U.S. SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from [____________to___________]
Commission file number 333-75044
CATALYST LIGHTING GROUP, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 84-1588927
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
7700 Wyatt Drive
Forth Worth, TX 76108
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(Address of principal (Zip Code)
executive offices)
Issuer's telephone number, including area code: (817) 738-8181
6777 Camp Bowie Boulevard, Fort Worth, TX 76116
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(Former name, former address and former
fiscal year, if changed since last report)
1
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,391,368 shares of Common Stock, par
value $.01 per share, outstanding as of February 16, 2003.
Traditional Small Business Disclosure Format (Check one): Yes ______ No___X___.
2
CATALYST LIGHTING GROUP, INC.
TABLE OF CONTENTS
PAGE(S)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31, 2003
(Unaudited) and September 30, 2003 4
Condensed Consolidated Statements of Operations for the Three Months
Ended December 31, 2003 and 2002 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
Three Months ended December 31, 2003 and 2002 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7 - 9
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL 10
CONDITION AND RESULTS OF OPERATION
ITEM 3. CONTROLS AND PROCEDURES 16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
CERTIFICATIONS 19-22
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, SEPTEMBER 30,
2003 2003
---------------- -----------------
(Unaudited) **
---------------- -----------------
ASSETS
CURRENT ASSETS:
Cash $ 36,056 $ 96,591
Trade receivables, less allowance for doubtful accounts of $63,637 and $53,892 2,900,813 3,380,471
Trade receivable - related party 83,304 92,305
Inventories, net of reserve of $77,280 and $64,698 1,256,648 1,311,130
Prepaid expenses and other 27,865 49,502
Deferred tax asset 71,260 47,699
-------------- --------------
Total current assets 4,375,946 4,977,698
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $66,312 and $58,410 132,701 115,198
OTHER ASSETS:
Goodwill, net of accumulated amortization of $330,151 and $330,151 2,971,362 2,971,362
Other 15,793 15,793
-------------- --------------
Total other assets 2,987,155 2,987,155
-------------- --------------
$ 7,495,801 $ 8,080,051
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving note payable $ 2,150,296 $ 2,072,522
Current maturities of long-term debt:
Related party 250,000 250,000
Other 275,411 274,134
Accounts payable 2,008,364 2,447,756
Accrued commissions 541,191 587,383
Other accrued liabilities 82,402 219,553
-------------- --------------
Total current liabilities 5,307,664 5,851,348
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LONG-TERM DEBT, less current maturities:
Related party 70,000 70,000
Other 1,086,392 1,083,989
-------------- --------------
Total long-term debt 1,156,392 1,153,989
DEFERRED TAXES 108,833 108,833
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; authorized 10,000,000 shares, none issued - -
Common stock - $.01 par value; authorized 40,000,000 shares,
3,391,368 shares issued and outstanding 33,914 33,914
Additional paid-in capital 1,454,984 1,454,984
Accumulated deficit (565,986) (523,017)
-------------- --------------
Total stockholders' equity 922,912 965,881
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,495,801 $ 8,080,051
============== ==============
** Derived from the Company's audited consolidated balance sheet at
September 30, 2003
4
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31,
------------------------------------------
2003 2002
------------------- --------------------
(Unaudited) (Unaudited)
NET SALES $ 4,451,910 $ 3,282,406
COST OF SALES 3,091,392 2,172,735
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GROSS PROFIT ON SALES 1,360,518 1,109,671
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES 1,329,664 1,100,376
--------------- ---------------
INCOME (LOSS) FROM OPERATIONS 30,855 9,296
OTHER EXPENSE:
Reverse merger costs - 3,771
Interest expense 97,385 71,519
--------------- ---------------
INCOME (LOSS) FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES (66,530) (65,994)
PROVISION FOR INCOME TAXES 23,561 -
--------------- ---------------
NET INCOME (LOSS) $ (42,969) $ (65,994)
=============== ===============
PRO FORMA INCOME TAX AND NET INCOME (LOSS):
Net income (loss) before pro forma income taxes $ (42,969) $ (65,994)
Pro forma income tax benefit (expense) (unaudited) - 22,838
--------------- ---------------
PRO FORMA NET INCOME (LOSS) (unaudited) $ (42,969) $ (43,156)
=============== ===============
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ (.01) $ (.02)
=============== ===============
