UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 0-49881
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 No.)
18191 N.W. 68th Avenue
Miami, Florida 33015
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (305) 558-4777
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of the close of business on August 5, 2002 was 4,413,460, which
reflects the one-for-five reverse stock split effective April 8, 2002.
EXPLANATORY NOTE
This Amendment No. 1 (this "Amendment") to Catalina Lighting, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (the "Form
10-Q"), is being filed solely to correct a typographical error in the
Condensed Consolidated Balance Sheets for Catalina Lighting, Inc. and
Subsidiaries (the "Balance Sheets"), whereby the dollar amount (in thousands)
for "Other current assets" as of June 30, 2002 was stated inadvertently as
$14,069 instead of $6,909. No additional typographical errors were made in the
Balance Sheets, including without limitation in the dollar amount for "Total
current assets" as of June 30, 2002. In accordance with Rule 12b-15 under the
Securities Exchange Act of 1934, this Amendment sets forth the complete text of
Item 1 of which the Balance Sheets are a part. Other than the foregoing, no
revisions have been made to the financial statements or any other disclosure
contained in the Form 10-Q.
CATALINA LIGHTING, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
June 30, September 30,
Assets 2002 2001
------ ----------------- ----------------
(Unaudited) *
Current assets
Cash and cash equivalents $ 4,041 $ 4,613
Restricted cash equivalents and short-term investments - 1,066
Accounts receivable, net of allowance for doubtful accounts
of $600 and $1,423, respectively 24,793 27,761
Inventories 39,495 37,425
Other current assets 6,909 5,114
----------------- ----------------
Total current assets 75,238 75,979
Property and equipment, net 18,856 30,227
Goodwill, net 28,227 28,812
Other assets, net 8,655 11,079
----------------- ----------------
Total assets $ 130,976 $ 146,097
================= ================
*Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
(Continued on Page 2)
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(In thousands, except share data)
June 30, September 30,
Liabilities and Stockholders' Equity 2002 2001
------------------------------------ ------------------- -----------------
(Unaudited) *
Current liabilities
Accounts payable $ 27,994 $ 27,586
Revolving credit facilities 2,387 7,078
Term loans 2,553 818
Bonds payable related to assets held for sale - 900
Current maturities of other long-term debt 480 878
Other current liabilities 13,107 12,466
------------------- -----------------
Total current liabilities 46,521 49,726
Revolving credit facilities 13,615 16,366
Term loans 18,101 23,479
Subordinated notes 2,746 6,110
Bonds payable - 4,200
Other long-term debt 748 1,085
Other liabilities 5,205 5,926
------------------- -----------------
Total liabilities 86,936 106,892
------------------- -----------------
Minority interest 1,113 1,073
------------------- -----------------
Commitments and Contingencies - -
Stockholders' equity
Preferred stock, $.01 par value
authorized 1,000,000 shares; none issued
Common stock, $.01 par value 44 33
authorized 20,000,000 shares; issued and outstanding
4,413,460 and 3,304,036 shares outstanding
Additional paid-in capital 38,349 34,411
Retained earnings 6,495 6,764
Accumulated other comprehensive income (loss) 500 (615)
Treasury stock, at cost, 128,387 shares (2,461) (2,461)
------------------- -----------------
Total stockholders' equity 42,927 38,132
------------------- -----------------
$ 130,976 $ 146,097
=================== =================
* Condensed from audited financial statements
See accompanying notes to condensed consolidated financial statements.
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------ ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- ------------
Net sales $ 53,351 $ 60,548 $ 163,463 $ 180,945
Cost of sales 42,920 52,571 131,329 155,095
------------- ------------- ------------- ------------
Gross profit 10,431 7,977 32,134 25,850
Selling, general and administrative expenses 8,121 10,072 24,739 30,840
Litigation settlement 959 (714) 959 (714)
Loss on disposal of warehouse and related equipment -- -- 1,098 --
------------- ------------- ------------- ------------
Operating income (loss) 1,351 (1,381) 5,338 (4,276)
------------- ------------- ------------- ------------
Other expenses:
Interest expense (1,899) (1,729) (5,751) (5,135)
Other income (expenses) (62) 64 12 46
------------- ------------- ------------- ------------
Total other income (expenses) (1,961) (1,665) (5,739) (5,089)
------------- ------------- ------------- ------------
Income (loss) before income taxes (610) (3,046) (401) (9,365)
Income tax expense (benefit) (201) (629) (132) (1,681)
------------- ------------- ------------- ------------
Net income (loss) $ (409) $ (2,417) $ (269) $ (7,684)
============= ============= ============= ============
Weighted average number of
shares outstanding
Basic 3,371 1,472 3,241 1,472
Diluted 3,371 1,472 3,241 1,472
Earnings (loss) per share
Basic $ (0.12) $ (1.64) $ (0.08) $ (5.22)
Diluted $ (0.12) $ (1.64) $ (0.08) $ (5.22)
See accompanying notes to condensed consolidated financial statements.
