CATALINA LIGHTING INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT

TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 0F 1934

----------

(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, 2001

OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number 1-9917

Catalina Lighting, Inc.
(Exact Name of Registrant as Specified in its Charter)

Florida 59-1548266
(State or Other Jurisdiction of (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 None
$.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 common stock held by non-affiliates of the
registrant on December 14, 2001 computed by reference to the closing price of
such stock, as quoted on the NASD Over-the-Counter Bulletin Board on such date,
was $4.8 million.

The number of shares of the registrant's common stock outstanding as of
the close of business on December 14, 2001 was 15,878,247.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement to be filed by the registrant
in connection with its 2002 Annual Meeting of Shareholders are incorporated by
reference into Part III.

Page 1

PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K (this "Form 10-K"),
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. In some cases you can identify
forward-looking statements by words such as "expects," "anticipates,"
"believes," "plans," "intends," "estimates," variations of such words and
similar expressions. These statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Factors
that would cause or contribute to the inability to obtain the results or to
fulfill the other forward-looking statements include, but are not limited to,
the following: the highly competitive nature of the lighting industry; our
reliance on key customers who may delay, cancel or fail to place orders;
consumer demand for lighting products; dependence on third party vendors and
imports from China which may limit our margins or affect the timing of revenue
and sales recognition; general domestic and international economic conditions
which may affect consumer spending; brand awareness, the existence of adverse
publicity, continued acceptance of our products in the marketplace, new products
and technological changes, and changing trends in customer tastes, each of which
can effect demand and pricing for our products; pressures on product pricing and
pricing inventories; cost of labor and raw materials; the availability of
capital; the ability to satisfy the terms of, and covenants under, credit and
loan agreements and the impact of increases in borrowing costs, each of which
affect our short-term and long-term liquidity; the costs and other effects of
legal and administrative proceedings; foreign currency exchange rates; changes
in our effective tax rate (which is dependent on our U.S. and foreign source
income); and other factors referenced in this Form 10-K. We will not undertake
and specifically decline any obligation to update or correct any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.

Item 1. BUSINESS.

General

Catalina Lighting, Inc. (collectively with its subsidiaries, the
"Company") designs, manufactures, contracts for the manufacture of, imports,
warehouses and distributes a broad line of lighting fixtures and lamps under the
Westinghouse(R) brand, and the Catalina(R), Dana(R), Ring and Illuminada(R)
trade names. We also function as an original equipment manufacturer, selling
goods under our customers' private labels. We sell in the United States through
a variety of retailers including home centers, national retail chains, office
superstore chains, mass merchandisers, warehouse clubs, discount department
stores, and hardware stores. We also sell our products in the United Kingdom,
continental Europe, Canada, Mexico and South America. Currently, our product
line is comprised primarily of lighting fixtures and lamps. We have supplemented
our product lines through acquisitions but have remained focused on lighting
products. Catalina Lighting, Inc. was incorporated under the laws of the state
of Florida in 1974, started selling lighting in 1985, and became a public
company in 1988. The Company's fiscal year ends September 30. Unless otherwise
noted, all references to 2001, 2000 and 1999 relate to the fiscal years then
ended.

Products

We market a diverse product line, comprised principally of lighting
products used primarily in residential and office environments. Our product line
consists mainly of two categories: lighting fixtures and lamps. Lighting
fixtures include outdoor/security lighting, chandeliers, recessed and track
lighting, and wall and ceiling lights. We sell both table and floor lamps which
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. A smaller percentage of our product line consists of
industrial consumables, products for the automotive aftermarket, and train and
bus lighting. We develop, manufacture and maintain separate product lines for
sale in North America, continental Europe and the United Kingdom due to the
different consumer preferences and electrical specifications of each of these
markets. We may continue to expand our product lines internally or through
acquisitions.

Distribution Methods

We utilize two distribution methods in selling our products: direct and
warehouse.

We obtain almost all of the lighting products we sell from factories in
China. Our direct sales are made either by delivering lighting products to our
customers' common carriers at a shipping point in China or by shipping the
products from China directly to customers' 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

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not be transferable) or on open credit with us. Upon receipt of a transferable
letter of credit, we transfer the portion of the letter of credit covering the
cost of merchandise to our supplier. The terms of the transfer provide that
draws may not be made by the supplier until we are entitled to be paid pursuant
to the terms of the customer's letter of credit. We have the right to draw upon
the customer's letter of credit once the products are inspected by us or our
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. With the exception of sales made into Europe by our China
subsidiary, direct sales are made by one of our North American subsidiaries. Our
China subsidiary, Go-Gro Industries, Ltd. ("Go-Gro"), either manufactures or
procures the products for our North American subsidiaries. For 2001 and 2000,
43% and 69%, respectively, of net sales were attributable to direct sales.

We also purchase products for our own account and warehouse the products
for subsequent resale to customers. We are 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. We own a 473,000
square foot warehouse facility near Tupelo, Mississippi, own and lease various
warehouse facilities in the U.K. and lease warehouse facilities in Toronto,
Canada and Mexico City, Mexico. In 2001 and 2000, warehouse sales accounted for
57% and 31%, respectively, of net sales. The increase in warehouse sales for
2001 is attributable to our acquisition of Ring Limited ("Ring"), our U.K.
subsidiary, on July 5, 2000, as substantially all of Ring's sales are warehouse
sales.

The relative proportion of our sales generated by each method is dependent
upon customer buying preferences and, to a lesser extent, our 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
typically 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. Over the past six years, our larger U.S. customers have increased their
direct business with us while reducing their purchases from the warehouse.

Business Segments

For internal management reporting purposes we operate three primary
business segments, which also correspond to the major geographic segments of our
business: Catalina Industries, Inc. (United States), Go-Gro Industries, Ltd.
(China) and Ring Limited (United Kingdom). We added the United Kingdom as a
primary business segment with the acquisition of Ring in 2000. We also have
operating subsidiaries in Canada (Catalina Canada), and Mexico (Catalina
Mexico). Sales (in thousands) for each primary segment for the fiscal years
ended September 30, 2001, 2000 and 1999 are set forth in the table below. Sales
for Ring for 2000 represent sales from July 5, 2000 to September 30, 2000.

Years Ended September 30,
-----------------------------------------
2001 2000 1999
--------- --------- ---------

Catalina Industries $ 78,943 $ 122,222 $ 135,308
Go-Gro Industries 108,671 141,356 136,945
Ring Limited 104,847 24,529 --
Others 27,198 29,914 23,806
Intersegment eliminations (84,873) (115,391) (119,498)
--------- --------- ---------
$ 234,786 $ 202,630 $ 176,561
========= ========= =========

See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 17 of Notes to Consolidated Financial Statements
for financial information by primary business segment.

Catalina Industries, Inc. (United States)

Catalina Industries designs, imports, warehouses and distributes lighting
fixtures and lamps in the United States to major retailers, including home
centers, office superstore chains, mass merchandisers, discount department
stores and warehouse clubs. Order entry, customer service and other support
functions for this segment are performed at the corporate headquarters in Miami,
Florida. Catalina Industries owns and operates a 473,000 square foot
distribution facility located near Tupelo, Mississippi.

Catalina Industries sells its products under the Westinghouse(R) brand,
the Catalina(R), Dana(R), and Illuminada(R) trade names, and also under its
customers' private labels. Catalina Industries markets a diverse product line
used primarily in residential and office settings. Its product line consists
mainly of two categories: lighting fixtures and lamps. Lighting fixtures include

Page 3

outdoor/security lighting, chandeliers, recessed and track lighting, and wall
and ceiling lights. Lamps sold by Catalina Industries 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 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.

Catalina Industries purchases its products from Go-Gro, our China
manufacturing and sourcing subsidiary. These products are manufactured by Go-Gro
or purchased from other factories by Go-Gro. Catalina Industries arranges for
the shipment of its products directly from Go-Gro or other China factories to
the customers' distribution centers or stores. Catalina Industries also sells
and ships from its Mississippi distribution facility (see "Distribution
Methods").

Catalina Industries' business is somewhat seasonal in nature. Historically
this segment's sales have been greater during the quarters ended June 30 and
September 30 due to home improvement activity occurring in the spring and summer
and retailer back-to-school promotions.

Catalina Industries competes on the basis of service, price and scope of
product offerings (see "Strategy"). Its industry is highly fragmented, with no
one competitor or small group of competitors possessing a dominant market
position (see "Competition").

Home Depot, Wal-Mart and K Mart are presently Catalina Industries' three
largest customers, constituting 33.3%, 16.9% and 13.6%, respectively, of this
segment's sales for 2001. These customers and one other represented 70% and 63%
of this segment's sales for 2001 and 2000, respectively.

At December 15, 2001 and 2000, the backlog of orders for Catalina
Industries amounted to $7.0 million and $8.3 million, respectively. Although any
of these orders could be cancelled by the customer prior to shipment we believe,
based upon experience, that substantially all of these orders will be shipped.

Go-Gro Industries, Ltd. (China)

Go-Gro both manufactures products and purchases products from independent
suppliers located in China. Catalina Industries, Catalina Canada and Catalina
Mexico obtain substantially all of their lighting products from Go-Gro. In
addition, Ring purchases a small amount of its products from Go-Gro. Go-Gro
maintains administrative offices in Hong Kong and manufacturing facilities in
the Guangdong Province of China.

In September 2000 Go-Gro deposited the purchase price of approximately $1
million for its joint venture partner's interest in Go-Gro's Chinese cooperative
joint venture manufacturing subsidiary, Shenzhen Jiadianbao Electrical Products
Co., Ltd. ("SJE"). This purchase was finalized in December 2000. During the
quarter ended March 31, 2001, SJE was converted under Chinese law from a
cooperative joint venture to a wholly owned foreign entity and its name was
changed to Jiadianbao Electrical Products (Shenzhen) Co., Ltd. ("JES").

JES obtained non-transferable land use rights for the land on which its
primary manufacturing facilities were constructed under a Land Use Agreement
dated April 11, 1995 between SJE and the Bureau of National Land Planning Bao-An
Branch of Shenzhen City. This agreement provides JES with the right to use this
land until January 18, 2042 and required the construction of approximately
500,000 square feet of factory buildings and 211,000 square feet of dormitories
and offices. This construction has been completed.

In connection with the settlement with Go-Gro's former joint venture
partner in SJE, JES acquired the land use rights for a parcel of land adjoining
its primary manufacturing facilities. Under the separate land use agreement for
this parcel, JES has the right to use the land through March 19, 2051 and is
obligated to complete new construction on the land (estimated to cost
approximately $1.3 million) by March 20, 2002. If this construction is not
completed by that date JES is subject to fines of up to $55,000, and if the
construction is not completed by March 20, 2004, the local municipal planning
and state land bureau may take back the land use rights for the parcel without
compensation and confiscate the structures and attachments. We are presently
investigating various courses of action for this commitment, including
negotiations with the local authorities to extend or modify the agreement's
deadlines.

