U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from [____________to___________]
Commission file number 333-75044
CATALYST LIGHTING GROUP, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 84-1588927
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
7700 Wyatt Drive
Forth Worth, TX 76108
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(Address of principal (Zip Code)
executive offices)
Issuer's telephone number, including area code: (817) 738-8181
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(Former name, former address and former
fiscal year, if changed since last report)
1
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,529,968 shares of Common Stock, par
value $.01 per share, outstanding as of April 30, 2004.
Traditional Small Business Disclosure Format (Check one): Yes ___ No X .
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2
CATALYST LIGHTING GROUP, INC.
TABLE OF CONTENTS
PAGE(S)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 2004
(Unaudited) and September 30, 2003 4
Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended March 31, 2004 and 2003 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Six Months
ended March 31, 2004 and 2003 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7 - 9
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 9
ITEM 3. CONTROLS AND PROCEDURES 14
PART II OTHER INFORMATION
ITEM 1. lEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
CERTIFICATIONS 18-23
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, SEPTEMBER 30,
2004 2003
----------- -----------
(Unaudited) **
----------- -----------
ASSETS
CURRENT ASSETS:
Cash $ 60,465 $ 96,591
Restricted Cash 21,250
Trade receivables, less allowance for doubtful accounts of $57,132 and $53,892 2,211,309 3,380,471
Trade receivable - related party 13,100 92,305
Inventories, net of reserve of $23,685 and $64,698 1,772,692 1,311,130
Prepaid expenses and other 13 49,502
Deferred tax asset 47,699 47,699
----------- -----------
Total current assets 4,126,528 4,977,698
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $75,277 and $58,410 140,261 115,198
OTHER ASSETS:
Goodwill 2,971,362 2,971,362
Deferred tax asset 203,658
Other 15,793 15,793
----------- -----------
Total other assets 3,190,813 2,987,155
----------- -----------
TOTAL ASSETS $ 7,457,602 $ 8,080,051
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving note payable $ 1,685,602 $ 2,072,522
Current maturities of long-term debt:
Related party 250,000 250,000
Other 276,708 274,134
Accounts payable 2,336,299 2,447,756
Accrued commissions 508,345 587,383
Other accrued liabilities 247,700 219,553
----------- -----------
Total current liabilities 5,304,654 5,851,348
----------- -----------
LONG-TERM DEBT, less current maturities:
Related party 70,000 70,000
Other 1,076,648 1,083,989
----------- -----------
Total long-term debt 1,146,648 1,153,989
DEFERRED TAXES 108,833 108,833
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; authorized 10,000,000 shares, none issued -- --
Common stock - $.01 par value; authorized 40,000,000 shares,
3,529,968 shares issued and outstanding 35,300 33,914
Additional paid-in capital 1,741,619 1,454,984
Accumulated deficit (879,453) (523,017)
----------- -----------
Total stockholders' equity 897,466 965,881
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,457,602 $ 8,080,051
=========== ===========
** Derived from the Company's audited consolidated balance sheet at September
30, 2003
The accompanying notes are an integral part of the condensed
consolidated financial statements
4
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------- ----------- ----------- -----------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $ 3,713,626 $ 3,292,002 $ 8,165,536 $ 6,574,408
COST OF SALES 2,536,134 2,222,223 5,627,526 4,394,957
----------- ----------- ----------- -----------
GROSS PROFIT ON SALES 1,177,492 1,069,779 2,538,010 2,179,451
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES 1,586,380 1,079,188 2,916,043 2,179,564
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (408,888) (9,409) (378,033) (113)
OTHER EXPENSE:
Reverse merger costs -- 59,615 -- 63,386
Interest expense 84,678 75,658 182,063 147,177
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES (493,566) (144,682) (560,096) (210,676)
PROVISION FOR INCOME TAXES 180,098 -- 203,659 --
----------- ----------- ----------- -----------
NET LOSS $ (313,468) $ (144,682) $ (356,437) $ (210,676)
=========== =========== =========== ===========
PRO FORMA INCOME TAX AND NET LOSS:
Net loss before pro forma income taxes $ (313,468) $ (144,682) $ (356,437) $ (210,676)
Pro forma income tax benefit (expense) -- 52,646 -- 75,484
----------- ----------- ----------- -----------
PRO FORMA NET LOSS $ (313,468) $ (92,036) $ (356,437) $ (135,192)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE:
Basic $ (.09) $ (.05) $ (.10) $ (.07)
=========== =========== =========== ===========
Diluted $ (.09) $ (.05) $ (.10) $ (.07)
=========== =========== =========== ===========
PRO FORMA NET LOSS PER COMMON SHARE:
Basic $ (.09) $ (.03) $ (.10) $ (.05)
=========== =========== =========== ===========
Diluted $ (.09) $ (.03) $ (.10) $ (.05)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic $ 3,456,860 $ 2,958,759 $ 3,423,935 $ 2,880,744
=========== =========== =========== ===========
Diluted $ 3,456,860 $ 2,958,759 $ 3,423,935 $ 2,880,744
=========== =========== =========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements
5
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31,
--------------------------
2004 2003
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (356,437) $ (210,676)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 16,866 14,034
Change in operating assets and liabilities:
Restricted Cash (21,250)
Trade receivables, related and other 1,248,367 265,285
Inventories (461,562) (461,611)
Prepaid expenses and other 49,489 (38,230)
Deferred taxes (203,659) --
Other assets -- 2,018
Accounts payable (111,457) 364,550
Other accrued liabilities (50,889) (197,560)
----------- -----------
Net cash provided by (used in) operating activities 109,468 (262,190)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (41,929) (13,718)
----------- -----------
Net cash used in investing activities (41,929) (13,718)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving note payable (386,920) 321,954
Payments on short-term and long-term notes payable (4,766) (46,046)
Common stock issuance 288,021 --
Net cash provided by (used in) financing activities (103,665) 275,908
----------- -----------
NET CHANGE IN CASH (36,126) --
CASH, at beginning of period 96,591 --
----------- -----------
CASH, at end of period $ 60,465 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 119,870 $ 125,208
=========== ===========
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Conversion of long term debt to equity interest $ -- $ 375,000
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements
6
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by Catalyst
Lighting Group, Inc. (the "Company") pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included
herein are adequate to make the information presented not misleading. A
description of the Company's accounting policies and other financial
information is included in the audited consolidated financial statements
as filed with the Securities and Exchange Commission in the Company's
Annual Report on Form 10-KSB for the year ended September 30, 2003.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the financial position of the Company as of March 31, 2004
and the results of operations and cash flows for the periods presented.
All such adjustments are of a normal recurring nature. The results of
operations for the quarter ended March 31, 2004 are not necessarily
indicative of the results that may be achieved for a full fiscal year and
cannot be used to indicate financial performance for the entire year.
SFAS 123 requires entities to reconcile net loss as reported to pro forma
net loss as a result of the difference between stock option expense
recorded under the intrinsic value method and what would have been
recorded had the entity adopted the fair value method under SFAS 123. All
options granted by the Company were issued prior to March 31, 2003. As of
March 31, 2003, the Company's stock was not trading, resulting in no
volatility in the stock price of the Company. As a result, there was no
difference in stock option expense under either the intrinsic or fair
value method.
2. RELATED PARTY TRANSACTIONS:
During the three months ended March 31, 2004 and 2003, and for the six
months ended March 31, 2004 and 2003, the Company paid $3,600, $18,000,
$7,200 and $30,000, respectively, for accounting and administrative
services to an entity related through common ownership through May 2002.
During the three months ended March 31, 2004 and 2003, and for the six
months ended March 31, 2004 and 2003, the Company had sales of $17,060,
$139,982, $121,383 and $235,823, respectively, to an entity whose
principal owner is the brother of an employee of the Company. Accounts
receivable from this related entity were $13,100 at March 31, 2004.
7
3. STOCKHOLDER'S EQUITY AND REVERSE MERGER:
The Company has filed a registration statement with the Securities and
Exchange Commission for the sale of up to 1,200,000 shares of common stock
at $2.50 per share in a self-underwritten offering (the Offering). The
Securities and Exchange Commission declared the registration statement
effective on February 2, 2004. The Company may engage broker-dealers to
assist with the offering and may receive up to a 7 % cash placement fee of
securities placed by such broker dealer in the Offering and four-year
common stock purchase warrants entitling such broker-dealer to purchase up
to 10% of the securities sold by such broker-dealer in the Offering, at an
exercise price of 125% of the per share price of the Offering.
The Company completed its first closing on February 17, 2004. The closing
was for 138,600 shares of common stock at $2.50 per share. The Company
incurred $58,479 of offering cost.
