirements of SFAS No. 128. Loss per common share
for the years ended December 31, 1998 and 1997 are based on the
weighted-average number of common shares outstanding. Due to the net
losses for the years ended December 31, 1998 and 1997, stock options and
warrants were not included as common stock equivalents as their effect
would be anti-dilutive.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the period in deferred tax
assets and liabilities.
Reclassifications
Certain amounts have been reclassified in 1997 to conform with the 1998
presentation.
11
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
For the year ended December 31, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting comprehensive income and its components in a financial
statement. Comprehensive income as defined includes all changes in equity
(net assets) during a period from non-owner sources. Examples of items to
be included in comprehensive income, which are excluded from net income,
include foreign currency translation adjustments and unrealized gains and
losses on available-for-sale securities. Comprehensive income is not
presented in the Company's financial statements since the Company did not
have any of the items of comprehensive income in any period presented.
Recently Issued Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for financial statements with fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The Company does not expect adoption of SFAS No. 133 to have a
material effect, if any, on its financial position or results of
operations.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," is effective for financial statements with the first fiscal
quarter beginning after December 15, 1998. The Company does not expect
adoption of SFAS No. 134 to have a material effect, if any, on its
financial position or results of operations.
SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical
Corrections," is effective for financial statements with fiscal years
beginning February 1999. This statement is not applicable to the Company.
NOTE 4 - NOTES RECEIVABLE - RELATED PARTIES
At December 31, 1998 and 1997, the Company had notes receivable of
$108,000 and $107,000, respectively, from two officers. The notes are
non-interest bearing and are currently due and payable. During the year
ended December 31, 1998, an allowance was established for the entire
balance as the two notes are considered uncollectible.
NOTE 5 - INVENTORIES
Inventories at December 31 consisted of the following:
1998 1997
---------- ----------
Raw materials $1,067,000 $1,042,000
Finished goods 2,425,000 3,304,000
---------- ----------
Total $3,492,000 $4,346,000
========== ==========
12
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment at December 31 consisted of the following:
1998 1997
---------- ----------
Computer equipment $ 481,000 $ 462,000
Displays and showrooms 709,000 695,000
Factory machinery and equipment 1,400,000 1,371,000
Furniture and fixtures 181,000 181,000
Office machinery and equipment 35,000 35,000
Vehicles 16,000 16,000
Leasehold improvements 310,000 301,000
---------- ----------
3,132,000 3,061,000
Less accumulated depreciation and
amortization 2,128,000 1,696,000
---------- ----------
Total $1,004,000 $1,365,000
========== ==========
Depreciation and amortization expense was $434,000 and $600,000 for the
years ended December 31, 1998 and 1997, respectively.
NOTE 7 - BUSINESS COMBINATION
On October 31, 1998, the Company acquired substantially all of the assets
of ORTEK, Inc., a company engaged in the business of light fixture design
and manufacturing, in exchange for a note payable. The total acquisition
cost was $250,000. The excess of the total acquisition cost over fair
value of the net assets acquired of $217,000 is being amortized over 15
years using the straight-line method. Accumulated amortization at December
31, 1998 was $2,000. In connection with the acquisition, the Company
entered into a four-year employment agreement with the president and sole
shareholder of ORTEK, Inc. providing for annual compensation at the rate
of $80,000.
The acquisition has been accounted for as a purchase, and the results of
operations of ORTEK, Inc. since the date of acquisition are included in
the consolidated financial statements.
13
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 7 - BUSINESS COMBINATION (Continued)
The following are the unaudited pro forma consolidated results of
operations for the years ended December 31, 1998 and 1997 as though ORTEK,
Inc. had been acquired as of January 1, 1997:
1998 1997
-------------- --------------
Net sales $ 12,398,000 $ 13,290,000
Net loss $ (2,367,000) (2,956,000)
Loss per share $ (2.18) (3.47)
Diluted loss per share $ (2.18) (3.47)
The above amounts reflect adjustments for amortization of goodwill.
NOTE 8 - CREDIT FACILITY
In October 1998, the Company entered into a two-year extension of its
credit facility with a finance company. The credit facility consists of a
line of credit and an equipment term loan. The facility provides for a
maximum borrowing of $4,000,000, based on 80% of the Company's eligible
accounts receivable and 40% of the Company's eligible inventory (capped at
$1,200,000). The term loan is capped at $100,000 or 80% of the liquidation
value of the Company's eligible equipment. The interest rates of the line
of credit and term loan are prime (7.75% at December 31, 1998 and 1997)
plus 2.50% and prime plus 3%, respectively. As of December 31, 1998,
$1,901,000 and $2,454,000 were outstanding under the line of credit and
the term loan, respectively. The Company's line of credit and term loan
are due October 31, 2000. (See Note 10)
NOTE 9 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties at December 31 consisted of the following:
1998 1997
-------- -------
Unsecured note payable to the former
Chairman of the Board, subordinate
to the bank credit facility,
bearing interest at 9% per annum $ 78,000 $78,000
Non-interest-bearing note payable to
the former owner of the acquired
company, dated October 1, 1998,
with an original principal
balance of $250,000 190,000 --
-------- -------
14
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 9 - NOTES PAYABLE - RELATED PARTIES (Continued) 1998 1997
---- ----
$268,000 $ 78,000
Less current portion 268,000 78,000
-------- --------
Long-term portion $ -- $ --
======== ========
NOTE 10 - LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
1998 1997
---------- ----------
Line of credit with a finance company,
secured by eligible accounts
receivable and inventory, bearing
interest at a rate of 11.25%, due in
October 2000 $1,875,000 $2,394,000
Equipment term loan with a finance
company, secured by eligible
equipment, bearing interest
at a rate of 11.5%, due in
October 2000 27,000 61,000
Loan payable to facility landlord,
secured by certain leasehold
improvements, bearing interest
at a rate of 9.97%, principal and
interest payable in monthly
installments of approximately $2,000
through May 2003 88,000 103,000
Capital leases 31,000 44,000
---------- ----------
2,021,000 2,602,000
Less current portion 1,929,000 2,483,000
---------- ----------
Long-term portion $ 92,000 $ 119,000
========== ==========
15
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 10 - LONG-TERM DEBT (Continued)
Required principal debt payments are as follows:
Year Ending
December 31,
------------
1999 $1,929,000
2000 19,000
2001 2,000
2002 -
2003 71,000
----------
$2,021,000
==========
NOTE 11 - SUBORDINATED CONVERTIBLE DEBT
During the year ended December 31, 1996, the Company raised capital
through the placement of three different series of subordinated
convertible notes, bearing interest at rates of 7%, 8%, and 12%. Each
series is convertible into common stock, commencing 90 days after issuance
at discounted conversion prices, based on 80%, 75%, and 75% of the average
bid price for the five trading days preceding the conversion, for the 7%,
8%, and 12% notes, respectively. For the 7% and 8% notes, the conversion
price per share is limited to a maximum of $2.875 and $2.00 per share,
respectively. In addition to the 25% discount on conversion for the 12%
notes, there is an additional 10% stock issuance, at no cost, for each
conversion.
During the year ended December 31, 1997, the Company raised capital
through the placement of three different series of subordinated
convertible notes, bearing interest at rates of 6%, 7%, and 8%. Each
series is convertible into common stock, commencing 90 days after issuance
at discounted conversion prices, based on 75% of the average bid price for
the five trading days preceding the conversion. For the 7% notes, the
conversion price per share is limited to a maximum of $2.875 per share.
The 12% subordinated convertible notes valued at $325,000 at December 31,
1997 became due and payable on November 27, 1997. The debt-holder has been
informed by the Company that the debt is subordinated to the line of
credit and term financing with its finance company.
The Company has recorded reserves in the amount of $200,000 relating to
penalties due to the Company's default on Convertible obligations.
16
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 11 - SUBORDINATED CONVERTIBLE DEBT (Continued)
The terms associated with each series and the related amounts raised and
converted during the years ended December 31, 1998 and 1997 are as
follows:
Outstanding Outstanding
as of Raised Converted as of
December 31, During During December 31,
1997 1997 1997 1998
---------- ---------- ---------- ----------
7% notes (a) $ 100,000 $ -- $ -- $ 100,000
12% notes (b) 325,000 -- -- 325,000
8% notes (c) 1,100,000 -- 73,000 1,027,000
---------- ---------- ---------- ----------
Total $1,525,000 $ -- $ 73,000 $1,452,000
========== ========== ========== ==========
(a) 7% notes, due March 31, 2001.
(b) 12% notes, due November 27, 1997.
(c) 8% notes, due August 31, 1999.
In accordance with generally accepted accounting principles, the fixed
discount on the conversion feature of the above notes is considered to be
interest expense and is recognized in the statement of operations during
the period from the issuance of the debt to the time at which the debt
becomes convertible (90 days). In addition, the 10% stock bonus upon
conversion of the 12% debt is also deemed to be interest. In connection
with the issuance of the above notes, the Company recorded interest
expense in the amount of $800,000 in the accompanying statements of
operations for the year ended December 31, 1997.
Subsequent to December 31, 1998, certain of the outstanding convertible
debentures and related obligations were cancelled. (See Note 19)
17
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its office space, manufacturing facility, showroom, and
certain property and equipment under long-term operating leases, expiring
through 2003. Included in property and equipment is approximately $72,000
of equipment which is leased under non-cancelable, capital leases,
expiring in September 2001 (see Note 10). Future minimum lease payments
for these leases are as follows:
Year Ending Operating Capital
December 31, Leases Leases
------------ --------- --------
1999 $ 324,000 $16,000
2000 296,000 13,000
2001 284,000 8,000
2002 322,000 -
2003 134,000 -
---------- -------
$1,360,000 37,000
==========
Less amount representing interest 6,000
-------
31,000
Less current portion 12,000
-------
Long-term portion $19,000
=======
Total rent expense under the operating leases was approximately $329,000
and $333,000 for the years ended December 31, 1998 and 1997, respectively.
Employment Agreements
The Company has employment agreements with certain executive officers
that, in addition to customary benefit and severance provisions, guarantee
lump sum payments after a change in control of the Company, if certain
events occur.
On October 1, 1998, the Company entered into a four-year employment
agreement with its Chief Executive Officer. The agreement calls for
$175,000 per year for the term of the agreement.
Litigation
The Company is a defendant in various lawsuits arising out of the normal
course of business. In the opinion of management, the outcome of these
lawsuits will not have a material effect on the Company's financial
position or results of operations.
18
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTION PLAN AND WARRANTS
The Company has four stock option plans under which the Company is
authorized to issue incentive and non-qualified stock options to its
directors, officers, key employees, and consultants totaling up to 58,400
shares of common stock. At December 31, 1998, 56,900 shares are available
for future grant under these plans. Options are generally granted at
exercise prices not less than the fair market value on the date of grant
and expire 10 years after the date of grant. Options granted under these
plans are fully vested immediately upon issuance.
The Company has granted warrants to stockholders, directors, officers,
consultants, underwriters, and a finance company in connection with
various transactions, including issuance of debt, extension of debt,
private placement of common shares, consulting services, and the initial
public offering ("IPO") of common shares. All warrants are granted at
exercise prices not less than the fair market value on the date of grant
and expire from two to five years after the date of grant. Warrants are
fully exercisable immediately upon grant.
The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies APB Opinion No. 25 and related interpretations in accounting for
its plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued to
outside third parties. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed by
SFAS 123, the Company's net loss for the years ended December 31, 1998 and
1997 would be as follows:
1998 1997
------------- -------------
Net loss
As reported $ (2,361,000) $ (2,935,000)
Pro forma $ (2,361,000) $ (2,935,000)
Basic and diluted loss per
common share
As reported $ (2.18) $ (3.45)
Pro forma $ (2.18) $ (3.45)
As permitted by SFAS No. 123, the fair value of these options was
estimated at the date of grant using the minimum value method with the
following weighted-average assumptions for the year ended December 31,
1997: dividend yield of 0%; risk-free interest rate of 5%; exercise price
of $0.15; and expected life of five years. The weighted-average fair value
of options granted during the year ended December 31, 1998 was $0.06 per
share.