Go-Gro manufactures a wide range of products, including lamps, recessed
lighting fixtures, track lighting fixtures and flashlights. During 2001 and 2000
goods produced by Go-Gro constituted approximately 31% and 40%, respectively, of
the total products either purchased or manufactured by us. Go-Gro sells the
products it manufactures to other Company subsidiaries at prices established by
our management intended to provide an appropriate profit allocation between our
manufacturing and distribution activities.

Page 4

The raw materials and components essential to Go-Gro's manufacturing
process are purchased from distributors and manufacturers located in various
countries as follows: plastic resin (Germany, China, Japan, Thailand, Korea and
Taiwan), steel (Korea, Japan, Taiwan and China), cable (China and Taiwan), light
bulbs (China, Taiwan, Germany, Indonesia and Hong Kong) and various other
components (China, Europe, U.S., Taiwan and others).

Through Go-Gro, Catalina Industries and other Company subsidiaries arrange
for, and coordinate, the purchase of a significant volume of products from
independent Chinese manufacturers. See "Dependence on China".

We choose our contract manufacturers based on price, quality of
merchandise, reliability and ability to meet our timing requirements for
delivery. Manufacturing commitments are made on a purchase order basis. Go-Gro,
Ring, or the customer is often required to post a letter of credit prior to
shipment.

Go-Gro employees supervise our 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 engineering, and
oversight of the manufacturing processes. We maintain a quality control and
quality assurance program and have established inspection and test criteria for
each of our products. These methods are applied by Go-Gro or its agents
regularly to product samples in each manufacturing location prior to shipment
and shipments are tested for quality control inspection.

In addition to its sales to other Company subsidiaries, Go-Gro sells
directly for its own account to European distributors and retailers. Such sales
were approximately $24.8 million and $27.0 million in 2001 and 2000,
respectively. At December 15, 2001 and 2000, Go-Gro's backlog of orders to these
third parties amounted to $2.9 million and $5.5 million, respectively.

Ring Limited (United Kingdom)

We acquired Ring on July 5, 2000. Ring is a wholesaler and distributor
headquartered in Leeds, England consisting of eight principal companies
comprising three operating divisions: Ring Lighting, Ring Automotive and
Consumables. These divisions are engaged in the sale of lighting, automotive
after-market and industrial consumable products in the United Kingdom.

Ring Lighting, a division of Ring Lamp Company Ltd., sells a product line
of lamps and lighting fixtures comparable to that offered by Catalina
Industries. These products are sold from warehouse facilities under the Ring
trade name or the customers' label to a variety of retailers in the U.K.,
including home centers and mass merchandisers. B&Q, a subsidiary of Kingfisher
PLC, is the largest customer of this division. Sales to B&Q comprised 37% of
Ring's consolidated sales for the year ended September 30, 2001 and the period
from July 5, 2000 to September 30, 2000. Ring competes on the basis of service,
product range and price, and does not believe any competitor has a dominant
position in the lighting markets it serves. The lighting division comprised 62%
of Ring's consolidated sales for the year ended September 30, 2001, and 63% of
Ring's consolidated sales for the period from July 5, 2000 to September 30,
2000.

Ring Automotive consists of the automotive division of Ring Lamp Company
Ltd. and four companies: Grove Products (Caravan Accessories) Ltd., Lighten
Point Corporation Europe Ltd., Lancer Products Ltd. and BMAC Ltd. These
companies sell an extensive line of products under each company's trade name or
under the customers' label, to the caravan, train and automotive aftermarkets.
Products sold include replacement headlights, antennas, security devices,
caravan accessory systems, flasher units and relays, windshield wiper blades and
wash systems, engine and suspension components and other automotive electrical
components. In addition, BMAC sells lighting used in the manufacture of trains
and buses. A number of competitors are present in each segmental market of this
division including manufacturers and other U.K. distributors and importers, but
we believe that no competitor has a dominant position in these markets other
than for H Burden Ltd. in the caravan sector. Ring Automotive competes on the
basis of service, product range and price. The automotive division comprised 28%
of Ring's consolidated sales for the year ended September 30, 2001, and 27% of
Ring's consolidated sales for the period from July 5, 2000 to September 30,
2000.

Van-Line Ltd., Arctic Products Ltd., and PH Products Ltd. form Ring's
consumables division. Van-Line is a leading supplier of workshop consumables and
brand tools to independent distributors. Arctic Products sells portable pipe
freezing equipment. PH Products sells a variety of products for the plumbing and
gas industry, including smoke alarms, carbon monoxide detectors, soldering
sprays and pressurized air cans. Approximately 10% of Ring's consolidated sales
were generated in the consumables division for the year ended September 30, 2001
and for the period from July 5, 2000 to September 30, 2000.

Ring purchases its products from suppliers (including Go-Gro) located
worldwide including China, the U.K. and the rest of Europe, with China being the
dominant supply source. Purchases from China suppliers, including Go-Gro,
accounted for 41% of

Page 5

Ring's purchases for the year ended September 30, 2001. A wide variety of
competitors exist for Ring including U.K., European and Chinese manufacturers
and other U.K. distributors and importers.

Ring's business is somewhat seasonal, with slightly more sales occurring
in the winter months.

At December 15, 2001 and 2000, Ring's backlog of orders amounted to $2.9
million and $2.7 million, respectively.

Strategy

Economic and other business factors led to a consolidation in the 1990s in
the retail sector for consumer products, with a limited number of large
retailers acquiring ever-increasing market shares. We focus on these major
retailers, which include home centers, office product superstores, and mass
merchandisers. Our strategies to strengthen our relationships and increase our
sales with these major retailers include the following:

1. International Expansion - Many of our U.S.-based retail customers are
expanding internationally. We believe these retailers need sophisticated
suppliers capable of meeting their worldwide requirements and expanding
with them - - manufacturers and distributors, such as the Company,
possessing global expertise, resources and operations.

We established operations in Canada in 1992 and in Mexico in 1995 to
support the international growth of key customers. The acquisition of Ring
in July 2000 represented a major step for our global distribution network.
We believe Ring strengthens our strategic position by providing both
increased access to the U.K. marketplace and an important platform for
continental Europe. Ring will enable us to better service our major North
American customers upon their entry and expansion into the U.K. and other
European markets.

2. Customer-Centric Activities - We attempt to increase our value to our
customers and differentiate ourselves from our competition by
"customizing" our business for our largest customers. To do so, we:

(i) seek input from buyers and other customer personnel to develop
product offerings, merchandising approaches and branding strategies
specific to each major retail customer;

(ii) dedicate Company-owned production resources and capabilities to each
major retailer; and

(iii) pursue technology linkages, the sharing of critical product and
sales data and the alignment of supply chain activities with our
major customers.

3. Program Selling - We strive to be the primary source of lighting products
to our retailers by offering a complete program of lighting products in a
variety of categories. The availability of more than 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 simplify their purchasing function by buying
more of their lighting products from us as opposed to using several
different suppliers.

4. Warehouse Supply of Goods - Our warehouses in the United States, United
Kingdom, Canada and Mexico enable us to provide our customers with the
advantage of short delivery time. Warehouse sales allow retailers to
receive products in days as compared to months for items shipped directly
to them from China. Timely deliveries can help to increase the customer's
inventory turns and profits.

Dependence on China

We obtain a very high percentage of the lighting products we sell from
factories located in China. We manufacture a portion of these products at Go-Gro
and purchase the remainder from independent suppliers.

In fiscal 2001 and 2000, Chinese suppliers, other than Go-Gro, accounted
for approximately 42% and 50%, respectively, of the total products we either
purchased or manufactured . Shunde No. 1 Lamp Factory ("Shunde") accounted for
approximately 12% of the total products we either purchased or manufactured in
fiscal 2001 and 21% in fiscal 2000. Purchases from Go-Gro and the top five
Chinese independent suppliers comprised 55% and 75%, respectively, of the total
of the products we either purchased or manufactured for fiscal 2001 and 2000,
respectively. Other than Shunde, no independent supplier accounted for more than
10% of the total of the products we either purchased or manufactured in 2001.

On July 20, 1999, we renewed an agreement with Shunde whereby Shunde
agreed to manufacture lighting products for us to be sold in North and South
America and the European Community on an exclusive basis for a three year period
beginning

Page 6

October 1, 1999 in return for annual minimum purchase requirements from us. This
agreement can be terminated if we do not meet the agreement's 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. Since
inception of this agreement in 1993 through 2000, we met the minimum purchase
requirements under the agreement. Due to our U.S. sales decrease, we did not
meet the minimum purchase requirements under this agreement in 2001. However, we
have not received notice from Shunde of its intention to cancel the agreement,
and we believe the agreement will remain in effect through September 30, 2002.

Although we purchase our products from suppliers with whom we maintain
close alliances, we believe the same products could be purchased from numerous
other Chinese suppliers.

Our ability to import products from China at current tariff levels could
be materially and adversely affected if trade relations with China should
change. At present, the U.S. government has granted "normal trade relations"
("NTR", formerly "most favored nation") status to China for trade and tariff
purposes. As a result of its NTR status, China receives the same favorable
tariff treatment that the United States extends to its other "normal" trading
partners. China's NTR status, coupled with its recent admission to the World
Trade Organization, could eventually reduce barriers to manufacturing products
in and exporting products from China. However, we cannot provide any assurance
that China's WTO membership or NTR status will not change.

We have 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 existing assets of JES in China. The policy
is a long-term non-cancelable guarantee covering the risks of expropriation and
war and civil disturbance.

Competition

Our product lines span major segments within the lighting industry and,
accordingly, our products compete in a number of different markets with a number
of different competitors. We compete with other independent distributors,
importers, manufacturers, and suppliers of lighting fixtures and other consumer
products in the United States, United Kingdom, continental Europe, Canada and
China. The lighting industry is highly competitive. Other competitors market
similar products that compete with ours on the basis of price. Some of these
competitors do not maintain warehouse operations or do not provide some of the
services we provide that require us to charge higher prices to cover the added
costs. 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. Our success in this highly competitive market
depends upon our ability to manufacture and purchase a variety of quality
products on favorable terms, ensure our products meet safety standards, deliver
the goods promptly at competitive prices, provide a wide range of services such
as electronic data interchange and customized products, packaging, and store
displays and otherwise adapt our services and product offerings to the demands
of our major retail customers.

Independent Safety Testing and ISO 9000 Certification

As part of our marketing strategy, we voluntarily submit our products to
recognized product safety testing laboratories in the countries where we market
our products. Such laboratories include Underwriters Laboratories (UL) in the
United States, Canadian Standards Association (CSA) in Canada, Specialized
Technology Resources in Great Britain, Association Nacional de Normalization 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 our 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. We do not anticipate any difficulty
in maintaining the right to use the listing marks of these laboratories.

Go-Gro's manufacturing operations have been certified as meeting ISO 9000
standards. ISO (the International Organization for Standardization) first
published its quality assurance and quality management standards in 1987 and
updated them in 1994. ISO 9000 standards and certification facilitate
international commerce by providing a single set of quality standards for both
product and service oriented organizations that are recognized and respected
throughout the world.

