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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION PERIOD PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________________ to _____________________
COMMISSION FILE NO: 1-9917
CATALINA LIGHTING, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 59-1548266
State or other jurisdiction of (I.R.S Employer
incorporation or organization Identification Number)
18191 N.W. 68TH AVENUE, MIAMI, FLORIDA 33015
(Address of principal executive offices, including zip code)
(305) 558-4777
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value New York Stock Exchange
$.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
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 ___.
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant computed by reference to the closing price of such stock, as reported
by the New York Stock Exchange, on December 15, 1997 was $38.2 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Company for its 1998
Annual Meeting of Stockholders are incorporated by reference into Part III.
Number of shares outstanding of Registrant's common stock, as of
December 15, 1997: 7,109,069
Exhibit Index at Page 56
Page 2
FORM 10-K
CATALINA LIGHTING, INC.
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (this "Form
10-K"), including statements under "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
including without limitation expectations as to future sales and profitability,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Catalina Lighting, Inc. (the "Company") and its subsidiaries to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, but are not
limited to, the following: the highly competitive nature of the lighting
industry; reliance on certain key customers; consumer demand for lighting
products; dependence on imports from China; general economic and business
conditions; operating costs; advertising and promotional efforts; brand
awareness; the existence or absence of adverse publicity; acceptance of new
product offerings; changing trends in customer tastes; changes in business
strategy; availability, terms and deployment of capital; availability and cost
of raw materials and supplies; the costs and other effects of legal and
administrative proceedings; and other factors referenced in this Form 10-K. The
Company will not undertake and specifically declines any obligation to update or
correct any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
ITEM 1. BUSINESS.
GENERAL
Catalina Lighting, Inc. was incorporated under the laws of the state of
Florida in 1974 and became a public company in 1988. The Company designs,
manufactures, contracts for the manufacture of, imports and distributes a broad
line of lighting fixtures and lamps under the Westinghouse/Registered trademark/
brand, and the Catalina/Registered trademark/, Dana/Registered trademark/,
Meridian Lamps/Registered trademark/ and Illuminada/Registered trademark/ trade
names. The Company also functions as an original equipment manufacturer, selling
goods under its customers' private labels. The Company sells principally in the
United States through a variety of retailers including home centers, national
retail chains, office superstore chains, warehouse clubs, discount department
stores, catalog showrooms, lighting showrooms and hardware stores. The Company
also sells its products in Europe and Canada, and, to a lesser extent, in
Mexico, Asia, Latin America and Australia. Currently, its product line is
comprised almost entirely of lighting fixtures and lamps. The Company has
supplemented its product lines through acquisitions but has remained focused on
lighting products and has no plans to materially change its sales focus in the
near future.
STRATEGY
In order to expand its retail distribution network and more efficiently
and profitably service its customers, the Company focuses on the following
strategies:
TARGETED DISTRIBUTION. The Company distributes a diverse product line
through multiple retail channels. The Company targets rapidly growing and large
retailers, including leading home centers, office product superstores, warehouse
clubs, discount department stores, catalog showrooms, lighting showrooms and
hardware stores. Large retailers assure a broad distribution of a variety of the
Company's products while high-growth retailers provide the Company with rapid
penetration of selected industry segments. Secondarily, the Company targets
smaller chains within the above retail categories. While sales to each of these
retailers are smaller than those to their larger counterparts, these smaller
retailers are more numerous than their larger competitors and account for a
significant portion of the lighting industry. The Company's distribution
strategy provides it with numerous sources of demand and promotes the Company's
brand names broadly throughout the residential and office lighting markets in
the United States, Europe and Canada, and to a lesser extent Asia, Mexico, Latin
America and Australia.
Page 3
PROGRAM SELLING. In its primary domestic markets, the Company strives
to be the primary source of lighting products to its retailers by offering a
complete program of lighting products in a variety of categories. The
availability of over 1000 styles of such products as outdoor/security lighting,
table, floor and torchiere lamps, chandeliers, recessed and track lighting and
wall and ceiling lights - the majority of which are available in several colors
or finishes - provides retailers the opportunity to source most of their
lighting products through the Company on a "one stop shopping" basis. The
Company believes that its broad selection of affordable products coupled with
its ability to aid its retail customers in developing a complete lighting
program gives it a competitive advantage.
INTERNATIONAL EXPANSION The Company's Hong Kong based subsidiary,
Go-Gro Industries Limited ("Go-Gro"), sells its products to wholesale
distributors in Europe and, to a lesser extent, various customers in Asia.
Go-Gro is also a major supplier to the Company's U.S. and Canadian subsidiaries.
Management believes the Company's products and services are well suited for
further growth in these and other markets. The Company expects to join forces
with sales representatives and distributors in Europe and utilize their
knowledge of local markets' tastes in products, social customs, and trading
nuances to facilitate the Company's entry into those countries. The Company's
current plans include expansion of Go-Gro's existing sales and marketing
operations in Europe, including the United Kingdom.
TURNKEY DEPARTMENTS. The Company consults with many of its domestic
retail customers to establish departments which allow the Company to display its
products in a customized layout designed to meet each retailer's specific
merchandising and marketing goals. The Company can design, assemble and maintain
these departments and provide the retailer with shelving plan-o-grams, signs,
point-of-purchase promotional strategies and in-store inventory stocking
programs. Turnkey departments ensure the Company's retail customers efficient
and convenient management of the Company's products within their stores and
allow the Company to maintain an attractive and informative presentation of its
products.
WAREHOUSE SUPPLY OF IMPORTED GOODS. The Company's warehouses in the
United States, Canada and Mexico enable it to provide the cost advantage of
imported products with the convenience of short delivery time. Warehouse sales
allow retailers to receive products in several days as compared to several
months for items shipped directly to them from Asia. Timely deliveries increase
the customer's inventory turns and profits making the Company a valuable partner
in the retailer's business.
PRODUCTS
The Company markets a diverse product line used primarily in
residential and office settings. The Company's product line is comprised almost
entirely of two main categories: lighting fixtures and lamps. Lighting fixtures
consist of outdoor/security lighting, chandeliers, recessed and track lighting,
and wall and ceiling lights. Lamps sold by the Company include both table and
floor models and may be either functional or decorative. Functional lamps
consist of halogen desk lamps, bankers lamps, swing arm desk lamps, torchiere
lamps, magnifier lamps, and any other lamps generally used for task oriented
functions. Decorative lamps are fashion oriented and made of such materials as
metal, ceramic, stained glass, and crystal glass. The Company also sells other
lighting-related products such as flashlights and ceiling fans. The Company may
continue to expand its product lines internally or through acquisitions.
The Company's products are manufactured and assembled according to the
Company's design specifications. The finished products are packaged and labeled
under one of the Company's brand names: Westinghouse/Registered trademark/,
Catalina/Registered trademark/, Dana/Registered trademark/, Meridian
Lamps/Registered trademark/ and Illuminada/Registered trademark/. The Company
also functions as an original equipment manufacturer, selling goods under its
customers' private labels.
Page 4
CUSTOMERS
The Company distributes its products in North America principally
through major retail outlets, including home centers, national retail chains,
office superstore chains, discount department stores, warehouse clubs, catalog
showrooms, furniture and lighting stores and hardware stores. Products are also
sold to a large extent in Europe to wholesale distributors under their private
labels and to selected retail customers in Europe, Australia and Asia. In fiscal
1997 and 1996, Home Depot accounted for 22.1% and 9.8% of the Company's net
sales. For the fiscal years ended September 30, 1997 and 1996, net sales to the
Company's ten largest customers represented approximately 63% and 57%,
respectively, of the Company's total revenues. The Company believes its
relationships with its customers are good.
DISTRIBUTION METHODS
The Company utilizes two methods to sell products: warehouse sales and
direct sales. The backlog of unshipped orders at November 30, 1997 and 1996 was
$20.0 million and $20.4 million, respectively. Although these orders are subject
to cancellation by the customers, the Company believes substantially all such
orders are firm.
The Company purchases products overseas for its own account and
warehouses the products in a 473,000 square foot Company-owned facility in
Tupelo, Mississippi and in leased facilities in Montreal, Canada, Mexico City,
Mexico and in a public warehouse in California. The Company is responsible for
costs of shipping, insurance, customs clearance and duties, storage and
distribution related to such warehouse products and therefore, warehouse sales
usually command higher per unit sales prices than direct sales of the same
items. For the fiscal years ended September 30, 1997 and 1996, warehouse sales
accounted for 39% and 48%, respectively, of net sales.
The Company's direct sales are made either by delivering lighting
products to the retailers' common carriers at a shipping point in Asia or by
shipping the products from Asia directly to retailers' distribution centers,
warehouses or stores. Direct sales are made in large quantities (generally
container-sized lots) to customers, who pay pursuant to their own international,
irrevocable letters of credit (which may or may not be transferable depending on
whether the goods are manufactured by Go-Gro) or on open credit with the
Company. Upon receipt of a customer's transferable letter of credit, the Company
transfers the portion of the letter of credit covering the cost of merchandise
to its supplier. The terms of the transfer provide that draws may not be made by
the supplier until the Company is entitled to be paid pursuant to the terms of
the customer's letter of credit. The Company has the right to draw upon the
customer's letter of credit once the products are inspected by the Company or
its agents, delivered to the port of embarkation and the appropriate
documentation has been presented to the issuing bank within the time periods
established by such letter of credit. For fiscal years ended September 30, 1997
and 1996, 61% and 52%, respectively, of net sales were attributable to direct
sales.
The relative proportion of the Company's sales generated by each method
is dependent upon customer buying preferences and Company sales strategies.