19
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTION PLAN AND WARRANTS (Continued)
A summary of the Company's stock option plans and changes in outstanding
options for the years ended December 31 are as follows:
Weighted-
Shares Average
Under Exercise
Option Price
------ --------
Outstanding at December 31, 1996 2,000 $61.75
-----
Outstanding at December 31, 1998 and 1997 2,000 $61.75
=====
Exercisable at December 31, 1998 2,000
=====
As of December 31, 1998, all outstanding options have a remaining life of
approximately five years, and all are currently exercisable.
A summary of the Company's outstanding warrants and activity for the years
ended December 31 are as follows:
Weighted-
Shares Average
Under Exercise
Warrant Price
----------- --------
Outstanding at December 31, 1996 101,000 $22.58
----------
Outstanding at December 31, 1997 101,000 $22.58
Granted 110,000 $ 0.15
Canceled (7,000) $ 1.63
----------
Outstanding at December 31, 1998 204,000 $10.50
==========
Exercisable at December 31, 1998 204,000
==========
20
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTION PLAN AND WARRANTS (Continued)
The following table summarizes information about the stock option plan and
warrants outstanding at December 31, 1998:
Weighted-
Average
Stock Options Stock Options Remaining
Exercise Price Outstanding Exercisable Contractual Life
-------------- ----------- ----------- ----------------
$ 0.15 110,000 55,000 3.8 years
$19.50 4,700 4,700 2.1 years
$22.75 30,400 30,400 2.0 years
$26.00 55,000 55,000 2.3 years
$39.00 3,900 3,900 2.7 years
------- -------
204,000 204,000
======= =======
NOTE 14 - STOCK ISSUED TO OFFICERS AS COMPENSATION
On November 1, 1995, 30,770 shares of stock were granted to certain
officers for services performed and to be performed over a ten-year
period. These shares will vest ratably over the same ten-year period. The
market price of the Company's common stock was $1.625 on the date of
grant, giving rise to $650,000 of deferred compensation. For each of the
years ended December 31, 1998 and 1997, the Company has recognized $65,000
of compensation expense. The remaining unamortized balance is recorded as
deferred compensation to be recognized as the stock vests over ten years.
21
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 15 - INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes as of December 31, 1998 and
1997 consisted of the following:
1998 1997
---------- ----------
Deferred tax asset
Allowance for doubtful accounts $ 118,000 $ 77,000
Inventory valuation 636,000 394,000
Uniform inventory capitalization 111,000 80,000
Accrued warranty expense 41,000 39,000
Deferred rent 71,000 82,000
Federal net operating loss
carryforwards 3,603,000 3,214,000
Other, net 607,000 530,000
---------- ----------
5,187,000 4,416,000
Valuation allowance 5,187,000 4,416,000
---------- ----------
Net deferred tax asset $ -- $ --
========== ==========
As of December 31, 1998, the Company had a federal net operating loss
carryforward of approximately $11,645,000, expiring through 2013.
NOTE 16 - EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan established in accordance with
Section 401(k) of the Employee Retirement Income Security Act of 1974 as
amended. The plan covers substantially all eligible employees. Employee
contributions to the plan are elective, and matching contributions by the
employer are optional. The Company incurred $12,000 and $10,000 in
contribution expense for the years ended December 31, 1998 and 1997,
respectively.
NOTE 17 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 1998, the Company granted 110,000 stock
options to an officer/stockholder of the Company.
During the years ended December 31, 1998 and 1997, a director of the
Company performed professional services valued at $78,000 and $101,000,
respectively.
22
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 18 - YEAR 2000 ISSUE
The Company is conducting a comprehensive review of its computer systems
to identify the systems that could be affected by the Year 2000 Issue and
is developing an implementation plan to resolve the Issue.
The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do
not properly recognize such information could generate erroneous data or
cause a system to fail. The Company is dependent on computer processing in
the conduct of its business activities.
Based on the review of the computer systems, management does not believe
the cost of implementation will be material to the Company's financial
position and results of operations. In addition, the Company has made
various inquiries of its supply chain vendors and has been assured that
they are Year 2000 Compliant.
NOTE 19 - SUBSEQUENT EVENTS (UNAUDITED)
Sale of Equity
On March 2, 1999, the Company consummated the sale of 1,191,752
newly-issued shares (the "Shares") of its common stock, par value $0.01
per share (the "common stock"), to Interiors, Inc., a Delaware corporation
("Interiors"), representing approximately 51% of the outstanding shares of
the Company's common stock, Pursuant to the terms of the Purchase
Agreement, Interiors acquired the Shares from the Company in exchange for
(i) the cancellation of approximately $1,400,000 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"). 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 generally by way of stock dividends or other distributions or
offerings made available to holders of the Company's common stock) if the
affect 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% of the shares of the Company's common stock then
outstanding.
23
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
NOTE 19 - SUBSEQUENT EVENTS (UNAUDITED) (Continued)
Sale of Equity (Continued)
Notwithstanding the foregoing, in the event Interiors shall own less than
51% 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% 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 from four to seven
members and appointed four persons to fill vacancies on the Board
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 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 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
Interiors.
Termination of President
On March 9, 1999, at a special meeting of the Board of Directors, the
Board terminated the President of the Company. On March 12, 1999, the
Company received a letter from the former President'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.
Settlement with Chief Executive Officer
In April 1999, the Company entered into a settlement and release agreement
(the "Agreement") with the former Chief Executive Officer ("CEO") and a
Director of the Company following his resignation in March 1999 as CEO.
Pursuant to the Agreement, the Company has agreed to pay to the former CEO
the sum of $205,000 in full satisfaction of the Company's obligations
pursuant to his employment agreement. The Company and the former CEO have
agreed to exchange general releases in connection with the transaction. In
connection with the payment to the former CEO, Interiors has agreed to
loan 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 the Company's Common Stock at a conversion price of $0.345 per
share, the closing price of the common stock on the thirty trading days
preceding March 22, 1999, the date the transaction was approved.
24
EMPLOYMENT AGREEMENT
AGREEMENT dated as of October 1, 1998 by and between CSL Lighting
Manufacturing, Inc., a Delaware corporation ("CSL" or the "Company") and Mark
Allen residing at 29 Loring Drive, Norwell, Massachusetts 02061 ("Allen").
WHEREAS, Allen is currently the Chief Executive Officer of CSL; and
WHEREAS, the Company desires to assure itself of the benefit of Allen's
services and experience for a period of time; and
WHEREAS, Allen is willing to enter into an agreement to that end with the
Company upon the terms and conditions herein set forth.
NOW THEREFORE, in consideration of the premises and covenants herein
contained, the parties hereto agree as follows:
1. Employment. CSL hereby employs Allen as its Chief Executive Officer and
and Allen hereby accepts such employment and agrees to perform his duties and
responsibilities hereunder in accordance with the terms and conditions
hereinafter set forth.
2. Duties and Responsibilities. Allen shall be the Chief Executive Officer
of CSL during the Employment Term (as defined below). Allen shall report to and
be subject to the direction of the Board of Directors (the "Board") of CSL and
Allen shall perform such duties as may be assigned to him from time to time by
the Board; provided, that such duties shall be of a nature consistent with the
dignity and authority of the positions of Chief Executive Officer. During the
Employment Term Allen shall, subject to the Company's vacation policy, devote
substantially all of his normal business time and attention to the businesses of
CSL and
<PAGE>
its subsidiaries and affiliates and shall perform such duties in a diligent,
trustworthy, loyal, businesslike and efficient manner, all for the purpose of
advancing the business of CSL and its subsidiaries and affiliates. Nothing
contained in this Agreement shall be deemed to prohibit Allen from devoting a
nominal amount of his time to his (and his family's) personal investments,
provided, however, that, in case of conflict, the performance of Allen's duties
under this Agreement shall take precedence over his activities with respect to
such investments.
3. Term. The Term of this Agreement shall commence on the date hereof and
shall continue until September 30, 2003, unless terminated prior thereto in
accordance with the terms and provisions hereof (the "Employment Term").
4. Compensation. CSL shall pay to Allen a salary at the rate of $175,000
per year, payable in such manner as CSL shall determine, but in no event any
less often than monthly, less withholding required by law and other deductions
agreed to by Allen. Allen's annual salary may be increased during the Employment
Term in the sole discretion of the Board.
5. Bonus. In addition to the compensation provided for in Paragraph 4 of
this Agreement, Allen shall during the Employment Term participate in the
Company's then existing and effective profit sharing and bonus plans.
Furthermore Allen shall receive such other bonuses as determined in the sole
discretion of the Board. Any bonuses shall be paid in such manner as the parties
mutually agree.
6. Principal Office. Without Allen's consent, CSL shall not require Allen
to maintain his principal office in any location other than Massachusetts.
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7. Expenses and Benefits.
(a) CSL shall, consistent with CSL's policy of reporting and
reimbursement of business expenses, reimburse Allen for such other ordinary and
necessary entertainment and business related expenses as shall be incurred by
Allen in the course of the performance of his duties under this Agreement.
(b) CSL recognizes that Allen will be required to incur significant
travel in rendering services to CSL hereunder and in connection therewith CSL
shall during the Employment Term provide Allen with a automobile allowance of
$900 per month which the parties agree shall be used to pay all of the expenses
associated with the operation of an automobile including, without limitation,
maintenance, repair and insurance costs.
(c) Allen shall be entitled to participate, to the extent he
qualifies, in such life insurance, hospitalization, disability and other medical
insurance plans or programs as are generally made available to executive
officers of CSL which shall be consistent with the programs and benefits
currently offered to Allen.
(d) Allen shall be entitled to use of the Company's corporate
apartment while providing services hereunder in the state of California and the
Company shall otherwise reimburse Allen for all ordinary and necessary
reasonable expenses in connection with his provision of services away from his
home.
8. Termination.
(a) CSL shall have the right to terminate this Agreement for
disability in the event Allen suffers any illness or incapacity of such
character as to substantially disable him from performing his duties hereunder
for a period of more than one hundred and eighty (180) consecutive days in any
one calendar year upon CSL giving at least thirty (30) days written
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notice of its intention to so terminate. If Allen shall resume his duties
hereunder within thirty (30) days following the receipt of such notice and shall
perform such duties for forty (40) days of the next sixty (60) consecutive days
thereafter, the Employment Term shall continue without interruption and such
notice of intention to terminate shall have no further force or validity.
(b) This Agreement shall terminate upon the death of Allen, except
that Allen's salary shall be payable to his estate for one hundred eighty (180)
days thereafter, together with all accrued bonuses and outstanding unreimbursed
expenses.
(c) CSL may terminate this Agreement at any time with Reasonable
Cause upon five (5) days written notice to Allen. "Reasonable Cause" means (i)
conviction of a crime involving moral turpitude; (ii) Allen having engaged in
any activity in competition with CSL, without CSL's consent; (iii) Allen having
divulged any secret or confidential information of a material nature belonging
to CSL, without CSL's consent, except as required by law; (iv) Allen's
dishonesty or misconduct that is damaging or detrimental to CSL in any material
respect; or (v) Allen's breach of any material term of this Agreement; provided,
however, that notice under this provision shall not be effective unless Allen
shall have first received written notice from CSL of the specific acts or
omissions alleged to constitute a breach of any material term of this Agreement,
and such breach continues unremedied for a period of fifteen (15) days after
such notice.
(d) If either (i) a third person, including a "group" as defined in
Section 13(d) (3) of the Securities Exchange Act of 1934, becomes the beneficial
owner of shares of CSL having 45% or more of the total number of votes that may
be cast for the election of directors of CSL or (ii) as the result of, or in
connection with, any cash tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any combination of the
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foregoing transactions (a "Transaction"), the persons who were directors of CSL
before the Transaction shall cease to constitute a majority of the Board or the
Board of Directors of any successor to CSL and following such Transaction (a)
Allen's duties and responsibilities are modified in a material respect in a
manner inconsistant with the dignity and role of a senior executive officer, or
(b) the Company breaches a material provision of this Agreement, which remains
uncured for ten (10) business days following written notice thereof; then and in
such event for a period of one hundred and twenty (120) days following the
occurrence of such events Allen may elect to terminate this Agreement upon five
(5) days prior written notice to CSL and upon such termination Allen shall be
entitled to receive, in addition to any other payments due to Allen pursuant to
this Agreement, a severance payment equal to the greater of (a) $200,000, or (b)
the compensation due to Allen for the balance of the Employment Term.