Product Liability

We are engaged in a business which could expose us to possible claims for
injury resulting from the failure of our products to function as designed or
from other product defects. We maintain primary product liability insurance
coverage of $1 million per occurrence, $2 million in the aggregate, as well as
umbrella insurance policies providing an aggregate of $75 million in excess
umbrella insurance coverage. The primary insurance coverage requires us to self-
insure for a maximum amount of $10,000 per incident. No

Page 7

assurance can be given that the claims will not exceed available insurance
coverage or that we will be able to maintain our current level of insurance.

Trademarks and Licenses

On April 26, 1996, we entered into a license agreement with Westinghouse
Electric Corporation to market and distribute a full range of lighting fixtures,
lamps and other lighting products under the Westinghouse brand name in exchange
for royalty payments. Originally, the agreement terminated on September 30,
2002, subject to the minimum sales conditions discussed below, after which we
had options to extend the agreement for two additional five-year terms. The
royalty payments are due quarterly and are based on a percent of the value of
our net shipments of Westinghouse branded products, subject to annual minimum
net shipments. Either party had the right to terminate the agreement if we did
not meet the minimum net shipments of $30 million for fiscal 2001 and $60
million for fiscal 2002. Net sales of Westinghouse branded products amounted to
$16.8 million and $29.0 million for the years ended September 30, 2001 and 2000,
respectively. In September 2001 we and Westinghouse amended the agreement to
eliminate both the minimum net shipment requirements and our options to extend
the license agreement upon its expiration on September 30, 2002. We do not
believe that the loss of the Westinghouse license, should it not be extended
after September 30, 2002, would have a material impact on our financial
condition or annual results of operations.

Our licensed brand, Westinghouse(R) and our own trademarks, Catalina(R),
Dana(R) and Illuminada(R) are registered in the United States, Canada, China and
Mexico as well as in numerous countries in the European Community.

Employees

As of September 30, 2001 we employed approximately 600 people in the
United States, United Kingdom, Canada and Mexico, and our China operations
employed approximately 2,800 people. None of our employees is represented by a
collective bargaining unit and we believe that our relationships with our
employees are good.

Financial Information about Foreign and Domestic Operations and Export Sales

We operate in the United States, United Kingdom and China, and to a lesser
extent, Canada, and Mexico. Our primary operating segments are located in the
United States, United Kingdom and China. These operating segments generally
follow the management organizational structure of the Company. Net sales to
external customers by U.S.- based operations are made primarily into the United
States. Net sales to external customers by U.K.- based operations are made
primarily into the U.K. Net sales to external customers by China-based
operations are made primarily into Europe. See Note 17 of Notes to Consolidated
Financial Statements.

Executive Officers of the Registrant

The following table sets forth certain information as of December 14, 2001
with respect to our executive officers:

Name Age Position With the Company
- ------------------- -------- -----------------------------------

Eric Bescoby 47 Chief Executive Officer and
Director

David W. Sasnett 45 Senior Vice President, Chief
Financial Officer, Treasurer
and Secretary

Eric Bescoby has served as our Chief Executive Officer and as a director
of the Company since July 2001. Prior to joining the Company, Mr. Bescoby was
president of JTECH Communications, Inc., an electronic communications solutions
provider, from April 2000 to June 2001. Prior to joining JTECH, Mr. Bescoby was
a division director at Environmental Industries, Inc., a full-service site
development, landscape, and horticultural services contractor, from September
1998 to March 2000. From May 1987 to August 1998, Mr. Bescoby was a division
director at Rain Bird Sprinkler Manufacturing Corporation, a leading irrigation
manufacturer.

David W. Sasnett has served as Senior Vice President of the Company since
November 1997, our Chief Financial Officer since November 1996, and our
Treasurer and Secretary since January 2001. Prior to becoming Senior Vice
President in 1997, he served as a Vice President since 1994, and prior to
becoming Chief Financial Officer in 1996, he served as our Controller since
1994. From 1993 through 1994, Mr. Sasnett was the Vice President - Finance of a
Miami-based financial institution and prior to 1993 was a senior manager with
the international accounting firm of Deloitte & Touche, LLP.

Page 8

Item 2. Properties.

The following table sets forth details about our offices, manufacturing
plants and warehouse facilities:

LEASED/
LOCATION FACILITY OWNED
- ----------------------- ----------------------------------------- -------------

Catalina Industries/
United States:

Miami, FL headquarters/office owned (1)

Tupelo, MS warehouse owned (1)

Go-Gro/China:

Hong Kong office leased

Shenzhen office/manufacturing plant/warehouse leased

dormitories leased

manufacturing plant/warehouse/dormitories owned (2)

Ring/United Kingdom:
Leeds office/warehouse; office/warehouse leased; owned
Hyde office/warehouse owned
Walsall office/warehouse leased
Corby office/warehouse; office/warehouse leased

Other:

Toronto, Canada office/warehouse leased

Mexico City, Mexico office/warehouse leased
- ----------------------- -------------------------------------------- -------------

(1) Owned subject to a first mortgage.

(2) We have purchased underlying land use rights which terminate in
2042.

All of our properties are fully utilized with the exception of one of the Corby
facilities, which Ring is presently trying to sublease, and our Tupelo facility,
in which approximately 44% of the square footage is presently utilized (or
available) for warehousing services we provide to third parties. All of our
properties are suitable for our operations.

Page 9

Item 3. Legal Proceedings.

On September 15, 1999, we filed a complaint entitled Catalina Lighting,
Inc. v. Lamps Plus, Civil Action 99-7200, in the U.S. District Court for the
Southern District of Florida, in which we requested declaratory relief regarding
claims of trade dress and patent infringement made by Lamps Plus against one of
our major customers. Lamps Plus filed an Answer and Counterclaim against us and
our customer on October 6, 1999 alleging patent infringement and trade dress.
The trade dress claim was dismissed with prejudice before trial in March 2001.
In April 2001, a jury returned a verdict finding liability against us on the
patent infringement claim and in June 2001 the Court entered a judgment of
approximately $1.6 million for damages and interest thereon. We have appealed
the judgment entered by the Court and have posted a surety bond in the amount of
$1.8 million (for which we posted $1.5 million in cash collateral) for the
appeal. We believe that we ultimately will not be found liable for patent
infringement in this case. Accordingly, no provision for loss has been recorded
in our September 30, 2001 Consolidated Financial Statements for this matter.

During the past few years we received a number of claims relating to
halogen torchieres we sold to various retailers. We maintain primary product
liability insurance coverage of $1 million per occurrence, $5 million in the
aggregate, as well as umbrella insurance policies providing an aggregate of $75
million in excess umbrella insurance coverage. The primary insurance policy
requires us to self-insure for up to $10,000 per incident and, based on
experience, have accrued $265,000 for this contingency as of September 30, 2001.
No assurance can be given that the number of claims will not exceed historical
experience or that claims will not exceed available insurance coverage or that
we will be able to maintain our current level of insurance.

We are also a party to routine litigation incidental to our business. We believe
the ultimate resolution of any such legal proceedings will not have a material
adverse effect on our financial position or annual results of operations.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

Page 10

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

On August 9, 1999, the New York Stock Exchange ("NYSE") notified us that
it had changed its rules regarding continued listing for companies which have
shares traded on the NYSE. The new rules changed and increased the requirements
to maintain a listing on the NYSE. Through March 31, 2001, we did not meet the
new rules, which required a total market capitalization of $50 million and the
maintenance of minimum total shareholders' equity of $50 million. On April 5,
2001, the NYSE announced that it had determined that our common stock should be
removed from the list of companies trading on the NYSE. We decided not to appeal
the NYSE's decision. On May 21, 2001, our common stock began to be quoted on the
NASD Over-the-Counter Bulletin Board under the symbol "CALA.OB".

The following table presents the quarterly high and low selling price
quotations during the last two fiscal years. For periods ended prior to May 21,
2001, the common stock was listed on the NYSE, and for periods ended after May
21, 2001, the common stock has been quoted on the NASD Over-the-Counter Bulletin
Board. These quotations reflect the inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not necessarily represent actual transactions.

High Low
---- ---

Fiscal Year Ended September 30, 2000
First Quarter............................... $ 5.75 $ 3.813
Second Quarter.............................. 6.188 4.438
Third Quarter............................... 4.875 3.563
Fourth Quarter.............................. 5.063 3.375

Fiscal Year Ended September 30, 2001
First Quarter............................... $ 3.438 $ 1.563
Second Quarter.............................. 3.063 1.25
Third Quarter............................... 1.70 0.84
Fourth Quarter.............................. 1.65 0.65

On December 14, 2001, the closing price of our common stock as quoted on
the NASD Over-the-Counter Bulletin Board was $.0.30. As of December 14, 2001
there were approximately 1,844 holders of record of our common stock, including
some brokerage firms, which hold shares in street name on behalf of their
clients.

We have never paid cash dividends on our common stock. We intend to retain
future earnings, if any, to finance the expansion of our business and do not
anticipate that any cash dividends will be paid in the foreseeable future. In
addition, the terms of our credit facilities prohibit the payment of any cash
dividends or other distribution on any shares of our common stock, other than
dividends payable solely in shares of common stock, unless approval is obtained
from the lenders. Future dividend policy will depend on our earnings, capital
and financing requirements, expansion plans, financial condition and other
relevant factors.

Our Board of Directors has authorized the repurchase of up to $2.7 million
shares of our common stock from time to time in the open market or in negotiated
purchases. As of December 15, 2001, we had repurchased 641,932 shares of our
stock for $2.5 million.

In November 2000, the Board of Directors reauthorized a stockholder rights
plan by adopting a plan similar to a pre-existing rights plan which expired on
November 20, 2000. Under our new rights plan, a preferred stock purchase right
was distributed for each share of common stock outstanding at the close of
business on the November 30, 2000 record date and issued in connection with each
share issued after such date. The rights were not initially exercisable, but
upon the occurrence of certain takeover-related events, the holders of the
rights (other than an adverse or acquiring person, or group thereof), under
certain circumstances, had the right to purchase additional shares of our stock
(or, in some cases, stock of the acquiring entity) at a discount to the then
market price. The rights were redeemable by us at any time, and would otherwise
have expired on November 20, 2005. The thresholds for triggering the rights plan
was a person (as defined in the rights plan) acquiring 21% of our outstanding
stock or a declaration by the Board of Directors that a person is an "adverse
person" as defined in the rights plan, and the exercise price of the rights was
$17. We redeemed and cancelled this shareholders' rights plan in connection with
the July 23, 2001 capital infusion consummated with an affiliate of Sun Capital
Partners, Inc. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources").

