UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission File Number 1-9917
Catalina Lighting, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Florida 59-1548266
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
18191 N.W. 68th Avenue
Miami, Florida 33015
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (305) 558-4777
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of the close of business on February 12, 2002 was 15,878,247.
CATALINA LIGHTING, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1 - Financial Statements:
Condensed Consolidated Balance Sheets -
December 31, 2001 and September 30, 2001...................................... 1
Condensed Consolidated Statements of Operations -
Three months ended December 31, 2001 and 2000................................. 3
Condensed Consolidated Statements of Cash Flows -
Three months ended December 31, 2001 and 2000................................. 4
Notes to Condensed Consolidated Financial Statements.......................... 5
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 11
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk............... 18
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings....................................................... 19
ITEM 4 - Submission of Matters to a Vote of Security Holders..................... 19
ITEM 6 - Exhibits and Reports on Form 8-K........................................ 19
Signatures........................................................................ 20
CATALINA LIGHTING, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
December 31, September 30,
Assets 2001 2001
------ ---------------------- --------------------
(Unaudited) *
Current assets
Cash and cash equivalents $ 2,885 $ 4,613
Restricted cash equivalents and short-term investments 607 1,066
Accounts receivable, net of allowance for doubtful accounts
of $1,547 and $1,423, respectively 30,781 27,761
Inventories 34,717 37,425
Other current assets 4,382 5,114
-------------- -------------
Total current assets 73,372 75,979
Property and equipment, net 29,126 30,227
Goodwill, net 28,192 28,812
Other assets 11,007 11,079
-------------- -------------
Total assets $ 141,697 $ 146,097
============== =============
*Condensed from audited financial statements
See accompanying notes to condensed consolidated financial statements.
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(In thousands)
December 31, September 30,
Liabilities and Stockholders' Equity 2001 2001
------------------------------------ ------------- --------------
(Unaudited) *
Current liabilities
Accounts payable $ 27,863 $ 27,586
Revolving credit facilities 7,040 7,078
Term loans 1,368 818
Current maturities of bonds payable 900 900
Current maturities of other long-term debt 729 878
Other current liabilities 12,450 12,466
----------------- ----------------
Total current liabilities 50,350 49,726
Revolving credit facilities 12,625 16,366
Term loans 22,571 23,479
Subordinated notes 6,533 6,110
Bonds payable 4,200 4,200
Other long-term debt 911 1,085
Other liabilities 5,694 5,926
----------------- ----------------
Total liabilities 102,884 106,892
----------------- ----------------
Minority interest 1,060 1,073
----------------- ----------------
Commitments and Contingencies
Stockholders' equity
Preferred stock, $.01 par value
authorized 1,000,000 shares; none issued
Common stock, $.01 par value
authorized 100,000,000 shares; issued and outstanding
16,520,179 shares 165 165
Additional paid-in capital 34,315 34,279
Retained earnings 6,568 6,764
Accumulated other comprehensive loss (834) (615)
Treasury stock, at cost, 641,932 shares (2,461) (2,461)
----------------- ----------------
Total stockholders' equity 37,753 38,132
----------------- ----------------
$ 141,697 $ 146,097
================= ================
*Condensed from audited financial statements
See accompanying notes to condensed consolidated financial statements.
2
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Ended
December 31,
---------------------------------
2001 2000
--------------- ---------------
Net sales $ 56,154 $ 64,608
Cost of sales 46,167 54,424
--------------- ---------------
Gross profit 9,987 10,184
Selling, general and administrative expenses 8,280 10,593
--------------- ---------------
Operating income (loss) 1,707 (409)
--------------- ---------------
Other income (expenses):
Interest expense (1,937) (1,590)
Other income (expenses) (58) (182)
--------------- ---------------
Total other income (expenses) (1,995) (1,772)
--------------- ---------------
Loss before income taxes (288) (2,181)
Income tax benefit (92) (282)
--------------- ---------------
Net loss $ (196) $ (1,899)
=============== ===============
Weighted average number of
shares outstanding
Basic 15,878 7,358
Diluted 15,878 7,358
Earnings (loss) per share
Basic $ (0.01) $ (0.26)
Diluted $ (0.01) $ (0.26)
See accompanying notes to condensed consolidated financial statements.
3
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
December 31,
-----------------------------------------
2001 2000
------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (196) $ (1,899)
Adjustments for non-cash items 1,751 1,795
Change in assets and liabilities 1,283 4
------------------- -----------------
Net cash provided by (used in) operating activities 2,838 (100)
------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (190) (2,142)
Proceeds from sale of property and equipment 141 -
Purchase of minority interest - (1,029)
Decrease (increase) in restricted cash equivalents and
short-term investments (2) 343
------------------- -----------------
Net cash used in investing activities (51) (2,828)
------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from other long-term debt - 323
Payments on other long-term debt (312) (393)
Proceeds from revolving credit facilities 6,907 14,593
Payments on revolving credit facilities (10,698) (9,450)
Payments on term loans (203) (1,236)
Sinking fund redemption payments on bonds payable (225) (225)
------------------- -----------------
Net cash provided by (used in) financing activities (4,531) 3,612
------------------- -----------------
Effect of exchange rate changes on cash 16 243
------------------- -----------------
Net increase (decrease) in cash and cash equivalents (1,728) 927
Cash and cash equivalents at beginning of period 4,613 2,309
------------------- -----------------
Cash and cash equivalents at end of period $ 2,885 $ 3,236
=================== =================
Supplemental Cash Flow Information
Three Months Ended
December 31,
--------------------------
2001 2000
----------- -----------
(In thousands)
Cash paid (received) for:
Interest $ 948 $ 1,327
Income taxes $ (142) $ 758
See accompanying notes to condensed consolidated financial statements.
4
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements of
Catalina Lighting, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with the accounting policies described in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2001 and should be read in
conjunction with the consolidated financial statements and notes which appear in
that report. These statements do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America ("generally accepted accounting principles") for complete
financial statements.
In the opinion of management, the condensed consolidated financial
statements include all adjustments (which consist mostly of normal, recurring
accruals) considered necessary for a fair presentation. The results of
operations for the three months ended December 31, 2001 may not necessarily be
indicative of operating results to be expected for any subsequent quarter or for
the full fiscal year due to seasonal fluctuations in the Company's business,
changes in economic conditions and other factors.
Accounts Receivable
-------------------
The Company provides allowances against accounts receivable for sales
deductions, returns and doubtful accounts. The Company's agreements with its
major customers provide for various sales allowances (i.e., deductions given the
customer from purchases made from the Company), the most common of which are for
volume discounts, consumer product returns and cooperative advertising. These
allowances are usually defined as a percentage of the gross sales price and are
recognized as a reduction of gross sales revenue at the time the related sales
are recorded. If the customer agreement does not provide for the deduction of
the allowance amount directly from the amount invoiced the customer at time of
billing, the Company records an accrual for the amounts due. These accrued
sales allowances are settled periodically either by subsequent deduction from
the accounts receivable from the customer or by cash payment. For financial
statement presentation purposes, these sales allowances are netted against
accounts receivable and amounted to $11,273,000 and $10,442,000 at December 31,
2001 and September 30, 2001, respectively.