Diluted $ (.01) $ (.02)
=============== ===============
PRO FORMA NET INCOME (LOSS) PER COMMON SHARE (unaudited):
Basic $ (.01) $ (.02)
=============== ===============
Diluted $ (.01) $ (.02)
=============== ===============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic $ 3,391,368 $ 2,800,995
=============== ===============
Diluted $ 3,391,368 $ 2,800,995
=============== ===============
5
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31,
-------------------------------------
2003 2002
------------------ ------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (42,969) $ (65,994)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 7,902 5,107
Change in operating assets and liabilities:
Trade receivables, related and other 488,659 499,912
Inventories 54,482 (208,110)
Prepaid expenses and other 21,637 (24,431)
Deferred taxes current (23,561) -
Other assets - 2,018
Accounts payable (439,392) (40,414)
Other accrued liabilities (183,343) (225,808)
---------------- ---------------
Net cash provided by (used in) operating activities (116,585) (57,720)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (25,405) (7,451)
---------------- ---------------
Net cash used in investing activities (25,405) (7,451)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving note payable 77,774 85,080
Payments on short-term and long-term notes payable 3,680 (19,909)
---------------- ---------------
Net cash provided by (used in) financing activities 81,454 65,171
---------------- ---------------
NET CHANGE IN CASH (60,536) -
CASH, at beginning of period 96,591 -
---------------- ---------------
CASH, at end of period $ 36,056 $ -
================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 59,880 $ 66,266
================ ===============
6
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by Catalyst
Lighting Group, Inc. (the "Company") pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included
herein are adequate to make the information presented not misleading. A
description of the Company's accounting policies and other financial
information is included in the audited consolidated financial statements
as filed with the Securities and Exchange Commission in the Company's
Annual Report on Form 10-KSB for the year ended September 30, 2003.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the financial position of the Company as of December 31,
2003 and the results of operations and cash flows for the periods
presented. All such adjustments are of a normal recurring nature. The
results of operations for the quarter ended December 31, 2003 are not
necessarily indicative of the results that may be achieved for a full
fiscal year and cannot be used to indicate financial performance for the
entire year.
SFAS 123 requires entities to reconcile net loss as reported to pro forma
net loss as a result of the difference between stock option expense
recorded under the intrinsic value method and what would have been
recorded had the entity adopted the fair value method under SFAS 123. As
of December 31, 2003, the Company's stock was not trading, resulting in no
volatility in the stock price of the Company. As a result, there was no
difference in stock option expense under either the intrinsic or fair
value method.
2. RELATED PARTY TRANSACTIONS:
During the three months ended December 31, 2003 and 2002, the Company paid
$3,600 and $12,000, respectively, for accounting and administrative
services to an entity related through common ownership through May 2002.
During the three months ended December 31, 2003 and 2002, the Company had
sales of $104,323 and $95,841, respectively, to an entity whose principal
owner is the brother of an employee of the Company. Accounts receivable
from this related entity were $83,304 at December 31, 2003.
7
3. SUBSEQUENT EVENTS:
The Company has filed a registration statement with the Securities and
Exchange Commission for the sale of up to 1,200,000 shares of common stock
at $2.50 per share in a self-underwritten offering. The Securities and
Exchange Commission declared the registration statement effective on
February 2, 2004. The Company may engage broker-dealers to assist with the
offering and may receive up to a 7 % cash placement fee of securities
placed by such broker-dealer in the offering and four-year common stock
purchase warrants entitling such broker-dealer to purchase up to 10% of
the securities sold by such broker-dealer in the offering, at an exercise
price of 125% of the per share price of the offering. On February 17,
2004, we held the first closing on our registered public offering, which
was declared effective February 2, 2004. We issued 138,600 shares of our
common stock for an aggregate of $346,500, or $2.50 per share. There were
no broker-dealers or finders and no commissions were paid or warrants
issued.