Keating Investments was the investment advisor for the reverse merger and
will be receiving an investment banking fee of $100,000, which is due in
10 monthly payments of $10,000 but it is not accrued as it is contingent
upon the Company's common stock trading on the Over-the-Counter Bulletin
Board.
4. REVOLVING NOTE PAYABLE:
The Company has a revolving credit agreement with a bank which bears
interest at the bank's prime rate plus 2.0% (totaling 6.5% at March 31,
2004) which enables the Company to borrow up to the lesser of $2,000,000
or the aggregate of 80% of eligible accounts receivable and 50% of
eligible inventory as defined by the agreement. Borrowings outstanding on
the revolving loan were $1,685,602 at March 31, 2004.
Borrowings under the revolving credit agreement are collateralized by
essentially all assets of the Company including accounts receivable and
inventory. The agreement requires the Company to maintain certain
financial covenants which include tangible net worth, cash flow coverage
and debt ratios as defined in the agreement. As of March 31, 2004, the
Company was not in compliance with certain financial covenants. As it is a
demand note, the lender can call the note even in the absence of
non-compliance. The lender is aware of this non-compliance and has
requested that the Company seek an alternative lender. The Company is in
current negotiations with such lenders in addition to seeking financing
through its public offering. The agreement also limits the amount of
additional third-party borrowings the Company can obtain and the amount of
distributions the Company can pay stockholders.
5. COMMITMENTS
The Company entered into a leasing agreement with BMF, LLC on December 31,
2003 to lease approximately 38,171 square feet of office and manufacturing
space located in White Settlement Texas. The rent is payable in monthly
installments at $10,338 and is for a term of five years terminating on
November 30, 2008. The lease includes a clause which gives the Company a
one-time right to terminate the lease in June of 2006. A termination fee,
equal to the unamortized portion of certain allowances given to the
Company for improvements to the property, shall be paid upon exercising
the termination clause. The allowances totaled $22,500.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Results of Operations and
Financial Condition ("MD&A") contains forward-looking statements that are based
on current expectations, estimates, forecasts and projections about us, our
future performance, the industries in which we operate, our beliefs and our
management's assumptions. In addition, other written or oral statements that
constitute forward-looking statements may be made by or on behalf of us. Words
such as "expects," "anticipates," "targets," "goals," "projects," "intends,"
"plans," "believes," "seeks," "estimates" and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecast in such forward-looking statements. These risks and
uncertainties include, but are not limited to: general economic indications to
improve or improve at the pace we anticipate; continued net losses may increase
our deficit; our ability to secure additional sources of funds on reasonable
terms; our credit ratings; our ability to compete effectively; our reliance on a
limited number of key customers; our exposure to the credit risk of our
customers' accounts receivable; our ability to retain and recruit key personnel;
existing and future litigation; changes in environmental health and safety law;
changes to existing regulations or technical standards; and the social,
political and economic risks of our foreign operations. Please see the risk
factors set forth in the Company's Form 10-KSB for the fiscal year ended
September 30, 2003 for a more thorough discussion of some of the most important
risks and uncertainties we face. Except as otherwise required under federal
securities laws and the rules and regulations of the Securities and Exchange
Commission (the "Commission"), we do not have any intention or obligation to
update publicly any forward-looking statements after the distribution of this
MD&A, whether as a result of new information, future events, changes in
assumptions or otherwise.
OVERVIEW
The Company was formed as a Delaware corporation in March 2001 as a "blank
check" company to effect a merger, exchange of capital stock, asset acquisition
or other similar business combination with an operating business which the
Company believes has significant growth potential. The Company filed a
registration statement on Form SB-2 (the "Registration Statement") with the
Commission, which became effective August 6, 2002, and the Company commenced an
offering of its common stock pursuant to the Registration Statement (the
"Offering"). The Offering closed in November 2002, raising proceeds of $50,000
from the sale of 50,000 shares of common stock. The Offering was a "blank check"
offering due to management's broad discretion with respect to the specific
application of the net proceeds thereof. Management had sole discretion in
determining which businesses to acquire, and the terms of such acquisition. The
9
Offering was subject to Rule 419 of Regulation C ("Rule 419") under the
Securities Act of 1933, as amended (the "Securities Act"). Rule 419 requires
that offering proceeds (except for an amount up to 10% of the deposited funds)
and the securities issued to investors must be deposited in an escrow account
and not released until an acquisition conforming to certain specified criteria
has been consummated and a sufficient number of investors reconfirm their
investment in accordance with the procedures set forth in that rule.