Page 11

Item 6. Selected Financial Data.
(in thousands, except per share data)

At or For the Years Ended September 30,
--------------------------------------------------------------------
2001 (1) 2000 (2) 1999 (3) 1998 1997 (4)
---------- --------- --------- --------- ----------

Net sales $ 234,786 $ 202,630 $ 176,561 $ 161,860 $ 196,955

Net income (loss) $ (18,347) $ 2,845 $ 6,489 $ 1,102 $ (3,093)

Basic earnings (loss) per share $ (2.04) $ 0.40 $ 0.92 $ 0.15 $ (0.44)
Diluted earnings (loss) per share $ (2.04) $ 0.37 $ 0.80 $ 0.15 $ (0.44)

Total assets $ 146,097 $ 167,971 $ 101,897 $ 98,960 $ 116,581
Long-term borrowings $ 51,240 $ 6,888 $ 24,774 $ 28,224 $ 39,737

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, 2001.

(1) Includes a $2.6 million charge to settle executive management contracts,
$1.2 million in severance and office closing costs, other income of
$714,000 from the settlement of litigation and a provision of $5.0 million
for a valuation allowance on deferred tax assets.

(2) Includes a $500,000 charge to close the Boston office, a $788,000 charge
related to the reorganization of executive management and assets and
liabilities acquired upon the acquisition of Ring on July 5, 2000 and the
operating results for Ring for the period July 5, 2000 to September 30,
2000. Long term borrowings reflect the classification of all borrowings
under the Company's $75 million credit facility as current liabilities at
September 30, 2000.

(3) Reflects the reversal of a $2.7 million provision for a judgment related
to litigation with a former officer of the Company and the reversal of an
associated $893,000 provision for post judgment interest.

(4) Includes $930,000 in plant closing costs due to the termination of
manufacturing operations at our Meridian Lamps subsidiary and $7.5 million
in litigation costs and related professional fees.

Page 12

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes.

RECENT DEVELOPMENTS

During our fiscal year ended September 30, 2001 we experienced significant
declines in sales, gross profit, profitability and liquidity due primarily to
economic and competitive conditions in the United States and United Kingdom. As
a result of quarterly net losses, we were unable to comply with the financial
covenants under our $75 million credit facility with a bank syndicate group for
the quarters ended December 31, 2000, March 31, 2001 and June 30, 2001, but were
able to obtain credit facility amendments and forbearance agreements that
deferred through July 31, 2001 the lenders' ability to exercise their rights and
remedies (including the demand for immediate repayment) for the event of default
under the credit facility resulting from the failures to meet the financial
covenants.

On July 23, 2001, we obtained $11.8 million in additional funding as a
result of closing a transaction (the "Sun transaction") with Sun Catalina
Holdings LLC (SCH), an affiliate of Sun Capital Partners, Inc. (a merchant
banking firm based in Boca Raton, Florida) and other parties. See "Liquidity and
Capital Resources".

The Sun transaction constituted a change of ownership of the Company as
defined under Internal Revenue Code Section 382 (IRC 382). In general, IRC 382
can limit an entity's utilization of its net operating loss carryforwards and
other anticipated tax return deductions existing at the time the change in
ownership occurs. Based upon management's estimate of the impact of IRC 382 on
the Company arising from the Sun transaction, during the fourth quarter of 2001
we recorded a provision for a valuation allowance of approximately $5.0 million
on deferred tax assets that existed as of July 23, 2001.

RESULTS OF OPERATIONS

In the following comparison of the results of operations, our fiscal years
ended September 30, 2001, 2000 and 1999 are referred to herein as "2001", "2000"
and "1999, respectively.

Comparison of Fiscal Years Ended September 30, 2001 and 2000

Consolidated Results

We had a net loss of $18.3 million, or $2.04 per diluted share, in 2001.
Net income for 2000 was $2.8 million, or $0.37 per diluted share. Factors
contributing to the deterioration in our consolidated operating results in 2001
included:

- a $9.6 million decline in the gross profit of Catalina Industries,
as U.S. sales fell $43.1 million (35%) due to significant weakness
in the U.S. economy. Similarly, the operating income contribution of
Go-Gro dropped from $8.9 million in 2000 to $5.2 million as Go-Gro's
intercompany sales declined by $30.5 million because of the problems
experienced by Catalina Industries.

- $4.1 million in additional interest expense arising from the
incremental borrowings made to acquire Ring and an increase in our
effective interest rate as a result of various credit facility
amendments.

- charges amounting to $3.4 million in 2001 relating to the
termination of employees throughout the Company, including former
members of executive management.

- the pretax losses generated by our Chile, Argentina and Mexico
subsidiaries, which exceeded those for 2000 by $1.5 million. We
decided to cease operations in Chile and Argentina during the year
and to reduce the level of inventories held and scope of warehousing
operations in Mexico.

- a provision of approximately $5.0 million for a valuation allowance
on deferred tax assets, which reduced our overall tax benefit.

In addition, our July 5, 2000 acquisition of Ring affects the
comparability of current year results to those for 2000. Our 2001 results
include the results of Ring for the entire fiscal year, while our 2000 results
include Ring's results only for the period

Page 13

from July 5, 2000 to September 30, 2000. The pretax amounts for Ring included in
our consolidated statements of operations for 2001 and 2000 are detailed below
(in thousands):

2001 2000
-------- --------

Net sales $104,847 $ 24,529
Gross profit $ 12,824 $ 3,460
Selling, general and
administrative expenses $ 13,289 $ 3,776
Employee severance costs $ 626 $ --
Litigation settlement received $ 714 $ --
Interest expense $ 5,113 $ 957
Other expenses $ 182 $ --
Pretax loss $ 5,672 $ 1,273

Net sales for 2001 were $234.8 million, a $32.2 million increase from the
prior year. Excluding Ring, net sales for 2001 were $129.9 million, as compared
to $178.1 million in 2000. In 2001 sales to U.S. and international customers
(excluding Ring) were $78.4 million and $51.5 million, respectively, and in 2000
such sales (excluding Ring) amounted to $121.6 million and $56.5 million,
respectively.

Lamps, lighting fixtures, automotive after-market products and industrial
consumables accounted for 37%, 46%, 13% and 4%, respectively, of net sales in
2001 and 55%, 40%, 4% and 1% of net sales, respectively, in 2000. In 2001,
Ring's largest customer, B & Q, a subsidiary of Kingfisher PLC, accounted for
$40.1 million (17.1%) of net sales. In 2001 and 2000, Home Depot accounted for
$32.2 million (13.7%) and $47.0 million (23.2%), respectively, of net sales.
Sales made from warehouses constituted 57% of our net sales in 2001, up from 31%
in 2000 as a result of the Ring acquisition, as substantially all Ring sales are
made from warehouses. For 2001 and 2000 net sales to our ten largest customers
represented approximately 60% and 69%, respectively, of net sales.

Gross profit decreased by $6.3 million, and decreased as a percentage of
sales from 19.0% in 2000 to 13.7% in 2001. The decrease in the gross profit as a
percentage of sales is due to the inclusion of $104.8 million in sales from Ring
at a gross profit percentage of 12.2%, gross margin erosion for the U.S.
attributable to economic conditions and a weak retail environment and lost
contributions from the decrease in U.S. sales. Selling, general and
administrative expenses ("SG&A") for 2001 were $40.2 million, an increase of
$9.4 million from the prior year. The increase reflects SG&A related to Ring.

We expensed $2.6 million in the fourth quarter of 2001 in connection with
the Sun transaction and related resolution of obligations under employment
agreements with our former chief executive officer, two former executive vice
presidents and our chief financial officer. Pursuant to a reorganization of our
executive management structure, in December 1999 we expensed $788,000 to settle
the employment contract of another former executive vice president.

In September 2000, our United States (Catalina Industries) business
segment finalized plans to consolidate the functions of its Boston office into
the Miami headquarters. We recorded a $500,000 charge comprised of employee
severance costs ($422,000), property write-downs ($56,000) and lease termination
costs ($22,000) in September 2000 for the Boston office closure. During 2001
Catalina Industries increased its provision for lease termination costs by
$314,000 due to a continuing inability to sublease the Boston office space. Our
U.S., U.K. and China operations also terminated 75 employees during 2001,
incurring severance costs of $840,000.

Other expenses of $595,000 for 2001 consisted of a net foreign currency
loss ($488,000), dividends on Ring convertible preferred stock ($182,000), and
other miscellaneous expenses ($177,000) partially reduced by interest income
($195,000) and income from joint ventures ($57,000). Other income of $442,000 in
2000 consisted primarily of interest income ($495,000), income from joint
ventures ($185,000) and other miscellaneous income ($65,000) partially offset by
a net foreign currency loss ($303,000).

Greater interest expense for 2001 reflects the interest on the loans to
fund the Ring acquisition, interest on Ring's revolving loans of $1.2 million
and a greater weighted average interest rate.

We recorded a benefit from income taxes of $383,000 on our pretax loss for
2001. The relatively low effective rate of this benefit (2.0%) reflects a $5.0
million provision for a valuation allowance on deferred tax assets existing at
the date of the Sun transaction (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Developments"). Our
effective income tax rate is dependent on both the total amount of pretax income
generated and the source of such income (i.e. domestic or foreign).
Consequently, our effective tax rate may vary in future periods. Our effective
income tax

Page 14

rate reflects the anticipated tax benefits associated with a 1999 restructuring
of our international operations. Should these tax benefits not materialize, we
may experience an increase in our effective consolidated income tax rate.

Results By Segment

See Note 17 of Notes to Consolidated Financial Statements for the
financial tables for each business segment.

Catalina Industries (United States)

Catalina Industries had a segment loss in 2001 of $3.3 million as compared
to a contribution of $5.3 million in 2000. The decrease in segment contribution
in 2001 reflects lower sales.

Sales by Catalina Industries to external customers were $78.3 million in
2001, a decrease of $43.1 million from 2000. Sales to Home Depot were $26.0
million or $13.5 million less than in 2000 and sales to the office superstores
group of customers decreased by $14.2 million. Sales to one other customer
dropped by $7 million for 2001. Management believes the sales decline is
attributable to a general slowdown in the U.S. retail economy that has affected
the purchasing patterns of Catalina Industries' major customers. In 2001, Home
Depot, Wal-Mart and K-Mart accounted for 33.3%, 16.9% and 13.6% , respectively,
of Catalina Industries' net sales and such customers accounted for 32.6%, 10.5%
and 10.2% of Catalina Industries' net sales in 2000, respectively.

Gross profit dollars decreased by $9.6 million in 2001 due to the lower
sales volume. Catalina Industries also experienced a drop in its gross profit as
a percentage of sales. The lower 2001 gross profit percentage reflects retail
pricing pressures and economic conditions.