Comprehensive Loss
------------------
Comprehensive loss consisted of the following:
Three Months Ended December 31,
--------------------------------------
2001 2000
----------------- ------------------
(In thousands)
Net loss $ (196) $ (1,899)
Foreign currency translation gain (loss) (238) 237
Change in unrealized loss on derivative
instrument, net of taxes 19 140
---------------- -----------------
Total comprehensive loss $ (415) $ (1,522)
================ =================
New Accounting Pronouncements
-----------------------------
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141"), was issued in July 2001. SFAS 141 addresses
financial accounting and reporting for business combinations and supercedes
Accounting Principles Board Opinion No. 16, "Business Combinations" and
Statement of Financial Accounting No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises". All business combinations in the scope
of SFAS 141 are to be accounted for under the purchase method. SFAS 141 became
effective June 30, 2001. The adoption of SFAS 141 did not have a material
impact on the Company's financial position, results of operations or cash flows
for the three months ended December 31, 2001.
5
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), was also issued in July 2001. SFAS 142
addresses financial accounting and reporting for intangible assets acquired
individually or with a group of other assets (but not those acquired in a
business combination) at acquisition. SFAS 142 also addresses financial
accounting and reporting for goodwill and other intangible assets subsequent to
their acquisition. With the adoption of SFAS 142, goodwill is no longer subject
to amortization. Rather, goodwill will be subject to at least an annual
assessment for impairment by applying a fair-value based test. The impairment
loss is the amount, if any, by which the implied fair value of goodwill is less
than carrying or book value. SFAS 142 is effective for fiscal years beginning
after December 15, 2001. Impairment loss for goodwill arising from the initial
application of SFAS 142 is to be reported as resulting from a change in
accounting principle. As of February 2002, the Company has not assessed the
impact of adopting SFAS 142.
Statement of Financial Accounting Standards No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" ("SFAS 143"),
was also issued in July 2001. SFAS 143 provides the accounting requirements for
retirement obligations associated with tangible long-lived assets. SFAS 143 is
effective for fiscal years beginning after June 15, 2002, and early adoption is
permitted. The Company is currently assessing the new standard and has not yet
determined its impact on its consolidated results of operations, cash flows or
financial position.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), was issued in October
2001. SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operation-Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transitions" for the disposal of a "Segment of a Business" (as
previously defined in that Opinion). SFAS 144 also amends ARB No. 51,
"Consolidated Financial Statements", to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS 144 is
effective for fiscal years beginning after December 15, 2001, and early adoption
is permitted. The Company is currently assessing this new standard and has not
yet determined its impact on its consolidated results of operations, cash flows
or financial position.
Reclassifications
-----------------
Certain amounts presented in the financial statements of prior periods have
been reclassified to conform to the current period's presentation.
2. Inventories
Inventories consisted of the following:
December 31
---------------------------------
2001 2000
------------- --------------
(In thousands)
Raw materials $ 3,367 $ 2,869
Work-in-progress 555 892
Finished goods 30,795 33,664
----------- ------------
Total inventories $ 34,717 $ 37,425
=========== ============
3. Revolving Credit Facility
The Company has a $75 million credit facility which funded the Company's
acquisition of Ring Limited (formerly known as Ring plc) ("Ring") and provides
funds through revolving facilities for the Company's U.S. and U.K. operations.
The credit facility agreement requires that the Company meet certain financial
covenants and minimum levels of adjusted quarterly earnings beginning with the
quarter ended September 30, 2001 and revised quarterly debt to adjusted earnings
and fixed charge ratios beginning with the quarter ending December 31, 2002.
6
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company was in compliance with the financial covenants of its credit
facility for the quarter ended December 31, 2001. Based upon its current
assessment of market conditions for its business and its projections for the
remainder of its 2002 fiscal year, the Company expects to be in compliance with
the credit facility's financial covenants for the March 31, 2002 and subsequent
quarters. The Company is dependent upon borrowings under the revolving loans of
its credit facility to fund its operations. Should the Company be unable to
comply with the terms and financial covenants of its credit facility, it would
be required to obtain a modification to the facility or another source of
financing to operate. In the event that additional financing is required, the
Company may not be able to raise it on acceptable terms, if at all.
Additionally, there can be no assurances that market conditions will not
deteriorate in the future or that the Company will be able to achieve its
projected results for 2002.
4. Segment Information
Information on operating segments and a reconciliation to income (loss)
before income taxes for the three months ended December 31, 2001 and 2000 are as
follows (in thousands):
Three Months Ended December 31,
---------------------------------------------------------------------------------------
Net Sales 2001 2000
----------------------------------------- ------------------------------------------
by Operating Segment: External External
Customers Intersegment Total Customers Intersegment Total
----------------------------------------- ------------------------------------------
United States $ 13,906 $ 101 $ 14,007 $ 19,256 $ 134 $ 19,390
China 5,667 16,521 22,188 7,871 23,147 31,018
United Kingdom 29,985 - 29,985 28,274 - 28,274
Other segments 6,596 11 6,607 9,207 90 9,297
Eliminations - (16,633) (16,633) - (23,371) (23,371)
----------------------------------------- ------------------------------------------
$ 56,154 $ - $ 56,154 $ 64,608 $ - $ 64,608
========================================= ==========================================
7
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Net Sales by Location Three Months Ended
of External Customers: December 31,
------------------------------
2001 2000
------------- ------------
United States $ 14,055 $ 19,263
United Kingdom 29,511 27,505
Canada 5,708 8,050
Other countries 6,880 9,790
------------- ------------
$ 56,154 $ 64,608
============= ============
Segment Contribution (Loss): Three Months Ended
December 31,
------------------------------
2001 2000
------------- ------------
United States $ 500 $ (512)
China 1,010 2,047
United Kingdom 369 (1,082)
Other segments 266 (131)
------------ -----------
Subtotal for segments 2,145 322
Parent/administrative expenses (2,433) (2,503)
------------ -----------
Income (loss) before income taxes $ (288) $ (2,181)
============ ===========
Interest Expense (Income) (1): Three Months Ended
December 31,
------------------------------
2001 2000
------------- ------------
United States $ (76) $ (102)
China (9) (80)
United Kingdom 1,126 1,202
Other segments 64 140
------------ -----------
Subtotal for segments 1,105 1,160
Parent interest expense 832 430
------------ -----------
Total interest expense $ 1,937 $ 1,590
============ ===========
Total Assets (2): December 31, September 30,
2001 2001
-------------- -------------
United States $ 49,891 $ 51,550
China 44,155 45,920
United Kingdom 69,395 68,368
Other segments 9,594 8,836
Eliminations (31,338) (28,577)
------------ -----------
Total assets $ 141,697 $ 146,097
============ ===========
8
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Long-Lived Assets (3):
December 31, September 30,
2001 2001
------------ ---------------
United States $10,608 $ 10,891
China 14,905 15,329
United Kingdom 3,528 3,910
Other segments 85 97
------------ ----------------
Total long-lived assets $29,126 $ 30,227
============ ================
Expenditures for Additions to Long-Lived Assets:
Three Months Ended December 31,
-------------------------------------
2001 2000
------------ ----------------
United States $ 3 $ 54
China 64 1,907
United Kingdom 123 175
Other segments - 6
------------ ----------------
Total expenditures $ 190 $ 2,142
============ ================
(1) The interest expense shown for each segment includes interest paid or
earned on inter-segment advances.