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended
June 30,
------------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (269) $ (7,684)
Loss on disposal of warehouse and related equipment 1,098 -
Adjustments for non-cash items 4,981 3,644
Change in assets and liabilities 2,613 9,641
---------- ----------
Net cash provided by operating activities 8,423 5,601
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (599) (4,204)
Proceeds from sale of property and equipment 8,454 95
Purchase of minority interest -- (1,029)
Increase in Ring acquisition costs -- (119)
Decrease (increase) in restricted cash equivalents and
short-term investments 1,066 (144)
---------- ----------
Net cash provided by (used in) investing activities 8,921 (5,401)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from other long-term debt -- 323
Payments on other long-term debt (737) (1,125)
Payments on bonds payable (5,100) (900)
Net proceeds from revolving credit facilities -- 4,906
Net payments on revolving credit facilities (7,619) --
Payments on term loans (4,013) (2,459)
Sinking fund redemption payments on bonds payable (515) (655)
---------- ----------
Net cash used in financing activities (17,984) 90
---------- ----------
Effect of exchange rate changes on cash 68 33
---------- ----------
Net (decrease) and increase in cash and cash equivalents (572) 323
Cash and cash equivalents at beginning of period 4,613 2,309
---------- ----------
Cash and cash equivalents at end of period $ 4,041 $ 2,632
========== ==========
Supplemental Cash Flow Information
Nine Months Ended
June 30,
----------------------
2002 2001
---------- ----------
(In thousands)
Cash paid for:
Interest $ 3,248 $ 3,738
Income taxes $ 626 $ 1,589
On June 14, 2002, the Company entered into a transaction whereby it converted
$6.0 million of subordinated debt into stockholders' equity.
See accompanying notes to condensed consolidated financial statements.
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Catalina Lighting, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with the accounting policies described in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2001 and should be read in
conjunction with the consolidated financial statements and notes which appear in
that report. These statements do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America ("generally accepted accounting principles") for complete
financial statements.
In the opinion of management, the condensed consolidated financial
statements include all adjustments (which consist mostly of normal, recurring
accruals) considered necessary for a fair presentation. The results of
operations for the three months and nine months ended June 30, 2002 may not
necessarily be indicative of operating results to be expected for any subsequent
quarter or for the full fiscal year due to seasonal fluctuations in the
Company's business, changes in economic conditions and other factors.
Accounts Receivable
The Company provides allowances against accounts receivable for sales
deductions, returns and doubtful accounts. The Company's agreements with its
major customers provide for various sales allowances (i.e., deductions given the
customer from purchases made from the Company), the most common of which are for
volume discounts, consumer product returns and cooperative advertising. These
allowances are usually defined as a percentage of the gross sales price and are
recognized as a reduction of gross sales revenue at the time the related sales
are recorded. If the customer agreement does not provide for the deduction of
the allowance amount directly from the amount invoiced the customer at time of
billing, the Company records an accrual for the amounts due. These accrued sales
allowances are settled periodically either by subsequent deduction from the
accounts receivable from the customer or by cash payment. For financial
statement presentation purposes, these sales allowances are netted against
accounts receivable and amounted to $8,304,000 and $10,442,000 at June 30, 2002
and September 30, 2001, respectively.