Purchasing on a direct basis allows the customer to generally pay a lower per
unit price than purchasing the same items from the warehouse, but such method
requires the customer to purchase in greater quantities and thus assume the
costs, risks and liquidity requirements associated with holding larger
inventories. Customer buying preferences are influenced by a number of business,
economic and other factors. The underlying factors driving customer buying
preferences often vary from customer to customer and are subject to change, thus
customer buying preferences over time are inherently difficult to predict.
SOURCES OF PRODUCTS
Virtually all of the products sold by the Company are obtained from
factories located in China. The Company manufactures a portion of these products
and purchases the remainder from independent suppliers.
In 1994 the Company purchased Go-Gro, a lighting products manufacturer
with its administrative office located in Hong Kong and production facilities
located in the Guangdong Province of China. Go-Gro's production equipment is
owned by Shenzhen Jiadianbao Electrical Products Co., Ltd. (SJE), Go-Gro's
cooperative joint venture subsidiary. Approximately 50% of SJE's factory
buildings are leased from the Company's joint venture partner in SJE, Shenzhen
Baoanqu Fuda Industries Co. Ltd. ("Fuda"), a Chinese company, the remaining 50%
is owned by SJE. Under the terms of the cooperative joint venture agreement with
Fuda, Go-Gro is entitled to 100% of the manufacturing profits and losses of SJE,
while Fuda is entitled to a yearly management fee from SJE of approximately
$400,000 in addition to the rent for the factory buildings. Go-Gro manufactures
an extensive product line consisting primarily of lamps sold mainly to wholesale
Page 5
distributors and retailers in Europe, the Company and its subsidiaries and to a
lesser extent, retailers in Asia and Australia. Go-Gro and its subsidiaries
employ approximately 3,000 people.
SJE leases factory buildings in three separate locations in China.
During 1995, the Company initiated a consolidation of its Go-Gro/SJE
manufacturing facilities into one large compound in order to achieve certain
manufacturing efficiencies and to control its occupancy costs in what management
believes will be an inflationary business environment. In April 1995, SJE and
the Bureau of National Land Planning Bao-An Branch of Shenzhen City entered into
a Land Use Agreement covering approximately 467,300 square feet in Bao-An
County, Shenzhen City, People's Republic of China. The agreement provides SJE
with the right to use this land until January 18, 2042. The land use rights are
non-transferable. Under the terms of the SJE joint venture agreement, ownership
of the land and buildings of SJE is divided 70% to Go-Gro and 30% to Fuda. Land
costs, including the land use rights, approximated $2.6 million of which Go-Gro
has paid its 70% proportionate share of $1.8 million.
Under the terms of this agreement, as amended, SJE is obligated to
construct approximately 500,000 square feet of factory buildings and 211,000
square feet of dormitories and offices, of which 40 percent was required to be
and was completed by April 1, 1997. The remainder of the construction is
required to be completed by December 31, 1999. The total cost for this project
is estimated at $15.5 million (of which $10.3 million had been expended as of
September 30, 1997) and includes approximately $1 million for a Municipal
Coordination Facilities Fee (MCFF). The MCFF was based upon the square footage
to be constructed. The agreement calls for the MCFF to be paid in installments
beginning in January 1997 and continuing through June 1998, with 46% of the
total fee due and paid by September 1997. A 162,000 square foot factory, 77,000
square foot warehouse and 60,000 square foot dormitory were completed in April
1997 and became fully operational in June 1997.
Goods produced by Go-Gro constituted approximately 41% in 1997 and 36%
in 1996, of the total products either purchased or manufactured by the Company.
The raw materials essential to Go-Gro's manufacturing process are purchased from
distributors located in various countries as follows: plastic resin (Germany and
china), steel (Korea and Japan), cable (China), light bulbs (China and Taiwan),
lampholders (China) and other various components (China, Europe, U.S., Taiwan
and others).
The Company chooses manufacturers based on price, quality of
merchandise, reliability and ability to meet the Company's timing requirements
for delivery. Manufacturing commitments are made on a purchase order basis. The
Company or its customer is often required to post a letter of credit prior to
shipment.
The Company has employees located in the U.S., Hong Kong and China who
supervise the Company's manufacturing contractors. These employees'
responsibilities include the establishment and ongoing development of close
relationships with the manufacturers, setting product and manufacturing
standards, performing quality assurance functions including inspection at
various stages, tracking costs, performing and/or working with manufacturing
engineering, and oversight of the manufacturing processes. The Company maintains
a quality control and quality assurance program and has established inspection
and test criteria for each of its products. These methods are applied by the
Company or its agents regularly to product samples in each manufacturing
location prior to shipment and each shipment must pass quality control
inspection.
The Company expects to continue to use a limited number of contract
manufacturers and accordingly will continue to be highly dependent upon sources
outside the Company for timely production and quality workmanship.
In fiscal 1997 and 1996, Chinese suppliers, other than Go-Gro,
accounted for approximately 53% and 57%, respectively, of the total products
either purchased or manufactured by the Company. Shunde No. 1 Lamp Factory
("Shunde") accounted for approximately 19% of the total products either
purchased or manufactured by the Company in 1997 and 21% in 1996 and Weing
Panasonic accounted for 13% and 5% of the same total in 1997 and 1996,
respectively. Purchases from the top five independent suppliers comprised 43%
and 42%, respectively, of the total of the products either purchased or
manufactured by the Company for fiscal 1997 and 1996. Other than Shunde and
Weing Panasonic, no independent supplier accounted for more than 10% of the
total of the products either purchased or manufactured by the Company in 1997.
On June 21, 1996, the Company entered into an agreement with Shunde
whereby Shunde agreed to manufacture lighting products for the Company to be
sold in North and South America and the European Community on an exclusive basis
for a three year period beginning October 1, 1996 in return for annual minimum
purchase requirements from the
Page 6
Company. The agreement is terminable if the Company does not meet its minimum
purchase requirements, at which time the exclusivity clause would cease.
However, no amounts would be due Shunde for failure to meet the purchase
requirements.
While the Company purchases its products from a small number of large
suppliers with whom it maintains close alliances, the same products could be
purchased from numerous other suppliers.
The continued importation of products from China and the Company's
business could be affected by any trade issues impacting U.S. - China relations.
On May 29, 1997, the President of the United States extended to the
People's Republic of China "Most Favored Nation" ("MFN") treatment for the entry
of goods into the United States for an additional year, beginning July 3, 1997.
In the context of United States tariff legislation, MFN treatment means that
products are subject to favorable duty rates upon entry into the United States.
On June 24, 1997 the House of Representatives supported the President's decision
and rejected a bill to impose trade sanctions against China due to alleged human
rights abuses. Members of Congress and the "human rights community" will
continue to monitor the human rights issues in China and adverse developments in
human rights and other trade issues in China could affect U.S. - China
relations. As a result of various political and trade disagreements between the
U.S. Government and China, it is possible restrictions could be placed on trade
with China in the future which could adversely impact the Company's operations
and financial position.
The Company obtained a political risk insurance policy issued by the
Multilateral Investment Guarantee Agency, a member of the World Bank Group, in
the amount of $14.4 million covering its purchase and expansion of SJE in China.
The contract is a long-term non-cancelable guarantee covering the risks of
expropriation and war and civil disturbance. The Company obtained guarantees to
cover existing assets of $11.0 million and stand-by guarantees of $3.4 million
on construction of its SJE facilities.
As a result of various political and trade disagreements between the
U.S. Government and China, it is possible restrictions could be placed on trade
with China in the future which could adversely impact the Company's operations.
In June 1997, the Company ceased manufacturing operations at Meridian
Lamps, Inc. ("Meridian"), a wholly-owned subsidiary with a manufacturing
facility located in Meridian, Mississippi, which commenced operations in late
December 1994. Meridian produced decorative table and floor lamps. The Meridian
facility consists of 123,000 square feet with both manufacturing and warehousing
capabilities. The Company leased the facility in June 1997. Meridian's
operations generated $2.8 million in net sales during fiscals 1997 and 1996.
COMPETITION
The Company's product lines span major segments within the lighting
industry and, accordingly, the Company's products compete in a number of
different markets with a number of different competitors. The Company competes
with other independent distributors, importers, manufacturers, and suppliers of
lighting fixtures and other consumer products. The lighting industry is highly
competitive. Other competitors market similar products that compete with the
Company on the basis of price. Some of these competitors do not maintain
warehouse operations or perform some of the services provided by the Company
which require the Company to charge higher prices. The relatively low barriers
to entry into the lighting industry and the limited proprietary nature of many
lighting products also permit new competitors to enter the industry easily. The
ability of the Company to compete successfully in this highly competitive market
depends upon its ability to manufacture and purchase quality products on
favorable terms, ensure its products meet safety standards, deliver the goods
promptly at competitive prices, and provide a wide range of services such as
electronic data interchange and customized products, packaging, and store
displays.
Page 7
INDEPENDENT SAFETY TESTING
As part of its marketing strategy, the Company voluntarily submits its
products to recognized product safety testing laboratories in countries in which
it markets its products. Such laboratories include Underwriters Laboratories
(UL) in the United States, Canadian Standards Association (CSA) in Canada,
Association Nacional de Normalizacion y Certification del Sector Electrico
(ANCE) in Mexico and various European electrical testing organizations. If the
product is acceptable, the laboratory issues a report which provides a technical
description of the product. It also provides the Company's suppliers with
procedures to follow in producing the products and periodically conducts
inspections at such suppliers' facilities for compliance. Electrical products
which are manufactured in accordance with safety certification marks are
generally recognized by consumers as safe products and such certification marks
are often required by various governmental authorities to comply with local
codes and ordinances. The Company does not anticipate any difficulty in
maintaining the right to use the listing marks of these laboratories.