(2) Total assets for United States include parent/administrative assets.
(3) Represents property and equipment, net.
Major Customers
---------------
During the three months ended December 31, 2001 and 2000, one customer
(included in the United Kingdom operations) accounted for 19.2% and 16.5%,
respectively, of the Company's consolidated net sales. One additional customer
(included in the United States and other operations) accounted for 12.8% of the
Company's consolidated net sales for the three months ended December 31, 2001,
compared to 11.8% during the same period in 2000. The Company's top five
customers accounted for 47.7% and 47.1% of consolidated net sales during the
three months ended December 31, 2001 and 2000, respectively.
5. Commitments and Contingencies
Westinghouse License
--------------------
On April 26, 1996, the Company entered into a license agreement with
Westinghouse Electric Corporation to market and distribute a full range of
lighting fixtures, lamps and other lighting products under the Westinghouse
brand name in exchange for royalty payments. The royalty payments are due
quarterly and are based on a percent of the value of the Company's net shipments
of Westinghouse branded products, subject to annual minimum net shipments.
Originally, subject to the minimum sales conditions discussed below, the
agreement would terminate on September 30, 2002, with the Company having options
to extend the agreement for two additional five-year terms. Either party had the
right to terminate the agreement if the Company did not meet the minimum net
shipments of $30 million for fiscal 2001 and $60 million for fiscal 2002.
Effective as of October 1, 2001, the Company and Westinghouse signed an
amendment to the license agreement that eliminates the minimum net shipments
requirement but also eliminates the Company's option to extend the license
agreement upon the agreement's expiration on September 30, 2002. Net sales of
Westinghouse branded products amounted to $2.7
9
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
million and $4.5 million for the three months ended December 31, 2001 and 2000,
respectively. Management does not believe that the loss of the Westinghouse
license will have a material effect on the Company's financial condition or
results of operations.
Litigation
----------
During the past few years, the Company has received a number of claims
relating to halogen torchieres sold by the Company to various retailers. The
Company maintains primary product liability insurance coverage of $1 million per
occurrence and $5 million in the aggregate, as well as umbrella insurance
policies providing an aggregate of $75 million in excess umbrella insurance
coverage. The primary insurance policy requires the Company to self-insure for
up to $10,000 per incident. Based on experience, the Company has accrued
$286,000 for this contingency as of December 31, 2001. No assurance can be given
that the number of claims will not exceed historical experience, that claims
will not exceed available insurance coverage or that the Company will be able to
maintain the same level of insurance.
On September 15, 1999, the Company filed a complaint entitled Catalina
Lighting, Inc. v. Lamps Plus, Civil Action 99-7200, in the U.S. District Court
for the Southern District of Florida. In the complaint, the Company requested
declaratory relief regarding claims of trade dress and patent infringement made
by Lamps Plus against a major customer of the Company. Lamps Plus filed an
Answer and Counterclaim against the Company and its customer on October 6, 1999,
alleging patent infringement and trade dress. The trade dress claim was
dismissed with prejudice before trial in March 2001. In April 2001, a jury
returned a verdict finding liability against the Company on the patent
infringement claim, and in June 2001 the Court entered a judgment of
approximately $1.6 million for damages and interest thereon. The Company has
appealed the judgment entered by the Court and has posted a surety bond in the
amount of $1.8 million for the appeal (for which the Company posted $1.5 million
in cash collateral). Based upon advice of counsel, the Company believes that it
ultimately will not be found liable for patent infringement in this case.
Accordingly, no provision for loss has been recorded in the accompanying
December 31, 2001 Condensed Consolidated Financial Statements for this matter.
Kmart Bankruptcy
----------------
On January 22, 2002, Kmart Corporation filed a Chapter 11 bankruptcy
petition with the U.S. Bankruptcy Court for the Northern District of Illinois.
The Company's sales to Kmart amounted to $10.7 million for the year ended
September 30, 2001 and $767,000 and $2.8 million for the three months ended
December 31, 2001 and 2000, respectively. The Company has no outstanding
receivables from Kmart for the period prior to January 22, 2002, and has resumed
shipments subsequent to the bankruptcy filing. The Company is continuing to
assess the effect of the bankruptcy proceedings on future sales to Kmart.
Pension Plan
------------
Ring has a defined benefit pension plan which covers 22 current employees
and approximately 750 members formerly associated with Ring. The plan is
administered externally, and the assets are held separately by professional
investment managers. The plan is funded by contributions at rates recommended
by an actuary. The Company is reviewing the plan and believes that in the
future it may terminate the plan. It is anticipated that a termination will
require payment of a lump sum equal to the "Minimum Funding Requirement" ("MFR")
shortfall. The most recent estimate as of September 2001 placed the MFR
shortfall at approximately $3.2 million. The U.K. government announced in its
March 2001 budget that it intends to abolish the MFR and to replace it with
funding standards individually tailored to the circumstances of plans and
employers. Based on current information, it appears that this change is not
likely to occur before April 2003, and should the Company not terminate its U.K.
pension plan prior to that date, the cost to terminate the plan under the new
rules is likely to be greater than the current $3.2 million deficit under the
MFR method.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In some cases, you can identify "forward-looking
statements" by words such as "expects", "anticipates", "believes", "plans",
"intends", "estimates", variations of such words and similar expressions. These
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Factors that would cause or
contribute to the inability to obtain the results or to fulfill the other
forward-looking statements include, but are not limited to, the following: the
highly competitive nature of the lighting industry; our reliance on key
customers who may delay, cancel or fail to place orders; consumer demand for
lighting products; dependence on third-party vendors and imports from China
which may limit our margins or affect the timing of revenue and sales
recognition; general domestic and international economic conditions which may
affect consumer spending; brand awareness, the existence or absence of adverse
publicity, continued acceptance of our products in the marketplace, new products
and technological changes, and changing trends in customer tastes, each of which
can affect demand and pricing for our products; pressures on product pricing and
pricing inventories; cost of labor and raw materials; the availability of
capital; the ability to satisfy the terms of, and covenants under, credit and
loan agreements and the impact of increases in borrowing costs, each of which
affect our short-term and long-term liquidity; the costs and other effects of
legal and administrative proceedings; foreign currency exchange rates; changes
in our effective tax rate (which is dependent on our U.S. and foreign source
income); and other factors referenced in this Form 10-Q and our Annual Report on
Form 10-K for the fiscal year ended September 30, 2001, as amended. We will not
undertake and specifically decline any obligation to update or correct any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
In the following comparison of the results of operations, the three
months ended December 31, 2001 and 2000 are referred to as "Q1 2001" and "Q1
2000", respectively. Unless otherwise noted, U.S. dollar equivalents of foreign
currency amounts are based upon the exchange rates prevailing at December 31,
2001.