9. Non-Competition. Allen covenants and agrees that during his employment
hereunder and for a period of one years after his employment hereunder is
terminated, he will not, without the prior written consent of CSL, (a) compete
with the business of CSL or any of its subsidiaries or affiliates and, in
particular, he will not without such consent, directly or indirectly, own,
manage, operate, finance, join, control or participate in the ownership,
management, operation, financing or control of, or be connected as a director,
officer, employee, partner, consultant or agent with, any business in
competition with or similar to the business of CSL or any of its subsidiaries or
affiliates; provided, however, that Allen may own up to two percent of the
capital stock of any publicly traded corporation in competition with the
business of CSL or any of its subsidiaries or affiliates if the fair market
value of such corporation's outstanding capital stock exceeds $100 million, and
(b) divert, take away, interfere with or attempt to take away any present or
former employee or customer of CSL or
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any of its subsidiaries or affiliates. The provisions of this Section 9 shall no
longer be applicable if Allen's employment is terminated by CSL (other than for
cause) or by Allen pursuant to the provisions of Section 8(d) hereof during the
Employment Term. In the event that the provisions of this Section 9 should ever
be deemed to exceed the time or geographic limitations or any other limitations
permitted by applicable law, then such provisions shall be deemed reformed to
the maximum permitted by applicable law. Allen acknowledges and agrees that the
foregoing covenant is an essential element of this Agreement and that, but for
the agreement of Allen to comply with the covenant, the Company would not have
entered into this Agreement, and that the remedy at law for any breach of the
covenant will be inadequate and the Company, in addition to any other relief
available to it, shall be entitled to temporary and permanent injunctive relief
without the necessity of proving actual damage.
10. Confidential Information. Allen recognizes and acknowledges that the
customer lists, patents, inventions, copyrights, methods of doing business,
trade secrets and proprietary information of CSL including, without limitation,
as the same may exist from time to time, are valuable, special and unique assets
of the business of CSL. Except in the ordinary course of business or as required
by law, Allen shall not, during or after the Employment Term, disclose any such
list of customers or any part thereof, any such patents, inventions, copyrights,
methods of doing business, trade secrets or proprietary information which are
not otherwise in the public domain to any person, firm, corporation or other
entity for any reason whatsoever. In addition, Allen specifically acknowledges
and agrees that the remedy at law for any breach of the foregoing shall be
inadequate and that CSL Lighting Manufacturing, and the Company, in addition to
any other relief available to them, shall be entitled to temporary and permanent
injunctive relief without the necessity of proving actual damage.
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11. COBRA. In the event of Allen's death during the term of this
Agreement, CSL shall make all COBRA medical premium payments for Allen's family
for the three year period following his death.
12. Opportunities. During his employment with CSL, Allen shall not take
any action which might divert from CSL or any of its subsidiaries or affiliates
any opportunity which would be within the scope of any of the present or future
businesses of CSL or any of its subsidiaries or affiliates.
13. Contents of Agreement, Parties in Interest, Assignment, etc. This
Agreement sets forth the entire understanding of the parties hereto with respect
to the subject matter hereof. All of the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective heirs, representatives, successors and assigns of the parties hereto,
except that the duties and responsibilities of Allen hereunder which are of a
personal nature shall neither be assigned nor transferred in whole or in party
by Allen. This Agreement shall not be amended except by a written instrument
duly executed by CSL and Allen.
14. Severability. If any term or provision of this Agreement shall be held
to be invalid or unenforceable for any reason, such term or provision shall be
ineffective to the extend of such invalidity or unenforceability without
invalidating the remaining terms and provisions hereof, and this Agreement shall
be construed as if such invalid or unenforceable term or provision had not been
contained herein.
15. Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the other party shall be in writing and shall be
deemed to have been duly given when delivered personally or five (5) days after
dispatch by registered or certified
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mail, postage prepaid, return receipt requested, to the party to whom the same
is so given or made:
If to CSL
addressed to: CSL Lighting Manufacturing, Inc.,
27615 Avenue Hopkins
Valencia, California 91355-3493
Attn: Chief Executive Officer
with a copy to: Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, New York 10022
Attn: Kenneth S. Rose, Esq.
If to Allen
addressed to: Mark J. Allen
29 Loring Drive
Norwell, Massachusetts 02061
or at such other address as the one party shall specify to the other party in
writing.
16. Counterparts and Headings. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original and all which
together shall constitute one and the same instrument. All headings are inserted
for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement.
17. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of California.
18. Arbitration. Any disputes arising hereunder shall be submitted to
arbitration before a single arbitrator in Los Angeles, California under the
rules and regulations of the American Arbitration Association. Any award in such
arbitration proceeding may be enforced in any court of competent jurisdiction.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
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CSL LIGHTING MANUFACTURING, INC.
By:
-----------------------------------------
Michael Smith, Chairman
Compensation Committee of the
Board of Directors
------------------------------------------
Mark J. Allen
9
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT (the "Agreement") dated as of October 1, 1998 by
and between CSL LIGHTING MANUFACTURING, INC., a Delaware corporation ("Buyer")
and ORTEK CORPORATION, a California corporation (hereinafter "Seller" or the
"Company").
WITNESSETH:
WHEREAS, Seller is engaged in the business of designing and developing
lighting products and lighting components (the "Business"); and
WHEREAS, Buyer wishes to purchase substantially all of the assets used in
connection with the Business; and
WHEREAS, Seller wishes to sell such assets to Buyer.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth, the parties hereto hereby agree as follows:
1. Purchase and Sale of Assets.
1.01 Purchase of Assets. On the terms and subject to the conditions
set forth herein, Buyer hereby purchases from Seller, and Seller hereby sells,
assigns, transfers, conveys and delivers to Buyer, all of Seller's right, title
and interest in and to all of the assets and properties used in connection with
the Business, as the same shall exist on the date hereof, except for the
Excluded Assets as described in Section 1.03, all of such assets and properties
being hereinafter collectively referred to as the "Purchased Assets."
<PAGE>
1.02 List of Assets. Except as expressly provided in Section 1.03
hereof, the Purchased Assets shall include, without limitation, all of Seller's
right, title and interest in and to:
(a) The Company name and/or trade name "Ortek" and all
variations thereof, including the registered service mark for "Ortek";
(b) all of Seller's rights under contracts relating to the
Business;
(c) all of Seller's accounts receivable, inventories,
equipment and prepaid expenses relating to the Business as more
particularly set forth on Schedule 1.02(c) hereto;
(d) all copyrights, patents, trade secrets and know-how
related to the Business and all rights to software and other intellectual
property in development and related research as more particularly set
forth on Schedule 1.02(d) hereto;
(e) all of Seller's rights in registered and common law
trademarks, service markets and trade names used in connection with the
Business as more particularly set forth on Schedule 1.02(e) hereto;
(f) all rights to service agreements and insurance policies
relating to the Business as well as rights to proceeds thereunder; and
(g) all goodwill of Seller relating to the Business.
1.03 Excluded Assets. The Purchased Assets shall not include any of
the following (the "Excluded Assets"):
(a) all of Seller's cash and cash equivalents;
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(b) all of Seller's marketable securities and other
investments including restricted assets;
(c) all of Seller's bank and brokerage accounts;
(d) all of Seller's accrued interest receivable;
(e) all of Seller's assets not used in connection with the
Business.
1.04 Instruments of Transfer. Seller is hereby delivering to Buyer
duly executed instruments of transfer and assignment, including, without
limitation, bills of sale and assignments in form and substance reasonably
satisfactory to Buyer and its counsel, sufficient to vest in Buyer valid title
to all of Seller's right, title and interest in and to the Purchased Assets,
free and clear of all mortgages, claims, liens, charges or encumbrances of any
kind or nature whatsoever, except for the Assumed Liabilities.
2. Purchase Price.
2.01 Purchase Price.
(a) The aggregate price to be paid by Buyer (the "Purchase
Price") for and in consideration of the sale and transfer of the Purchased
Assets as provided herein shall consist of (i) $250,000 payable in monthly
installments, without interest, as follows: three installments of $20,000 due on
November 30, 1998, February 28, 1999, and March 31, 1999, respectively, followed
by twenty-four installments of $7,916.67; and (ii) the agreement by Buyer to
assume and pay the Assumed Liabilities (as defined below). The Buyer may prepay
any portion of the Purchase Price in its sole discretion.
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2.02 Allocation of Purchase Price. The parties agree that the
Purchase Price shall be allocated to the various assets and properties included
in the Purchased Assets in the manner set forth on Schedule 2.02 hereto.
3. Post-Closing Obligations.
3.01 Assumption.
(a) Except as set forth in Section 3.01(b) below, Buyer hereby
(except as may otherwise be specifically agreed to in any other provision of
this Agreement) assumes and agrees to timely and fully pay, perform and
discharge the following obligations and liabilities of Seller relating to the
Business (the "Assumed Liabilities"):
(i) the accounts payable and accrued expenses relating
to the Business set forth on Schedule 3.01(a) hereto;
(b) Buyer shall not and does not assume the following
liabilities or obligations of Seller (the "Excluded Liabilities"):
(i) all of Seller's legal, accounting or other fees or
expenses arising out of the transactions contemplated hereby;
(ii) any taxes arising out of the conduct of the
Business prior to the Closing Date; and
(iii) all wages, consulting fees or other employee
benefits payable to any employees of the Company for the period prior to
the date hereof.
3.02 Receivable Payments. Buyer and Seller each hereby agree that if
either one of them shall have received a payment where all or a portion of such
payment represents a receivable due to the other party then, and in such event,
the party receiving such payment
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shall immediately forward to the other party that portion of such payment which
represents the receivable of such other party.
3.03 Endorsement of Checks. Seller hereby agrees that any check
received by Buyer on or after the Closing Date as payment on account of any
trade account receivable constituting a part of the Purchased Assets, which
check is payable to Seller, may be endorsed by Buyer for its own account, with
all such payments being subject to the provisions of Section 3.02 hereof.
4. Representations and Warranties of Seller. Seller represents and
warrants to and agrees with Buyer as follows:
4.01 Organization and Good Standing. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Seller has full corporate power and authority to conduct its
business as now conducted and to own or lease and operate the assets and
properties now owned or leased and operated by it. Seller is duly qualified to
do business and is in good standing in each jurisdiction in which the nature of
its business or the character of its properties requires such qualification
except where the failure to be so qualified would not have a material adverse
effect on the Business or the Purchased Assets (a "Material Adverse Effect").
The jurisdictions in which Seller is so qualified are set forth on Schedule
4.01.
4.02 Authority and Compliance. Seller has full corporate power and
authority to execute and deliver this Agreement. The consummation and
performance by Seller of the transactions contemplated by this Agreement have
been duly and validly authorized by all necessary corporate actions. This
Agreement has been duly and validly
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executed and delivered on behalf of Seller and constitutes a valid obligation of
Seller, enforceable in accordance with its terms, except to the extent that such
enforceability may be limited by applicable insolvency, bankruptcy,
reorganization or similar laws affecting the enforcement of creditors' rights
generally and by general equity principles. No consent, authorization or
approval of, exemption by, or filing with, any domestic governmental or
administrative authority, or any court, is required by Seller or any of its
shareholders to be obtained or made in connection with the execution, delivery
and performance of this Agreement or the consummation of the transactions
contemplated hereby.
4.03 No Conflict. The performance of this Agreement and the
consummation of the transactions contemplated hereby will not result in a breach
or violation of any of the terms or provisions of, or constitute a default under
(i) any agreement or instrument relating to the Purchased Assets (subject to
obtaining any consents required to assign any agreements included in the
Purchased Assets); (ii) the certificate of incorporation or by-laws of the
Seller; or (iii) any law, order, rule, regulation, writ, injunction or decree
applicable to the Seller.
4.04 Compliance with Law.
(a) Seller's operation of the Business and use of the Purchased
Assets are (i) in compliance with all, and not in violation of any, and (ii)
Seller has not received any claim or notice that such operation or use and
occupancy is in violation of any, applicable law or ordinance, or any order,
rule or regulation of any governmental agency or body to which the Seller, the
Business or the Purchased Assets are subject (except where the failure to be in
compliance does not have a material adverse effect on the conduct of the
Business).