PRODUCT LIABILITY
The Company is engaged in a business which could expose it to possible
claims for injury resulting from the failure of its products. While the Company
maintains $1 million in product liability insurance per occurrence, $2 million
in the aggregate, as well as a $25 million aggregate umbrella insurance policy
and $25 million excess umbrella insurance, there can be no assurance that claims
will not exceed available insurance coverage or that the Company will be able to
maintain the same level of insurance. See "Legal Proceedings".
TRADEMARKS AND PATENTS
On April 26, 1996, the Company entered into a license agreement with
Westinghouse Electric Corporation ("Westinghouse") 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 agreement
terminates on September 30, 2001. The Company has an option to extend the
agreement for an additional ten years. The royalty payments are due quarterly
and are based on a percent of the value of the Company's net shipments of
Westinghouse branded products, subject to annual minimum payments due. Either
party has the right to terminate the agreement during years three through five
of the agreement if the Company does not meet the minimum net shipments required
under the agreement. Net sales of Westinghouse branded products amounted to $9.0
million and $800,000 for the years ended September 30, 1997 and 1996,
respectively.
On December 17, 1996 White Consolidated Industries, Inc. ("White"),
which has acquired certain limited trademark rights from Westinghouse Electric
Corp. ("Westinghouse") to market certain household products under the
White-Westinghouse trademark, notified the Company of a lawsuit against
Westinghouse and the Company filed in the United States District Court, for the
Northern District of Ohio. The lawsuit challenged the Company's right to use the
Westinghouse trademarks on its lighting products and alleges trademark
infringement. On December 24, 1996, Westinghouse and the Company served a
Complaint and Motion for Preliminary Injunction against White, AB Electrolux,
Steel City Vacuum Co., Inc., Salton/Maxim Housewares, Inc., Newtech Electronics
Corp., and Windmere Durable Holdings, Inc. in the United States District Court,
Eastern District of Pennsylvania, Case No. 96-2294 alleging that the defendants
had violated Westinghouse's trademark rights, breached the Agreement between
Westinghouse and White and sought an injunction to enjoin White against
interference with their contractual arrangements. In October 1997, the cases
were consolidated in the Pennsylvania case and on November 7, 1997 White filed a
Counterclaim and Third Party Claims against Westinghouse, Catalina and Minami
International Corporation alleging trademark infringement, trademark dilution,
false designation of origin, false advertising and unfair competition and
seeking injunctive relief and damages. Both the Company and Westinghouse
vigorously dispute White's allegations. Pursuant to the License Agreement
between Westinghouse and the Company, Westinghouse is defending and indemnifying
the Company for all costs and expenses for claims, damages and losses, including
the costs of litigation. Discovery is proceeding and the case could be tried in
late 1998.
The Company's licensed brand, Westinghouse/Registered trademark/ and
the Company's own trademarks, Catalina/Registered trademark/, Dana/Registered
trademark/, Meridian Lamps/Registered trademark/ and Illuminada/Registered
trademark/ are registered in the United States, Canada and Mexico as well as in
numerous countries in the European Community and Asia. The Company is in the
process of registering its trademarks in Central and South America.
Page 8
EMPLOYEES
As of December 15, 1997 the Company employed approximately 225 people
in the United States, Canada and Mexico. The Hong Kong and China operations,
including Go-Gro's cooperative joint venture, employed approximately 3,000
people. None of the Company's employees are represented by a collective
bargaining unit and the Company believes that its relationships with its
employees are good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Please see Note 13 of Notes to Consolidated Financial Statements.
Page 9
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of December 15,
1997 with respect to the executive officers of the Company:
NAME AGE POSITION WITH THE COMPANY
- ------------------------ ------ ---------------------------------------------
Robert Hersh 51 Chairman, President,
Chief Executive Officer, Director
Dean S. Rappaport 45 Executive Vice President,
Chief Operating Officer, Director
William D. Stewart 49 Executive Vice President, Director
Nathan Katz 42 Executive Vice President
David W. Sasnett 41 Senior Vice President, Chief Financial
Officer, Chief Accounting Officer
Janet P. Ailstock 49 Vice President, General Counsel
Thomas M. Bluth 40 Vice President, Secretary, Treasurer
Wai Check Lau 50 President of Go-Gro Industries Limited
None of the Company's officers has any family relationship with any
director or other officer. "Family relationship" for this purpose means any
relationship by blood, marriage, or adoption, not more remote than first cousin.
ROBERT HERSH has been the President and Chief Executive Officer of the
Company since April 1991, Chairman of the Board since June 1991 and a Director
of the Company since April 1988. Mr. Hersh served as the Executive Vice
President of the Company from 1985 to April 1991 and as Secretary from June 1989
until June 1991.
DEAN S. RAPPAPORT has been Executive Vice President of the Company
since January 1988 and a Director of the Company since April 1988. From January
1988 to November 1996 Mr. Rappaport was Chief Financial Officer and Treasurer of
the Company. Mr. Rappaport was promoted to Chief Operating Officer of the
Company in November 1996. From 1984 until he joined the Company, Mr. Rappaport
was a partner with Wachsman & Rappaport, P.A., a public accounting firm located
in Margate, Florida.
WILLIAM D. STEWART has been Executive Vice President of the Company
since 1989, and a Director of the Company since April 1994. From 1985 until he
joined the Company, Mr. Stewart was an Executive Vice President of Crest
Industries, Inc., a distributor of home improvement products.
NATHAN KATZ has been Executive Vice President of the Company since
October 1, 1993 and Chief Executive Officer of Dana Lighting, Inc., a
wholly-owned subsidiary of the Company since August 1989. From October 1983 to
August 1989, Mr. Katz was the Chief Executive Officer of Dana Imports, Inc., an
importer of lamps located in Boston, Massachusetts.
DAVID W. SASNETT has been a Vice President of the Company since
November 1994. In November 1997, Mr. Sasnett became a Senior Vice President of
the Company. In November 1996, Mr. Sasnett became the Chief Financial Officer of
the Company. Prior to that time, he was the Company's Controller and Chief
Accounting Officer. From 1993 until he joined the Company, Mr. Sasnett was the
Vice President - Finance and Controller of Hamilton Bank, N.A. and from 1980 to
1993 was employed by the international accounting firm of Deloitte & Touche.
Page 10
JANET P. AILSTOCK has been Vice President and General Counsel for the
Company since April 1992. Prior to joining the Company, from 1986 to 1992 Ms.
Ailstock was associated with the law firm of Fine, Jacobson, Schwartz, Nash and
Block practicing in the area of securities and corporate law.
THOMAS M. BLUTH has been Vice President since August 1994 and Secretary
of the Company since November 1994. Mr. Bluth became Treasurer of the Company in
November 1996. From 1989 until he joined the Company, Mr. Bluth was Vice
President and General Counsel for Ellis Diversified, Inc. From 1987 to 1989, Mr.
Bluth was the Assistant Tax Director for Southwestern Bell Corporation.
WAI CHECK LAU was President of Go-Gro Industries Limited since 1985. On
December 4, 1997 Mr. Lau submitted his resignation from Go-Gro and the Company,
effective January 23, 1998.
Page 11
ITEM 2. PROPERTIES.
The following table sets forth details about the Company's offices,
manufacturing plants and warehouse facilities:
LEASED/
LOCATION FACILITY OWNED
- -------------------- ------------------------ -----------------
Miami, FL Headquarters/office owned (1)
Dallas, TX office/warehouse leased (2)
Tupelo, MS warehouse owned (1)
warehouse leased
Easton, MA office/warehouse leased
Meridian, MS manufacturing plant / owned (1) (4)
warehouse
Montreal, Canada office/warehouse leased
Mexico office leased
warehouse leased
Hong Kong office leased
China office/manufacturing leased
plants/warehouse
dormitories leased
manufacturing plant/ owned (3)
warehouse/dormitories
Taiwan office leased
- -------------------- ------------------------ -----------------
(1) Owned subject to a first mortgage.
(2) The Company has subleased all space under this lease to unrelated parties.
(3) This facility is owned by a joint venture in which the Company has a 70%
interest as to ownership of the facility. The joint venture purchased land
use rights which terminate in the year 2042.
(4) The Company has leased this facility to an unrelated party.
Additionally, the Company has a month-to-month lease agreement with a public
warehouse in California which provides handling services for the Company's
inventory.
All of the Company's properties are fully utilized with the exception of the
Dallas and the Meridian facilities, which have been fully subleased and leased,
respectively. All of the Company's properties are suitable for its operations,
with the exception of the Meridian facility, which the Company ultimately
expects to sell.
Page 12
ITEM 3. LEGAL PROCEEDINGS.
On June 4, 1991, the Company was served with a copy of the Complaint in
the matter of Browder vs. Catalina Lighting, Inc., Robert Hersh, Dean S.
Rappaport and Henry Gayer, Case No. 91-23683, in the Circuit Court of the 11th
Judicial Circuit in and for Dade County, Florida. The plaintiff in the action,
the former President and Chief Executive Officer of the Company, contended that
his employment was wrongfully terminated and as such brought action for breach
of contract, defamation, slander, libel and intentional interference with
business and contractual relationships, including claims for damages in excess
of $5 million against the Company and $3 million against the named directors.
During the course of the litigation the Company prevailed on its Motions for
Summary Judgment and the Court dismissed the plaintiff's claims of libel and
indemnification. On February 3, 1997, the plaintiff voluntarily dismissed the
remaining defamation claims against the Company and Directors. The breach of
contract claim was tried in February, 1997 and the jury returned a verdict
against the Company for total damages of $2.4 million (including prejudgment
interest). On July 14, 1997, the Court also granted plaintiff's motion for
attorney fees and costs of $1.9 million. A provision of $4.3 million was
recorded by the Company during the quarter ended March 31, 1997 and a $258,000
provision for post-judgment interest was recorded through September 30, 1997.