Approximately $16.5 million of Catalina Industries' sales in 2001 were
made from its warehouse as compared to $24.3 million in warehouse sales for
2000. Lower warehouse sales in 2001 stem in part from economic factors but also
reflect a trend in Catalina Industries' business. Warehouse sales to U.S.
customers have declined in each fiscal year since 1995 when Catalina Industries'
present warehouse was constructed in Tupelo, Mississippi and annual warehouse
sales were $83.9 million. With the consolidation in the retail sector over the
last six years this segment's customer base is now comprised of fewer, larger
retailers that purchase primarily on a direct basis, whereby the merchandise is
shipped directly from the factory to the customer, rather than from the
warehouse. The relative amount of Catalina Industries' sales made from its
warehouse affects its overall gross profit percentage as warehouse sales have
historically commanded higher per unit prices than direct sales of the same
items. Catalina Industries reduced the operating costs for its warehouse in 2001
as well as in previous fiscal years. However Catalina Industries may continue to
experience declines in warehouse sales and may be unable to further reduce its
overall warehousing costs sufficiently to avoid an adverse impact on its gross
profit in the future from decreased warehouse sales.

Catalina Industries began attempting to lower inventory levels
significantly during the first quarter of 2001 to generate cash and address the
liquidity concerns created by lower sales volumes and operating losses. The
continuing weakness in the U.S. economy affected this segment's ability to
effect a major reduction in its inventories during the year, as Catalina's
Industries' gross inventories before allowances at September 30, 2000 were $12.2
million, as compared to $11.4 million at September 30, 2001. Retail conditions
and consumer confidence further weakened after the terrorist attacks in New York
City and Washington, D.C. on September 11, 2001. With the dramatic change in
market conditions and the U.S. economy in recession, many competing
manufacturers and wholesalers are selling off inventories at substantial
discounts. Certain retailers went out of business during the year, others are
experiencing financial difficulties, and management believes retailers in
general have become more selective with their inventory purchases. In response
to the current retail environment and based upon management's plans to continue
to emphasize overall inventory reductions to improve liquidity, Catalina
Industries' inventory allowance increased by $2.5 million from September 30,
2000 to September 30, 2001. The net provision recorded to increase this
allowance significantly reduced Catalina Industries' gross profit during 2001.
Any need to further increase its inventory allowance due to continuing weakness
in the U.S. retail economy could adversely impact Catalina Industries' future
gross profits.

Catalina Industries decreased its SG&A by approximately $245,000 in 2001.
Decreases in sales-related expenses and certain other expenses were sufficient
to offset a $775,000 provision for uncollectible accounts receivable for
customers that filed for bankruptcy.

In September 2000, this business segment finalized plans to consolidate
the functions of its Boston office into our Miami headquarters. We recorded a
$500,000 charge comprised of employee severance costs ($422,000), property
write-downs ($56,000) and lease termination costs ($22,000) was recorded in
September 2000 for the Boston office closure.

Page 15

The closing of the Boston office resulted in the termination of two
vice-presidents and eight customer support and administrative personnel. The
non-cash property write-down consisted of the net book value of leasehold
improvements and the office furniture and other equipment not suitable for use
by the Miami headquarters or our Canadian operations. The charge for lease
termination costs represented the remaining aggregate contractual lease
obligation for the Boston office subsequent to the date of its closure, net of
projected sublease income. Catalina Industries continued to incur and expense
normal payroll, depreciation, lease and other operating costs for its Boston
office during the 2001 fiscal year, until the office was closed in December 2000
and certain remaining employees ceased working for the Company in March 2001.
Costs incurred for the Boston office during 2001 and 2000 were $429,000 and
$999,000, respectively.

Due to the continuing inability to sublease the Boston office space,
Catalina Industries increased its provision for lease termination costs by
$314,000 during 2001. Catalina Industries also terminated 31 employees at its
Miami, Florida and Tupelo, Mississippi locations during the fourth quarter of
2001, incurring severance costs of $130,000.

Go-Gro (China)

Go-Gro's segment contribution decreased in 2001 to $4.9 million, down $4.3
million from $9.2 million in 2000, reflecting the impact of a $32.7 million
decrease in sales.

Go-Gro's sales for 2001 were $108.7 million, as compared to $141.4 million
in 2000. Sales of products manufactured by Go-Gro in 2001 (as opposed to sales
of products purchased for resale by Go-Gro from other manufacturers) decreased
by $11.1 million, to $60.3 million. Third party and intercompany sales by Go-Gro
in 2001 were $24.8 million and $83.9 million, respectively, while the comparable
sales amounts for 2000 were $27.0 million and $114.4 million, respectively. The
decline in intercompany sales for 2001 is primarily attributable to the overall
sales decline to Catalina Industries reflecting a decrease in Catalina
Industries' U.S. business. Third party sales in 2000 included $5.0 million in
sales to Ring Limited. Sales to one third-party customer were $10.5 million in
2001 and $10.1 million in 2000, respectively.

Go-Gro's gross profit dollars decreased by $4.1 million due to the $32.7
million decrease in sales, as gross profit as a percentage of sales remained
relatively constant between the years.

Ring Limited (United Kingdom)

We acquired Ring on July 5, 2000, and only the results from that date to
September 30, 2000 are included in our fiscal 2000 results, as reflected in the
table below. The Ring results (in thousands) for the full year ended September
30, 2000 (excluding acquisition costs) are also provided below and discussed for
comparison purposes in the paragraphs that follow.

Ring Results
for the Year
Ring Amounts Included in Ended
Company's Consolidated Results Sept 30, 2000
------------------------------ -------------
2001 2000
--------- ---------

Net sales $ 104,847 $ 24,529 $ 116,253
========= ========= =========
Gross profit $ 12,824 $ 3,460 $ 17,675
========= ========= =========
Pretax income (loss)
before acquisition costs $ (719) $ (213) $ 2,835
=========

Goodwill amortization 1,025 260 N/A
Acquisition related
interest costs 3,928 800 N/A
--------- ---------
Segment contribution (loss) $ (5,672) $ (1,273) N/A
========= =========

Ring's net sales in U.S. dollars fell 10% from $116.3 million in 2000 to
$104.8 million in 2001. However, in terms of Great British pounds (GBP) Ring's
sales remained relatively flat, falling only GBP 1.5 million, or 2%. The
remaining 8% of Ring's sales decline in terms of U.S. dollars relates to changes
in the average foreign exchange rate (which is used to translate Ring's results
from GBP to dollars) from 2000 to 2001. The average foreign exchange rate in
2000 was $1.565 for each pound. The British pound experienced a devaluation
relative to the dollar in 2001 of approximately 8%, as the average exchange rate
for 2001 was $1.442 for each pound.

Page 16

The devaluation of the British pound had both a translation and economic
impact on Ring's gross profit in 2001, which declined in terms of British pounds
by 21% to GBP 8.8 million in 2001 from GBP 11.2 million in 2000. The majority of
the gross profit decrease occurred in Ring's lighting division, which purchases
most of its products in U.S. dollars from Chinese manufacturers. Since Ring
sells in pounds, the drop in the British pound relative to the U.S. dollar
squeezed Ring's margin due to an inability in the U.K. marketplace to increase
prices sufficiently to offset the higher effective costs of purchasing its goods
from China. Highly competitive retail conditions and a less favorable product
mix also contributed to Ring's overall gross profit decline for 2001.

Ring's SG&A was approximately $1.1 million lower in 2001. Severance costs
to terminate 31 employees in 2001 were $626,000. During 2001 Ring received
$714,000 from the settlement of litigation.

Ring's stand alone interest expense on its revolving loan was $680,000
more in 2001 as average borrowings and weighted interest rates increased.

Comparison of Fiscal Years Ended September 30, 2000 and 1999

Consolidated Results

We earned $2.8 million, or $0.37 per diluted share, in 2000. Net income
for 1999, which included a non-recurring reversal of a provision for litigation
(and related interest) that increased pretax income by $3.6 million, was $6.5
million, or $0.80 per diluted share. Net income and diluted earnings per share
for 1999, as adjusted to exclude the impact of the litigation settlement, were
$4.5 million and $0.57, respectively.

Our July 5, 2000 acquisition of Ring significantly affected 2000 operating
results and the comparability of 2000 results to those for 1999. Our 2000
results include net sales of $24.5 million and a pretax loss of $1.3 million
attributable to Ring for the period July 5, 2000 to September 30, 2000. Ring's
pretax loss of $1.3 million includes interest and financing costs and goodwill
amortization related to the acquisition aggregating $1.1 million. Ring's results
for the period after its acquisition were negatively affected by an increasingly
competitive retail sector, consolidation and direct importation trends in Ring's
markets and product lines and a weakening of the British pound relative to the
U.S. dollar. See "Results By Segment - Ring Limited" for a comparative analysis
of Ring's results.

We took actions in two areas of our business that resulted in charges that
reduced 2000 pretax earnings by approximately $1.3 million. We expensed $788,000
pursuant to a reorganization of our executive management structure in December
1999. Separately, in September 2000 we finalized plans to consolidate the
functions of our Boston office into our Miami headquarters. We recorded a
$500,000 charge to provide for employee severance costs and to writedown
equipment and other property in September 2000 for the Boston office closure.

Net sales for 2000 were a record $202.6 million as a result of the Ring
acquisition. Excluding Ring, net sales for 2000 were $178.1 million, as compared
to $176.6 million in 1999. Higher unit sales to Canadian, European and other
international customers offset lower unit sales and an overall sales decline to
U.S. customers. In 2000 sales to U.S. and international customers (excluding
Ring) were $121.6 million and $56.5 million, respectively, and in 1999 such
sales amounted to $134.0 million and $42.6 million, respectively.

Lamps, lighting fixtures, automotive after-market products and industrial
consumables accounted for 55%, 40%, 4% and 1% of net sales in 2000. Lamps and
lighting fixtures accounted for 64% and 36% of net sales in 1999. In 2000 and
1999 our largest customer, Home Depot, accounted for $47.0 million (23.2%) and
$45.6 million (25.8%), respectively, of our net sales. Wal-Mart and an affiliate
accounted for $18.8 million (9.3%) and $25.6 million (14.5%) of net sales in
2000 and 1999, respectively. For 2000 and 1999, net sales to our ten largest
customers represented approximately 69% and 73%, respectively, of our net sales.
Approximately 69% of our sales in 2000 were made on a direct basis as compared
to 75% in 1999.

Gross profit increased in total dollars, but decreased as a percentage of
sales, from 1999 to 2000. The decrease in gross profit as a percentage of sales
is due in part to the inclusion of $24.5 million in sales from Ring at a gross
profit percentage of 14.1% for the fourth quarter of 2000 and other factors. See
"Results By Segment - Catalina Industries".

Page 17

SG&A for 2000 was $27.0 million (net of Ring-related SG&A of $3.8
million), a decrease of $1.5 million from 1999. The majority of this decrease
relates to reductions in (i) bonuses for U.S. employees of $916,000; (ii)
professional fees of $269,000; (iii) tradeshow expenses of $148,000; and (iv)
sales commissions of $143,000.

Greater interest expense for 2000 reflects the impact of $800,000 in
interest on the loans to fund the Ring acquisition.

Other income for 2000 consisted primarily of interest income ($495,000),
income from joint ventures ($185,000) and other miscellaneous income ($65,000).
Other income in 2000 was reduced by a net foreign currency loss of $303,000.
Other income in 1999 consisted primarily of a gain on sale of our Meridian
facility ($194,000), interest income ($349,000), income from joint ventures
($145,000) and miscellaneous income ($455,000). Other income in 1999 was reduced
by a net foreign currency loss of $25,000.