Keating Investments was the investment advisor for the reverse merger and
will be receiving an investment banking fee of $100,000, which is due in
10 monthly payments of $10,000 but it is not accrued as it is contingent
upon the Company's common stock trading on the Over-the-Counter Bulletin
Board.
4. REVOLVING NOTE PAYABLE:
The Company has a revolving credit agreement with a bank which bears
interest at the bank's prime rate plus 1.50% (totaling 5.5% at December
31, 2003) which enables the Company to borrow up to the lesser of
$2,000,000 or the aggregate of 80% of eligible accounts receivable and 50%
of eligible inventory as defined by the agreement. Borrowings outstanding
on the revolving loan were $2,150,296 at December 31, 2003, which exceeded
the borrowing limit.
Borrowings under the revolving credit agreement are collateralized by
essentially all assets of the Company including accounts receivable and
inventory. The agreement requires the Company to maintain certain
financial covenants which include tangible net worth, cash flow coverage
and debt ratios as defined in the agreement. As of December 31, 2003, the
Company was not in compliance with certain financial covenants. As it is a
demand note, the lender can call the note even in the absence of
non-compliance. The lender is aware of this non-compliance and has
indicated it will not seek to call the note or initiate any other action
which would be detrimental to the Company's liquidity situation. The
agreement also limits the amount of additional third-party borrowings the
Company can obtain and the amount of distributions the Company can pay
stockholders. The agreement is subject to annual review by the lender who
has the right to terminate or change any of the terms and conditions of
the agreement.
5. COMMITMENTS
The Company entered into a leasing agreement with BMF, LLC on December 31,
2003 to lease approximately 38,171 square feet of office and manufacturing
space located in White Settlement Texas. The rent is payable in monthly
installments at $10,338 and is for a term of five years terminating on
November 30, 2008. The lease includes a clause which gives the Company a
one-time right to terminate the lease in June of 2006. A termination fee,
equal to the unamortized portion of certain allowances given to the
Company for improvements to the property, shall be paid upon exercising
the termination clause. The allowances totaled $22,500.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Results of Operations
and Financial Condition ("MD&A") contains forward-looking statements that are
based on current expectations, estimates, forecasts and projections about us,
our future performance, the industries in which we operate, our beliefs and our
management's assumptions. In addition, other written or oral statements that
constitute forward-looking statements may be made by or on behalf of us. Words
such as "expects," "anticipates," "targets," "goals," "projects," "intends,"
"plans," "believes," "seeks," "estimates" and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecast in such forward-looking statements. These risks and
uncertainties include: general economic indications to improve or improve at the
pace we anticipate; continued net losses may increase our deficit; our ability
to secure additional sources of funds on reasonable terms; our credit ratings;
our ability to compete effectively; our reliance on a limited number of key
customers; our exposure to the credit risk of our customers' accounts
receivable; our ability to retain and recruit key personnel; existing and future
litigation; changes in environmental health and safety law; changes to existing
regulations or technical standards; and the social, political and economic risks
of our foreign operations. You are encouraged to read more about the specific
risks and uncertainties of our business. We have described those that we
currently consider most important in our report on Form 10-KSB for our fiscal
year ended September 30, 2003. Except as otherwise required under federal
securities laws and the rules and regulations of the SEC, we do not have any
intention or obligation to update publicly any forward-looking statements after
the distribution of this MD&A, whether as a result of new information, future
events, changes in assumptions or otherwise.