4.05 Books and Records. The books of account and other financial
records of Seller are complete and correct in all material respects and are
maintained in accordance with good business practices, and accurately reflect
the basis for the preparation of the Financial Statements.
4.06 Assets and Properties. Seller has valid title to all personal
property included in the Purchased Assets, free and clear of all liens, pledges,
mortgages, security
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interests, conditional sales contracts and other encumbrances or any kind or
nature, except for the Assumed Liabilities.
4.07 Condition of Assets and Properties. All equipment and other
tangible personal property included in the Purchased Assets (the "Tangible
Personal Property") are in good working order.
4.8 Patents, Trademarks, Copyrights, Etc. Schedule 1.02(e) contains
a complete and correct list of all patents, patent rights, patent applications,
licenses, shop rights, trademarks, trademark applications, tradenames,
copyrights and similar rights currently used in the Business (collectively
"Rights"), indicating the registered owner, the registration number, and the
expiration date thereof. Seller owns or validly licenses all Rights and other
proprietary information used in the conduct of the Business as currently being
conducted; to the best of Seller's actual knowledge, the conduct of the Business
as currently operated does not conflict with valid rights of others in any way,
nor has any material use been made of the Rights, except by Seller.
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4.9 Insurance. The Company has maintained insurance policies as are
customary to the operation of Business and is presently covered by adequate
product liability coverage.
4.10 Legal Proceedings. Etc. There are no claims, actions, suits,
proceedings, arbitrations or investigations, either administrative or judicial,
pending or, to the best of Seller's actual knowledge, threatened by, or against,
Seller or any of the Purchased Assets, or specifically relating to the
transactions contemplated by this Agreement, at law or in equity or otherwise,
before or by any court or governmental agency or body, domestic or foreign, or
before an arbitrator of any kind. Seller has not paid or reserved an amount in
excess of $2,500 with respect to any product liability claim made or threatened
against Seller.
4.11 Taxes and Tax Returns. Seller has duly made all deposits
required by law to be made with respect to employees' withholding taxes. Seller
has duly filed with all appropriate governmental agencies and bodies, whether
federal, state or local, all income, sales, license, franchise, excise, gross
receipts, employment and payroll-related and real and personal property tax
returns and all other tax returns which were required to be filed, all of which
properly reflect the taxes owed by them for the periods covered thereby and, to
the extent due, Seller has paid all taxes shown to be due on such returns.
4.12 Labor. The Seller is not a party to any collective bargaining
agreement with any union or other representative of employees and no question
concerning representation exists with regard to any group of employees of
Seller.
4.13 Assets Being Transferred. The Purchased Assets being conveyed
hereunder constitute such assets (except for working capital) as are necessary
to permit Buyer
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to continue the Business in a manner substantially similar to the manner in
which Seller is operating the Business on the date hereof.
4.14 Finder. There is no firm, corporation, agency or other entity
or person that is entitled to a finder's fee or any type of brokerage commission
in relation to or in connection with the transactions contemplated by this
Agreement as a result of any agreement or understanding with Seller or any of
its directors, officers, employees or shareholders.
4.15 Full Disclosure. No representation or warranty by Seller in
this Agreement contains or will contain any untrue statement of a material fact
or omits or will omit to state any material fact necessary to make any statement
herein or therein not materially misleading. The parties agree that any item
disclosed in any Schedule to this Agreement shall be deemed to have been
disclosed on all Schedules to this Agreement wherein such disclosure may have
been required.
5. Representations and Warranties of Buyer. Buyer hereby represents and
warrants to Seller as follows:
5.01 Organization and Good Standing. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, with full corporate power and authority to conduct its business as now
conducted and to own or lease and operate the assets and properties now owned or
leased and operated by it. Buyer has the full corporate power and authority to
conduct the Business as now conducted by Seller and to own or lease and operate
the Purchased Assets.
5.02 Authority and Compliance. Buyer has full corporate power and
authority to execute and deliver this Agreement. The consummation and
performance by Buyer
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of the transactions contemplated by this Agreement have been duly and validly
authorized by all necessary corporate and other proceedings. This Agreement has
been duly and validly executed and delivered on behalf of Buyer and constitutes
a valid obligation of Buyer, enforceable in accordance with its terms, except to
the extent that such enforceability may be limited by applicable insolvency,
bankruptcy, reorganization or similar laws affecting the enforcement of
creditors' rights generally and by general equity principles. No consent,
authorization or approval of, exemption by, or filing with, any domestic
governmental or administrative authority, or any court, is required to be
obtained or made by Buyer in connection with the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby.
5.03 No Conflict. The performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a breach
or violation of any of the terms or provisions of, or constitute a default under
(i) any contract or other agreement or instrument to which Buyer is a party or
by which Buyer or any of its properties or assets is bound; (ii) the certificate
of incorporation or by-laws of Buyer; or (iii) any law, order, rule, regulation,
writ, injunction or decree applicable to Buyer.
5.04 Finder. There is no firm, corporation, agency or other entity
or person that is entitled to a finder's fee or any type of brokerage commission
in relation to or in connection with the transactions contemplated by this
Agreement as a result of any agreement or understanding with Buyer or any of its
directors, officers, or employees.
5.05 Legal Proceedings. There are no claims, actions, suits,
proceedings, arbitrations or investigations, either administrative or judicial,
pending or, to the best of
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Buyer's actual knowledge, threatened by or against Buyer including without
limitation, any with respect to relations between Buyer and its employees,
environmental matters or matters specifically relating to the transactions
contemplated by this Agreement, at law or in equity or otherwise, before or by
any court, government agency or body, domestic or foreign on or before any
arbitrator of any kind.
5.06 Full Disclosure. No representation or warranty by Buyer in this
Agreement contains or will contain any untrue statement of a material fact or
omits or will omit to state any material fact necessary to make any statement
herein or therein not materially misleading.
6. Indemnification.
6.01 Indemnification by Buyer. Buyer hereby covenants and agrees
with Seller that it shall reimburse and indemnify Seller and their successors
and assigns (individually an "Indemnified Party") and hold them harmless from,
against and in respect of any and all costs, losses, claims, liabilities, fines,
penalties, damages and expenses (including interest which may be imposed in
connection therewith and court costs and reasonable fees and disbursements of
counsel) incurred by any of them due to, arising out of, or in connection with
(i) a breach of any of the representations, warranties, covenants or agreements
made by Buyer in this Agreement; (ii) Buyer's failure to timely and fully honor,
discharge, pay or fulfill any Assumed Liability; and (iii) the operation of the
Business from and after the date hereof (each a "Claim").
6.02 Indemnification by Seller. Seller hereby covenants and agrees
with Buyer that it shall reimburse and indemnify Buyer and its successors and
assigns (also
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individually an "Indemnified Party") and hold them harmless from, against and in
respect of any and all costs, losses, claims, liabilities, fines, penalties,
damages and expenses (including interest which may be imposed in connection
therewith and court costs and reasonable fees and disbursements of counsel)
incurred by any of them due to, arising out of, or in connection with (i) a
breach of any of the representations, warranties, covenants or agreements made
by Seller in this Agreement; and (ii) the failure of Seller to discharge any
liability or obligation of Seller which is an Excluded Liability (each a
"Claim").
6.03 Right to Defend. Etc.
(a) If the facts giving rise to any such indemnification shall
involve any actual Claim or demand by any third party against an Indemnified
Party, the indemnifying party shall be entitled to notice of and entitled to
defend or prosecute such Claim at its expense and through counsel of its own
choosing if it advises the Indemnified Party in writing of its intention to do
so within thirty (30) days after notice of such Claim has been given to the
indemnifying party (without prejudice to the right of any Indemnified Party to
participate at its expense through counsel of its own choosing). Such
Indemnified Party shall cooperate in the defense and/or settlement of such
Claim, but shall be entitled to be reimbursed for all costs and expenses
incurred by it in connection therewith. No settlement of any Claim may be made
without the consent of the indemnifying party, which consent may not be
unreasonably withheld; provided, however, that if such indemnifying party has
been offered the opportunity to defend such Claim and has elected not to do so
then settlement may be made without the consent of the indemnifying party.
(b) Notwithstanding Section 6.03(a) hereof, if, in the
reasonable opinion of Buyer, any Claim involves an issue or matter which could
have a materially adverse
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effect on the business, operations, assets or prospects of Buyer, then, and in
such event, Buyer shall have the right to control the defense or settlement of
any such Claim. If Buyer should so elect to exercise such right, Buyer shall pay
the legal expenses associated with such defense and the indemnifying party shall
have the right at its sole expense to participate in, but not control, the
defense or settlement of such Claim. No settlement of any such Claim may be made
without the consent of the indemnifying party, which consent may not be
unreasonably withheld.
7. General Provisions.
7.01 Survival of Representations, Warranties, Covenants, and
Agreements. The representations, warranties, covenants and agreements contained
in this Agreement shall survive the execution of this Agreement and the closing
of the transactions contemplated hereby for a period of two year; provided,
however, that any representations, warranties, covenants and agreements
contained herein which specifically set forth longer time periods of
effectiveness shall survive for the periods indicated therein and further
provided that the covenants and agreements set forth in Sections 3.01, 3.02,
3.03 and 4.11 shall survive indefinitely. If any claim for indemnity has been
timely made but has not been resolved by the parties prior to the expiration of
the applicable time period of survival then, and in such event, such claim shall
survive until finally resolved.
7.02 Expenses. Whether or not the transactions contemplated by this
Agreement are consummated, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expense.
13
<PAGE>
7.03 Notices. All notices, requests, demands and other
communications which are required to be or may be given under this Agreement to
any party to any of the other parties shall be in writing and shall be deemed to
have been duly given when (a) delivered in person, the day following dispatch by
an overnight courier service (such as Federal Express or UPS, etc.) or (c) five
(5) days after dispatch by certified or registered first class mail, postage
prepaid, return receipt requested, to the party to whom the same is so given or
made:
If to Seller
addressed to: CSL Lighting Manufacturing, Inc.
27615 Avenue Hopkins
Valencia, California 91355-3493
Attn: Chief Executive Officer
with a copy to: Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, New York 10022
Attn: Kenneth S. Rose, Esq.
If to Seller
addressed to: Ortek Corporation
1250 N. Kings Road, #505
Hollywood, CA 90069
Attn: Mr. Miron Skegin
7.04 Assignability and Amendments. This Agreement shall not be
assignable by any of the parties hereto. This Agreement cannot be altered or
otherwise amended except pursuant to an instrument in writing signed by each of
the parties.
7.05 Entire Agreement. This Agreement and Schedules which are a part
hereof and the other writings and agreements specifically identified herein
contain the entire agreement between the parties with respect to the
transactions contemplated herein and supersede all previous written or oral
negotiations, commitments and understandings.
14
<PAGE>
7.06 Waivers, Remedies. Any condition to the performance of any
party hereto which legally may be waived on or prior to the Closing Date may be
waived by the party entitled to the benefit thereof. Any waiver must be in
writing and signed by the party to be bound thereby. A waiver of any of the
terms or conditions of this Agreement shall not in any way affect, limit or
waive a party's rights under any other term or condition of this Agreement. All
remedies under this Agreement shall be cumulative and not alternative.
7.07 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
7.08 Headings. All headings (including, without limitation, Article
headings and Section titles) are inserted for convenience of reference only and
shall not affect the meaning or interpretation of any such provisions or of this
Agreement, taken as an entirety.
7.09 Severability. If and to the extent that any court of competent
jurisdiction holds any provision (or any part thereof) of this Agreement to be
invalid or unenforceable, such holding shall in no way affect the validity of
the remainder of this Agreement.
7.10 No Third Party Beneficiaries. Nothing contained in this
Agreement shall be deemed to confer rights on any Person or to indicate that
this Agreement has been entered into for the benefit of any Person, other than
the parties hereto.
7.11 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without regard
to conflicts of laws provisions.
15
<PAGE>
7.12 Binding Effects. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors, legal
representatives and assigns.
7.13 Further Assurances. At any time after the Closing Date, each
party shall upon request of another party, execute, acknowledge and deliver all
such further and other assurances and documents, and will take such action
consistent with the terms of this Agreement, as may be reasonably requested to
carry out the transactions contemplated herein and to permit each party to enjoy
its rights and benefits hereunder.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
CSL LIGHTING MANUFACTURING, INC.