As of February 12, 2003, we entered into a merger agreement with Whitco
Company, L.L.P., a Texas limited liability partnership which manufactures,
markets and distributes outdoor lighting poles. The Company filed a
post-effective amendment to the Registration Statement with the Commission
describing Whitco and its business, and included audited financial statements
which, upon being declared effective by the Commission, were delivered to all
investors in the Offering. Those investors were given the opportunity to
evaluate the merits and risks of the Whitco acquisition and all investors
elected to remain investors in the Company. On August 27, 2003, we acquired
Whitco Company, LP (successor in interest as a result of the conversion of
Whitco Company, L.L.P. to a limited partnership) through an exchange of all of
Whitco's partnership units, and options to purchase partnership units, for
2,991,368 shares of common stock, and options to purchase 808,632 shares of
common stock. Whitco became our wholly-owned subsidiary.
On August 29, 2003, we formed Catalyst Lighting Group, Inc., a Delaware
corporation and purchased 200 shares of its common stock for an aggregate of
$2,000. On September 2, 2003, we entered into an Agreement of Merger with
Catalyst. On September 3, 2003, we filed with the Delaware Secretary of State a
Certificate of Ownership and Merger of Catalyst Lighting Group, Inc. into
Wentworth III, Inc. Pursuant to such certificate, and in accordance with Section
253(b) of the Delaware General Corporation Law, we changed our name to Catalyst
Lighting Group, Inc.
Whitco is a nationwide marketer and distributor of steel and aluminum
outdoor lighting poles. Founded in 1969, Whitco sells poles directly to original
equipment manufacturers (OEM's) and indirectly to other third parties through
its own contracted sales representatives. We seek to have Whitco become the
preferred marketer and distributor of steel and aluminum lighting pole
structures and accessories, and we may attempt to acquire or develop
subsidiaries to pursue additional market opportunities. We believe the necessary
systems and people are in place to aggressively grow and expand in Whitco's
defined markets.
RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
Our condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and judgments that affect the reported amount of assets,
liabilities, revenues and expenses, and the related disclosures. A summary of
those significant accounting policies can be found in our Notes to the
Consolidated Financial Statements included in this report. The estimates used by
management are based upon their historical experiences combined with
management's understanding of current facts and circumstances. Certain of our
10
accounting policies are considered critical as they are both important to the
portrayal of our financial condition and the results of our operations and
require significant judgments on the part of management. Management believes the
following represent our critical accounting policies as described in Financial
Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical
Accounting Policies," which was issued by the Commission: inventory, goodwill,
allowance for doubtful accounts, and warranty policy.
The Company states inventory at the lower of cost or market, determined under
the first-in, first-out method. We maintain a significant amount of raw material
inventory to serve future order demand of customers. While management believes
its processes for ordering and controlling inventory are adequate, changes in
economic or industry conditions may require us to hold inventory longer than
expected or write outdated inventory off as the result of obsolescence.
During fiscal 2001, we amortized goodwill using a fifteen-year life. Beginning
January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142
(SFAS 142) "Goodwill and Other Intangible Assets," and as a result ceased
amortizing goodwill. We test goodwill for impairment annually or on an interim
basis if an event or circumstance occurs between the annual tests that may
indicate impairment of goodwill. Impairment of goodwill will be recognized in
operating results in the period it is identified.
We utilize our best estimate for allowance for doubtful accounts based on past
history and accruing the expense as a percentage of sales. We grant credit to
distributors of sports and area lighting poles located throughout the United
States. Collateral is generally not required for trade receivables. While we
consider our process to be adequate to effectively quantify its exposure to
doubtful accounts, changes in economic, industry or specific customer conditions
may require an adjustment of the allowance for doubtful accounts.
Our customers receive a one year product warranty for defects in material and
workmanship, providing repair, replacement or refund of the purchase price. We
provide an accrual as a reserve for potential warranty costs based on historical
experience and accruing as a percentage of sales. While management considers our
process to be adequate to effectively quantify its exposure to warranty claims
based on historical performance, changes in warranty claims on a specific or
cumulative basis may require us to adjust our reserve for potential warranty
costs.
Impact of Recently Issued Accounting Pronouncements - Management of the Company
observed no new recently issued accounting pronouncements that it believes will
materially impact the Company.