OVERVIEW
The Company was formed as a Delaware corporation in March 2001 as a
"blank check" company to effect a merger, exchange of capital stock, asset
acquisition or other similar business combination with an operating business
which the Company believes has significant growth potential. The Company filed a
registration statement on Form SB-2 (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission"), which became effective
August 6, 2002, and the Company commenced an offering of its common stock
pursuant to this effective Registration Statement (the "Offering"). The Offering
closed in November 2002, raising proceeds of $50,000 from the sale of 50,000
shares of common stock. The Offering was a "blank check" offering due to
management's broad discretion with respect to the specific application of the
net proceeds thereof. Management had sole discretion in determining which
businesses to acquire, and the terms of such acquisition. The Offering was
subject to Rule 419 of Regulation C ("Rule 419") under the Securities Act of
1933, as amended (the "Securities Act"). Rule 419 requires that offering
proceeds (except for an amount up to 10% of the deposited funds) and the
securities issued to investors must be deposited in an escrow account and not
released until an acquisition conforming to certain specified criteria has been
consummated and a sufficient number of investors reconfirm their investment in
accordance with the procedures set forth in that rule.
9
As of February 12, 2003, we entered into a merger agreement with Whitco
Company, L.L.P., a Texas limited liability partnership which manufactures,
markets and distributes outdoor lighting poles. The Company filed a
post-effective amendment to the Registration Statement with the Commission
describing Whitco and its business, and included audited financial statements
which, upon being declared effective by the Commission, were delivered to all
investors in the Offering. Those investors were given the opportunity to
evaluate the merits and risks of the Whitco acquisition and all investors
elected to remain investors in the Company. On August 27, 2003, we acquired
Whitco Company, LP (successor in interest as a result of the conversion of
Whitco Company, L.L.P. to a limited partnership) through an exchange of all of
Whitco's partnership units, and options to purchase partnership units, for
2,991,368 shares of common stock, and options to purchase 808,632 shares of
common stock. Whitco became our wholly-owned subsidiary.
On August 29, 2003, we formed Catalyst Lighting Group, Inc., a Delaware
corporation and purchased 200 shares of its common stock for an aggregate of
$2,000. On September 2, 2003, we entered into an Agreement of Merger with
Catalyst. On September 3, 2003, we filed with the Delaware Secretary of State a
Certificate of Ownership and Merger of Catalyst Lighting Group, Inc. into
Wentworth III, Inc. Pursuant to such certificate, and in accordance with Section
253(b) of the Delaware General Corporation Law, we changed our name to Catalyst
Lighting Group, Inc.
Whitco is a nationwide marketer and distributor of steel and aluminum
outdoor lighting poles. Founded in 1969, Whitco sells poles directly to original
equipment manufacturers (OEM's) and indirectly to other third parties through
its own contracted sales representatives. We seek to have Whitco become the
preferred marketer and distributor of steel and aluminum lighting pole
structures and accessories, and we may attempt to acquire or develop
subsidiaries to pursue additional market opportunities. We believe the necessary
systems and people are in place to aggressively grow and expand in Whitco's
defined markets.
RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
Our condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and judgments that affect the reported amount of assets,
liabilities, revenues and expenses, and the related disclosures. A summary of
those significant accounting policies can be found in our Notes to the
Consolidated Financial Statements included in this report. The estimates used by
management are based upon their historical experiences combined with
management's understanding of current facts and circumstances. Certain of our
accounting policies are considered critical as they are both important to the
portrayal of our financial condition and the results of our operations and
require significant judgments on the part of management. Management believes the
following represent our critical accounting policies as described in Financial
Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical
Accounting Policies," which was issued by the Securities and Exchange
Commission: inventory, goodwill, allowance for doubtful accounts, and warranty
policy.
10
The Company states inventory at the lower of cost or market, determined under
the first-in, first-out method. We maintain a significant amount of raw material
inventory to serve future order demand of customers. While management believes
its processes for ordering and controlling inventory are adequate, changes in
economic or industry conditions may require us to hold inventory longer than
expected or write outdated inventory off as the result of obsolescence.
During fiscal 2001, we amortized goodwill using a fifteen-year life. Beginning
January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142
(SFAS 142) "Goodwill and Other Intangible Assets," and as a result ceased
amortizing goodwill. We test goodwill for impairment annually or on an interim
basis if an event or circumstance occurs between the annual tests that may
indicate impairment of goodwill. Impairment of goodwill will be recognized in
operating results in the period it is identified.