By:
---------------------------------------
Mark Allen, Chief Executive Officer
ORTEK CORPORATION
By:
---------------------------------------
Miron Skegin, President
16
EMPLOYMENT AGREEMENT
AGREEMENT dated as of October 1, 1998 by and between CSL LIGHTING
MANUFACTURING, INC., a Delaware corporation ("CSL" or the "Company") and SKEGIN
residing at 1250 N. Kings Rd., #505 West Hollywood, CA 90069 ("Skegin").
WHEREAS, Skegin is currently the President and sole shareholder of Ortek
Corporation ("Ortek"); and
WHEREAS, simultaneously herewith the Company is acquiring substantially
all of the assets of Ortek pursuant to an Asset Purchase Agreement of even date
herewith; and
WHEREAS, the Company desires to assure itself of the benefit of Skegin's
services and experience for a period of time; and
WHEREAS, Skegin is willing to enter into an agreement to that end with the
Company upon the terms and conditions herein set forth.
NOW THEREFORE, in consideration of the premises and covenants herein
contained, the parties hereto agree as follows:
1. Employment. CSL hereby employs Skegin as President -- Ortek Division
and Skegin hereby accepts such employment and agrees to perform his duties and
responsibilities hereunder in accordance with the terms and conditions
hereinafter set forth.
2. Duties and Responsibilities. Skegin shall be the President -- Ortek
Division during the Employment Term (as defined below). Skegin shall report to
and be subject to the direction of the Chief Executive Officer and/or the
President of CSL and Skegin shall perform such duties as may be assigned to him
from time to time by the Chief Executive Officer and/or President of CSL;
provided, that such duties shall be of a nature consistent with the dignity and
<PAGE>
authority of the positions of President -- Ortek Division. During the Employment
Term Skegin shall, subject to the Company's vacation policy, devote
substantially all of his normal business time and attention to the businesses of
CSL and its subsidiaries and affiliates and shall perform such duties in a
diligent, trustworthy, loyal, businesslike and efficient manner, all for the
purpose of advancing the business of CSL and its subsidiaries and affiliates.
Nothing contained in this Agreement shall be deemed to prohibit Skegin from
devoting a nominal amount of his time to his (and his family's) personal
investments, provided, however, that, in case of conflict, the performance of
Skegin's duties under this Agreement shall take precedence over his activities
with respect to such investments.
3. Term. The Term of this Agreement shall commence on the date hereof and
shall continue until September 30, 2003, unless terminated prior thereto in
accordance with the terms and provisions hereof (the "Employment Term").
4. Compensation. CSL shall pay to Skegin a salary at the rate of
$80,000.00 per year, payable in such manner as CSL shall determine, but in no
event any less often than monthly, less withholding required by law and other
deductions agreed to by Skegin. Skegin's annual salary may be increased during
the Employment Term in the sole discretion of the Board.
5. Bonus. In addition to the compensation provided for in Paragraph 4 of
this Agreement, Skegin shall during the Employment Term be eligible to
participate in the Company's then existing and effective profit sharing and
bonus plans. Furthermore Skegin shall receive such other bonuses as determined
in the sole discretion of the Board of Directors.
6. Expenses and Benefits.
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<PAGE>
(a) CSL shall, consistent with CSL's policy of reporting and
reimbursement of business expenses, reimburse Skegin for such other ordinary and
necessary entertainment and business related expenses as shall be incurred by
Skegin in the course of the performance of his duties under this Agreement.
(b) Skegin shall be entitled to participate, to the extent he
qualifies, in such life insurance, hospitalization, disability and other medical
insurance plans or programs as are generally made available to employees of CSL.
7. Skegin's Representation and Warranties. Skegin represents and warrants
that he has the full right and authority to enter into this Agreement and fully
perform his obligations hereunder, that he is not subject to any non-competition
agreement other than with the Company, and that his past, present and
anticipated future activities have not and will not infringe on the proprietary
rights of others. Skegin further represents and warrants that he is not
obligated under any contract (including, but not limited to, licenses, covenants
or commitments of any nature) or other agreement or subject to any judgment,
decree or order of any court or administrative agency which would conflict with
his obligation to use his best efforts to perform his duties hereunder or which
would conflict with the Company's business and operations as presently conducted
or proposed to be conducted. Neither the execution nor delivery of this
Agreement, nor the carrying on of the Company's business as officer and employee
by Skegin will conflict with or result in a breach of the terms, conditions or
provisions of or constitute a default under any contract, covenant or instrument
to which Skegin is currently a party.
8. Termination.
(a) CSL shall have the right to terminate this Agreement for
disability in the event Skegin suffers any illness or incapacity of such
character as to substantially disable him from performing his duties hereunder
for a period of more than ninety (90) consecutive days in any one calendar year
upon CSL giving at least fifteen (15) days written
notice of its intention to so
3
<PAGE>
terminate. If Skegin shall resume his duties hereunder within fifteen (15) days
following the receipt of such notice and shall perform such duties for forty
(40) days of the next sixty (60) consecutive days thereafter, the Employment
Term shall continue without interruption and such notice of intention to
terminate shall have no further force or validity.
(b) This Agreement shall terminate automatically upon the death of
Skegin, except that Skegin's salary through the date of his death and any cash
payments due him, if any, through the date of this death shall be paid to his
estate within thirty (30) days of his death.
(c) CSL may terminate this Agreement at any time with Reasonable
Cause upon five (5) days written notice to Skegin. "Reasonable Cause" means (i)
conviction of a crime involving moral turpitude; (ii) Skegin having engaged in
any activity in competition with CSL, without CSL's consent; (iii) Skegin having
divulged any secret or confidential information of a material nature belonging
to CSL, without CSL's consent, except as required by law; (iv) Skegin's
dishonesty or misconduct that is damaging or detrimental to CSL in any material
respect; or (v) Skegin's breach of any material term of this Agreement;
provided, however, that termination under this provision shall not be effective
unless Skegin shall have first received written notice from CSL of the specific
acts or omissions alleged to constitute a breach of any material term of this
Agreement, and such breach continues unremedied for a period of fifteen (15)
days after such notice.
(d) If, during the employment period, the Company terminates
Skegin's employment other than for Cause or Disability, the Company shall pay to
Skegin a cash payment equal to the "Base Amount" (as defined below). The Base
Amount shall mean the sum of (i) the annual base salary at the time of such
termination, and (ii) the amount of the highest aggregate annual bonus received
by Skegin from the Company in any year during the two (2) year period preceding
the date of such termination. Such sum shall be payable in an lump sum payment
within ninety (90) days of the date of such termination.
4
<PAGE>
9. Non-Competition. Skegin covenants and agrees that during his employment
hereunder and for a period of one year after his employment hereunder is
terminated, he will not, without the prior written consent of CSL, (a) compete
with the business of CSL or any of its subsidiaries or affiliates and, in
particular, he will not without such consent, directly or indirectly, own,
manage, operate, finance, join, control or participate in the ownership,
management, operation, financing or control of, or be connected as a director,
officer, employee, partner, consultant or agent with, any business in
competition with or similar to the business of CSL or any of its subsidiaries or
affiliates; provided, however, that Skegin may own up to two percent of the
capital stock of any publicly traded corporation in competition with the
business of CSL or any of its subsidiaries or affiliates if the fair market
value of such corporation's outstanding capital stock exceeds $100 million, and
(b) divert, take away, interfere with or attempt to take away any present or
former employee or customer of CSL or
5
<PAGE>
any of its subsidiaries or affiliates. In the event that the provisions of this
Section 9 should ever be deemed to exceed the time or geographic limitations or
any other limitations permitted by applicable law, then such provisions shall be
deemed reformed to the maximum permitted by applicable law. Skegin acknowledges
and agrees that the foregoing covenant is an essential element of this Agreement
and that, but for the agreement of Skegin to comply with the covenant, the
Company would not have entered into this Agreement, and that the remedy at law
for any breach of the covenant will be inadequate and the Company, in addition
to any other relief available to it, shall be entitled to temporary and
permanent injunctive relief without the necessity of proving actual damage.
10. Confidential Information. Skegin recognizes and acknowledges that the
customer lists, patents, inventions, copyrights, methods of doing business,
trade secrets and proprietary information of CSL including, without limitation,
as the same may exist from time to time, are valuable, special and unique assets
of the business of CSL. Except in the ordinary course of business or as required
by law, Skegin shall not, during or after the Employment Term, disclose any such
list of customers or any part thereof, any such patents, inventions, copyrights,
methods of doing business, trade secrets or proprietary information which are
not otherwise in the public domain to any person, firm, corporation or other
entity for any reason whatsoever. In addition, Skegin specifically acknowledges
and agrees that the remedy at law for any breach of the foregoing shall be
inadequate and that the Company, in addition to any other relief available to
them, shall be entitled to temporary and permanent injunctive relief without the
necessity of proving actual damage.
6
<PAGE>
11. Opportunities. During his employment with CSL, Skegin shall not take
any action which might divert from CSL or any of its subsidiaries or affiliates
any opportunity which would be within the scope of any of the present or future
businesses of CSL or any of its subsidiaries or affiliates.
12. Contents of Agreement, Parties in Interest, Assignment, etc. This
Agreement sets forth the entire understanding of the parties hereto with respect
to the subject matter hereof. All of the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective heirs, representatives, successors and assigns of the parties hereto,
except that the duties and responsibilities of Skegin hereunder which are of a
personal nature shall neither be assigned nor transferred in whole or in party
by Skegin. This Agreement shall not be amended except by a written instrument
duly executed by CSL and Skegin.
13. Severability. If any term or provision of this Agreement shall be held
to be invalid or unenforceable for any reason, such term or provision shall be
ineffective to the extend of such invalidity or unenforceability without
invalidating the remaining terms and provisions hereof, and this Agreement shall
be construed as if such invalid or unenforceable term or provision had not been
contained herein.
14. Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the other party shall be in writing and shall be
deemed to have been duly given when delivered personally or five (5) days after
dispatch by registered or certified mail, postage prepaid, return receipt
requested, to the party to whom the same is so given or made:
7
<PAGE>
If to CSL
addressed to: CSL Lighting Manufacturing, Inc.,
27615 Avenue Hopkins
Valencia, California 91355-3493
Attn: Mark J. Allen, Chief Executive Officer
with a copy to: Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, New York 10022
Attn: Kenneth S. Rose, Esq.
If to Skegin
addressed to: Miron Skegin
1250 N. Kings Rd., #505
West Hollywood, CA 90069
or at such other address as the one party shall specify to the other party in
writing.
15. Counterparts and Headings. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original and all which
together shall constitute one and the same instrument. All headings are inserted
for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement.
16. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of California.
17. Arbitration. Any disputes arising hereunder shall be submitted to
arbitration before a single arbitrator in Los Angeles, California under the
rules and regulations of the American Arbitration Association. Any award in such
arbitration proceeding may be enforced in any court of competent jurisdiction.
8
<PAGE>
THIS AGREEEMENT CONTAINS VERY IMPORTANT TERMS GOVERNING YOUR EMPLOYMENT. IN
PARTICULAR, PARAGRAPH 9 AFFECTS YOUR ABILITY TO TAKE CERTAIN ACTIONS FOLLOWING
THE TERMINATION OF THIS AGREEMENT. YOU SHOULD SEEK ADVICE FROM YOUR ATTORNEY
REGARDING ANY MATTER RELATING TO THIS AGREEMENT. BY EXECUTING THIS AGREEMENT,
YOU ARE AFFIRMING THAT YOU HAVE HAD THE OPPORTUNITY TO REVIEW THIS AGREEMENT AND
TO CONSULT WITH YOUR ATTORNEY IF YOU SO DESIRED, THAT YOU UNDERSTAND THE MEANING
AND SIGNIFICANCE OF ALL OF ITS PROVISIONS, THAT NO REPRESENTATIONS OR PROMISES
HAVE BEEN MADE TO YOU REGARDING YOUR EMPLOYMENT WHICH ARE NOT SET FORTH IN THIS
AGREEMENT, AND THAT YOU ARE FREELY SIGNING THIS AGREEMENT TO OBTAIN EMPLOYMENT
WITH THE COMPANY.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
CSL LIGHTING MANUFACTURING, INC.