Three months ended March 31, 2004 compared to the three months ended March 31,
2003, and six months ended March 31, 2004 compared to the six months ended March
31, 2003
Revenue. For the three months ended March 31, 2004, the recognized revenue was
$3,713,626. For the three months ended March 31, 2003, the recognized revenue
was $3,292,002. For the six months ended March 31, 2004, the recognized revenue
was $8,165,536. For the six months ended March 31, 2003, the recognized revenue
was $6,574,408. Cost of goods sold for the three months ended March 31, 2004 was
11
$2,536,134, which generated a gross margin of 31.7%, versus 32.5% for the three
months ended March 31, 2003. The increase in revenue for the three month period
can be attributed to a 46% increase in aluminum sales and a 28% increase in
sales to an OEM customer, Lithonia Lighting. The decrease in gross margin
percent for the three month period is attributable to an increase in steel
prices, start up cost associated with the Company's new manufacturing facility,
and a lower margin mix of sales of products. The lower margin mix of sales
products is specifically attributable to a 45.6% increase in revenue for
aluminum products and a 28.1% increase in revenue for Lithonia Lighting (OEM)
sales, which historically are both low gross margin products. During the same
three month period revenue from high margin products decreased, including a
7.19% decrease in revenue for sports lighting and a 39.7% decrease in high mast.
Cost of goods sold for the six months ended March 31, 2004 was $5,627,536, which
generated a gross margin of 31.08%, versus 33.15% for the six months ended March
31, 2003. The increase in sales for the six month period can be attributed to an
increase in sales though our sales agents, as well as aluminum, Lithonia
Lighting (OEM), steel area lighting poles, and high mast lighting poles. For the
six month period aluminum, Lithonia Lighting (OEM), steel area products, and
high mast lighting poles sales increased 32.6%, 44.0%,15.1%, and 32.4%,
respectively. The decrease in gross margin percent for the six month period is
attributable to an increase in steel prices, an increase in freight cost, start
up cost associated with the Company's new manufacturing facility, and a lower
margin mix of sales of products. The lower margin mix of sales products is
specifically attributable to the growth in revenue of aluminum and Lithonia
Lighting, historically low gross margin products.
The rapid steel price increases have had a significant effect on Catalyst's
quarterly gross margins to date. These prices have been particularly significant
on the non-tapered shafts and miscellaneous material categories. Through the
month of April, non-tapered square shafts have increased by 100% to 110%,
non-tapered round shafts have increased from 100% to 150%, and round tapered
from 20% to 45%. These increases in costs have been passed on to the Company's
customers in the form of a price increase on all steel poles. However, the
Company was not able to react quickly enough to cover the initial increases,
thus the decline in the quarterly gross margin.
Other general, selling, and administrative expenses. For the three months ended
March 31, 2004, operating expenses totaled $1,586,380, compared to $1,079,188
for the three months ended March 31, 2003. For the six months ended March 31,
2004, operating expenses totaled $2,916,043, compared to $2,179,564 for the six
months ended March 31, 2003. The increase in operating expenses for the three
month period resulted from an increase in commission expenses paid, salary,
wage, and labor related expenses, investor relations, warranty, and board of
directors expenses. The increase in operating expenses for the six month period
resulted from an increase in commission expenses paid, salary, wage, and labor
related expenses, investor relations, warranty, and board of directors expenses.
Commission expense. For the three month periods ending March 31, 2004 and 2003,
and the six month periods ending March 31, 2004 and 2003, commission expense was
$858,693, $580,585, $1,569,804, and $1,098,255, respectively. The increase in
commissions paid for both the three and six month periods is the result of an
increase in total revenues as compared to the previous comparative periods.
12
Salaries, wages, and labor related. For the three month periods ending March 31,
2004 and 2003, and the six month periods ending March 31, 2004 and 2003,
salaries, wages, and labor related expense was $350,218, $310,647, $710,342 and
$582,837, respectively. The increase in salaries, wages, and labor related
expense for both the three month and six month periods can be attributed to
additional individuals hired in customer service, accounting and production to
properly manage the increased volume of sales and transactions incurred by the
Company.
Investor relations expense. For the three month periods ending March 31, 2004
and 2003, and the six month periods ending March 31, 2004 and 2003, investor
relations expense was $27,747, $0, $48,664, and $0, respectively. The increases
in investor relations expense for the comparative periods are related to the
registered offering.