Comparison of Three Months Ended December 31, 2001 and 2000
Consolidated Results
We had operating income of $1.7 million in Q1 2001 compared to an
operating loss of $409,000 in Q1 2000. The $2.1 million operating income
improvement primarily resulted from a significant decrease in selling, general
and administrative expenses ("SG&A"). The expense reduction and improvement in
operating income reduced our net loss from $1.9 million, or $.26 per diluted
share, in Q1 2000, to a net loss of $196,000, or $.01 per diluted share, in Q1
2001.
Net sales for Q1 2001 were $56.2 million, an $8.5 million decrease from
the same period in the prior year. The decrease in net sales is primarily
attributable to lower sales in the United States and Canada. Shipments to Kmart
during the quarter were $2.0 million below the same period in the prior year.
Kmart filed a Chapter 11 bankruptcy petition with the U.S. Bankruptcy Court for
the Northern District of Illinois on January 22, 2002. We are continuing to
assess the effect of the bankruptcy proceedings on future sales to Kmart.
Continued weakness in the economy and other competitive factors also continue to
affect order volume with other North American customers. See "Results by
Segment" for further discussion.
Lamps, lighting fixtures, automotive after-market products and
industrial consumables accounted for 33.9%, 46.8%, 14.5% and 4.8% of net sales
in Q1 2001 compared to 39.8%, 45.9%, 10.3% and 4.0% in Q1 2000. In Q1 2001 and
Q1 2000, Ring's largest customer, B & Q, a subsidiary of Kingfisher PLC,
accounted for $10.8 million (19.1%) and $10.6 million (16.5%), respectively, of
our net sales. In Q1 2001 and Q1 2000, Home Depot accounted for $7.2 million
(12.8%) and $7.6 million (11.8%), respectively, of our net sales. Sales made
from warehouses constituted 66% of our net sales in Q1 2001, up from 56% in Q1
2000.
Gross profit in total dollars decreased from $10.2 million in Q1 2000 to
$10.0 million in Q1 2001. However, gross profit as a percentage of sales
increased from 15.8% in 2000 to 17.8% in Q1 2001. The increase in gross profit
as a percentage of sales is attributable to decreased warehousing and product
development costs as a result of our initiatives to lower operating costs.
11
SG&A for Q1 2001 was $8.3 million, a decrease of $2.3 million from the same
period in the prior year. The decrease in SG&A is a result of our Company-wide
efforts to reduce operating and overhead costs. Expense categories in which we
experienced significant declines included payroll and related expenses in the
U.S. ($647,000) and the United Kingdom ($372,000), travel and entertainment,
($123,000), merchandising and displays ($106,000) and bad debt and VAT tax
provisions ($450,000). Additionally, Go Gro reduced its SG&A by $346,000. See
"Results by Segment" for further discussion.
Interest expense was $1.9 million in 2001 compared to $1.6 million in Q1
2000. The increased expense is primarily attributable to the amortization of
debt discount and financing costs associated with the subordinated notes issued
in July 2001 ($257,000 of non-cash charges).
Other expenses of $58,000 for Q1 2001 consisted of a net foreign currency
loss ($69,000), dividends on Ring convertible preference stock ($45,000), equity
in loss of unconsolidated joint venture ($91,000) partially reduced by interest
income ($90,000) and other miscellaneous income ($57,000). Other expenses of
$182,000 in Q1 2000 consisted primarily of net foreign currency loss ($150,000),
dividends on Ring convertible preference stock ($45,000), equity in loss of
unconsolidated joint venture ($45,000) and other expenses ($22,000) offset by
interest income of ($80,000).
The effective income tax rates for Q1 2001 and Q1 2000 were 31.9% and
12.9%, respectively. The lower effective tax rate for Q1 2000 is attributable
to significant losses, primarily in foreign jurisdictions, for which no benefit
could be recorded. Our effective income tax rate is dependent on both the total
amount of pretax income generated and the source of such income (i.e., domestic
or foreign). Consequently, our effective tax rate may vary in future periods.
Our effective income tax rate reflects the anticipated tax benefits associated
with the 1999 restructuring of our international operations. Should these tax
benefits not materialize, we may experience an increase in our effective
consolidated income tax rate.
Results By Segment
See Note 4 of Notes to Consolidated Condensed Financial Statements for the
financial tables for each business segment.
Catalina Industries (United States)
Catalina Industries had a segment profit in Q1 2001 of $500,000 as compared
to a segment loss of $512,000 in Q1 2000. The increase in segment contribution
in Q1 2001 is primarily attributable to decreased SG&A and other operating
costs.
Sales by Catalina Industries to external customers were $13.9 million in Q1
2001, a decrease of $5.4 million from Q1 2000. Sales to Home Depot were $6.2
million or $1.5 million more than in Q1 2000 while sales to WalMart, Kmart and
the office superstores (Office Depot and Staples) decreased by $3.1 million,
$2.1 million and $300,000, respectively. In Q1 2001, Home Depot, Staples,
Lowes, Kmart and WalMart accounted for 45%, 11%, 8%, 6% and 4%, respectively, of
Catalina Industries' net sales and in Q1 2000, 25%, 5%, 6%, 15% and 19%,
respectively.
Gross profit for Catalina Industries was $1.8 million in Q1 2001 compared
to $1.5 million in 2000. Gross profit as a percentage of net sales increased
from 7.9% in Q1 2000 to 13.1% in Q1 2001. The increase in gross profit as a
percentage of net sales is primarily attributable to changes in our customer
mix, as well as reduced product development expenses and warehousing costs.