By:
---------------------------------------
Mark J. Allen
Chief Executive Officer
------------------------------------------
MIRON SKEGIN
9
THE NOTE REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE;
AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF
EXCEPT IN COMPLIANCE WITH, OR PURSUANT TO AN EXEMPTION FROM, THE REQUIREMENTS OF
SUCH ACT OR SUCH LAWS.
--------------------
CONVERTIBLE NOTE
Due April 30, 2001
April 14, 1999 $205,000.00
No. I -1
CSL Lighting Manufacturing, Inc., a Delaware corporation (hereinafter
called the "Issuer"), for value received, hereby promises to pay to the Holder
(as defined below) on April 30, 2001 the principal amount of $205,000.00 in such
coin or currency of the United States of America as at the time of payment shall
be legal tender for public and private debts, at the principal office of the
Issuer with interest on the principal sum outstanding at the rate of 6.75% per
annum (the "Note Interest Rate"), subject to Section 6.3 hereto, computed on the
basis of the actual number of days elapsed in a 365-day year. Accrual of
interest shall commence on the date hereof until payment in full of the
principal sum has been made or duly provided for.
ARTICLE 1
DEFINITIONS
SECTION 1.1 Definitions. The terms defined in this Article whenever used
in this Note shall have the respective meanings hereinafter specified.
(a) "Business Day" shall mean a day other than Saturday, Sunday or
any day on which banks located in the state of New York are authorized or
obligated to close.
<PAGE>
(b) "Capital Shares" shall mean the Common Shares and any other
shares of any other class of common stock, whether now or hereafter authorized,
which have the right to participate in the distribution of earnings and assets
of the Issuer.
(c) "Common Shares" shall mean shares of the common stock, par value
$.01, of the Issuer.
(d) "Conversion Date" shall mean any day on which a Conversion
Notice is delivered in accordance with the terms of this Note, provided that a
Conversion Date must be a Business Day.
(e) "Conversion Notice" shall have the meaning set forth in Section
3.2.
(f) "Conversion Price" shall have the meaning set forth in Section
3. 1.
(g) "Conversion Ratio" shall have the meaning set forth in Section
3.1.
(h) "Default Interest Rate" shall be equal to the Note Interest Rate
plus 6% per annum.
(i) "Event of Default" shall have the meaning set forth in Section
6.1.
(j) "Holder" shall mean Interiors, Inc., or any person to which this
Note is subsequently transferred in accordance with the terms provided herein.
(k) "Issuer" shall mean CSL Lighting Manufacturing, Inc., a Delaware
corporation, and any successor corporation by merger, consolidation, sale or
exchange of all or substantially all of the Issuer's assets, or otherwise.
(l) "Maximum Rate" shall have the meaning set forth in Section 6.3.
(m) "Note" shall mean this Convertible Note or such other
Convertible Note or Notes exchanged therefor as provided in Section 2.1.
(n) "Note Shares" when used with reference to the securities
issuable upon conversion of this Note, shall mean all Common Shares now or
hereafter Outstanding and securities of any other class into which the Note
Shares shall hereafter have been changed, whether now or hereafter created.
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<PAGE>
(o) "Outstanding" when used with reference to Common Shares or
Capital Shares (collectively, "Shares"), shall mean, at any date as of which the
number of such Shares is to be determined, all issued and outstanding Shares,
and shall include all such Shares issuable in respect of outstanding scrip or
any certificates representing fractional interests in such Shares; provided,
however, that "Outstanding" shall not mean any such Shares then directly or
indirectly owned or held by or for the account of the Issuer or any Subsidiary.
(p) "Person" shall mean an individual, a corporation, a partnership,
an association, a trust or other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
(q) "SEC" shall mean the United States Securities and Exchange
Commission.
(r) "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations of the SEC thereunder, all as in effect
at the time.
(s) "Senior Debt" shall have the meaning set forth in Section 4.2.
(t) "Senior Lender" shall have the meaning set forth in Section 4.2.
(u) "Subsidiary" shall mean any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are owned
directly or indirectly by the Issuer.
(v) "Subordinated Debt" shall have the meaning set forth in Section
4.2.
(w) "Trading Day" shall mean any day on which trades of securities
listed thereon are reported by the NASDAQ (or, if the Common Shares are not
listed for trading on the NASDAQ, the principal trading market for the Common
Shares) and on which no Market Disruption Event has occurred.
ARTICLE 2
EXCHANGES AND TRANSFER; REDEMPTION
SECTION 2.1 Exchange and Registration of Transfer of Notes. The Holder
may, at its option, surrender this Note at the office of the Issuer and receive
in exchange therefor a Note or Notes, each in the denomination of $10,000.00 or
an integral multiple of $10,000.00 in excess thereof, dated as of the date of
this Note, and, subject to Section 4.1, payable to such Person, or order, as may
be designated by such Holder. The aggregate principal amount of such Note or
Notes exchanged in
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<PAGE>
accordance with this Section 2.1 shall equal the aggregate unpaid principal
amount of this Note as of the date of such surrender; provided, however, that
upon such exchange there shall be filed with the Issuer the name and address for
all purposes hereof of the Holder or Holders of the Note or Notes delivered in
such exchange. This Note, when presented for registration of transfer or for
exchange, conversion or payment, shall (if so required by the Issuer) be duly
endorsed by, or be accompanied by a written instrument of transfer in form
reasonably satisfactory to the Issuer duly executed by, the Holder or its
attorney duly authorized in writing.
SECTION 2.2 Loss. Theft. Destruction of Note. Upon receipt of evidence
satisfactory to the Issuer of the loss, theft, destruction or mutilation of this
Note and, in the case of any such loss, theft or destruction, upon receipt of
indemnity or security reasonably satisfactory to the Issuer, or, in the case of
any such mutilation, upon surrender and cancellation of this Note, the Issuer
will make and deliver, in lieu of such lost, stolen, destroyed or mutilated
Note, a new Note of like tenor and unpaid principal amount dated as of the date
hereof. This Note shall be held and owned upon the express condition that the
provisions of this Section 2.2 are exclusive with respect to the replacement of
a mutilated, destroyed, lost or stolen Note and shall preclude any and all other
rights and remedies notwithstanding any law or statute existing or hereafter
enacted to the contrary with respect to the replacement of negotiable
instruments or other securities without their surrender.
SECTION 2.3 Who Deemed Absolute Owner. The Issuer may deem the person in
whose name this Note shall be registered upon the registry books of the Issuer
to be, and may treat it as, the absolute owner of this Note (whether or not this
Note shall be overdue) for the purpose of receiving payment of or on account of
the principal of this Note, for the conversion of this Note and for all other
purposes, and the Issuer shall not be affected by any notice to the contrary.
All such payments and such conversion shall be valid and effectual to satisfy
and discharge the liability upon this Note to the extent of the sum or sums so
paid or the conversion so made.
SECTION 2.4 Optional Prepayment by the Issuer. The Issuer at its election,
may prepay this Note in whole or in part at any time and from time to time.
ARTICLE 3
CONVERSION OF NOTE
SECTION 3.1 Conversion: Conversion Price. At the option of the Holder, at
any time from and after August 1, 1999 and until this Note is paid in full, the
outstanding balance on this Note may be converted, either in whole or in part up
to the outstanding principal amount hereof together with accrued and unpaid
interest thereon to the relevant Conversion Date, into Note Share (calculated as
to each conversion to the nearest 1/100th of a Note Share), at the conversion
price the
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<PAGE>
("Conversion Price") equal to $0.345 (average closing bid price of the Common
Stock on the thirty Trading Days immediately preceding March 22, 1999).
SECTION 3.2 Exercise of Conversion Privilege. The Purchaser may exercise
its right to convert this Note, either in whole or in part, by telecopying an
executed and completed Conversion Notice in the form attached hereto as Annex I
(the "Conversion Notice") to the Company and delivering within three business
days thereafter, the original Conversion Notice and this Note by express courier
to the Issuer. Each date on which a Conversion Notice is telecopied to and
received by the Company (at the telecopy number provided for in Paragraph 11 of
the Purchase Agreement) in accordance with the provisions hereof shall be deemed
a Conversion Date. The Issuer shall convert the Note and issue the Note Shares
effective as of the Conversion Date. The Conversion Notice shall also state the
name or names (with address) of the persons who are to become the holders of the
Note Shares in connection with such conversion. Upon surrender for conversion,
this Note shall be accompanied by a proper assignment hereof to the Issuer or in
blank. As promptly as practicable after the receipt of such original Conversion
Notice and the surrender of this Note as aforesaid, the Issuer shall (i) issue
the Note Shares issuable upon such conversion in accordance with the provisions
of this Article 3, and (ii) deliver to the Holder (X) a certificate or
certificate(s) representing the number of Note Shares to which the Holder is
entitled by virtue of such conversion, and (Y) cash, as provided in Section 3.3,
in respect of any fraction of a Share issuable upon such conversion. Such
conversion shall be deemed to have been effected at the time at which the
Conversion Notice indicates so long as this Note shall have been surrendered as
aforesaid at such time, and at such time the rights of the Holder as holder of
this Note shall cease and the person and persons in whose name or names the Note
Shares shall be issuable upon such conversion shall be deemed to have become the
holder or holders of record of the Note Shares represented thereby. The
Conversion Notice shall constitute a contract between the Holder and the Issuer,
whereby the Holder shall be deemed to subscribe for the number of Note Shares
which it will be entitled to receive upon such conversion and, in payment and
satisfaction of such subscription (and for any cash adjustment to which it is
entitled pursuant to Section 3.4), to surrender this Note and to release the
Issuer from all liability thereon.
SECTION 3.3 Fractional Shares. No fractional Note Shares or scrip
representing fractional Note Shares shall be issued upon conversion of this
Note. Instead of any fractional Note Shares which would otherwise be issuable
upon conversion of this Note, the Issuer shall pay a cash adjustment in respect
of such fraction in an amount equal to the same fraction of the greater of the
Current Market Price per Common Share at the close of business on the Business
Day which next precedes the day of conversion or the Conversion Price in effect
at the time of conversion. No payment or adjustment shall be made upon any
conversion on account of any distribution on the Note Shares issued upon such
conversion but the Holder surrendering this Note for conversion shall be
entitled to receive in cash, upon any
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<PAGE>
conversion, the amount of any interest accrued and unpaid to the date of such
conversion on the then outstanding principal amount thereof.
SECTION 3.4 Reclassification. Consolidation. Merger or Mandatory Share
Exchange. At any time while this Note remains outstanding and unexpired, in case
of any reclassification or change of Outstanding Common Shares issuable upon
conversion of this Note (other than a change in par value, or from par value to
no par value per share, or from no par value per share to par value or as a
result of a subdivision or combination of outstanding securities issuable upon
conversion of this Note) or in case of any consolidation, merger or mandatory
share exchange of the Issuer with or into another corporation (other than a
merger or mandatory share exchange with another corporation in which the Issuer
is a continuing corporation and which does not result in any reclassification or
change, other than a change in par value, or from par value to no par value per
share, or from no par value per share to par value, or as a result of a
subdivision or combination of Outstanding Common Shares upon conversion of this
Note), or in the case of any sale or transfer to another corporation of the
property of the Issuer as an entirety or substantially as an entirety, the
Issuer, or such successor or purchasing corporation, as the case may be, shall,
without payment of any additional consideration therefore, execute a new Note
providing that the Holder shall have the right to convert such new Note (upon
terms and conditions not less favorable to the Holder than those then applicable
to this Note) and to receive upon such exercise, in lieu of each Common Share
theretofore issuable upon conversion of this Note, the kind and amount of shares
of stock, other securities, money or property receivable upon such
reclassification, change, consolidation, merger, mandatory share exchange, sale
or transfer by the holder of one Common Share issuable upon conversion of this
Note had this Note been converted immediately prior to such reclassification,
change, consolidation, merger, mandatory share exchange or sale or transfer. The
provisions of this Section 3.4 shall similarly apply to successive
reclassifications, changes, consolidations, mergers, mandatory share exchanges
and sales and transfers.