The effective income tax rates for 2000 and 1999 were 27.4% and 31.2%,
respectively, and reflect the impact of foreign income, which is taxed at a
lower rate than U.S. income.

Results By Segment

See Note 17 of Notes to Consolidated Financial Statements for the
financial tables for each business segment.

Catalina Industries (United States)

The segment contribution made by Catalina Industries in 2000 was $5.3
million, as compared to $9.0 million in 1999. The decrease in segment
contribution in 2000 reflects lower sales to U.S. customers, with a resulting
loss of gross profit dollars.

Sales by Catalina Industries to external customers were $121.4 million in
2000, a decrease of $12.3 million, or 9.2% from 1999. Sales to Wal-Mart were
$12.8 million or $9.6 million less than in 1999, as Catalina Industries
introduced new programs and benefited from promotional sales with Wal-Mart in
1999. Catalina Industries also generated $2.9 million in sales in 1999 from a
customer that went out of business prior to fiscal 2000. Sales to Home Depot,
Catalina Industries' largest customer, were $39.5 million and $40.4 million for
2000 and 1999, respectively.

The gross profit decrease of $4.9 million in 2000 is attributable to the
lower sales volume, and to a decrease in the overall gross profit percentage.
The lower gross profit percentage in 2000 reflects a change in the product mix
and a continuing reduction of Catalina Industries' warehouse sales. Most of our
major U.S. customers (including Home Depot and Wal-Mart) purchase from Catalina
Industries primarily on a direct basis. Approximately 79% of Catalina
Industries' sales to U.S. customers in 2000 were made on a direct basis as
compared to 75% in 1999. Warehouse sales to U.S. customers declined each fiscal
year in the six-year period commencing fiscal 1995, when the present warehouse
was constructed in Tupelo, Mississippi, and warehouse sales were 61% of U.S.
sales compared to the present 21%. This decline in warehouse sales as a
percentage of U.S. sales represents a significant decrease in sales dollars.
With the continued decline in warehouse sales in 2000, Catalina Industries also
earned lower overall margins on its warehouse sales, as we reduced U.S.
inventories from $15.6 million at September 30, 1999 to $10.6 million at
September 30, 2000. Catalina Industries lowered its warehousing costs by
terminating its other U.S. warehouse operation located in Los Angeles effective
March 31, 1998.

Catalina Industries lowered its SG&A by approximately $1 million in 2000,
as this segment reduced its involvement in tradeshows and its use of certain
other merchandising approaches, resulting in a decrease of more than $700,000 in
this expense category.

In September 2000, this business segment finalized plans to consolidate
the functions of its Boston office into our Miami headquarters. We recorded a
$500,000 charge comprised of employee severance costs ($422,000), property
write-downs ($56,000) and lease termination costs ($22,000) in September 2000
for the Boston office closure.

The closing of the Boston office resulted in the termination of two
vice-presidents and eight customer support and administrative personnel. The
non-cash property write-down consisted of the net book value of leasehold
improvements and the office furniture and other equipment not suitable for use
by the Miami headquarters or Canadian operations. The charge for lease
termination costs represented the remaining aggregate contractual lease
obligation for the Boston office subsequent to the date of its closure, net of
projected sublease income. Catalina Industries continued to incur and expense
normal payroll, depreciation, lease and other operating costs for its Boston
office during the 2001 fiscal year, until the office was closed in December
2000. Costs incurred for the Boston office during 2000 and 1999 were
approximately $999,000 and $905,000, respectively.

Page 18

Go-Gro (China)

Go-Gro's segment contribution rose in 2000 to $9.2 million, up $2.6
million, or 39%, from $6.6 million for 1999. Go-Gro became more profitable in
2000 by growing its sales to third parties and raising its manufacturing output.

Go-Gro's sales for 2000 were $141.4 million, an increase of $4.4 million
from the $137.0 million generated in 1999. Sales of products manufactured by
Go-Gro in 2000 (as opposed to sales of products purchased for resale by Go-Gro
from other manufacturers) increased by $13.3 million, to $71.4 million. Third
party and intercompany sales by Go-Gro in 2000 were $27.0 million and $114.4
million, respectively, while the comparable sales amounts for 1999 were $19.5
million and $117.5 million, respectively. Sales to one third party customer were
$10.1 million in 2000 and $2.7 million in 1999, respectively. In 2000 new
product introductions for Europe were the driving factor behind Go-Gro's sales
growth to third parties, while Go-Gro's greater manufacturing sales reflects the
added capacity of Go-Gro's new factory. Go-Gro's gross profit increased $2.6
million due to the growth in sales of products manufactured by Go-Gro, as the
margins Go-Gro earns on products it manufactures typically exceed the margins
Go-Gro earns on products it purchases from other manufacturers.

Ring Limited (United Kingdom)

The Ring segment recorded a pretax loss of $1.3 million for 2000, which
includes $260,000 in goodwill amortization arising from the acquisition and
$800,000 in interest and financing costs for the acquisition-related debt.
Excluding these acquisition costs, Ring's pretax loss for the period from July
5, 2000 to September 30, 2000 was approximately $210,000, as compared to pretax
income of approximately $850,000 for the quarter ended September 30, 1999.

Net sales and gross profit for the period from July 5, 2000 to September
30, 2000 were $24.5 million and $3.5 million, respectively, as compared to $26.7
million and $4.6 million, respectively, for the same period of 1999. Ring's
sales volume and gross profit reflect an increasingly competitive retail
business sector stemming from consolidation in both the lighting and automotive
markets, a general decline in the automotive aftermarket, and greater direct
importation of products by Ring's customers. In addition, a weakening of the
Great British pound relative to the U.S. dollar has increased Ring's cost of
goods and lowered its margins. The average exchange rate of the dollar to the
pound for the quarter ended September 30, 2000 was approximately 1.48 to 1, a
significant decline from the average exchange rate for the quarter ended
September 30, 1999 of 1.61 to 1. Ring's lighting division sales increased (in
local currency) in the 2000 period but such sales were made at lower margins.
Sales for Ring's automotive and consumable divisions declined in 2000, as did
such divisions' gross profits. Ring's margin erosions are directly related to
the economic factors mentioned previously.

LIQUIDITY AND CAPITAL RESOURCES

We meet our short-term liquidity needs through cash provided by
operations, borrowings under various credit facilities with banks, accounts
payable and the use of letters of credit from customers to fund certain of our
direct import sales activities. Term loans, lease obligations, mortgage notes,
bonds, subordinated debt, capital stock and sales of assets are additional
sources for our longer-term liquidity and financing needs. Based upon
management's projections and assessment of current market conditions, we believe
we will have adequate liquidity to meet our needs for fiscal 2002. See
"Liquidity and Capital Resources - Revolving Credit and Term Loan Facilities".

Cash Flows and Financial Condition

Our operating, investing and financing activities resulted in a net
increase in cash and cash equivalents of $2.3 from September 30, 2000 to
September 30, 2001.

We used funds generated from operations and proceeds from the issuance of
common stock, warrants and subordinated notes to pay for capital expenditures
and make payments of $4.1 million on our term loans. Capital expenditures for
the period totaled $4.8 million, the majority of which related to the planned
expansion of the Go-Gro manufacturing facility and Go-Gro equipment purchases.

Accounts receivable balances decreased to $27.8 million at September 30,
2001 from $36.6 million at September 30, 2000 resulting from the significant
decline in sales to U.S. customers. Inventory levels at September 30, 2001 were
$37.4 million, as compared to $52.8 million at September 30, 2000, due to our
focus on lowering inventories in each of our principal business segments in
response to current business and economic conditions and liquidity needs.

Page 19

Our agreements with our major customers provide for various sales
allowances (i.e., deductions given the customer from purchases made from us),
the most common of which are for volume discounts, consumer product returns, and
cooperative advertising. These allowances are usually defined as a percentage of
the gross sales price, and are recognized as a reduction of gross sales revenue
at the time the related sales are recorded. If the customer agreement does not
provide for the deduction of the allowance amount directly from the amount
invoiced the customer at time of billing, we record an accrual for the amounts
due. These accrued sales allowances are settled periodically either by
subsequent deduction from the accounts receivable from the customer or by cash
payment. For financial statement presentation purposes, these sales allowances
are netted against accounts receivable, and amounted to $10.4 million and $11.3
million at September 30, 2001 and 2000, respectively. The amounts of our accrued
sales allowances, by customer and in the aggregate, are dependent upon various
factors, including sales volumes, the specific terms negotiated with each
customer (including whether the allowance amounts are deducted immediately from
the invoice or accrued) and the manner and timing of settlement.

Revolving Credit and Term Loan Facilities

In July 2000 we entered into a credit facility for approximately $75
million with a bank syndication group to finance the acquisition of Ring and
repay and terminate our existing U.S. credit facility and Ring's U.K. facility.
The facility consists of two term loans amounting to $15 million and the GBP
equivalent of U.S. $15 million (GBP 10.5 million), respectively, and two
revolving facilities for loans, acceptances, and trade and stand-by letters of
credit for our ongoing operations in the U.S. and the U.K. Amounts outstanding
under the revolving facilities are limited under a borrowing base defined as
percentages of the combined accounts receivable and inventory balances for the
U.S. and U.K. Obligations under the facility are secured by substantially all of
our U.S. and U.K. assets, including 100% of the common stock of our U.S.
subsidiaries and 65% of the stock of our Canadian and first tier United Kingdom
and Hong Kong subsidiaries. The agreement prohibits the payment of cash
dividends or other distribution on any shares of our common stock, other than
dividends payable solely in shares of common stock, unless approval is obtained
from the lenders. We pay a quarterly commitment fee of .50% per annum based on
the unused portion of the revolving facilities.

Under English law, a British company cannot lawfully provide financial
assistance for the purpose of the acquisition of its own shares (which would
include using its cash flows and other sources of funds to make payments due on
debt used to fund its acquisition) unless certain conditions are met. In
addition, lenders providing the financing for the acquisition cannot perfect
their collateral interest in the assets of the acquired British company unless
such conditions are met. In order to lawfully provide financial assistance, the
acquired British company must complete a "whitewash procedure" under English
law. In essence, the whitewash procedure requires the following: (1) every
director of the acquired British company must make a statutory declaration as to
the solvency of the acquired company and its ability to pay its debts for the
next twelve months; and (2) the statutory declarations must be accompanied by an
independent auditors' report stating that the auditors' are not aware of
anything to indicate that the statutory declarations of the directors are not
reasonable. In addition, English law requires that the net assets of the
acquired British company are not reduced by the financial assistance or, to the
extent that the net assets are reduced, the reduction is funded out of
distributable profits. "Net assets" and "distributable profits" have prescribed
meanings under the statute governing the whitewash procedure. Failure to comply
with the whitewash procedure will mean the financial assistance is unlawful,
which could result in the acquired British company facing a fine and its
directors and managers facing a fine or imprisonment or both. In addition, the
transaction constituting the financial assistance together with any security
given in contravention of the financial assistance rules, may be held by English
courts to be void and unenforceable. The financial assistance rules apply to any
subsidiaries of the acquired company which are also involved in providing
financial assistance. Until the whitewash procedure is completed, cash flows
from Ring cannot be used to repay the Company's term loans and cash payments by
Ring to other Company subsidiaries are limited to trade transactions in the
normal course of business.