We utilize our best estimate for allowance for doubtful accounts based on past
history and accruing the expense as a percentage of sales. We grant credit to
distributors of sports and area lighting poles located throughout the United
States of America. Collateral is generally not required for trade receivables.
While we consider our process to be adequate to effectively quantify its
exposure to doubtful accounts, changes in economic, industry or specific
customer conditions may require an adjustment of the allowance for doubtful
accounts.
Our customers receive a one year product warranty for defects in material and
workmanship, providing repair, replacement or refund of the purchase price. We
provide an accrual as a reserve for potential warranty costs based on historical
experience and accruing as a percentage of sales. While management considers our
process to be adequate to effectively quantify its exposure to warranty claims
based on historical performance, changes in warranty claims on a specific or
cumulative basis may require us to adjust our reserve for potential warranty
costs.
Impact of Recently Issued Accounting Pronouncements - In December 2002, the FASB
issued Statements of Financial Accounting Standards No.148, Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement 123 (SFAS 123). For entities that change their accounting for
stock-based compensation from the intrinsic method to the fair value method
under SFAS 123, the fair value method is to be applied prospectively to those
awards granted after the beginning of the period of adoption (the prospective
method). The amendment permits two additional transition methods for adoption of
the fair value method. In addition to the prospective method, the entity can
choose to either (i) restate all periods presented (retroactive restatement
method) or (ii) recognize compensation cost from the beginning of the fiscal
year of adoption as if the fair value method had been used to account for awards
(modified prospective method). For fiscal years beginning December 15, 2003, the
prospective method will no longer be allowed. The Company currently accounts for
its stock-based compensation using the intrinsic value method as proscribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and plans on continuing using this method to account for stock
options; therefore, it does not intend to adopt the transition requirements as
specified in SFAS 148. The Company has adopted the new SFAS 148 disclosure
requirements of SFAS 148 in these financial statements.
11
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity ("FAS 150"). FAS
150 requires that three classes of freestanding financial statements that embody
obligations for entities be classified as liabilities. Generally, FAS 150 is
effective for financial instruments entered into or modified after May 31, 2003
and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not believe the adoption of FAS
150 will have a material impact on its financial position or results of
operations.
The FASB issued Interpretation ("FIN") No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, in November 2002 and FIN No. 46, Consolidation of
Variable Interest Entities, in January 2003. FIN No. 45 is applicable on a
prospective basis for initial recognition and measurement provisions to
guarantees issued after December 2002; however, disclosure requirements are
effective immediately. FIN No. 45 requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the obligations
undertaken in issuing the guarantee and expands the required disclosures to be
made by the guarantor about its obligation under certain guarantees that it has
issued. The adoption of FIN No. 45 did not have a material impact on the
Company's financial position or results of operations. FIN No. 46 requires that
a company that controls another entity through interest other than voting
interest should consolidate such controlled entity in all cases for interim
periods beginning after June 15, 2003. Management does not believe the adoption
of FIN No. 46 will have a material impact on its financial position or results
of operations.
Three months ended December 31, 2003 compared to the three months ended December
31, 2002
Revenue. For the three months ended December 31, 2003, the recognized revenue
was $4,451,910. For the three months ended December 31, 2002, the recognized
revenue was $3,282,406. Cost of goods sold for the twelve months ended December
31, 2003 was $3,091,392, which generated a gross margin of 30.6%, versus 33.8%
for the three months ended December 31, 2002. The increase in sales can be
attributed to an increase in overall pole sales through agency customers. The
decrease in gross margin percent is attributable to an increase in freight
expense and a lower margin mix of sales of products compared to the previous
comparative period.
Other general, selling, and administrative expenses. For the three months ended
December 31, 2003, operating expenses totaled $1,329,664, compared to $1,100,376
for the three months ended December 31, 2002. The increase in operating expenses
resulted from an increase in commission expenses paid, legal expenses, salary,
wage, and labor related expenses, and investor relations expenses.