ARTICLE 4
STATUS; RESTRICTIONS ON TRANSFER
SECTION 4.1 Status of Note. Subject to Section 4.2 below, this Note is a
direct, general and unconditional obligation of the Issuer ranking pari passu
with all other unsecured senior indebtedness of the Issuer, and constitutes a
valid and legally binding obligation of the Issuer, enforceable in accordance
with its terms subject, as to enforcement, to bankruptcy, insolvency,
reorganization and other similar laws of general applicability relating to or
affecting creditors' rights and to general principals of equity.
SECTION 4.2 Subordination of Note. The payment of principal, interest,
fees and other sums arising pursuant this Note (the "Subordinated Debt") is
expressly
-6-
<PAGE>
subordinated, in the manner hereinafter set forth, in right of payment to the
prior payment and satisfaction in full of the Senior Debt. As used herein,
"Senior Debt" means the principal, interest, fees and other sums currently
payable to Coast Business Credit (the "Senior Lender") and any future
restructuring of such indebtedness including any restructurings where a new
lender is substituted for the Senior Lender and any additional borrowings from
the Senior Lender (or any substitute Senior Lender) made after the date of this
Agreement. So long as any part of the Senior Debt shall be due to the Senior
Lender (or any substitute Senior Lender) and unpaid, no payment of any
Subordinated Debt (whether in respect of principal, interest, fees, charges or
otherwise) shall be made at any time by the Company or received by the Holder,
without the prior written consent of the Senior Lender (or any substitute Senior
Lender). Notwithstanding the foregoing, however, the Company may convert this
Note pursuant to Article 3 hereof.
SECTION 4.3 Restrictions on Transfer. This Note, and any Note Shares
issued according to the terms hereof, have not been and will not be registered
under the United States Securities Act. This Note and any Note Shares may not be
offered or sold, directly or indirectly, except pursuant to registration under
the Act, an available exemption therefrom, or pursuant to Regulation S.
ARTICLE 5
COVENANTS
The Issuer covenants and agrees that so long as this Note shall be
outstanding:
SECTION 5.1 Payment of Note. The Issuer will punctually, according to the
terms hereof,(a) pay or cause to be paid the principal of, or interest on, this
Note and (B) issue Note Shares upon conversion.
SECTION 5.2 Notice of Default. If any one or more events occur which
constitute or which, with the giving of notice or the lapse of time or both,
would constitute an Event of Default or if the Holder shall demand payment or
take any other action permitted upon the occurrence of any such Event of
Default, the Issuer will forthwith give notice to the Holder, specifying the
nature and status of the Event of Default or other event or of such demand or
action, as the case may be.
SECTION 5.3 Sufficient of Authorized Common Shares. The Issuer shall at
all times have authorized and reserved for issuance, free from preemptive
rights, a sufficient number of Common Shares to yield a number of Note Shares
sufficient to satisfy the conversion rights of the Purchaser pursuant to the
terms and conditions hereof.
SECTION 5.4 Insurance. The Issuer will carry and maintain in full force
and effect at all times with insurers the Issuer reasonably believes to be
financially
-7-
<PAGE>
sound and reputable such insurance in such amounts as is customary in the
respective industries of the Issuer and such subsidiaries.
SECTION 5.5 Payment of Obligations. The Issuer will pay and discharge at
or before maturity, all its respective material obligations and liabilities,
including, without limitation, tax liabilities, except where the same may be
contested in good faith by appropriate proceedings, and will maintain in
accordance with generally accepted accounting principles, appropriate reserves
for the accrual of any of the same;
SECTION 5.6 Compliance with Laws. The Issuer will comply in all material
respects with all applicable laws, ordinances, rules, regulations, and
requirements of governmental authorities except where the necessity of
compliance therewith is contested in good faith by appropriate proceedings.
SECTION 5.7 Inspection of Property. Books and Records. The Issuer will
keep proper books of record and account in which full, true and correct entries
shall be made of all dealings and transactions in relation to its business and
activities and will permit representatives of the Holder at the Holder's expense
to visit and inspect any of its respective properties, to examine and make
abstracts from any of its respective books and records and to discuss its
respective affairs, finances and accounts with its respective officers,
employees and independent public accountants, all at such reasonable times and
as often as may reasonably be desired.
ARTICLE 6
REMEDIES
SECTION 6.1 Events of Default. "Event of Default" wherever used herein
means any one of the following events:
(a) default in the issuance of Note Shares due upon conversion;
(b) default in the due and punctual payment of the principal of,
interest on, or any other amount owing in respect of, this Note when and as the
same shall become due and payable, and continuance of such default for a period
of five (5) calendar days; or
(c) failure in the performance or observance of Section 5.5 of this
Note and the continuance of such default for a period of thirty (30) calendar
days; or
(d) default in the performance or observance of any covenant or
agreement of the Issuer in this Note (other than a covenant or agreement a
default in the performance of which is specifically provided for elsewhere in
this Section), and the continuance of such default for a period of thirty (30)
calendar days after there has been given to the Issuer by a Holder a written
notice specifying such default and requiring it to be remedied; or
-8-
<PAGE>
(e) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Issuer or any Subsidiary a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Issuer under the Bankruptcy
Code or any other applicable Federal or state law, or appointing a receiver,
liquidator, assignee, trustee or sequestrator (or other similar official) of the
Issuer or of any substantial part of its property, or ordering the winding-up or
liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 30 calendar days; or
(f) the institution by the Issuer or any Subsidiary of proceedings
to be adjudicated a bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the filing by
it of a petition or answer or consent seeking reorganization or relief under the
Federal Bankruptcy Code or any other applicable Federal or state law, or the
consent by it to the filing of any such petition or to the appointment of a
receiver, liquidator, assignee, trustee or sequestrator (or other similar
official) of the Issuer or of any substantial part of its property, or the
making by it of an assignment for the benefit of creditors, or the admission by
it in writing of its inability to pay its debts generally as they become due, or
the taking of corporate action by the Issuer in furtherance of any such action;
or
SECTION 6.2 Acceleration of Maturity: Rescission and Annulment. If an
Event of Default occurs and is continuing, then and in every such case any
Holder may declare the principal of this Note to be due and payable immediately,
by a notice in writing to the Issuer, and upon any such declaration the
principal of this Note shall become immediately due and payable.
SECTION 6.3 Default Interest Rate. (a) If any portion of the principal of
or interest on the Note shall not be paid when due (whether at the stated
maturity, by acceleration or otherwise) such principal of and interest on the
Note which is due and owing but not paid shall, without limiting the Holder's
rights under this Note or under the Purchase Agreement, bear interest at the
Default Interest Rate until paid in full.
(b) Notwithstanding anything herein to the contrary, if at any time
the applicable interest rate as provided for herein shall exceed the maximum
lawful rate which may be contracted for, charged, taken or received by the
Lender in accordance with applicable laws of the State of New York (the "Maximum
Rate"), the rate of interest applicable to the Note shall be limited to the
Maximum Rate.
SECTION 6.4 Remedies Not Waived. No course of dealing between the Issuer
and the Holder or any delay in exercising any rights hereunder shall operate as
a waiver by the Holder.
-9-
<PAGE>
ARTICLE 7
MISCELLANEOUS
SECTION 7.1 Register. (a) The Issuer shall keep at its principal office a
register in which the Issuer shall provide for the registration of this Note.
Upon any transfer of this Note in accordance with Article 2 and 4 hereof, the
Issuer shall register such transfer on the Note register.
(b) The Issuer may deem the person in whose name this Note shall be
registered upon the registry books of the Issuer to be, and may treat it as, the
absolute owner of this Note (whether or not this Note shall be overdue) for the
purpose of receiving payment of interest on or principal of this Note, for the
conversion of this Note and for all other purposes, and the Issuer shall not be
affected by any notice to the contrary. All such payments and such conversions
shall be valid and effective to satisfy and discharge the liability upon this
Note to the extent of the sum or sums so paid or the conversion or conversions
so made.
SECTION 7.2 Withholding. To the extent required by applicable law, the
Issuer may withhold amounts for or on account of any taxes imposed or levied by
or on behalf of any taxing authority in the United States having jurisdiction
over the Issuer from any payments made pursuant to this Note.
SECTION 7.3 Governing Law. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO
CONFLICTS OF LAWS PRINCIPLES). WITH RESPECT TO ANY SUIT, ACTION OR PROCEEDINGS
RELATING TO THIS NOTE, THE ISSUER IRREVOCABLY SUBMITS TO THE EXCLUSIVE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES
DISTRICT COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK AND
HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT
ANY SUCH SUIT, ACTION OR PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
SUBJECT TO APPLICABLE LAW, THE ISSUER AGREES THAT FINAL JUDGMENT AGAINST IT IN
ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE SHALL BE
CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION WITHIN OR OUTSIDE THE
UNITED STATES BY SUIT ON THE JUDGMENT, A CERTIFIED COPY OF WHICH JUDGMENT SHALL
BE CONCLUSIVE EVIDENCE THEREOF AND THE AMOUNT OF ITS INDEBTEDNESS, OR BY SUCH
OTHER MEANS PROVIDED BY LAW.
SECTION 7.4 Headings. The headings of the Articles and Sections of this
Note are inserted for convenience only and do not constitute a part of this
Note.
-10-
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this Note to be signed by its
duly authorized officer under its corporate seal, attested by its duly
authorized officer, on the date of this Note.
CSL Lighting Manufacturing, Inc.
By:
-----------------------------------------
Name: Max Munn
Title: Chief Operating Officer
-11-
<PAGE>
ANNEX I TO THE NOTE
[FORM OF CONVERSION NOTICE]
TO _____________________:
The undersigned owner of the Convertible Note, dated April 14, 1999,
issued by CSL Lighting Manufacturing, Inc. (the "Note") hereby irrevocably
exercises the option to convert $______________ of the principal amount of the
Note [and accrued and unpaid interest thereon] into Common Shares, par value
$.01, of CSL Lighting Manufacturing, Inc. (the "Note Shares"), in accordance
with the terms of the Note. The undersigned directs that the Note Shares
issuable and certificates therefor (to the extent that certificates evidencing
Common Shares are then being issued by CSL Lighting Manufacturing, Inc.
deliverable upon the conversion, together with any check in payment for
fractional Note Shares, be issued in the name of and delivered, if appropriate,
to the undersigned unless a different name has been indicated below
Dated:
Signature
Fill in for registration of Note Shares:
Please print name and address
(including zip code number)
-12-
SETTLEMENT AGREEMENT AND RELEASE
THIS SETTLEMENT AGREEMENT AND RELEASE ("Agreement") is made and entered
into by and between MARK J. ALLEN (hereinafter referred to as "Allen"), and CSL
LIGHTING MANUFACTURING, INC., a Delaware Corporation, (hereinafter referred to
as "CSL") and is effective as of March 31, 1999.
PREAMBLE:
WHEREAS, Allen has been employed by CSL for many years;
WHEREAS, Allen and CSL previously entered into that certain Employment
Agreement effective October 1, 1998 ("Employment Agreement") whereby Allen's
employment was continued by CSL on the terms and conditions of the Employment
Agreement; and
WHEREAS, Allen's active employment with CSL was modified on March 8, 1999
on the terms and conditions contained within that certain Stand-Still Agreement
entered into by and between Allen and CSL on March 15, 1999 (the "Stand-Still
Agreement"); and
WHEREAS, Allen and CSL desire to settle fully and finally all differences
between them, including, but in no way limited to, any differences that might
arise out of Allen's employment with CSL, and the termination of those services.
THEREFORE IT IS AGREED AS FOLLOWS:
FIRST: This Agreement shall not in any way be construed as an admission
that:
A. Allen has acted wrongfully with respect to CSL, or any other
person or entity, or that CSL has any claims against Allen of
any type; or
B. CSL has acted wrongfully with respect to Allen or any other
person, or that Allen has any claims against CSL of any type.
SECOND: CSL and Allen represent, understand and agree that:
A. Allen's employment with CSL terminated as of the close of
business on March 31, 1999 (the "Termination Date") and from
and after that date Allen has not been and shall not be
required to perform any or all of his prescribed duties under
the Employment Agreement, or otherwise, with the exception of
those items that
<PAGE>
Allen has agreed, in the Stand-Still Agreement, to assist CSL
and its accountants and attorneys with.