The $75 million credit facility contained financial covenants requiring us
to meet certain debt to adjusted earnings (i.e. leverage) and fixed charge
coverage ratios on a quarterly basis. We obtained an amendment of this credit
facility on December 22, 2000, and without this amendment we would not have been
in compliance with one of the financial covenants for the quarter ended
September 30, 2000. As a result of quarterly net losses, we were unable to
comply with the financial covenants under our $75 million credit facility for
the quarters ended December 31, 2000, March 31, 2001 and June 30, 2001 but were
able to obtain amendments to the credit facility and forbearance agreements that
deferred through July 31, 2001 the lenders' ability to exercise their rights and
remedies (including the demand for immediate repayment) for the event of default
under the credit facility resulting from the failures to meet the financial
covenants.

On July 23, 2001 we obtained $11.8 million in additional funding as a
result of closing a transaction (the "Sun transaction") with Sun Catalina
Holdings LLC ("SCH"), an affiliate of Sun Capital Partners, Inc. (a merchant
banking firm based in Boca Raton, Florida) and other parties. The $75 million
credit facility was amended and restructured in connection with the Sun
transaction.

Page 20

In exchange for the $11.8 million, we issued SCH 8,489,932 shares of
common stock (for $3 million) and $4.5 million in secured subordinated notes,
and issued $4.3 million in secured subordinated notes to another lender,
SunTrust Equity Partners ("STEP"). SCH and STEP also received the right to
obtain warrants exercisable immediately upon receipt at $.01 per warrant to
purchase an additional 3,904,838 and 1,652,636 shares, respectively, of our
common stock. Immediately after the Sun transaction, SCH owned approximately 53%
of our outstanding common stock. We also paid an affiliate of SCH a $400,000
investment banking fee in connection with the Sun transaction.

With respect to our $75 million credit facility the net proceeds from the
transaction amounting to $8.9 million were applied against the revolving loans
and term loans under this facility. Available borrowings under the revolving
loans were reallocated under the amendment to increase the U.S. revolver to
$21.4 million and decrease the U.K. revolver to the British pound equivalent of
$ 23.6 million. Borrowings under the facility bear interest, payable monthly at
our option of either the prime rate plus an applicable margin or the LIBOR rate
plus an applicable margin. The effective rate on the facility was 8.1% at
September 30, 2001. Under the amended facility, we are required to meet minimum
levels of adjusted quarterly earnings beginning with the quarter ended September
30, 2001 and revised quarterly debt to adjusted earnings and fixed charge ratios
beginning with the quarter ending December 31, 2002. Annual capital expenditures
are limited under the amendment to $3.75 million. The term loans are now
repayable in installments aggregating approximately (i) $200,000 on each of
December 31, 2001, March 31, 2002, June 30, 2002 and September 30, 2002; (ii)
$750,000 on each of December 31, 2002, March 31, 2003, June 30, 2003, and
September 30, 2003, and; (iii) $20,497,000 on December 31, 2003. The revolving
loans under the facility mature December 31, 2003. The bank syndication group's
fee for the amendment consisted of the right to obtain warrants to purchase
354,136 shares of common stock at a price of $.01 per share. The July 23, 2001
amendment to the $75 million credit facility eliminated (as an event of default)
a previous requirement of the credit facility that we complete the whitewash
procedure. However, if the whitewash procedure is not completed by December 31,
2001, 50 basis points will be added to the facility's effective interest rate.
We do not expect to complete the whitewash procedure by December 31, 2001.

The terms of our credit facilities, English law, and U.S. and foreign
income tax considerations impact the flow of funds between our major
subsidiaries. The $75 million credit facility prohibits loans to Go-Gro from
either Ring or our other companies other than normal intercompany payables
arising from trade. This facility permits loans from our U.S. companies to Ring,
but restricts the flow of funds from Ring to our non-U.K. companies to payments
constituting dividends or a return of capital. English laws and our current
inability to complete the whitewash procedure also restrict the amount of funds
that may be transferred from Ring to our U.S. companies and other subsidiaries.
The Hong Kong credit facility prohibits the payment of dividends without the
consent of the bank and limits the amount of loans or advances from Go-Gro to
our other companies. Any loan made or dividends paid either directly or
indirectly by Go-Gro to the Company or its U.S. subsidiaries could be considered
by U.S. taxing authorities as a repatriation of foreign source income subject to
taxation in the U.S. at a higher rate than that assessed in Hong Kong. The net
impact of such a funds transfer from Go-Gro could be an increase in our U.S.
income taxes payable and our effective tax rate. The credit facility for
Catalina Canada also limits payments to our other companies other than trade
payments in the ordinary course of business.

We utilize the revolving portions of our $75 million credit facility to
support our operations in the U.S. and U.K. Our U.S. operations are also
supported to a limited extent by cash flows from our China operations. Due to an
inability to transfer funds from the U.K. to the U.S. until the whitewash
procedure is completed, all payments on our term loans must presently be made by
U.S. operations. As of December 14, 2001, we had $11.8 million available under
our revolving facilities to support U.S. and U.K. operations. Since the closing
of the Sun transaction on July 23, 2001, we have significantly reduced our
overhead and operating costs in the U.S., U.K. and China through personnel
reductions and the elimination of discretionary expenditures. We plan to
continue to focus on cost control and liquidity management during 2002. Based
upon our (i) sales results for October 2001 and November 2001, (ii) current
assessments of market conditions for our business; and (iii) sales,
profitability and cash flow projections, we believe we will be in compliance
with the terms and covenants of the $75 million credit facility, and that we
will have adequate available borrowings and other sources of liquidity for 2002.
However, there can be no assurances that market conditions will not deteriorate
in the future, or that we will be able to achieve our projected results. Should
our operating losses continue, or should our cash needs in the future exceed our
available liquidity from borrowings under the revolving facilities and other
sources, we may be required to obtain either a modification of the $75 million
credit facility or funding from other sources to continue to support our
operations.

Ring has an arrangement with a U.K. bank which is secured by standby
letters of credit issued under the GBP revolving loan facility of our $75
million credit facility. The arrangement provides for borrowings, trade letters
of credit, bonds, and foreign currency forward contracts and transactions.
Borrowings, trade letters of credit, bonds and foreign currency forward
contracts outstanding under this arrangement amounted to approximately $7.1
million, $22,000, $199,000 and $5,700,000, respectively, at September 30, 2001.

Page 21

As of September 30, 2001 Catalina Canada had a credit facility with a
Canadian bank which provided 5.5 million Canadian dollars or U.S. equivalent
(approximately U.S. $3.5 million) in revolving demand credit. Canadian dollar
advances bore interest at the Canadian prime rate plus .5% (5.75% at September
30, 2001) and U.S. dollar advances bore interest at the U.S. base rate of the
bank (6.5% at September 30, 2001). In December 2001 Catalina Canada repaid this
credit facility upon the closing of a new credit facility with a different
lender. The new facility provides U.S. dollar and Canadian dollar revolving
credit loans of up to 7,000,000 Canadian dollars in the aggregate and matures
December 2004. Borrowings in Canadian dollars bear interest at the Canadian
prime rate plus 1.5% while borrowings in U.S. dollars bear interest at the rate
of the U.S. prime rate plus .5%. Borrowings under the facility are limited to a
borrowing base calculated from receivables and inventory. The credit facility is
secured by substantially all of the assets of Catalina Canada. The facility
limits the payment of dividends, advances or loans from Catalina Canada to
Catalina Lighting, Inc. to $500,000 annually, and no such amounts may be
transferred if Catalina Canada does not have sufficient excess borrowing
availability under the facility's borrowing base. The facility contains a
financial covenant requiring Catalina Canada to maintain a minimum net worth.

Go-Gro has a 60 million Hong Kong dollars (approximately U.S. $7.7
million) facility with a Hong Kong bank. The facility provides limited credit in
the form of acceptances, trade and stand-by letters of credit, overdraft
protection, and negotiation of discrepant documents presented under export
letters of credit issued by banks. The facility is secured by Go-Gro's assets
and a guarantee issued by the Company and requires Go-Gro to maintain a minimum
level of equity. This agreement prohibits the payment of dividends without the
consent of the bank and limits the total amount of trade receivables, loans or
advances from Go-Gro to our other companies. This facility is repayable upon
demand and is subject to an annual review by the bank. At September 30, 2001,
Go-Gro had used $1.8 million of this line for letters of credit (there were no
borrowings). As a result of our present financial situation, the Hong Kong bank
is requiring Go-Gro to maintain additional collateral in the form of cash
deposits as security on this facility. Such deposits amounted to $686,000 at
September 30, 2001.

Subordinated Notes

We issued $8.8 million in secured subordinated notes in July 2001 in
connection with the Sun transaction which are due in full on July 23, 2006.
These notes bear interest at 12%, compounded quarterly. Interest on the notes is
payable quarterly in arrears in cash commencing March 31, 2003. Interest for
quarters prior to the quarter ending March 31, 2003 will be added to the
principal amount of the note. SCH and STEP are also entitled to additional
warrants to purchase common shares at $.01 per share for the quarters during
which interest on the notes is not paid in cash. Interest was not paid on the
notes for the period July 23, 2001 to September 30, 2001, for which SCH and STEP
received additional warrants to purchase, in the aggregate, 128,400 shares of
common stock. We will be required to issue additional warrants for up to 907,189
shares of common stock if interest payments do not commence until March 31,
2003.

Bonds Payable

We 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 a $1 million leasing facility) our
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 through 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 (3.05% at September 30, 2001) 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 a $5.2 million direct
pay letter of credit which is not part of our credit lines. This direct pay
letter of credit provides that any default under any other agreement involving a
material borrowing or guarantee constitutes a default under the direct pay
letter of credit. The unpaid balance of these bonds was $5.1 million at
September 30, 2001. In January 1999, we entered into an interest rate swap
agreement maturing May 1, 2004, to manage our exposure to interest rate
movements by effectively converting this debt from a variable interest rate to a
fixed interest rate of 5.52%. Interest rate differentials paid or received under
the agreement are recognized as adjustments to interest expense.

Other Obligations

We financed the purchase of our corporate headquarters in Miami, Florida
with a loan payable monthly through 2004, based on a 15-year amortization
schedule, with a balloon payment in 2004. The loan bears interest at 8% and is
secured by a mortgage on the land and building. The unpaid balance of this loan
was $828,000 at September 30, 2001.