Comprehensive Loss
Comprehensive income (loss) consisted of the following:
Three Months Ended June 30, Nine Months Ended June 30,
----------------------------- ----------------------------
2002 2001 2002 2001
---------- --------- ---------- ---------
(In thousands) (In thousands)
Net income (loss) $ (409) $ (2,417) $ (269) $ (7,684)
Foreign currency translation loss 1,621 (98) 976 (833)
Change in unrealized loss on derivative
instrument, net of taxes - 10 139 (42)
---------- --------- ---------- ---------
Total comprehensive income (loss) $ 1,212 $ (2,505) $ 846 $ (8,559)
========== ========= ========== =========
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141"), was issued in July 2001. SFAS 141 addresses
financial accounting and reporting for business combinations and supercedes
Accounting Principles Board Opinion No. 16, "Business Combinations", and
Statement of Financial Accounting No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises". All business combinations in the scope
of
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
SFAS 141 are to be accounted for under the purchase method. SFAS 141 became
effective June 30, 2001. The adoption of SFAS 141 did not have a material impact
on the Company's financial position, results of operations or cash flows for the
nine months ended June 30, 2002.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), was also issued in July 2001. SFAS 142
addresses financial accounting and reporting for intangible assets acquired
individually or with a group of other assets at acquisition. SFAS 142 also
addresses financial accounting and reporting for goodwill and other intangible
assets subsequent to their acquisition. With the adoption of SFAS 142, goodwill
is no longer subject to amortization. Rather, goodwill will be subject to at
least an annual assessment for impairment by applying a fair-value based test.
The impairment loss is the amount, if any, by which the implied fair value of
goodwill is less than carrying or book value. SFAS 142 is effective for fiscal
years beginning after December 15, 2001. Impairment loss for goodwill arising
from the initial application of SFAS 142 is to be reported as resulting from a
change in accounting principle. The Company is currently assessing the new
standard and has not yet determined its impact on its consolidated results of
operations, cash flows or financial position.
Statement of Financial Accounting Standards No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" ("SFAS 143"),
was also issued in July 2001. SFAS 143 provides the accounting requirements for
retirement obligations associated with tangible long-lived assets. SFAS 143 is
effective for fiscal years beginning after June 15, 2002, and early adoption is
permitted. The Company is currently assessing the new standard and has not yet
determined its impact on its consolidated results of operations, cash flows or
financial position.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), was issued in October
2001. SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operation-Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transitions" for the disposal of a "Segment of a Business" (as
previously defined in that Opinion). SFAS 144 also amends ARB No. 51,
"Consolidated Financial Statements", to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS 144 is
effective for fiscal years beginning after December 15, 2001, and early adoption
is permitted. The Company is currently assessing this new standard and has not
yet determined its impact on its consolidated results of operations, cash flows
or financial position.
Reclassifications
Certain amounts presented in the financial statements of prior periods have
been reclassified to conform to the current period's presentation.
2. Inventories
Inventories consisted of the following:
June 30, September 30,
2002 2001
------------ ---------------
(In thousands)
Raw materials $ 2,403 $ 2,869
Work-in-progress 650 892
Finished goods 36,442 33,664
------------ ---------------
Total inventories $ 39,495 $ 37,425
============ ===============
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Loss on Disposal of Warehouse and Related Equipment
During the three months ended March 31, 2002, the Company began actively
marketing for sale its underutilized Tupelo, Mississippi distribution center,
which had a carrying value of $8.1 million as of March 31, 2002. On May 6, 2002,
the building and substantially all of the equipment in the distribution center
were sold to a third party, resulting in a loss on sale of $1.1 million. This
loss was recognized in the quarter ended March 31, 2002 as a loss on disposal of
warehouse and related equipment. The net proceeds from the sale after the
pay-off of the mortgage bonds of approximately $3.3 million were used to pay
down the Company's term loans.
4. Conversion of Subordinated Debt
On June 14, 2002, the Company entered into a transaction with Sun Catalina
Holdings, LLC ("SCH"), an affiliate of Sun Capital Partners, Inc., and SunTrust
Banks, Inc. ("SunTrust") whereby it issued and sold 924,572 and 184,843 shares
of the Company's common stock, to SCH and SunTrust, respectively, for an
aggregate purchase price of $5,001,937 and $1,000,000, respectively,
representing a price of $5.41 per share. As payment for their shares, SCH and
SunTrust each surrendered a corresponding amount of subordinated debt and
accrued interest, and the Company was released from all obligations and
liabilities associated with the surrendered debt. In connection with the
transaction a special committee of independent members of the Board of Directors
obtained a fairness opinion from a major investment bank regarding the $5.41 per
share sale price. The amount of subordinated debt reflected in the condensed
consolidated balance sheet as of June 30, 2002 consists of the following:
Additions of
Original Principal for Interest Unamortized
Principal Not Paid in Cash Discount Total
--------------- ----------------------- -------------- -----------
(In thousands)
Balance as of September 30, 2001 $ 8,800 $ 199 $ (2,899) $ 6,110
Additions to principal for interest not paid in
cash 692 692
Discount amortization 435 435
Repayment of subordinated debt (5,400) (602) 1,511 (4,491)
--------------- ----------------------- -------------- -----------
Balance as of June 30, 2002 $ 3,400 $ 289 $ (943) $ 2,746
=============== ======================= ============== ===========
5. Common Stock and Stock Warrants
Effective April 8, 2002, the Company announced a one-for-five reverse stock
split. As a result, the number of shares of the Company's common stock
authorized, and issued and outstanding, decreased from 100,000,000 to
20,000,000, and from 16,520,179 to 3,304,036, respectively. Earnings per share
in the financial statements reflect the reverse stock split for all periods
presented.