Presently, most major U.S. customers (including Home Depot, Staples, Lowes,
Kmart and Wal-Mart) purchase from Catalina Industries primarily on a direct
basis, whereby the merchandise is shipped directly from the factory to the
customer, rather than from the warehouse. Catalina Industries serves these
customers by placing orders directly with our factory in China and with other
Far East suppliers. As more U.S. customers have changed their sourcing method,
warehouse sales to U.S. customers have declined each fiscal year in the six-year
period commencing fiscal 1995, when the present warehouse was constructed in
Tupelo, Mississippi, and warehouse sales were 61% of annual U.S. sales compared
to 23% for the current quarter. This percentage decline represents a
significant reduction in orders flowing through the Tupelo warehouse. During
the 2001 fiscal year, Catalina Industries lowered its warehousing costs
primarily by reducing personnel and related costs. Catalina Industries may
experience further declines in sales made from its U.S. warehouse and, at least
in the short term, may be unable to further reduce its overall warehousing
costs.
12
SG&A decreased from $2.1 million in Q1 2000 to $1.4 million in Q1 2001.
This decrease reflects reduced salary and related costs, travel and
entertainment, merchandising costs, legal and professional fees and bad debt
expense.
Go-Gro (China)
Go-Gro's segment contribution in Q1 2001 was $1.0 million, compared to $2.0
million in Q1 2000.
Go-Gro's sales for Q1 2001 were $22.2 million, a decrease of $8.8 million
from the $31.0 million generated in Q1 2000. Sales of products manufactured by
Go-Gro in Q1 2001 (as opposed to sales of products purchased for resale by Go-
Gro from other manufacturers) decreased by $5.6 million, to $13.2 million.
Third-party and intercompany sales by Go-Gro in Q1 2001 were $5.7 million and
$16.5 million, respectively, while the comparable sales amounts for Q1 2000 were
$7.9 million and $23.1 million, respectively. The decline in the intercompany
sales in Q1 2001 primarily reflects the lower overall sales to Catalina
Industries and Catalina Canada attributable to a decline in Catalina Industries'
U.S. and Canadian business. Sales to one third-party customer were $1.9 million
in Q1 2001 and $3.8 million in Q1 2000.
SG&A decreased from $1.9 million in Q1 2000 to $1.6 million in Q1 2001,
primarily as a result of lower payroll and related costs and lower bank charges,
partially offset by increased bad debt expense.
Ring Limited (United Kingdom)
Ring's segment contribution for Q1 2001 was $369,000 compared to a loss of
$1.1 million in Q1 2000.
Net sales and gross profit for Q1 2001 were $30.0 million and $4.5 million,
respectively, as compared to $28.3 million and $3.5 million, respectively, for
the same period of 2000. The increase in net sales is primarily attributable to
growth in Ring's automotive division. Gross profit percentage increased to
15.1% in Q1 2001 compared to 12.4%, primarily as a result of a change in product
mix, reduced freight charges and lower warehousing costs as a result of
personnel reductions.
SG&A was $3.0 million in Q1 2001 compared to $3.3 million in Q1 2000. The
decrease is primarily related to lower salary and related costs.
Liquidity and Capital Resources
We meet our short-term liquidity needs through cash provided by operations,
borrowings under various credit facilities with banks, accounts payable and the
use of letters of credit from customers to fund certain of our direct import
sales activities. Term loans, lease obligations, mortgage notes, bonds,
subordinated debt and capital stock are sources for our longer-term liquidity
and financing needs.
Cash Flows and Financial Condition
Our operating, investing and financing activities resulted in a net
decrease in cash and cash equivalents of $1.7 million from September 30, 2001 to
December 31, 2001. We used funds generated from operations to pay for capital
expenditures and make payments of $4.5 million on our revolving credit
facilities and, to a lesser extent, on our term loans and other long term debt.
Availability under our revolving credit facility increased from $7.9 million at
September 30, 2001 to $14.7 million at December 31, 2001. Capital expenditures
for the period were $190,000 and consisted primarily of furniture, fixtures and
equipment.
Accounts receivable balances increased to $30.8 million at December 31,
2001 from $27.8 million at September 30, 2001 primarily as a result of
significantly higher sales in the Ring segment during the three months ended
December 31, 2001 compared to the three months ended September 30, 2001.
Inventory levels at December 31, 2001 were $34.7 million, as compared to $37.4
million at September 30, 2001, due to our focus on lowering our inventories in
each of our principal business segments.
Our agreements with our major customers provide for various sales
allowances (i.e., deductions given the customer from purchases made from us),
the most common of which are for volume discounts, consumer product returns, and
cooperative advertising. These allowances are usually defined as a percentage
of the gross sales price and are recognized as a reduction of gross sales
revenue at the time the related sales are recorded. If the customer agreement
does not provide for the deduction of the allowance amount directly from the
amount invoiced the customer at time of billing, we record an
13
accrual for the amounts due. These accrued sales allowances are settled
periodically either by subsequent deduction from the accounts receivable from
the customer or by cash payment. For financial statement presentation purposes,
these sales allowances are netted against accounts receivable and amounted to
$11,273,000 and $10,442,000 at December 31, 2001 and September 30, 2001,
respectively. The amounts of our accrued sales allowances, by customer and in
the aggregate, are dependent upon various factors, including sales volumes, the
specific terms negotiated with each customer (including whether the allowance
amounts are deducted immediately from the invoice or accrued) and the manner and
timing of settlement.
Revolving Credit and Term Loan Facilities
In July 2000, we entered into a credit facility for approximately $75
million with a bank syndication group to finance the acquisition of Ring and
repay and terminate our existing U.S. credit facility and Ring's U.K. facility.
The facility consists of two term loans originally amounting to $15 million and
the GBP equivalent of U.S. $15 million (GBP 10.2 million), respectively, and two
revolving facilities for loans, acceptances and trade and stand-by letters of
credit for our ongoing operations in the U.S. and the U.K. Amounts outstanding
under the revolving facilities are limited under a borrowing base defined as
percentages of the combined accounts receivable and inventory balances for the
U.S. and U.K. Obligations under the facility are secured by substantially all
of our U.S. and U.K. assets, including 100% of the common stock of our U.S.
subsidiaries and 65% of the stock of our Canadian and first-tier United Kingdom
and Hong Kong subsidiaries. The agreement prohibits the payment of cash
dividends or other distribution on any shares of our common stock, other than
dividends payable solely in shares of common stock, unless approval is obtained
from the lenders. We pay a quarterly commitment fee of .50% per annum based on
the unused portion of the revolving facilities.
Under English law, a British company cannot lawfully provide financial
assistance for the purpose of the acquisition of its own shares (which would
include using its cash flows and other sources of funds to make payments due on
debt used to fund its acquisition) unless certain conditions are met. In
addition, lenders providing the financing for the acquisition cannot perfect
their collateral interest in the assets of the acquired British company unless
such conditions are met. In order to lawfully provide financial assistance, the
acquired British company must complete a "whitewash procedure" under English
law. In essence, the whitewash procedure requires the following: (1) every
director of the acquired British company must make a statutory declaration as to
the solvency of the acquired company and its ability to pay its debts for the
next twelve months; and (2) the statutory declarations must be accompanied by an
independent auditors' report stating that the auditors are not aware of anything
to indicate that the statutory declarations of the directors are not reasonable.