The Company plans to appeal the verdict and attorney fee award.
On February 23, 1993, Dana Lighting (now Catalina Industries, Inc.), a
subsidiary of the Company, and Nathan Katz, President of Dana, were served with
a copy of the Complaint in a matter captioned Holmes Products Corp. vs. Dana
Lighting, Inc. and Nathan Katz, Case No. 93-0249 in the Superior Court of the
Commonwealth of Massachusetts, City of Worcester, Massachusetts. The plaintiff
in the action alleges that Dana Lighting engaged in acts constituting tortuous
interference with contractual actions, interference with prospective economic
relationship with plaintiff's supplier and unfair competition. Plaintiff seeks
injunctive relief and damages in excess of $10 million. Dana filed its Answer to
the Complaint on March 15, 1993 denying all allegations, and Plaintiff's request
for a temporary restraining order was denied by the Court. The supplier and
Dana's President have filed affidavits with the Court denying that Dana engaged
in such acts. In July 1994, Holmes Products Corp. amended the Complaint to
include allegations of a violation of civil RICO and a violation of the Federal
Antitrust laws. On July 22, 1994, Dana Lighting removed the case from State
Court to the United States District Court for the District Court of
Massachusetts. On March 19, 1997, the Court granted Dana's motion for summary
judgment and dismissed the claims against the Company regarding violation of
civil RICO, Federal Antitrust and State unfair competition. Subsequently, the
Federal Court remanded the counts alleging interference with contractual
relations and prospective business relations to the Massachusetts Superior
Court, City of Worcester. Plaintiff has filed an appeal of the Federal Court's
dismissal of the state unfair competition and unjust enrichment claims with the
federal appeals court. Management believes that the Complaint is totally without
merit and disputes that any of the alleged acts or damages occurred or that Dana
is liable in any matter. The Company intends to defend this case vigorously and
the outcome of this case cannot presently be determined. No provision for any
liability that may result from this litigation has been recorded in the
accompanying consolidated financial statements.
On December 17, 1996 White Consolidated Industries, Inc. ("White"),
which has acquired certain limited trademark rights from Westinghouse Electric
Corp. ("Westinghouse") to market certain household products under the
White-Westinghouse trademark, notified the Company of a lawsuit against
Westinghouse and the Company filed in the United States District Court, for the
Northern District of Ohio. The lawsuit challenged the Company's right to use the
Westinghouse trademarks on its lighting products and alleges trademark
infringement. On December 24, 1996, Westinghouse and the Company served a
Complaint and Motion for Preliminary Injunction against White, AB Electrolux,
Steel City Vacuum Co., Inc., Salton/Maxim Housewares, Inc., Newtech Electronics
Corp., and Windmere Durable Holdings, Inc. in the United States District Court,
Eastern District of Pennsylvania, Case No. 96-2294 alleging that the defendants
had violated Westinghouse's trademark rights, breached the Agreement between
Westinghouse and White and sought an injunction to enjoin White against
interference with their contractual arrangements. In October 1997, the cases
were consolidated in the Pennsylvania case and on November 7, 1997 White filed a
Counterclaim and Third Party Claims against Westinghouse, Catalina and Minami
International Corporation alleging trademark infringement, trademark dilution,
false designation of origin, false advertising and unfair competition and
seeking injunctive relief and damages. Both the Company and Westinghouse
vigorously dispute White's allegations. Pursuant to the License Agreement
between Westinghouse and the Company, Westinghouse is defending and indemnifying
the Company for all costs and expenses for claims, damages and losses, including
the costs of litigation. Discovery is proceeding and the case could be tried in
late 1998.
The Company has recently received a number of claims relating to
halogen torchieres sold by the Company to various retailers. While the Company
is still in the process of evaluating these claims, management does not
currently believe they will result in material uninsured liability to the
Company. See "Product Liability."
The Company is also a defendant in other legal proceedings arising in
the course of business. In the opinion of management the ultimate resolution of
these other legal proceedings will not have a material adverse effect on the
financial position or annual results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended September 30, 1997, no matters were submitted
for a vote of the Company's stockholders.
Page 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded on the New York Stock Exchange
under the symbol LTG. The following table sets forth, for the periods indicated,
the high and low closing prices of the common stock as reported by the New York
Stock Exchange.
High Low
Fiscal Year Ended September 30, 1996
First Quarter 5 3/8 3 5/8
Second Quarter 6 3/4 4 3/4
Third Quarter 7 1/8 5 3/8
Fourth Quarter 5 3/4 3 1/2
Fiscal Year Ended September 30, 1997
First Quarter 5 1/4 3 3/4
Second Quarter 5 1/2 3 5/8
Third Quarter 4 1/8 3
Fourth Quarter 6 7/16 3 7/8
On December 15, 1997, the closing price of the Company's common stock
as reported on the New York Stock Exchange was $5 3/8. As of December 15, 1997,
there were 161 holders of record of the Company's common stock, several of which
are brokerage firms which hold shares in street name on behalf of their clients
and whose holdings comprise a majority of the Company's outstanding shares.
The Company has never paid cash dividends on its common stock. The
Company intends to retain future earnings, if any, to finance the expansion of
its business and does not anticipate that any cash dividends will be paid in the
foreseeable future. In addition, the terms of the Company's domestic credit
facility and convertible subordinated notes prohibit the payment of any cash
dividends or other distribution on any shares of the Company's common stock,
other than dividends payable solely in shares of common stock, unless approval
is obtained from the lenders. Future dividend policy will depend on the
Company's earnings, capital and financing requirements, expansion plans,
financial condition and other relevant factors.
Page 14
ITEM 6. SELECTED FINANCIAL DATA.
(in thousands, except per share data)
AT OR FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------
1997 (1) 1996 1995 (2) 1994 (3) 1993
--------- --------- --------- --------- ---------
Net sales $ 196,955 $ 184,630 $ 176,292 $ 142,123 $ 112,791
Net income (loss) $ (3,093) $ 1,603 $ 400 $ 5,510 $ 4,404
Primary earnings (loss) per share $ (0.44) $ 0.21 $ 0.05 $ 0.75 $ 0.69
Fully diluted earnings (loss) per share $ (0.44) $ 0.21 $ 0.05 $ 0.74 $ 0.65
Total assets $ 116,581 $ 117,462 $ 120,051 $ 101,428 $ 65,904
Long-term borrowings $ 39,737 $ 36,571 $ 46,299 $ 30,068 $ 20,316
Certain amounts presented above for prior years have been reclassified to
conform to the current year's presentation. No cash dividends were declared
during the five year period ended September 30, 1997.
(1) Includes $930,000 in plant closing costs due to the termination of
manufacturing operations at Meridian and $7.5 million in litigation
costs and related professional fees.
(2) Includes operating results for Meridian from December 15, 1994 to
September 30, 1995.
(3) Includes assets and liabilities acquired upon the acquisition of Go-Gro
on July 30, 1994 and the operating results for Go-Gro for the period
July 31, 1994 to September 30, 1994.
Page 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, including without limitation
expectations as to future sales and profitability, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company and its subsidiaries to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
but are not limited to, the following: the highly competitive nature of the
lighting industry; reliance on certain key customers; consumer demand for
lighting products; dependence on imports from China; general economic and
business conditions; operating costs; advertising and promotional efforts; brand
awareness; the existence or absence of adverse publicity; acceptance of new
product offerings; changing trends in customer tastes; changes in business
strategy; availability, terms and deployment of capital; availability and cost
of raw materials and supplies; the costs and other effects of legal and
administrative proceedings; and other factors referenced in this Form 10-K. The
Company will not undertake and specifically declines any obligation to update or
correct any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
The Company's fiscal years ended September 30, 1997, 1996 and 1995 are
referred to herein as "1997", "1996" and "1995", respectively.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
relationship to net sales of amounts presented in the Company's consolidated
statements of operations.
YEARS ENDED
SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- -------- --------
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 83.5 83.2 84.1
--------- -------- --------
Gross proft 16.5 16.8 15.9
Selling, general and
administrative expenses 13.1 13.7 13.6
Plant closing costs 0.5 - -
Litigation charges and related
professional fees 3.8 0.2 -
--------- -------- --------
Operating income (loss) (0.9) 2.9 2.3
Interest expense (2.1) (1.8) (2.0)
Other income - 0.2 0.2
--------- -------- --------
Income (loss) before income taxes (3.0) 1.3 0.5
Income tax benefit (provision) 1.4 (0.5) (0.3)
--------- -------- --------
Net income (loss) (1.6) % 0.8 % 0.2 %
========= ======== ========
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Net sales and gross profit for 1997 were $197 million and $32.5
million, respectively, as compared to $184.6 million and $30.9 million,
respectively, for 1996. The Company incurred a net loss of $3.1 million ($.44
per share) in 1997 due to plant closing costs and litigation costs, as compared
to net income of $1.6 million ($.21 per share) in 1996.
Net sales increased by $12.3 million from the prior year due to an
increase in units sold. The increase in sales reflects the benefits of the
Company's strategy to strengthen its relationships with certain major U.S. and
European retailers. Lamp sales increased by $10.7 million and net sales for the
Company's other principal line of products, lighting fixtures, increased by $1.6
million. Lamps and lighting fixtures accounted for 67% and 33%, respectively, of
net sales in 1997 as compared to 66% and 34%, respectively, in 1996. In 1997 and
1996, Home Depot accounted for 22.1% and 9.8%, respectively, of the Company's
net sales. In 1996, Builders Square and its affiliate Kmart accounted for 11% of
net sales. In 1997, the respective percentages of net sales represented by Kmart
and Builders Square (which were no longer affiliates at September 30, 1997) were
7.1% and 4.6%. For the fiscal years ended September 30, 1997 and 1996, net sales
to the Company's ten largest customers represented approximately 63% and 57%,
respectively, of the Company's total revenues.