On January 11, 2002, the Company entered into a three-year consulting
agreement with a related party, who is an executive officer of an entity under
common control with the Company, whereby it issued to the consultant a warrant
to purchase 64,400 shares of the Company's common stock with an exercise price
of $2.20 per share which was the market value on the date of grant. Half of the
warrants vest on January 24, 2003, and the remainder vest one year later.
However, if the Company terminates the consulting agreement without cause, the
warrant becomes fully exercisable on the date of such termination.
During May 2002, the Company granted options valued at $24,000 and paid
$26,000 cash to an employee of an entity under common control with the Company.
During the nine months ended June 30, 2002, the Company issued 91,000 stock
options to employees and directors at prices between $1.75 and $25.00 per share.
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Interest on the subordinated notes is payable quarterly in arrears in cash
commencing March 31, 2003. Interest for quarters prior to the quarter ending
March 31, 2003 will be added to the principal amount of the note. The note
holders are also entitled to additional warrants to purchase shares of common
stock at $.05 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 six months ended
March 31, 2002, for which the note holders received additional warrants to
purchase, in the aggregate, 69,065 shares of common stock. The interest due on
the remaining subordinated notes for the quarter ended June 30, 2002 was paid in
cash, and no additional warrants were issued. The Company anticipates that it
will continue to make cash payments for interest due. If the Company does not
make such payments, it will be required to issue additional warrants for up to
17,411 shares of common stock.
6. Revolving Credit Facility
The Company has a $75 million credit facility which funded the Company's
acquisition of Ring Limited (formerly known as Ring plc) ("Ring") and provides
funds through revolving facilities for the Company's U.S. and U.K. operations.
The credit facility agreement requires that the Company meet certain financial
covenants and minimum levels of adjusted quarterly earnings beginning with the
quarter ended September 30, 2001 and quarterly debt to adjusted earnings and
fixed charge ratios beginning with the quarter ending December 31, 2002.
The Company was in compliance with the financial covenants of its credit
facility for the quarter ended June 30, 2002. Based upon its current assessment
of market conditions for its business and its projections for the remainder of
its 2002 fiscal year, the Company expects to be in compliance with the credit
facility's financial covenants for the September 30, 2002 and subsequent
quarters.
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Segment Information
Information on operating segments and a reconciliation to income (loss)
before income taxes for the three and nine months ended June 30, 2002 and 2001
are as follows (in thousands):
Three Months Ended June 30,
-----------------------------------------------------------------------------------------
Net Sales 2002 2001
------------------------------------------- -------------------------------------------
by Operating Segment: External External
Customers Intersegment Total Customers Intersegment Total
------------------------------------------- -------------------------------------------
United States $ 17,210 $ 70 $ 17,280 $ 24,864 $ 137 $ 25,001
China 4,068 20,478 24,546 5,756 26,317 32,073
United Kingdom 25,941 - 25,941 24,415 - 24,415
Other segments 6,132 - 6,132 5,513 35 5,548
Eliminations - (20,548) (20,548) - (26,489) (26,489)
------------------------------------------- -------------------------------------------
$ 53,351 $ - $ 53,351 $ 60,548 $ - $ 60,548
=========================================== ===========================================
Nine Months Ended June 30,
-----------------------------------------------------------------------------------------
2002 2001
------------------------------------------- -------------------------------------------
External External
Customers Intersegment Total Customers Intersegment Total
------------------------------------------- -------------------------------------------
United States $ 46,025 $ 269 $ 46,294 $ 60,044 $ 547 $ 60,591
China 13,789 52,980 66,769 19,030 66,553 85,583
United Kingdom 83,925 - 83,925 80,453 - 80,453
Other segments 19,724 62 19,786 21,418 309 21,727
Eliminations - (53,311) (53,311) - (67,409) (67,409)
------------------------------------------- -------------------------------------------
$163,463 $ - $163,463 $180,945 $ - $180,945
=========================================== ===========================================