In addition, English law requires that the net assets of the acquired British
company are not reduced by the financial assistance or, to the extent that the
net assets are reduced, the reduction is funded out of distributable profits.
"Net assets" and "distributable profits" have prescribed meanings under the
statute governing the whitewash procedure. Failure to comply with the whitewash
procedure will mean the financial assistance is unlawful, which could result in
the acquired British company facing a fine and its directors and managers facing
a fine or imprisonment or both. In addition, the transaction constituting the
financial assistance together with any security given in contravention of the
financial assistance rules, may be held by English courts to be void and
unenforceable. The financial assistance rules apply to any subsidiaries of the
acquired company which are also involved in providing financial assistance.
Until the whitewash procedure is completed, cash flows from Ring cannot be used
to repay our term loans and cash payments by Ring to other Company subsidiaries
are limited to trade transactions in the normal course of business.
On July 23, 2001, we obtained $11.8 million in additional funding as a
result of closing a transaction (the "Sun transaction") with Sun Catalina
Holdings LLC ("SCH"), an affiliate of Sun Capital Partners, Inc. (a private
investment firm based in Boca Raton, Florida) and other parties. Our $75
million credit facility was amended and restructured in connection with the Sun
transaction.
As a part of the restructuring, available borrowing under the revolving
loans were reallocated under the amendment to increase the U.S. revolver to
$21.4 million and decrease the U.K. revolver to the British pound equivalent of
U.S. $23.6 million. Borrowings under the facility bear interest, payable
monthly, at our option of either the prime rate plus an applicable margin or the
LIBOR rate plus an applicable margin. The effective rate on the facility was
6.7% at December 31, 2001. Under the amended facility, we are required to meet
minimum levels of adjusted quarterly earnings beginning with the quarter ended
September 30, 2001 and revised quarterly debt to adjusted earnings and fixed
charge ratios beginning with the quarter ending December 31, 2002. Annual
capital expenditures are limited under the amendment to $3.75 million. The term
loans are now repayable in installments aggregating approximately (i) $200,000
on each of December 31, 2001, March 31, 2002, June 30, 2002 and September 30,
2002; (ii) $750,000 on each of December 31, 2002, March 31, 2003, June 30, 2003,
and September 30, 2003, and; (iii) $20,497,000 on December 31, 2003. The
revolving loans under the facility mature on December 31, 2003. The bank
syndication group's fee for the amendment consisted of the right to obtain
warrants to
14
purchase 354,136 shares of common stock at a price of $.01 per share. The July
23, 2001 amendment to the $75 million credit facility eliminated (as an event of
default) a previous requirement of the credit facility that we complete the
whitewash procedure. However, if the whitewash procedure was not completed by
December 31, 2001, 50 basis points would be added to the facility's effective
interest rate. We did not complete the whitewash procedure by December 31, 2001
and, consequently, the effective interest rate on the credit facility increased.
Ring has an arrangement with a U.K. bank which is secured by standby
letters of credit issued under the GBP revolving loan facility of our $75
million credit facility. The arrangement provides for borrowings, trade letters
of credit, bonds and foreign currency forward contracts and transactions.
Borrowings, trade letters of credit, bonds and foreign currency forward
contracts outstanding under this arrangement amounted to approximately $7.0
million, $4.3 million, $1.1 million and $3.1 million, respectively, at
December 31, 2001.
Catalina Canada has a credit facility with a Canadian company that provides
U.S. dollar and Canadian dollar revolving credit loans up to $7 million Canadian
dollars in the aggregate. The facility matures in December 2004. Borrowings in
Canadian dollars bear interest at the Canadian prime rate plus 1.5%, while
borrowings in U.S. dollars bear interest at the rate of the U.S. prime rate plus
.5%. Borrowings under the facility are limited to a borrowing base calculated
from receivables and inventory. The credit facility is secured by substantially
all of the assets of Catalina Canada. The facility limits the payment of
dividends, advances or loans from Catalina Canada to Catalina Lighting, Inc. to
$500,000 annually, and no such amounts may be transferred if Catalina Canada
does not have sufficient excess borrowing availability under the facility's
borrowing base. The facility contains a financial covenant requiring Catalina
Canada to maintain a minimum net worth.
Go-Gro has a 60 million Hong Kong dollars (approximately U.S. $7.7 million)
facility with a Hong Kong bank. The facility provides limited credit in the
form of acceptances, trade and stand-by letters of credit, overdraft protection,
and negotiation of discrepant documents presented under export letters of credit
issued by banks. The facility is secured by Go-Gro's assets and a guarantee
issued by us and requires Go-Gro to maintain a minimum level of equity. This
agreement prohibits the payment of dividends without the consent of the bank and
limits the total amount of trade receivables, loans or advances from Go-Gro to
our other companies. This facility is repayable upon demand and is subject to
an annual review by the bank. At December 31, 2001, Go-Gro had used $819,000 of
this line for letters of credit (there were no borrowings). The Hong Kong bank
from time to time also requires Go-Gro to maintain additional collateral in the
form of cash deposits as security on this facility. At December 31, 2001,
letters of credit received from customers exceeded letters of credit issued to
suppliers and therefore no cash deposits were maintained as collateral.
The terms of our credit facilities, English law and U.S. and foreign income
tax considerations impact the flow of funds between our major subsidiaries. Our
$75 million credit facility prohibits loans to Go-Gro from either Ring or our
other companies other than normal intercompany payables arising from trade.
This facility permits loans from our U.S. companies to Ring but restricts the
flow of funds from Ring to our non-U.K. companies to payments constituting
dividends or a return of capital. English laws and our current inability to
complete the whitewash procedure also restrict the amount of funds that may be
transferred from Ring to our U.S. companies and other subsidiaries. Our Hong
Kong credit facility prohibits the payment of dividends without the consent of
the bank and limits the amount of loans or advances from Go-Gro to our other
companies. Any loan made or dividends paid either directly or indirectly by Go-
Gro to us or our U.S. subsidiaries could be considered by U.S. taxing
authorities as a repatriation of foreign source income subject to taxation in
the U.S. at a higher rate than that assessed in Hong Kong. The net impact of
such a funds transfer from Go-Gro could be an increase in our U.S. income taxes
payable and our effective tax rate. The credit facility for Catalina Canada
also limits payments to our other companies other than trade payments in the
ordinary course of business.