During the two months subsequent to September 30, 1997 the Company
experienced a decline in net sales of approximately $10 million as compared to
the same period of the prior year. Approximately $3 million of this decline is
attributable to a decrease in unit sales of one product class, halogen
torchieres (gross sales of halogen torchieres were $36.2 million and $33.1
million for the 1997 and 1996 fiscal years respectively). The sales decline for
the halogen torchieres occurred after media attention focused on incidents of
fire associated with this product. Current versions of the halogen torchiere
sold by the Company incorporate new safety devices exceeding the new safety
requirements for this product recently promulgated by Underwriters Laboratory.
During fiscal 1998 the Company expects to introduce new versions of the
torchiere incorporating new technologies to address the declining sales of this
product category. However, there can be no assurance these versions will be as
successful as the previous models and torchiere sales for the balance of 1998
are not expected to equal 1997 sales levels. Another $1.7 million of the decline
related to sales of products which have been discontinued. Management believes
the remainder of the $10 million sales decrease is due to a variety of factors
including the consolidation of the customer base, delayed new product placement
in Europe and the purchasing patterns of the Company's customers in general,
which can vary from quarter to quarter. The Company estimates net sales for the
quarter ending December 31, 1997 will be approximately $10 million less than the
same quarter of the prior year due to these factors. Sales during the early
portion of the 1998 calendar year could continue to be affected by these
factors, however management believes these factors (other than torchiere sales)
should not significantly impact overall sales for the second half of fiscal
1998.
Page 16
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996 (CONTINUED)
Gross profit increased by $1.5 million in 1997 due to added sales
volume but decreased as a percentage of net sales from 16.8% to 16.5%. Certain
major domestic retailers accounted for a larger percentage of the Company's
sales in 1997 than 1996 due to the Company's sales focus on these major
retailers and the consolidation of the customer base. Many of these major
retailers (most notably Home Depot and Kmart) are currently purchasing from the
Company primarily on a direct basis, whereby the merchandise is shipped directly
from the factory to the customer, rather than from the Company's warehouses.
Approximately 61% of the Company's sales in 1997 were made on a direct basis,
whereby the merchandise is shipped directly from the factory to the customer, as
compared to 52% in 1996. Sales made by the Company on a direct basis typically
generate lower margins than sales from the Company's warehouses, and the higher
relative proportion of direct sales was a contributing factor to the decline in
the gross profit percentage. The relative proportion of the Company's sales made
on a direct basis is dependent upon customer buying preferences, which are
influenced by a number of factors that vary from customer to customer and are
subject to change and thus cause the Company's gross margin percentage to be
inherently difficult to predict. Nevertheless the Company believes that the
majority of any future sales growth will be comprised of direct sales made to
the Company's larger customers. The lower gross profit percentage for 1997 also
reflects an $870,000 provision for discontinued inventory resulting from
management's decision to cease operations at its Meridian factory (see separate
discussion below). The impact of these factors lowering the gross profit
percentage was partially offset by lower provisions for sales incentives as a
percentage of sales, stemming from favorable incentive experience and a decrease
in purchasing and warehousing costs as a result of the consolidation of the
Company's warehousing operations during fiscal 1996.
Selling, general and administrative expenses ("SG&A") were 13.1% of
sales in 1997 compared to 13.7% in 1996. The decrease in these expenses as a
percentage of net sales is attributable to higher sales. SG&A increased by
$628,000 from 1996 due to additional costs incurred in the Orient to support the
Company's growth and restructuring of operations ($881,000), U.S. personnel
costs ($644,000) and an increase in consulting and professional fees due to
costs incurred to set up the Company's new computer system and introduce
Westinghouse brand name products ($580,000). These increases were partially
offset by lower depreciation expense ($600,000) principally attributable to the
accelerated depreciation in the prior year of the Company's previous computer
system, lower merchandising and display costs ($268,000), and lower costs
incurred at the Meridian facility ($594,000) as a result of the decision to
cease Meridian's operations.
Litigation charges and related professional fees aggregated $7.5
million and represent the amount provided for an adverse jury verdict (currently
under appeal) of $4.3 million on litigation with the Company's former Chief
Executive Officer, a payment of $1,000,000 to settle patent litigation, and the
related professional fees of $2.2 million incurred for these matters (see Note
15 of Notes to Consolidated Financial Statements).
Interest expense increased from $3.3 million in 1996 to $4.1 million in
1997 due to increased borrowings to finance capital expenditures and a $258,000
provision for interest related to the $4.3 million adverse jury verdict.
Other income of $385,000 in 1996 consisted primarily of gains on the
sale of intangible assets and investment income.
Effective income tax rates for 1997 and 1996 were 46.9% and 34.6%,
respectively. The higher effective tax rate for 1997 is attributable to the
combination of (1) foreign pretax income, which is taxed at a significantly
lower rate than U.S. income, and (2) a pretax loss for U.S. operations, on which
the Company recorded a tax benefit at the applicable U.S. rates. The Company's
effective income tax rate is dependent both on the total amount of pretax income
generated and the relative distribution of such total income between domestic
and foreign operations. Consequently, the Company's effective tax rate may vary
in future periods.
MERIDIAN
In March 1997, the Company committed to a plan to cease manufacturing
operations and close its Meridian Lamps, Inc. ("Meridian") facility by September
30, 1997. The pretax loss for Meridian was $3.5 million for 1997 and $2.4
million for 1996. Net sales were $2.8 million for both years.
Page 17
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Cost of sales in 1997 was $4.7 million and exceeded sales by $1.9
million. Gross profit during 1997 was adversely affected by a provision for
discontinued inventory amounting to $870,000 as a result of management's
decision to cease operations at Meridian and significant underutilization of
plant capacity due to insufficient sales volume resulting in negative
manufacturing variances.
Cost of sales exceeded sales by $1.2 million in 1996 mainly due to
negative unplanned manufacturing variances arising principally from
underutilization of plant capacity, a provision for inventory, research and
development costs and additional storage expenses.
In 1997, in conjunction with the decision to cease Meridian's
operations, the Company recorded a $930,000 charge to write down the plant and
related equipment to fair market value (less disposition costs) and to provide
for severance payments to Meridian's employees.
Other expenses for Meridian in 1997 and 1996 were $703,000 and
$1,184,000, respectively, consisting mostly of administrative payroll and
benefits, marketing and merchandising expenses, interest expense and the
amortization of start up costs in 1996.
As of June 30, 1997, the Company had ceased operations at Meridian and
subleased the facility.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Net sales and gross profit for 1996 were $184.6 million and $30.9
million, respectively, as compared to $176.3 million and $27.9 million,
respectively, for 1995. The Company generated net income of $1.6 million ($.21
per share) in 1996 as compared to net income of $400,000 ($.05 per share) in
1995, as the pretax operating results of the Company's Hong Kong manufacturing
subsidiary (Go-Gro) improved significantly.
In 1996, Kmart accounted for 3.9% of the Company's net sales while its
affiliate, Builders Square, accounted for 7.1% of net sales. In 1995, the
respective percentages of net sales for Kmart and Builders Square were 5.9% and
6.9%. For the fiscal years ended September 30, 1996 and 1995, net sales to the
Company's ten largest customers represented approximately 57% and 53%,
respectively, of the Company's net sales.
DISTRIBUTION OPERATIONS
Distribution operations contributed pretax income of approximately $3.3
million in 1996 and $3.2 million in 1995.
Net sales from distribution operations aggregated $153.8 million in
1996, as compared to $148.3 million in 1995. The $5.5 million increase in net
sales reflects additional sales in Canada of $3 million. An increase in gross
sales was partially offset by an increase in provisions for sales incentives of
$3.4 million resulting from competitive pressures. Sales of lamps increased by a
total of $13.5 million reflecting increased unit sales. Sales of lamps accounted
for 64% of sales in 1996 compared to 58% in 1995. The Company's net sales for
its other principal line of products, lighting fixtures, decreased by $8 million
or 12.8% from 1995 to 1996. Management attributes this decline to a weakened
customer base arising from the financial difficulties experienced by several of
the Company's more significant customers for lighting fixtures.
Gross profit from distribution operations increased to $23.9 million in
1996 from $22.9 million in 1995. As a percentage of net sales, gross profit from
distribution operations was 15.5% and 15.4% for 1996 and 1995, respectively. The
$1 million increase in gross profit is attributable for the most part to the
incremental contribution of higher sales. The gross profit percentage for 1996
reflects higher margins on sales of new products and higher margins on warehouse
sales, which offset the impact on the gross profit percentage of the higher
proportion of total distribution sales represented by direct sales (which are
made at lower margins than warehouse sales of the same items) and the increase
in provisions for sales incentives. Warehouse sales decreased to comprise 54% of
distribution sales in 1996, as compared to 61% in 1995.
Page 18
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
Selling, general and administrative expenses ("SG&A") for distribution
operations amounted to $18.3 million in 1996, as compared to $17.7 million in
1995. The added SG&A is comprised of increases in depreciation and amortization
of property and equipment ($472,000) as the Company accelerated the amortization
of its computer system in connection with the planned purchase of a new system
in 1997, expenses related to Mexican operations which commenced during fiscal
1996 ($275,000) and factoring costs related to the insurance of additional
customer accounts ($181,000). These increases were offset by a reduction in the
amortization of deferred costs of $214,000.