B. Effective March 8, 1999, Allen has resigned as an officer of
CSL and each of its affiliates and subsidiaries.
C. Effective immediately following the consummation of the
transactions contemplated by this Agreement, Allen shall
resign as a Director of CSL and each of its affiliates and
subsidiaries.
D. Neither Allen nor CSL has filed any complaints or charges or
lawsuits against the other with any governmental agency or any
court, and that neither will do so at any time hereafter;
provided, however, this shall not limit either party from
filing a lawsuit for the sole purpose of enforcing their
respective rights under this Agreement.
THIRD: In consideration of Allen executing this Agreement and agreeing to
be bound by its terms and conditions:
A. CSL shall on April 15, 1999 pay to Allen the sum of TWO
HUNDRED FIVE THOUSAND DOLLARS ($205,000) without deduction or
offset of any type. Allen hereby acknowledges that he is
solely responsible for any and all Federal employment and
income tax withholding obligations in connection with such
payment;
B. CSL shall release and discharge Allen from any and all
obligations Allen may have to CSL including, but not limited
to, all outstanding loans, receivables, or advances from CSL
to Allen;
C. Allen shall retain the options held by him for the purchase of
up to FIFTY-FIVE THOUSAND (55,000) SHARES of CSL stock
(collectively the "Options") granted to and vested in him
under the terms and conditions of the CSL Option Plan, and
Allen hereby elects to exercise the Option on a "cashless"
basis. In connection with such exercise, Options, CSL shall
promptly cause its Transfer Agent to deliver a certificate
representing 34,874 CSL shares to Allen without any cost to
Allen. Any Options, which have not vested in Allen under the
CSL Option Plan, shall immediately expire;
D. Allen shall retain all shares of CSL common stock that are
held of record or beneficially by him or his family;
2
<PAGE>
E. All CSL's claims to, rights in, title and interest in the Jeep
automobile currently used by Allen are hereby transferred to
Allen subject to the underlying lease obligations encumbering
such vehicle. CSL shall be solely responsible for the payment
of EIGHT HUNDRED SIXTY-SEVEN DOLLARS and 24/100 ($867.24)
comprising the February and March 1999 monthly lease payments
and late payment fees;
F. Allen shall have unrestricted access to the CSL apartment in
Valencia, California that he has occupied from time to time.
All of the furniture, furnishings, clothing and other contents
of the apartment ("Allen's belongings") are the property of
Allen. Allen shall abandon the apartment and remove all of
Allen's belongings therefrom prior to April 30, 1999. CSL
shall bear all of the costs and expenses of the apartment
through April 30, 1999 which charges shall include, but are
not limited to, rent, telephone and utility charges. There are
unpaid utility and telephone charges in the approximate amount
of TWO HUNDRED DOLLARS ($200.00) which shall be immediately
paid by CSL;
G. It is agreed that the cumulative market value of all CSL
property in the California apartment or Allen's Massachusetts
office is ONE THOUSAND FIVE HUNDRED DOLLARS ($1,500.00). This
property is hereby transferred to Allen;
H. CSL shall provide Allen packing materials and bear the cost,
not to exceed $2,500, of shipping Allen's belongings
(including the CSL property transferred to Allen pursuant to
the terms of this Agreement) to Allen's Massachusetts office;
I. CSL and Allen agree that the letter in the form of Exhibit A
hereto, shall be the only document transmitted by CSL or Allen
to any third party concerning Allen's departure from CSL.
J. CSL will, in response to all inquiries concerning Allen's
departure from the employ of CSL, advise CSL employees,
vendors and customers that Allen has left CSL to attend to
other business interests;
K. CSL shall reimburse Allen for or pay those business expenses
set forth on Exhibit B hereto incurred by Allen in connection
with his employment through the Termination Date; and
L. CSL shall, at CSL's sole cost and expense, continue to provide
Allen and his dependents with health insurance coverage
3
<PAGE>
consistent with that currently provided to him for one year
from the Termination Date. At the end of this period CSL shall
give Allen the required notification of his COBRA and
conversion privileges, which Allen may exercise at his sole
cost.
The payments called for in this paragraph THIRD shall be in lieu of and
discharge any obligations of CSL to Allen for compensation, unused accrued
vacation, or any other employment remuneration or benefit or any other amount
now or hereafter due Allen by CSL.
FOURTH: Allen understands and agrees that, except as otherwise provided
for herein, as of the close of business on March 8, 1999, he was no longer
authorized to incur any expenses, obligations or liabilities on behalf of CSL.
FIFTH: CSL, its officers, employees, directors, representatives, agents,
affiliates (including Interiors, Inc. and its officer, directors and employees),
parents and subsidiaries (collectively, "CSL Persons"), shall not disparage or
denigrate Allen directly or indirectly, in any manner. It is specifically
acknowledged and agreed that the restrictions contained in the preceding
sentence of this Paragraph FIFTH shall not restrict CSL Persons from testifying
truthfully or providing information if compelled to do so by applicable law, or
from freely communicating with their legal counsel.
CSL acknowledges that its breach of the provisions contained in this
Paragraph FIFTH would cause irreparable damage to Allen. These damages would be
difficult, if not impossible, to measure. It is agreed that Allen's remedy at
law for such breach would be inadequate and, therefore, Allen shall be entitled,
in addition to any other remedy available to him, temporary or permanent
injunctive relief to enjoin any breach of this provision.
SIXTH: Allen shall not disparage or denigrate any CSL Person, in any
manner. It is specifically acknowledged and agreed that the restrictions
contained in the preceding sentence of this Paragraph SIXTH shall not restrict
Allen from testifying truthfully or providing information if compelled to do so
by applicable law, or from freely communicating with his legal counsel.
Allen acknowledges that his breach of the provisions contained in
this Paragraph SIXTH would cause irreparable damage to CSL. These damages would
be difficult, if not impossible, to measure. It is agreed that CSL's remedy at
law for such breach would be inadequate and, therefore, CSL shall be entitled,
in addition to any other remedy available to it, temporary or permanent
injunctive relief to enjoin any breach of this provision.
SEVENTH: The provisions of this Agreement are severable, and if any part
of it is found to be unenforceable, the other paragraphs shall remain fully
valid
4
<PAGE>
and enforceable. This Agreement shall survive the termination of any
arrangements contained herein.
EIGHTH: Each party represents to the other and agrees that it will keep
the terms, amount and fact of this Agreement completely confidential, and that
they will not hereafter disclose any information concerning this Agreement to
anyone except as required by law or as compelled to do so by order of a
governmental agency or court of law. Each party acknowledges that this Agreement
(but not the Exhibits hereto) shall be an exhibit to the Company's filings under
applicable securities laws.
NINTH: As a material inducement to enter into this Agreement, Allen
irrevocably and unconditionally releases, acquits and forever discharges the CSL
Persons, from any and all charges, complaints, claims, liabilities, obligations,
promises, agreements, controversies, damages, actions, causes of action, suits,
rights, demands, costs, losses, debts, and expenses (including attorneys' fees
and costs actually incurred), known or unknown, suspected or unsuspected, which
Allen may have against the CSL Persons, including those arising out of Allen's
employment at and separation from CSL, including any alleged violations of the
Employment Agreement. Notwithstanding the foregoing, this release is not
intended to, and shall not relieve the CSL Persons of their respective duties,
obligations and liabilities pursuant to this Agreement, including the Exhibits
hereto which are incorporated herein by reference.
TENTH: As a material inducement to enter into this Agreement, CSL and
Interiors, Inc. ("Interiors"), on behalf of themselves and their respective
officers, directors, shareholders, employees and agents (collectively the
"Releasors") hereby irrevocably and unconditionally release, acquit and forever
discharge Allen, from any and all charges, complaints, claims, liabilities,
obligations, promises, agreements, controversies, damages, actions, causes of
action, suits, rights, demands, costs, losses, debts, and expenses (including
attorneys' fees and costs actually incurred), known or unknown, suspected or
unsuspected, which the Releasors may have against Allen, including those arising
out of Allen's employment at and separation from CSL, including any alleged
violations of the Employment Agreement. Notwithstanding the foregoing, this
release is not intended to, and shall not relieve Allen of his duties,
obligations and liabilities pursuant to this Agreement, including the Exhibits
hereto which are incorporated herein by reference.
ELEVENTH: Any controversy or claim arising out of, or relating to this
Agreement, or the making, performance or interpretation thereof (except for the
provisions of paragraphs FIFTH and SIXTH), shall be settled by arbitration in
the State of New York in accordance with the Rules of the American Arbitration
Association then existing, and judgment on the arbitration award may be entered
in any court having jurisdiction over the subject matter of the controversy.
Each party shall pay the fees and expenses of its respective witnesses and any
other expenses connected with presenting its claim; provided, however, that the
prevailing party shall be entitled, as part of any award, to recover its
attorneys' fees. Other costs of the arbitration, including
5
<PAGE>
the fees of the arbitrator, cost of any record or transcript of the arbitration,
administrative fees, and all other fees and costs, shall be borne equally (i.e.,
half and half) by the parties. Should either party institute any legal action or
administrative proceeding with respect to any claim released by this Agreement
or pursue any dispute or matter covered by this paragraph by any method other
than arbitration, the responding party shall be entitled to recover from the
other party all damages, costs, expenses and attorneys' fees incurred as a
result of such action.
TWELFTH: Each party represents and acknowledges to the other that in
executing this Agreement it does not rely, and has not relied, upon any
representation or statement not set forth in this Agreement made by the other
party or by any party's agents, representatives, or attorneys with regard to the
subject matter, basis or effect of this Agreement or otherwise.
THIRTEENTH: Each party represents and agrees that it has not previously
assigned or transferred to any person or entity all or any portion of any claim
covered by Paragraph NINTH or TENTH of this Agreement.
FOURTEENTH: This Agreement shall be binding upon and inure to the benefit
of the parties, their successors and assigns.
FIFTEENTH: This Agreement is made and entered into in the State of
California, and in all respects shall be interpreted, enforced and governed
under the laws of California except as provided in Paragraph ELEVENTH. The
language of all parts of this Agreement in all cases shall be construed as a
whole, according to its fair meaning, and not strictly for or against any of the
parties.
6
<PAGE>
SIXTEENTH: This Agreement, and Exhibit A, B and C which are hereby
incorporated herein by reference, set forth the entire agreement between the
parties hereto, and fully supersedes any and all prior agreements or
understandings between the parties hereto pertaining to the subject matter
hereof.
Date of Execution:
--------------------------------------------
April 13, 1999. MARK J. ALLEN
Date of Execution: CSL LIGHTING MANUFACTURING INC.
April 13, 1999.
By:
-----------------------------------------
Max Munn, Chief Operating Officer
Interiors, Inc. joins in this
Agreement with respect to its
obligations set forth in Paragraph
FIFTH and its release of Allen set
forth in Paragraph TENTH hereof.
INTERIORS, INC.
By:
-----------------------------------------
Max Munn, Chief Executive Officer
7
Consent of Arthur Andersen LLP
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-KSB of our report dated March 12, 1998. It should be
noted that we have not audited any financial statements of the Company
subsequent to December 31, 1997 or performed any audit procedures subsequent to
the date of our report.
April 14, 1999
Arthur Andersen LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from CSL Lighting
Manufacturing Inc. and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 65,000
<SECURITIES> 0
<RECEIVABLES> 1,608,000
<ALLOWANCES> 298,000
<INVENTORY> 3,492,000
<CURRENT-ASSETS> 5,085,000
<PP&E> 3,132,000
<DEPRECIATION> 2,128,000
<TOTAL-ASSETS> 6,421,000
<CURRENT-LIABILITIES> 4,290,000
<BONDS> 3,920,000
0
0
<COMMON> 12,000
<OTHER-SE> 396,000
<TOTAL-LIABILITY-AND-EQUITY> 6,421,000
<SALES> 12,386,000
<TOTAL-REVENUES> 12,386,000
<CGS> 8,456,000
<TOTAL-COSTS> 14,307,000
<OTHER-EXPENSES> 439,000
<LOSS-PROVISION> 212,000
<INTEREST-EXPENSE> 440,000
<INCOME-PRETAX> (2,360,000)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> (2,360,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,360,000)
<EPS-PRIMARY> (2.18)
<EPS-DILUTED> (2.18)
</TABLE>