We utilize the revolving portions of our $75 million credit facility to
support our operations in the U.S. and U.K. Our U.S. operations are also
supported to a limited extent by cash flows from our China operations. Due to
an inability to transfer funds from the U.K. to the U.S. until the whitewash
procedure is completed, all payments on our term loans must presently be made by
U.S. operations. As of February 7, 2002, we had $14.2 million available under
our revolving facilities to support U.S. and U.K. operations, an increase of
$6.3 million from September 30, 2001.
Since July 2001, we have significantly reduced our overhead and operating
costs in the U.S., U.K. and China through personnel reductions and the
elimination of discretionary expenditures. As of December 31, 2001, we were in
compliance with the terms and covenants of our $75 million credit facility.
Based upon (i) our results for January 2002, (ii) current assessments of market
conditions for our business, and (iii) sales, profitability and cash flow
projections, we believe we will continue to be in compliance with the terms and
covenants of our $75 million credit facility and that we will have adequate
available borrowings and other sources of liquidity for the remainder of the
2002 fiscal year.
15
However, there can be no assurances that market conditions will not deteriorate
in the future or that we will be able to achieve our projected results.
Subordinated Notes
We issued $8.8 million in secured subordinated notes in July 2001 in
connection with the Sun transaction which are due in full on July 23, 2006.
These notes bear interest at 12%, compounded quarterly. Interest on the notes is
payable quarterly in arrears in cash commencing March 31, 2003. Interest for
quarters prior to the quarter ending March 31, 2003 will be added to the
principal amount of the note. The note holders are also entitled to additional
warrants to purchase shares of common stock at $.01 per share for the quarters
during which interest on the notes is not paid in cash. Interest was not paid on
the notes for the period July 23, 2001 to December 31, 2001, for which the note
holders received additional warrants to purchase, in the aggregate, 300,379
shares of common stock. We will be required to issue additional warrants for up
to 735,210 shares of common stock if interest payments do not commence until
March 31, 2003.
Ring Preference Shares
We have accrued approximately $260,000 as of December 31, 2001 for the
payment of dividends on Ring's preference shares. Presently Ring does not have
sufficient equity under English law to repay these dividends. We will continue
to accrue these dividends until such time as Ring generates sufficient profits
to allow payment.
Westinghouse License
On April 26, 1996, we entered into a license agreement with Westinghouse
Electric Corporation to market and distribute a full range of lighting fixtures,
lamps and other lighting products under the Westinghouse brand name in exchange
for royalty payments. The royalty payments are due quarterly and are based on a
percent of the value of our net shipments of Westinghouse branded products,
subject to annual minimum net shipments. Originally, subject to the minimum
sales conditions discussed below, the agreement would terminate on September 30,
2002, after which we had options to extend the agreement for two additional
five-year terms. Either party had the right to terminate the agreement if we did
not meet the minimum net shipments of $30 million for fiscal 2001 and $60
million for fiscal 2002. Effective as of October 1, 2001, we and Westinghouse
signed an amendment to the license agreement that eliminates the minimum net
shipments requirement but also eliminates our option to extend the license
agreement upon the agreement's expiration on September 30, 2002. Net sales of
Westinghouse branded products amounted to $2.7 million and $4.5 million for the
three months ended December 31, 2001 and 2000, respectively. We do not believe
that the loss of the Westinghouse license will have a material effect on our
financial condition or results of operations.
Litigation
During the past few years, we received a number of claims relating to
halogen torchieres sold by us to various retailers. We maintain primary product
liability insurance coverage of $1 million per occurrence, $5 million in the
aggregate, as well as umbrella insurance policies providing an aggregate of $75
million in excess umbrella insurance coverage. The primary insurance policy
requires us to self-insure for up to $10,000 per incident. Based on experience,
we have accrued $286,000 for this contingency as of December 31, 2001. No
assurance can be given that the number of claims will not exceed historical
experience or that claims will not exceed available insurance coverage or that
we will be able to maintain the same level of insurance.
On September 15, 1999, we filed a complaint entitled Catalina Lighting,
Inc. v. Lamps Plus, Civil Action 99-7200, in the U.S. District Court for the
Southern District of Florida. In the complaint, we requested declaratory relief
regarding claims of trade dress and patent infringement made by Lamps Plus
against one of our major customers. Lamps Plus filed an Answer and Counterclaim
against us and our customer on October 6, 1999 alleging patent infringement and
trade dress. The trade dress claim was dismissed with prejudice before trial in
March 2001. In April 2001, a jury returned a verdict finding liability against
us on the patent infringement claim, and in June 2001 the Court entered a
judgment of approximately $1.6 million for damages and interest thereon. We
have appealed the judgment entered by the Court and have posted a surety bond in
the amount of $1.8 million for the appeal (for which we posted $1.5 million in
cash collateral). We believe that we ultimately will not be found liable for
patent infringement in this case. Accordingly, no provision for loss has been
recorded in the accompanying December 31, 2001 Condensed Consolidated Financial
Statements for this matter.
16
Other Matters
Our ability to import products from China at current tariff levels could be
materially and adversely affected if the normal trade relations ("NTR", formerly
"most favored nation") status the U.S. government has granted to China for trade
and tariff purposes is terminated. As a result of its NTR status, China
receives the same favorable tariff treatment that the United States extends to
its other "normal" trading partners. China's NTR status, coupled with its
recent admission to the World Trade Organization, could eventually reduce
barriers to manufacturing products in and exporting products from China.
However, we cannot provide any assurance that China's WTO membership or NTR
status will not change.
Ring has a defined benefit pension plan which covers 22 current employees
and over approximately 750 other members formerly associated with Ring. The
plan is administered externally and the assets are held separately by
professional investment managers. The plan is funded by contributions at rates
recommended by an actuary. We are reviewing the future of the plan and believe
that in the future we may begin the process of terminating our liability under
the plan. We anticipate that a termination will require payment of a lump sum
equal to the "Minimum Funding Requirement' ("MFR") shortfall. The most recent
estimate as of September 30, 2001 placed the MFR shortfall at approximately $3.2
million. The U.K. government announced in its March 2001 budget that it intends
to abolish the MFR and to replace it with funding standards individually
tailored to the circumstances of plans and employers. Based on current
information, it appears that this change is not likely to occur before April
2003, and should we not terminate our U.K. pension plan prior to that date, the
cost to terminate the plan under the new rules is likely to be greater than the
current $3.2 million deficit under the MFR method.
As of June 30, 2001, Ring had outstanding 9.5 million convertible
preference shares of which 2.5 million shares were held by third parties and the
remaining 7 million shares were owned by the Company. The holders of the
convertible preference shares are entitled to receive in priority to the equity
shareholders a fixed cumulative dividend of 19.2% per annum until January 1,
2004. The shares are convertible at the option of the holder into fully paid
ordinary shares on the basis of two ordinary shares for every five preference
shares. Any outstanding preference shares on January 1, 2004 automatically will
convert into fully paid ordinary shares on the same basis.