Interest expense on distribution-related financing rose to $2.3 million
in 1996 from $2.1 million in 1995 primarily due to additional average
outstanding borrowings.
MANUFACTURING OPERATIONS
Excluding certain administrative costs incurred at the corporate
headquarters, in 1996 the Company's foreign and domestic manufacturing
operations recorded a pretax loss of $867,000. This compares to a pretax loss
from manufacturing operations of $2.4 million in 1995. An analysis of the
results for the Company's two manufacturing subsidiaries is as follows:
Go-Gro:
Go-Gro generated $1.6 million in pretax income in 1996 while reporting
a pretax loss of $600,000 in 1995. Sales by Go-Gro to non-related companies
primarily located in Europe, increased by $2.4 million, or 9%, in 1996 to $28
million. Go-Gro also recorded intercompany sales to the Company and its
subsidiaries (which are eliminated for financial statement purposes and the
profit on such sales deferred until the goods are sold to third parties) of
$25.3 million in 1996 and $17.3 million in 1995. Gross profit increased in total
dollars in 1996 by $2.3 million to $8.3 million as a result of the overall
increase in shipments.
SG&A was $6.3 million for 1996, up $735,000 from 1995 mostly due to
added payroll and benefits related to new employees hired to pursue additional
sales in the European market and to support the increased sales volume. Interest
expense declined in 1996 by $424,000 due to lower outstanding borrowings while
other income increased by $129,000, mostly reflecting the sale of intangibles
and increased income from an investee.
Meridian:
Meridian's pretax loss of $1.8 million for 1995 is not comparable to
the pretax loss of $2.4 million for 1996 as Meridian did not commence operations
until mid December 1994. Net sales for Meridian were $2.8 million in 1996 and
$2.3 million in 1995. An additional $500,000 in Meridian product was sold in
1995 through the Company's distribution operations.
Cost of sales for 1996 was $4 million. The following factors increased
costs of sales during 1996:
(1) a sales volume insufficient to avoid significant underutilization of
plant capacity (the plant operated at approximately 50% of capacity),
resulting in negative manufacturing variances;
(2) unit production that has exceeded unit sales to date, resulting in
additional storage expenses and a provision for excess inventory;
(3) costs required to develop new products.
Cost of sales exceeded sales in 1995 by $870,000 due entirely to
manufacturing inefficiencies related to the start up nature of Meridian's
operations during this period.
Meridian's remaining expenses for 1996 increased by $244,000 from 1995
as Meridian was operational for twelve months in 1996 as compared to only nine
months in 1995.
Page 19
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAX PROVISION
The effective income tax rates for 1996 and 1995 were 34.6% and 51.9%,
respectively. The decrease in the effective rate from 1995 is mostly
attributable to higher proportionate foreign income which is taxed at a lower
rate than U.S. income. The high effective tax rate for 1995 reflects the impact
on pretax income of amounts expensed by the Company for financial statement
purposes which are not deductible for tax purposes (consisting primarily of
goodwill amortization and interest incurred by certain foreign subsidiaries),
which have the effect of increasing the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its short-term liquidity needs through cash provided
by operations, accounts payable, borrowings under various credit facilities with
banks, and the use of letters of credit from customers to fund certain of its
direct sales activities. Lease obligations, mortgage notes, convertible
subordinated notes, bonds and capital stock are additional sources for the
longer-term liquidity and financing needs of the Company. Management believes
the Company's available sources of cash will enable it to fulfill its known
liquidity requirements for the foreseeable future.
1997 CASH FLOWS
The Company's operating, investing and financing activities resulted in
a net increase in cash and cash equivalents of $81,000 from September 30, 1996
to September 30, 1997.
Net cash of $6.2 million was provided by operating activities. Such
cash combined with an increase in outstanding borrowings under the credit lines,
was used to pay for certain capital expenditures and to make a $1.5 million
escrow payment on the Meridian bonds.
Capital expenditures during the year included $6.5 million in costs
incurred by Go-Gro for the construction of a China factory and dormitory and the
purchase of machinery, molds and equipment, $623,000 for the purchase of
computer hardware and software, $325,000 for merchandising products and $320,000
for leasehold improvements. In addition, machinery for the Go-Gro factory
amounting to $669,000 was acquired and financed by one of the Company's leasing
facilities.
Management estimates that capital expenditures in fiscal 1998 will
approximate $3.3 million, representing additional construction costs and
equipment for the China facilities, computer software and hardware and other
miscellaneous capital additions. These capital expenditures will be financed by
leasing facilities with financial institutions and funds from operations.
CREDIT AND LEASING FACILITIES, BONDS, MORTGAGE AND CONVERTIBLE SUBORDINATED
NOTES
The Company has a $65 million credit facility with a group of
commercial banks. This facility provides credit in the form of a $7.6 million
non-revolving loan and $57.4 million in revolving loans, acceptances, and trade
and stand-by letters of credit, matures March 31, 1999 and provides for
quarterly principal payments of $950,000 which commenced on June 1, 1997 on the
non-revolving loan. As the non-revolving loan is reduced, the remaining credit
facility is increased by a similar amount. The non-revolving loan bears
interest, payable monthly, at prime plus 1% and other borrowings under the
facility bear interest, payable monthly, at the Company's preference of either
the prime rate or the LIBOR rate plus a variable spread based upon earnings,
debt and interest expense levels defined under the credit agreement (LIBOR plus
2.5% at September 30, 1997). The effective rates for the non-revolving loan and
the other borrowings were 9.5% and 8.2%, respectively, at September 30, 1997.
Obligations under this facility are secured by substantially all of the
Company's U.S. assets. The Company is required to comply with various covenants
in connection with this facility and borrowings are subject to a borrowing base
calculated from U.S. receivables and inventory. In addition, the agreement
prohibits the payment of any cash dividends or other distribution on any shares
of the Company's common stock, other than dividends payable solely in shares of
common stock, unless approval is obtained from the lenders. At September 30,
1997, the Company had used $33.6 million under this credit facility (loans
amounted to $24.8 million of which $3.8 million was included in current notes
payable-credit lines) and $3.5 million was available for additional borrowings
under the borrowing base calculation.
Page 20
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CREDIT AND LEASING FACILITIES, BONDS, MORTGAGE AND CONVERTIBLE SUBORDINATED
NOTES (CONTINUED)
The Company's Canadian and Hong Kong subsidiaries have credit
facilities with foreign banks of 4 million Canadian dollars (approximately U.S.
$2.9 million) and 35 million Hong Kong dollars (approximately U.S. $4.5
million), respectively. Borrowings under the Canadian facility are secured by
substantially all of the assets of the Canadian subsidiary and are limited under
a borrowing base defined as the aggregate of certain percentages of accounts
receivable and inventory. Advances bear interest at the Canadian prime rate plus
.5% (5.25% at September 30, 1997). At September 30, 1997, borrowings amounted to
U.S. $1.8 million (included in current notes payable-credit lines) and U.S.
$445,000 was available for additional borrowings under the borrowing base
calculation. The Hong Kong facility provides credit in the form of acceptances,
trade and stand-by letters of credit, overdraft protection and negotiation of
discrepant documents presented under export letters of credit issued by banks.
Advances bear interest at the Hong Kong prime rate plus .25% (9% at September
30, 1997). Each of these credit facilities are payable upon demand and are
subject to annual reviews by the banks. At September 30, 1997, there were no
borrowings under this facility and U.S. $3.5 million was available for
borrowings. With respect to the Canadian facility, the agreement prohibits the
payment of dividends and the Company is required to comply with various
covenants, which effectively restrict the amount of funds which may be
transferred from the Canadian subsidiary to the Company. The Hong Kong facility
limits dividends that may be paid to the Company but does not limit advances or
loans from Go-Gro to the Company.
The Company has outstanding $7.6 million of 8% convertible subordinated
notes due March 15, 2002. The notes are convertible into common shares of the
Company's stock at a conversion price of $7.31 per share, subject to certain
anti-dilution adjustments (as defined in the Note Agreement), at any time prior
to maturity. The notes are subordinated in right of payment to all existing and
future senior indebtedness of the Company and the notes are callable at the
option of the Company with certain required premium payments. Principal payments
of approximately $2.5 million are required on March 15 in each of the years 2000
and 2001. The remaining outstanding principal and interest is due in full on
March 15, 2002. Interest is payable semiannually. The terms of the Note
Agreement require the Company to maintain specific interest coverage ratio
levels in order to increase its credit facilities or otherwise incur new debt
and to maintain a minimum consolidated net worth. In addition, the Note
Agreement prohibits the declaration or payment of dividends on any shares of the
Company's capital stock, except dividends or other distributions payable solely
in shares of the Company's common stock, and the purchase or retirement of any
shares of capital stock or other capital distributions.
The Company arranged for the issuance in 1995 of $10.5 million in State
of Mississippi Variable Rate Industrial Revenue Development Bonds to finance
(along with internally generated cash flow and the Company's $1 million leasing
facility) its warehouse located near Tupelo, Mississippi. The bonds have a
stated maturity of May 1, 2010 and require mandatory sinking fund redemption
payments, payable monthly, of $900,000 per year from 1996 to 2002, $600,000 per
year in 2003 and 2004, and $500,000 per year from 2005 to 2010. The bonds bear
interest at a variable rate (5.7% at September 30, 1997) that is adjustable
weekly to the rate the remarketing agent for the bonds deems to be the market
rate for such bonds. The bonds are secured by a lien on the land, building, and
all other property financed by the bonds. Additional security is provided by an
$8.9 million direct pay letter of credit which is not part of the Company's
credit line.