12
Commission expense. For the three months ended December 31, 2003, commission
expense was $711,111, compared with $517,670 for the three months ended December
31, 2002. The increase in commissions paid is the result of an increased mix of
sales of products through agency customers and an increase in total revenues as
compared to the previous comparative period.
Legal expense. For the three months ended December 31, 2003, legal expense was
$23,329, compared with $2,771 for the three months ended December 31, 2002. The
increase in legal expense for the comparative period reflects additional
expenses related to the Company's public filings and the Company's registered
offering.
Salaries, wages, and labor related. For the three months ended December 31,
2003, salaries, wages, and labor related totaled $369,244, compared to $273,689
for the three months ended December 31, 2002. The increase in salaries and wages
can be attributed to additional personnel hired during the last two quarters of
fiscal year 2003 and the three months ended December 31, 2003. The increase in
headcount was a result of the increase in sales volume.
Investor relations expense. For the three months ended December 31, 2003,
investor relations expense was $20,917, compared with $0 for the three months
ended December 31, 2002. The increases in investor relations expense for the
comparative period are related to the registered offering.
Interest expense. Interest expense for the three months ended December 31, 2003
was $97,385, compared with $71,519 for the three months ended December 31, 2002.
The increase in interest expense for the comparative period reflects an increase
in the operating credit line.
Other expense. For the three months ended December 31, 2003 Catalyst Lighting
Group incurred $0 expense associated with the merger compared to $3,771 for the
three months ended December 31, 2002.
Liquidity and Capital Resources
At December 31, 2003, the Company had a working capital deficit of $931,718. The
Company also incurred a net loss for the three months ending December 31, 2003
of $42,969 and was not in compliance with its debt covenants as of December 31,
2003, as described in Note 4. While the related promissory note is a demand note
and can be called at any time, the bank could require repayment on its note as a
result of this noncompliance.
Management of the Company believes that the loss is due to the seasonality of
the sports and area lighting pole business and that the Company will return to
profitability. The Company also believes its bank will not call its note in a
manner which would adversely affect the Company. The Company is also pursuing
additional equity through a public offering of its common stock. The proceeds
will be used to pay down subordinated debt, provide working capital, and product
development. If the Company does not raise additional equity capital sufficient
to provide for positive working capital and is unable to return in the near
future to profitability, it may be required to curtail future operations and/or
liquidate assets or enter into credit arrangements on less than favorable terms
than would normally be expected, to provide for future liquidity.
13
Cash provided by (used in) operations for the three months ended December 31,
2003, and the three months ended December 31, 2002 was ($116,585), and ($57,720)
respectively. The cash used by operations for the three months ended December
31, 2003 resulted primarily from a loss of $42,969, a decrease in accounts
payable of $439,392, and a decrease in accrued liabilities of $183,343. This was
partially off-set by a decrease in accounts receivable of $488,659.
Primarily as a result of purchases of property and equipment, cash used in
investing activities for the three months December 31, 2003 was ($25,405).
Cash provided by financing activities for the three months ended December 31,
2003 was $81,454. For the three months ended December 31, 2003 there was an
increase in revolving notes payable of $77,774,
Material cash requirements for the next twelve months not in the ordinary course
of business relate to expenses incurred in connection with the completion of the
merger and the registered securities offering described herein. The Company's
current maturities of long term debt as of December 31, 2003 is $525,411,
consisting of subordinated debt. For the next 12 months, one $250,000 payment is
due on March 31, 2004 and one $217,850 payment is due on June 30, 2004, while
the rest is spread evenly over the entire year. Whitco and the Company intend to
fund future payments on these obligations through operational cash flow and
capital provided through our public offering.
The Company currently has a $2,000,000 senior, secured credit facility with PNC
Bank, evidenced by a demand promissory note, and secured by all of our assets.
The outstanding balance at December 31, 2003 was $2,150,296. The Company can
borrow the lesser of $2,000,000 or the aggregate of 80% of eligible accounts
receivable and 50% of eligible inventory as defined in the agreement with PNC.