Impact of New Accounting Pronouncements
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141"), was issued in July 2001. SFAS 141 addresses
financial accounting and reporting for business combinations and supercedes
Accounting Principles Board Opinion No. 16, "Business Combinations" and
Statement of Financial Accounting No. 38 "Accounting for Preacquisition
Contingencies of Purchased Enterprises". All business combinations in the scope
of SFAS 141 are to be accounted for under the purchase method. SFAS 141 became
effective June 30, 2001. The adoption of SFAS 141 did not have a material
impact on our financial position, results of operations or cash flows for the
three months ended December 31, 2001.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), was also issued in July 2001. SFAS 142
addresses financial accounting and reporting for intangible assets acquired
individually or with a group of other assets (but not those acquired in a
business combination) at acquisition. SFAS 142 also addresses financial
accounting and reporting for goodwill and other intangible assets subsequent to
their acquisition. With the adoption of SFAS 142, goodwill is no longer subject
to amortization. Rather, goodwill will be subject to at least an annual
assessment for impairment by applying a fair-value based test. The impairment
loss is the amount, if any, by which the implied fair value of goodwill is less
than carrying or book value. SFAS 142 is effective for fiscal years beginning
after December 15, 2001. Impairment loss for goodwill arising from the initial
application of SFAS 142 is to be reported as resulting from a change in
accounting principle. As of February 2002, we have not assessed the impact of
adopting SFAS 142.
Statement of Financial Accounting Standards No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" ("SFAS 143"),
was also issued in July 2001. SFAS 143 provides the accounting requirements for
retirement obligations associated with tangible long-lived assets. SFAS 143 is
effective for fiscal years beginning after June 15, 2002, and early adoption is
permitted. We are currently assessing the new standard and have not yet
determined its impact on our consolidated results of operations, cash flows or
financial position.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144") was issued in October
2001. SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supersedes SFAS 121,
"Accounting for the Impairment of
17
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operation-Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transitions" for the disposal of a "Segment of a Business" (as previously
defined in that Opinion). SFAS 144 also amends ARB No. 51, "Consolidated
Financial Statements", to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. SFAS 144 is effective
for fiscal years beginning after December 15, 2001, and early adoption is
permitted. We are currently assessing this new standard and have not yet
determined its impact on our consolidated results of operations, cash flows or
financial position.
Impact of Inflation and Economic Conditions
Go-Gro has periodically experienced price increases in the costs of raw
materials, which reduce Go-Gro's profitability due to an inability to
immediately pass on such price increases to its customers. Significant
increases in raw materials prices could have an adverse impact on our net sales
and income from continuing operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our market risk exposure during
the three months ended December 31, 2001 that would require an update to the
disclosure in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2001, as filed with the Securities and Exchange Commission on
December 24, 2001.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In our Annual Report on Form 10-K for the fiscal year ended September
30, 2001, as filed with the Securities and Exchange Commission on December 24,
2001, we reported that we have appealed a judgment of $1.6 million for damages
and interest thereon that was entered by the U.S. District Court for the
Southern District of Florida in June 2001 in connection with a patent
infringement counterclaim filed against us in Catalina Lighting, Inc. v. Lamps
Plus, Civil Action 99-7200. As we reported, we have posted a surety bond in the
amount of $1.8 million for the appeal (for which we posted $1.5 million in cash
collateral). There have been no material developments in these legal
proceedings. We believe that we ultimately will not be found liable for patent
infringement in this case.
In addition, during the past few years, we have received a number of
claims relating to halogen torchieres sold by us to various retailers. We
maintain primary product liability insurance coverage of $1 million per
occurrence, $5 million in the aggregate, as well as umbrella insurance policies
providing an aggregate of $75 million in excess umbrella insurance coverage. The
primary insurance policy requires us to self-insure for up to $10,000 per
incident. Based on experience, we have accrued $286,000 for this contingency as
of December 31, 2001. No assurance can be given that the number of claims will
not exceed historical experience or that claims will not exceed available
insurance coverage or that we will be able to maintain the same level of
insurance.
We are also a party to routine litigation incidental to our business. We
believe the ultimate resolution of any such legal proceedings will not have a
material adverse effect on our financial position or annual results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
We held a Special Meeting of Shareholders on November 7, 2001. Four
matters were considered and voted upon at the Special Meeting: the amendment to
our Articles of Incorporation to increase the number of shares of Common Stock
that we are authorized to issue; the adoption of our Stock Incentive Plan; the
adoption of our Management Settlement Stock Incentive Plan; and the adoption of
our Amended and Restated By-laws, which increase the quorum requirements for
meetings of our shareholders. Each of these matters was considered and approved,
by the votes set forth below:
Votes Votes Votes Broker
For Against Abstained Non-Votes
--- ------- --------- ---------
Amendment to Articles of Incorporation 10,008,737 1,265,782 9,100 0
Adoption of Stock Incentive Plan 10,067,665 1,204,854 10,100 0
Adoption of Management Settlement Stock Incentive Plan 10,066,515 1,206,704 10,400 0
Adoption of Amended and Restated By-laws 10,751,353 523,166 9,100 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description
-------- -------------------------------------------------------------------------------------------------
10.1(b) First Amendment to Third Amended and Restated Credit Agreement, dated as of November 27, 2001,
by and between the registrant, Catalina International Limited, Ring Limited, Sun Trust Bank
and certain other lenders named therein.
10.24(d) License Agreement by and between Westinghouse Electric Corporation and the registrant,
effective as of October 1, 2001.
10.36 Loan Agreement, dated as of December 3, 2001, by and between Congress Financial
Corporation (Canada) and Catalina Lighting Canada, (1992) Inc. / Lumieres Catalina
Canada, (1992) Inc.
(b) Reports on Form 8-K.
None.
* * * * *
19
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, thereunto duly authorized.
CATALINA LIGHTING, INC.
/s/ Eric Bescoby
-------------------------------
Eric Bescoby
Chief Executive Officer
/s/ Lynn Skillen
-------------------------------
Lynn Skillen
Chief Financial Officer
(Chief Accounting Officer)
Date: February 14, 2002
INDEX TO EXHIBITS
Exhibit
Number Description
-------- -----------------------------------------------------------------------------------------
10.1(b) First Amendment to Third Amended and Restated Credit Agreement, dated as of November 27,
2001, by and between the registrant, Catalina International Limited, Ring Limited,
Sun Trust Bank and certain other lenders named therein.
10.24(d) License Agreement by and between Westinghouse Electric Corporation and the registrant,
effective as of October 1, 2001.
10.36 Loan Agreement, dated as of December 3, 2001, by and between Congress Financial
Corporation (Canada) and Catalina Lighting Canada, (1992) Inc. / Lumieres Catalina
Canada, (1992) Inc.