The Company financed the purchase and improvements of its Meridian
manufacturing facility through the issuance of a series of State of Mississippi
General Obligation Bonds (Mississippi Small Enterprise Development Finance Act
Issue, 1994 Series GG) with an aggregate available principal balance of
$1,605,000, a weighted average coupon rate of 6.23% and a contractual maturity
of November 1, 2009. The bonds are secured by a first mortgage on land, building
and improvements and a $1,713,000 standby letter of credit which is not part of
the Company's credit line. Interest on the bonds is payable semiannually and
principal payments are due annually. In June 1997, the Company ceased
manufacturing operations at Meridian and leased the facility to a
non-manufacturing entity and in August 1997 made a $1.5 million payment to
escrow on the bonds. The Company plans to redeem the bonds at their earliest
redemption date, approximately November 1, 1999.
The Company has a $1 million facility with a U.S. financial institution
to finance the purchase of equipment in the United States, of which $599,000 was
available at September 30, 1997. In addition, the Company has a leasing facility
for $9 million Hong Kong dollars (approximately U.S. $1.2 million) with a Hong
Kong financial institution to finance the purchase of equipment for its China
facilities of which $494,000 was available at September 30, 1997.
The Company financed its corporate headquarters in Miami, Florida with
a loan payable monthly through 1999, based on a 15 year amortization schedule,
with a balloon payment in 1999, bearing interest at 8% and secured by a mortgage
on the land and building.
Page 21
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER
Shenzhen Jiadianbao Electrical Products Co., Ltd. ("SJE"), a
cooperative joint venture subsidiary of Go-Gro, and the Bureau of National Land
Planning Bao-An Branch of Shenzhen City entered into a Land Use Agreement
covering approximately 467,300 square feet in Bao-An County, Shenzhen City,
People's Republic of China on April 11, 1995. The agreement provides SJE with
the right to use the above land until January 18, 2042. The land use rights are
non-transferable. Under the terms of the SJE joint venture agreement, ownership
of the land and buildings of SJE is divided 70% to Go-Gro and 30% to the other
joint venture partner. Land costs, including the land use rights, approximated
$2.6 million of which Go-Gro has paid its 70% proportionate share of $1.8
million.
Under the terms of this agreement, as amended, SJE is obligated to
construct approximately 500,000 square feet of factory buildings and 211,000
square feet of dormitories and offices, with 40 percent of the construction
required to be completed by April 1, 1997 (and was completed) and the remainder
by December 31, 1999. The total cost for this project is estimated at $15.5
million (of which $10.3 million had been expended as of September 30, 1997) and
includes approximately $1 million for a Municipal Coordination Facilities Fee
(MCFF). The MCFF is based upon the square footage to be constructed. The
agreement calls for the MCFF to be paid in installments beginning in January
1997 and continuing through June 1998, with 46% of the total fee due by
September 1997. A 162,000 square foot factory, a 77,000 square foot warehouse
and a 60,000 square foot dormitory were completed in April 1997 and became fully
operational in June 1997.
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 agreement terminates on
September 30, 2001. Catalina has an option to extend the agreement for an
additional ten years. The royalty payments are due quarterly and are based on a
percent of the value of the Company's net shipments of Westinghouse branded
products, subject to annual minimum payments due. Either party has the right to
terminate the agreement during years three through five of the agreement if the
Company does not meet the minimum net shipments required under the agreement.
See also Item 1, "Trademarks and Patents".
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations. The Company is in the process of identifying and
assessing the systems that could be affected by the Year 2000 Issue and is
developing an implementation plan to resolve the issue. The Company expects to
complete the assessment, formalize its plan for corrective action, and estimate
the potential incremental costs required to address this issue by December 1998.
The Company presently believes that, with modifications to existing software and
conversions to new software, the Year 2000 problem will not pose significant
operational problems for the Company's computer systems as so modified and
converted.
RENEWAL OF CHINA'S MOST FAVORED NATION STATUS
The continued importation into the U.S. of products manufactured in
China could be affected by any one of several significant trade issues that
presently impact U.S. - China relations. On May 29, 1997, the President of the
United States extended to the People's Republic of China "Most Favored Nation"
("MFN") treatment for the entry of goods into the United States for an
additional year, beginning July 3, 1997. In the context of United States tariff
legislation, MFN treatment means that products are subject to favorable duty
rates upon entry into the United States. On June 24, 1997 the House of
Representatives supported the President's decision and rejected a bill to impose
trade sanctions against China due to alleged human rights abuses. Members of
Congress and the "human rights community" will continue to monitor the human
rights issues in China and adverse developments in human rights and other trade
issues in China could affect U.S. - China relations. As a result of various
political and trade disagreements between the U.S. Government and China, it is
possible restrictions could be placed on trade with China in the future which
could adversely impact the Company's operations and financial position.
Page 22
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
FOREIGN EXCHANGE FLUCTUATIONS
The Company expects to continue to obtain most of its products from
China. Large fluctuations in currency exchange rates could have a material
effect on the Company's cost of products, thereby decreasing the Company's
ability to compete. All purchases of finished goods are made in U.S.
dollar-denominated letters of credit which limit the Company's exposure to
foreign currency fluctuations with respect to fluctuations that would impact
existing outstanding purchase commitments. However, the Company is subject to
foreign currency fluctuations to the extent such fluctuations affect the cost of
products purchased (or manufactured) or the Company's ability to sell into
domestic or foreign markets. The Company's Canadian and Mexican subsidiaries are
subject to fluctuations between the U.S. dollar currency in which they purchase
goods and the Canadian dollar and Mexican peso currencies in which they sell
goods, however the Company's foreign exchange risk is not significant with
respect to Canada and Mexico due to the relative size of these subsidiaries in
comparison with the Company.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Number 128 "Earnings per Share"
("SFAS 128") which changes the method of calculating earnings per share. SFAS
128 requires the presentation of "basic" earnings per share and "diluted"
earnings per share on the face of the income statement. Basic earnings per share
is computed by dividing the net income or loss attributable to common
shareholders by the weighted average common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted earnings per share is computed similarly
to fully diluted earnings per share under APB Opinion No. 15. SFAS 128 is
effective for financial statements for periods ending after December 15, 1997.
The Company will adopt SFAS 128 in the first quarter of the fiscal year ending
September 30, 1998, as early adoption is not permitted. Upon adoption, earnings
per share data for prior periods are required to be restated. The pro forma
basic earnings (loss) per share and diluted earnings (loss) per share calculated
in accordance with SFAS 128 for the years ended September 30, 1997, 1996 and
1995 are as follows:
YEARS ENDED
SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- -------- --------
Pro Forma Basic Earnings (Loss) Per Share $ (0.44) $ 0.23 $ 0.06
Pro Forma Diluted Earnings (Loss) Per Share $ (0.44) $ 0.21 $ 0.05
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was
issued. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that a company (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. The Company has not determined the effect, if any, that SFAS No. 130
will have on its consolidated financial statements.
Page 23
CATALINA LIGHTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was also issued in June 1997. SFAS No. 131 establishes standards
for the way that public companies report selected information about operating
segments in financial statements and requires that those companies report
selected information about segments in interim and annual financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No.
131, which supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise", but retains the requirement to report information about
major customers, requires that a public company report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 requires that a public company report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. However, SFAS No. 131 does not require the reporting of
information that is not prepared for internal use if reporting it would be
impracticable. SFAS No. 131 also requires that a public company report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement, of segment amounts from period to period. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company has not determined the effects, if any, that SFAS No. 131 will
have on the disclosures in its consolidated financial statements.
IMPACT OF INFLATION AND ECONOMIC CONDITIONS
During 1995 Go-Gro experienced price increases in the costs of raw
materials, which reduced Go-Gro's profitability due to an inability to
immediately pass on such price increases to its customers. The Company believes
that increased prices could have an initial adverse impact on the Company's net
sales and income from continuing operations but that, over time, increased
prices can be passed on to its customers.
During late 1997 various countries in Southeast Asia (including
Thailand, South Korea, Malaysia, the Philippines and Indonesia) were involved in
an emerging crisis impacting their economies and characterized by currency
devaluations, rising interest rates, deteriorating economic growth and declining
capital markets. The Company does not conduct business with, or have a
significant investment in, any of these countries. However, this crisis could
have serious adverse repercussions on the financial stability of all countries
in the region, including Hong Kong and China, and has implications for the
global financial system as well, including the United States. The Company is
presently unable to determine what impact, if any, this Asian economic crisis
will have on its business.