The Company currently does not comply with certain portions of its agreement
with PNC relating to maintaining (1) a tangible net worth of not less than
$300,000, (2) a ceiling on debt to net worth ratio and (3) defined cash flow
coverage of at least 1 to 1. As a result, PNC can call the note, although the
note can be called at any time in any event, as it is a demand note. PNC is
aware of this non-compliance and has indicated it will not seek to call the
promissory note. The Company will actively pursue alternative lenders should the
note with PNC be called.
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ITEM 3. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief executive
officer and our chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and
15d-15(e)) as of a date (the "Evaluation Date") as of the end of the
period covered by this quarterly report, have each independently concluded
that, as of the Evaluation Date, our disclosure controls and procedures
were adequate and designed to ensure that material information relating to
us and our consolidated subsidiaries would be made known to them by others
within those entities.
INTERNAL CONTROL OVER FINANCIAL REPORTING. Under Rules 13a-15 and 15d-15
of the Exchange Act, companies are required to maintain internal control
over financial reporting, as defined, and company management is required
to evaluate and report on internal control over financial reporting. Under
an extended compliance period for these rules, the Company must begin to
comply with the evaluation and disclosure requirements with its annual
report for the fiscal year ending September 30, 2005, and the Company must
begin to comply with a requirement to perform a quarterly evaluation of
changes to internal control over financial reporting that occur
thereafter.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in our
internal controls or to our knowledge, in other factors that could
materially affect, or would be reasonably likely to materially affect, our
disclosure controls and procedures, or our internal control over financial
reporting, subsequent to the Evaluation Date.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. There are no material legal proceedings to which the
Company is a party or to which any of its assets or properties are subject.
ITEM 2. CHANGES IN SECURITIES. On December 30, 2003, Keating Reverse Merger
Fund, LLC agreed to an extension of its $250,000 unsecured promissory note held
against Whitco Company, L.L.P. (predecessor of Whitco Company, LP, our
wholly-owned subsidiary) through March 31, 2004. This note was issued to Keating
Reverse Merger Fund, LLC as consideration for a $250,000 loan made to Whitco
Company, L.L.P. on July 8, 2003.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Under the current $2,000,000 credit
facility with PNC Bank, we can borrow the lesser of $2,000,000 or the aggregate
of 80% of eligible accounts receivable and 50% of eligible inventory, as those
terms are defined in the agreement with PNC. We currently do not comply with the
following covenants of the agreement: (1) Whitco has a tangible net worth (as
defined in the PNC agreement) of less than $300,000 and (2) the ratio of (Total
Debt - Subordinated Debt) to (Book Net Worth + Subordinated Net Worth -
Intangible Assets) is greater than 8 to 1. As of December 31, 2003, Whitco owed
PNC approximately $2,150,296. Since it is a demand note, PNC can call it at any
time, even in the absence of any non-compliance. However, PNC is aware of the
non-compliance set forth above and has indicated it will not seek to call the
promissory note. However, no assurances can be given that PNC will not decide to
declare Whitco in default and seek to enforce its rights pursuant to the
agreement. In such event, Whitco may have to pay such debt, be subject to the
remedies available to PNC Bank or find alternative financing to replace the PNC
Bank debt, although no assurance can be given that Whitco will be able to find
such alternative financing on satisfactory terms, if at all.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
On February 17, 2004, we held the first closing on our registered public
offering, which was declared effective February 2, 2004. We issued 138,600
shares of our common stock for an aggregate of $346,500, or $2.50 per share.
There were no broker-dealers or finders and no commissions were paid or warrants
issued.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
31.1 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes- Oxley Act of 2002, with respect to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended December 31,
2003.
31.2 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes- Oxley Act of 2002, with respect to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended December 31,
2003.
32.1 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002, with respect to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 2003
32.2 Certification of Principal Financial Officer pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002, with respect to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 2003
(b) Reports on Form 8-K. None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Registrant: CATALYST LIGHTING GROUP, INC.
Date: February 17, 2004
/s/ Dennis H. Depenbusch
--------------------------------------------
Dennis H. Depenbusch
Chief Executive Officer, Chairman of the Board
of Directors, Chief Financial Officer and Secretary
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