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Net Sales by Location Three Months Ended Nine Months Ended
of External Customers: June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
United States $ 17,362 $ 25,031 $ 46,455 $ 60,425
United Kingdom 25,140 24,099 82,122 77,877
Canada 5,659 4,550 17,438 18,544
Other countries 5,190 6,868 17,448 24,099
------------ ------------ ------------ ------------
$ 53,351 $ 60,548 $163,463 $180,945
============ ============ ============ ============
Segment Contribution (Loss): Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
United States $ 103 $ (437) $ 108 $ (1,831)
China 1,069 1,650 3,357 4,684
United Kingdom 362 (773) 2,554 (3,273)
Other segments 261 (948) 1,266 (1,348)
------------ ------------ ------------ ------------
Subtotal for segments 1,795 (508) 7,285 (1,768)
Parent/administrative expenses (2,405) (2,538) (7,686) (7,597)
------------ ------------ ------------ ------------
Income (loss) before income taxes $ (610) $ (3,046) $ (401) $ (9,365)
============ ============ ============ ============
Interest Expense (Income) (1): Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
United States $ (223) $ (168) $ (400) $ (381)
China (5) (7) (19) (120)
United Kingdom 1,201 1,266 3,288 3,768
Other segments 72 81 207 324
------------ ------------ ------------ ------------
Subtotal for segments 1,045 1,172 3,076 3,591
Parent interest expense 854 557 2,675 1,544
------------ ------------ ------------ ------------
Total interest expense $ 1,899 $ 1,729 $ 5,751 $ 5,135
============ ============ ============ ============
Total Assets (2): June 30, September 30,
2002 2001
-------------- ----------------
United States $ 32,380 $ 51,550
China 43,440 45,920
United Kingdom 70,972 68,368
Other segments 10,297 8,836
Eliminations (26,113) (28,577)
-------------- ----------------
Total assets $ 130,976 $ 146,097
============== ================
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Long-Lived Assets (3):
June 30, September 30,
2002 2001
------------ -------------
United States $ 1,783 $ 10,891
China 14,153 15,329
United Kingdom 2,852 3,910
Other segments 68 97
------------ -------------
Total long-lived assets $ 18,856 $ 30,227
============ =============
Expenditures for Additions to Long-Lived Assets:
Nine Months Ended June 30,
------------------------------
2002 2001
------------ -------------
United States $ 22 $ 102
China 249 3,754
United Kingdom 308 335
Other segments 20 13
------------ -------------
Total expenditures $ 599 $ 4,204
------------ -------------
(1) The interest expense shown for each segment includes interest charged
or earned on intersegment advances.
(2) Total assets for United States include parent/administrative assets.
(3) Represents property and equipment, net.
Major Customers
During the three months ended June 30, 2002 and 2001, one customer
(included in the United Kingdom operations) accounted for 14.7% and 16.9%,
respectively, of the Company's consolidated net sales. Two additional customers
(included in the United States and other operations) accounted for 13.6% and
10.5% of the Company's consolidated net sales for the three months ended June
30, 2002, compared to 13.9% and 12.2% during the same period in 2001. No other
customers accounted for more than 10% of consolidated net sales during the three
months ended June 30, 2002 and 2001.
During the nine months ended June 30, 2002 and 2001, one customer (included
in the United Kingdom operations) accounted for 17.4% and 17.1%, respectively,
of the Company's consolidated net sales. One additional customer (included in
the United States and other operations) accounted for 13.7% of the Company's
consolidated net sales for the nine months ended June 30, 2002, compared to
12.8% during the same period in 2001. No other customers accounted for more than
10% of consolidated net sales during the nine months ended June 30, 2002.
8. Commitments and Contingencies
Westinghouse License
On April 26, 1996, the Company entered into a license agreement with
Westinghouse Electric Corporation to market and distribute a full range of
lighting fixtures, lamps and other lighting products under the Westinghouse
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
brand name in exchange for royalty payments. The royalty payments are due
quarterly and are based on a percent of the value of the Company's net shipments
of Westinghouse branded products, subject to annual minimum net shipments.
Originally, subject to the minimum sales conditions discussed below, the
agreement would terminate on September 30, 2002, with the Company having options
to extend the agreement for two additional five-year terms. Either party had the
right to terminate the agreement if the Company did not meet the minimum net
shipments of $30 million for fiscal 2001 and $60 million for fiscal 2002.