Page 24
CATALINA LIGHTING, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
Independent Auditors' Report....................................................................................... 26
Consolidated Balance Sheets - September 30, 1997 and 1996.......................................................... 27
Consolidated Statements of Operations - Years Ended September 30, 1997, 1996 and 1995.............................. 28
Consolidated Statements of Stockholders' Equity - Years Ended September 30, 1997,
1996 and 1995............................................................................................. 29
Consolidated Statements of Cash Flows - Years Ended September 30, 1997, 1996 and 1995.............................. 30
Notes to Consolidated Financial Statements......................................................................... 32
Schedule II - Valuation and Qualifying Accounts - Years ended September 30, 1997, 1996 and 1995.................... 54
(All other schedules have been omitted as the related information is not
required or applicable)
Page 25
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Catalina Lighting, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheets of Catalina
Lighting, Inc. and its subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1997. Our
audits also included the financial statement schedule listed in Item 14 a(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Catalina Lighting, Inc. and its
subsidiaries as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
December 2, 1997
Page 26
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
-----------------------
1997 1996
--------- ---------
(IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents $ 1,847 $ 1,766
Accounts receivable, net of allowances
of $8,314,000 and $7,313,000, respectively 24,169 29,644
Inventories 34,612 39,648
Income taxes receivable 2,380 -
Other current assets 5,406 5,009
--------- ---------
Total current assets 68,414 76,067
Property and equipment, net 29,969 26,003
Restricted cash equivalents and short-term investments 1,883 378
Goodwill, net 11,473 11,344
Other assets 4,842 3,670
--------- ---------
$ 116,581 $ 117,462
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable - credit lines $ 5,574 $ 3,963
Accounts and letters of credit payable 18,099 25,289
Current maturities of bonds payable 970 970
Current maturities of other long-term debt 476 363
Income taxes payable - 21
Other current liabilities 5,586 5,500
--------- ---------
Total current liabilities 30,705 36,106
Notes payable - credit lines 21,000 17,044
Convertible subordinated notes 7,600 7,600
Bonds payable - real estate related 9,195 10,165
Other long-term debt 1,942 1,762
Other liabilities 5,082 811
--------- ---------
Total liabilities 75,524 73,488
--------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value
Authorized 1,000,000 shares; none issued - -
Common stock, $.01 par value
Authorized 20,000,000 shares; issued and
outstanding 7,094,569 shares and 7,063,587
shares, respectively 71 71
Additional paid-in capital 26,311 26,135
Retained earnings 14,675 17,768
--------- ---------
Total stockholders' equity 41,057 43,974
--------- ---------
$ 116,581 $ 117,462
========= =========
See accompanying notes to consolidated financial statements.
Page 27
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
Net sales $ 196,955 $ 184,630 $ 176,292
Cost of sales 164,493 153,698 148,343
--------- --------- ---------
GROSS PROFIT 32,462 30,932 27,949
Selling, general and administrative expenses 25,946 25,318 23,881
Plant closing costs 930 - -
Litigation charges and related professional fees 7,453 293 17
--------- --------- ---------
OPERATING INCOME (LOSS) (1,867) 5,321 4,051
--------- --------- ---------
Other income (expenses)
Interest expense (4,088) (3,254) (3,537)
Other income 128 385 317
--------- --------- ---------
Total other expenses (3,960) (2,869) (3,220)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (5,827) 2,452 831
Income tax (provision) benefit 2,734 (849) (431)
--------- --------- ---------
NET INCOME (LOSS) $ (3,093) $ 1,603 $ 400
========= ========= =========
EARNINGS (LOSS) PER SHARE
PRIMARY
Earnings (loss) per share $ (0.44) $ 0.21 $ 0.05
Weighted average number of shares 7,071 7,798 7,800
FULLY DILUTED
Earnings (loss) per share $ (0.44) $ 0.21 $ 0.05
Weighted average number of shares 7,071 7,805 7,800
See accompanying notes to consolidated financial statements.
Page 28
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- -------- -------------
BALANCE AT SEPTEMBER 30, 1994 6,923,652 $ 69 $ 25,483 $ 15,765 $ 41,317
Exercise of stock options 70,601 1 411 - 412
Net income - - - 400 400
--------- ---- -------- -------- --------
BALANCE AT SEPTEMBER 30, 1995 6,994,253 70 25,894 16,165 42,129
Exercise of stock options 64,334 1 226 - 227
Common stock issued under employment agreement 5,000 - 15 - 15
Net income - - - 1,603 1,603
--------- ---- -------- -------- --------
BALANCE AT SEPTEMBER 30, 1996 7,063,587 $ 71 $ 26,135 $ 17,768 $ 43,974
Exercise of stock options 17,166 - 80 - 80
Common stock issued under employment agreement 5,000 - 9 - 9
Common stock issued in settlement
of litigation 2,566 - 10 - 10
Common stock issued as compensation 6,250 - 19 - 19
Stock options issued under sales agreement - - 58 - 58
Net loss - - - (3,093) (3,093)
--------- ---- -------- -------- --------
BALANCE AT SEPTEMBER 30, 1997 7,094,569 $ 71 $ 26,311 $ 14,675 $ 41,057
========= ==== ======== ======== ========
See accompanying notes to consolidated financial statements.
Page 29
CATALINA LIGHTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
-----------------------------
1997 1996 1995
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,093) $ 1,603 $ 400
--------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for impairment of long-lived assets 735 - -
Provision for litigation judgement under appeal 4,487 - -
Depreciation and amortization 5,184 6,266 5,239
Deferred income taxes (1,452) (1,335) (1,506)
(Gain) loss on disposition of property and equipment 35 53 (328)
Other 92 - -
Change in assets and liabilities, net of effects of
acquisitions:
Decrease (increase) in accounts receivable 5,475 2,103 (246)
Decrease (increase) in inventories 5,036 658 (7,159)
Decrease (increase) in income taxes receivable (2,380) - -
Decrease (increase) in other current assets (393) 452 772
Decrease (increase) in other assets (473) (544) (1,564)
Increase (decrease) in income taxes payable (21) (425) 334
Increase (decrease) in accounts payable, letters of credit
payable and other liabilities (7,035) 3,642 2,758
--------- -------- --------
Total adjustments 9,290 10,870 (1,700)
--------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 6,197 12,473 (1,300)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (7,955) (9,479) (13,595)
Payments for Go-Gro acquisition, net of cash acquired (626) (144) (586)
Return of funds escrowed in conjunction with the
acquisition of Go-Gro - - 1,904
Collection of receivable from stockholder - - 1,850
Payment to affiliated company - - (2,002)
Decrease (increase) in restricted cash equivalents and
short-term investments (1,505) 5,961 (5,862)
--------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (10,086) (3,662) (18,291)
--------- -------- --------
(Continued on page 31)
Page 30
CATALINA LIGHTING, INC. SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
-----------------------------
1997 1996 1995
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - credit lines 35,450 43,400 43,900
Payments on notes payable - credit lines (29,594) (50,556) (30,768)
Net proceeds from (payments on) notes payable-credit lines
due on demand (289) 459 277
Payment on convertible subordinated notes - - (7,600)
Payments on other long-term debt (707) (581) (812)
Proceeds from the issuance of bonds payable - 99 11,936
Payments on bonds payable (970) (900) -
Proceeds from issuance of common stock and
related income tax benefit 80 227 412
--------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,970 (7,852) 17,345
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 81 959 (2,246)
Cash and cash equivalents at beginning of year 1,766 807 3,053
--------- -------- --------
Cash and cash equivalents at end of year $ 1,847 $ 1,766 $ 807
========= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
YEARS ENDED SEPTEMBER 30,
---------------------------------
1997 1996 1995
------- ------- -------
Cash paid for:
Interest $ 3,833 $ 3,457 $ 3,595
======= ======= =======
Income taxes $ 1,168 $ 2,671 $ 1,352
======= ======= =======
During the years ended September 30, 1997, 1996 and 1995 capital lease
obligations aggregating approximately $781,000, $573,000 and $189,000,
respectively, were incurred when the Company entered into leases for new office,
computer, machinery and warehouse equipment.
In 1997 and 1996, the Company issued 5,000 common shares to an employee
as salary, pursuant to an employment agreement with such employee.
In 1995, the Company sold racking and equipment with a net book value
of $216,000 receiving as payment a note receivable for $572,000.
See accompanying notes to consolidated financial statements.
Page 31
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(a) The Business
Catalina Lighting, Inc. ("the Company") is a United States-based wholesaler,
distributor and manufacturer of lamps, lighting fixtures and other lighting
related products. The Company sells principally in the U.S. to a variety of
retailers including home centers, national retail chains, office superstore
chains, warehouse clubs, discount department stores and catalog showrooms. The
Company also sells its products in Europe, Canada and other foreign markets.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. The consolidated statements include the results
of the wholly-owned subsidiary Go-Gro Industries Limited ("Go-Gro") and Meridian
Lamps, Inc. ("Meridian"), a wholly-owned subsidiary formed by the Company that
commenced operations in fiscal 1995 and ceased operations in June 1997. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
(c) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
d) Geographic Risks
Substantially all of the Company's products are obtained from suppliers located
in China. Any inability by the Company to continue to obtain its products from
China could significantly disrupt the Company's business. In addition, in the
Company's consolidated balance sheet at September 30, 1997 are net assets of
$23.8 million of Company subsidiaries located in China and Hong Kong (which
became a sovereign territory of China in 1997). The Company maintains
approximately $14 million in noncancelable political risk insurance.
(e) Cash and Cash Equivalents
Cash on hand and in banks, money market funds and other short-term securities
with maturities of three months or less when purchased are considered cash and
cash equivalents.
(f) Accounts Receivable
Pursuant to an agreement between the Company and a bank, the bank assumes the
credit risk of certain of the Company's U.S. and Canadian receivables. The
Company pays a fee of .50 percent of billings to customers covered by the
arrangement. In addition, the Company insures certain of its foreign receivables
with an insurance company. Gross accounts receivable secured under such
agreements at September 30, 1997 and 1996 amounted to $15.3 million and $19.2
million, respectively. In addition, certain of the Company's sales are made to
customers who pay pursuant to their own international, irrevocable, transferable
letters of credit. Gross accounts receivable secured by such letters of credit
at September 30, 1997 and 1996 amounted to $8.7 million and $8.1 million,
respectively.
The Company provides allowances against accounts receivable for doubtful
accounts, sales returns and sales incentives.
Page 32
CATALINA LIGHTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
(g) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
(h) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Interest expense incurred for the construction of facilities is
capitalized until such facilities are ready for use. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the lease term or estimated useful
lives of the related assets.
(i) Restricted Cash Equivalents and Short-Term Investments
The Company's restricted cash