Immediately prior to the closing of the Sun transaction we had existing
employment agreements with our then chief executive officer, two executive vice
presidents and our chief financial officer that provided for certain payments to
these employees in the event that we experienced a "change in control". We
resolved these obligations as part of the Sun transaction by terminating the
previous employment agreements and entering into settlement agreements with
these employees which

Page 22

provide in the aggregate for (i) the granting of rights to fully vested options
to purchase 1,569,229 shares of common stock at a price of $1.18 per share and
(ii) payments of approximately $198,000 each quarter over a three-year period
beginning September 1, 2001. The quarterly payments under these settlement
agreements are suspended at any time in which a default under our credit
facility has occurred and is continuing. Effective upon the closing of the Sun
transaction, our former chief executive officer entered into a new one-year
employment agreement to serve as our president, the chief financial officer
signed a new one-year employment agreement, and the employment of the executive
vice presidents was terminated. In August 2001 our former chief executive
officer (and then acting president) resigned. As part of the settlement
agreements, we obtained covenants not to compete through July 23, 2004. Amounts
receivable from the two former executive vice presidents totaled $212,000
immediately prior to the Sun transaction. These amounts are being repaid on a
quarterly basis in the aggregate amount of $16,667 from the proceeds due these
former executives under the settlement agreements negotiated as part of the Sun
transaction. At September 30, 2001, the remaining amounts due from these
individuals totaled $194,000.

Pursuant to a reorganization of our executive management structure,
William D. Stewart, an executive vice-president left the employ of the Company
in December 1999 to pursue other interests. Under the terms of the settlement
agreement, Mr. Stewart will continue to provide consulting services under a
three-year non-compete and consulting agreement. We recorded a non-recurring
pretax charge of $788,000 in 2000 related to the settlement of our contractual
employment obligation to Mr. Stewart and we are obligated to pay $250,000
annually through December 2002 under the non-compete and consulting agreement.

Capital Expenditures

In September 2000 Go-Gro deposited the purchase price of approximately $1
million for its joint venture partner's interest in Go-Gro's Chinese cooperative
joint venture manufacturing subsidiary, Shenzhen Jiadianbao Electrical Products
Co., Ltd. ("SJE"). This purchase was finalized in December 2000. During the
quarter ended March 31, 2001, SJE was converted under Chinese law from a
cooperative joint venture to a wholly owned foreign entity and its name was
changed to Jiadianbao Electrical Products (Shenzhen) Co., Ltd. ("JES").

JES obtained non-transferable land use rights for the land on which its
primary manufacturing facilities were constructed under a Land Use Agreement
dated April 11, 1995 between SJE and the Bureau of National Land Planning Bao-An
Branch of Shenzhen City. This agreement provides JES with the right to use this
land until January 18, 2042 and required SJE to construct approximately 500,000
square feet of factory buildings and 211,000 square feet of dormitories and
offices. This construction is complete and total costs aggregated $15.8 million
through September 30, 2001.

In connection with the settlement with Go-Gro's former joint venture
partner in SJE, JES acquired the land use rights for a parcel of land adjoining
its primary manufacturing facilities. Under the separate land use agreement for
this parcel, JES has the right to use the land through March 19, 2051 and is
obligated to complete new construction on the land (estimated to cost
approximately $1.3 million) by March 20, 2002. If this construction is not
completed by that date JES is subject to fines of up to $55,000, and if the
construction is not completed by March 20, 2004, the local municipal planning
and state land bureau may take back the land use rights for the parcel without
compensation and confiscate the structures and attachments. We are presently
investigating various courses of action for this commitment, including
negotiations with the local authorities to extend or modify the agreement's
deadlines.

Litigation

During the past few years we received a number of claims relating to
halogen torchieres we sold to various retailers. We maintain primary product
liability insurance coverage of $1 million per occurrence, $2 million in the
aggregate, as well as umbrella insurance policies providing an aggregate of $75
million in excess umbrella insurance coverage. The primary insurance policy
requires us to self-insure for up to $10,000 per incident and, based on
experience, have accrued $265,000 for this contingency as of September 30, 2001.
No assurance can be given that the number of claims will not exceed historical
experience or that claims will not exceed available insurance coverage or that
we will be able to maintain our current level of insurance.

In connection with our appeal of a judgment entered by the U.S. District
Court for the Southern District of Florida in June 2001 (see "Legal
Proceedings") we have posted a surety bond in the amount of $1.8 million (for
which we have provided $1.5 million in cash collateral) for the appeal. We
believe that we ultimately will not be found liable for patent infringement in
this case. Accordingly, no provision for loss has been recorded in the
accompanying September 30, 2001 Consolidated Financial Statements for this
matter.

Page 23

Other Matters

Ring has a defined benefit pension plan which covers 27 current employees
and approximately 750 other members formerly associated with Ring. The plan is
administered externally and the assets are held separately by professional
investment managers. The plan is funded by contributions at rates recommended by
an actuary. We are reviewing the plan and believe that in the future we may
begin the process of terminating our liability under the plan. We anticipate
that a termination will require payment of a lump sum equal to the "Minimum
Funding Requirement ("MFR") shortfall. The most recent estimate as of September
2001 placed the MFR shortfall at approximately $2.2 million. The U.K. government
announced in its March 2001 budget that it intends to abolish the MFR and to
replace it with funding standards individually tailored to the circumstances of
plans and employers. Based on current information, it appears that this change
is not likely to occur before April 2003, and should we not terminate our U.K.
pension plan prior to that date, the cost to terminate the U.K. plan under the
new rules is likely to be much greater than the current $2.2 million deficit
under the MFR method.

As of September 30, 2001, Ring had outstanding 9.5 million convertible
preference shares of which 2.5 million shares were held by third parties and the
remaining 7 million shares were owned by us. The holders of the convertible
preference shares are entitled to receive in priority to the equity shareholders
a fixed cumulative dividend of 19.2 % per annum until January 1, 2004. The
shares are convertible at the option of the holder into fully paid ordinary
shares on the basis of two ordinary shares for every five preference shares. Any
outstanding preference shares on January 1, 2004 automatically will convert into
fully paid ordinary shares on the same basis.

Impact of New Accounting Pronouncements

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") which summarizes certain of the staff's
view in applying generally accepted accounting principles to revenue recognition
in financial statements. Our adoption of SAB 101 during the quarter ended
September 30, 2001 did not impact our financial position or results of
operations.

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141") "Business
Combinations". SFAS 141 addresses financial accounting and reporting for
business combinations and supercedes Accounting Principles Board Opinion No. 16,
"Business Combinations and Statement of Financial Accounting No. 38 "Accounting
for Preacquisition Contingencies of Purchased Enterprises". All business
combinations in the scope of SFAS 141 are to be accounted for under the
purchased method. SFAS 141 was effective June 30, 2001.

In July 2001, the FASB also issued Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142
addresses financial accounting and reporting for intangible assets acquired
individually or with a group of other assets (but not those acquired in a
business combination) at acquisition. SFAS 142 also addresses financial and
accounting and reporting for goodwill and other intangible assets subsequent to
their acquisition. With the adoption of SFAS 142, goodwill is no longer subject
to amortization. Rather, goodwill will be subject to at least an annual
assessment for impairment by applying a fair-value based test. The impairment
loss is the amount, if any, by which the implied fair value of goodwill is less
than carrying or book value. SFAS 142 is effective for fiscal years beginning
after December 15, 2001. Impairment loss for goodwill arising from the initial
application of SFAS 142 is to be reported as resulting from a change in
accounting principle. As of September 30, 2001, we had not assessed the impact
of adopting SFAS 142.

In July 2001, the FASB also issued Statement of Financial Accounting
Standards No. 143, "Accounting for Obligations associated with the Retirement of
Long-Lived Assets ("SFAS 143"). SFAS 143 provides the accounting requirements
for retirement obligations associated with tangible long-lived assets. SFAS 143
is effective for fiscal years beginning after June 15, 2002, and early adoption
is permitted. We are currently assessing the new standard and have not yet
determined its impact on our consolidated results of operations, cash flows or
financial position.

In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets ("SFAS 144"). This statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. This statement supersedes
FASB Statement 121, "Accounting for the Impairment of Long-Lived assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting provision
of APB Opinion No. 30, "Reporting the Results of Operation-Reporting the Effects
of Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transitions" for the disposal of a "segment of
a business" (as previously defined in that Opinion). This statement also amends
ARB No. 51, "Consolidated Financial Statements" to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
144 is effective for the fiscal years beginning after December 15, 2001, and
early adoption is permitted. We are currently assessing the new standard and
have not yet determined its impact on our consolidated results of operations,
cash flows, or financial position.

Page 24

Impact of Inflation and Economic Conditions

Go-Gro has periodically 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. Significant increases
in raw materials prices could have an adverse impact on our net sales and income
from continuing operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates and
fluctuations in foreign currency exchange rates.

Interest Rate Risk

Approximately 76% of our debt at September 30, 2001 (87% at September 30,
2000) is subject to variable interest rates. The remainder of our debt has fixed
interest rates. Our fixed interest rate debt includes bonds for the financing of
our Tupelo, Mississippi warehouse, the variable rate on which has been fixed by
means of an interest rate swap, and $8.8 million (face value) in subordinated
notes. The carrying value and market value of our debt at September 30, 2001
were $60.9 million and $61.4 million, respectively. Based upon debt balances
outstanding at September 30, 2001, a 100 basis point (i.e. 1%) addition to our
weighted average effective interest rate would increase our interest expense by
approximately $484,000 on an annual basis.

Foreign Currency Risk

We maintain significant investments in subsidiaries in the United Kingdom
and Canada, and sell our products into these foreign markets. We also maintain a
major capital investment in manufacturing facilities and supporting
administrative offices in China. Due to the significance of our international
sales and operations, our business and operating results are impacted by
fluctuations in foreign currency exchange rates. If any of the currencies of the
foreign countries in which we conduct business depreciated against the U.S.
dollar we could experience significant changes in our competitive position, cost
structure and the translations of assets, liabilities and transactions
denominated in foreign currencies, which could adversely impact our future
earnings.

We engage in limited hedging activities with respect to foreign currency
exposures. See Notes 1 and 19 of Notes to consolidated Financial Statements for
additional information regarding derivative instruments and hedging activities.

Our foreign net asset/exposures (defined as assets denominated in foreign
currency less liabilities denominated in foreign currency) at fiscal year end in
U.S. dollar equivalents were as follows:

(In thousands) 2001 2000
----------------- ------- -------

British pounds $20,377 $19,497

Hong Kong dollars $14,175 $12,609

Canadian dollars $ 4,415 $ 5,941

Our foreign currency risks relative to our significant foreign
subsidiaries are as follows:

Ring sells in Great British Pounds (GBP) but pays in U.S. dollars for
approximately 36% of the products it purchases. At the time such products are
shipped from its suppliers Ring enters into forward foreign exchange contracts
to exchange GBP for U.S. dollars, with such contracts maturing on the date
payment in U.S. dollars is due. These contracts are intended to hedge fixed
commitments (payab