Effective as of October 1, 2001, the Company and Westinghouse signed an
amendment to the license agreement that eliminates the minimum net shipments
requirement but also eliminates the Company's option to extend the license
agreement upon the agreement's expiration on September 30, 2002. Net sales of
Westinghouse branded products amounted to $8.6 million and $13.3 million for the
nine months ended June 30, 2002 and 2001, respectively. The Company does not
intend to sell Westinghouse labeled goods after September 30, 2002 and does not
believe that the loss of the Westinghouse license will have a material effect on
the Company's financial condition or results of operations.
Litigation
During the past few years, the Company has received a number of claims
relating to halogen torchieres sold by the Company to various retailers. The
Company maintains primary product liability insurance coverage of $1 million per
occurrence and $5 million in the aggregate, as well as umbrella insurance
policies providing an aggregate of $75 million in excess umbrella insurance
coverage. The primary insurance policy requires the Company to self-insure for
up to $10,000 per incident. Based on experience, the Company has accrued
$302,000 for this contingency as of June 30, 2002. No assurance can be given
that the number of claims will not exceed historical experience, that claims
will not exceed available insurance coverage or that the Company will be able to
maintain the same level of insurance.
On September 15, 1999, the Company filed a complaint entitled Catalina
Lighting, Inc. v. Lamps Plus, Civil Action 99-7200, in the U.S. District Court
for the Southern District of Florida. In the complaint, the Company requested
declaratory relief regarding claims of trade dress and patent infringement made
by Lamps Plus against a major customer of the Company. Lamps Plus filed an
Answer and Counterclaim against the Company and its customer on October 6, 1999,
alleging patent infringement and trade dress. The trade dress claim was
dismissed with prejudice before trial in March 2001. In April 2001, a jury
returned a verdict finding liability against the Company on the patent
infringement claim, and in June 2001 the Court entered a judgment of
approximately $1.6 million for damages and interest thereon. The Company
appealed the judgment entered by the Court and posted a surety bond in the
amount of $1.8 million for the appeal (for which the Company posted $1.5 million
in cash collateral). In a decision published on June 28, 2002, the Court of
Appeals affirmed the finding of liability against the Company but reduced the
lower court's award of damages. The final judgment including related costs is
reflected in the financial statements as a $959,000 litigation settlement.
Subsequent to June 28, 2002, the Company received the cash collateral for the
surety bond net of the judgment amount.
Kmart Bankruptcy
On January 22, 2002, Kmart Corporation filed a Chapter 11 bankruptcy
petition with the U.S. Bankruptcy Court for the Northern District of Illinois.
The Company's sales to Kmart amounted to $10.7 million for the year ended
September 30, 2001 and $3.2 million and $8.4 million for the nine months ended
June 30, 2002 and 2001, respectively. The Company has no outstanding receivables
from Kmart for the period prior to January 22, 2002, and has resumed shipments
subsequent to the bankruptcy filing. The Company is continuing to assess the
effect of the bankruptcy proceedings on future sales to Kmart.
Pension Plan
Ring has a defined benefit pension plan which covers 22 current employees
and approximately 750 members formerly associated with Ring. The plan is
administered externally, and the assets are held separately by professional
investment managers. The plan is funded by contributions at rates recommended by
an actuary. The
CATALINA LIGHTING, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Company reviews the plan on a periodic basis, and in the future it may determine
to continue the plan or terminate the plan. If the Company were to terminate the
plan, it is anticipated that this would require accelerated payments based on
the "Minimum Funding Requirement" ("MFR") shortfall. The most recent estimate as
of March 2002 placed the MFR shortfall at approximately $3.2 million. The U.K.
government announced 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. Should the Company not terminate its U.K.
pension plan prior to that date, the cost to terminate the plan under the new
rules could be significantly greater than the current $3.2 million deficit under
the MFR method. The accrued liability for the U.K. pension at June 30, 2002 was
$4.4 million.
IRS Audit
The Internal Revenue Service has started its field work in its examination
of the Company's 1999 tax return. To date, no adjustments have been proposed.
Management believes that adequate provision for taxes has been made for the
years under examination and those not yet examined.
* * * * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CATALINA LIGHTING, INC.
/s/ Eric Bescoby
----------------------------------
Eric Bescoby
Chief Executive Officer
/s/ Lynn Skillen
----------------------------------
Lynn Skillen
Chief Financial Officer
(Chief Accounting Officer)
Date: August 15, 2002