Warranty. For the three month periods ending March 31, 2004 and 2003, and the
six month periods ending March 31, 2004 and 2003, warranty expense was $45,637,
$7,981, $64,424 and $20,388, respectively. The increase in warranty expense for
both the three and six month periods is the result of an increase in total
revenues as compared to the previous comparative periods and an increase in
actual warranty work performed during the periods.
Board of directors expense. For the three month periods ending March 31, 2004
and 2003, and the six month periods ending March 31, 2004 and 2003, accrued
compensation related to the board of directors was $83,500, $0, $83,500, and $0,
respectively. $75,000 of the accrued compensation, for both the three and six
month period ending March 31, 2004, related to a non-cash charge. This charge
represented 10,000 shares of common stock granted to the three independent
members of the board of directors. The remaining $8,500 in accrued compensation
is for direct compensation to three members of the board of directors which
began accruing upon the first closing of the registered offering, which occurred
on February 17, 2004.
Interest expense. Interest expense for the three months ended March 31, 2004 was
$84,677, compared with $75,658 for the three months ended March 31, 2003.
Interest expense for the six months ended March 31, 2004 was $182,061, compared
with $147,177 for the six months ended March 31, 2003. The increase in interest
expense for both the three and six month periods reflects an increase in the
operating credit line.
Other expense. For the three month periods ending March 31, 2004 and 2003, and
the six month periods ending March 31, 2004 and 2003, expenses associated with
the merger were $0, $59,615, $0 and $63,386, respectively.
Liquidity and Capital Resources
At March 31, 2004, the Company had a working capital deficit of $1,178,126. The
Company also incurred a net loss for both the three month and six periods ending
March 31, 2004 of $313,468 and $356,437, respectively. Management of the Company
believes that the loss is due to the seasonality of the sports and area lighting
pole business and the impact of significant increases in steel prices.
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The Company currently has a $2,000,000 senior, secured credit facility with PNC
Bank, evidenced by a demand promissory note, and secured by all of our assets.
The outstanding balance at March 31, 2004 was $1,685,602. The Company can borrow
the lesser of $2,000,000 or the aggregate of 80% of eligible accounts receivable
and 50% of eligible inventory as defined in the agreement with PNC. The Company
currently does not comply with certain portions of its agreement with PNC
relating to maintaining (1) a tangible net worth of not less than $300,000, (2)
a ceiling on debt to net worth ratio and (3) defined cash flow coverage of at
least 1 to 1. As a result, PNC can call the note, although the note can be
called at any time in any event, as it is a demand note. PNC is aware of this
non-compliance and has requested that the Company seek an alternative lender.
The Company is in current negotiations with such lenders and hopes to replace
the PNC Bank loan on similar terms, although no assurances thereof can be given
or that such financing can be replaced at all. The Company also continues to
seek financing through its public offering.
Cash provided by (used in) operations for the six months ended March 31, 2004,
and the six months ended March 31, 2003 was $109,468, and ($262,190)
respectively. The cash provided by operations for the six months ended March 31,
2004 resulted primarily from a decrease in accounts receivable of $1,248,367.
This was partially off-set by a net income loss of $356,437, an increase in
inventory of $461,562, an increase in deferred taxes of $203,659, and a decrease
in accounts payable of $111,457.
Primarily as a result of purchases of property and equipment, cash used in
investing activities for the six month period ending March 31, 2004 was
($41,929).
Cash used in financing activities for the six months ended March 31, 2004 was
($103,665). For the six months ended March 31, 2004 there was a decrease in
revolving notes payable of $386,920 which was offset by net proceeds from the
first closing of the public offering of $288,021.
Material cash requirements for the next twelve months not in the ordinary course
of business relate to expenses incurred in connection with the completion of the
registered securities offering described herein, product development, and
acquisitions. The Company's current maturities of long term debt as of March 31,
2004 is $526,708, consisting of subordinated debt. For the next 12 months,
payments of $467,850 are due on June 30, 2004, while the rest is spread evenly
over the entire year. Whitco and the Company intend to fund future payments on
these obligations through operational cash flow and capital provided through
possible future equity sales.
Management of the Company believes that many of the costs incurred in fiscal
2003 and for the first three fiscal months of 2004 will not be incurred in the
future and that the Company will return to profitability in the fourth fiscal
quarter of 2004, although no assurances thereof can be given.
The Company is also pursuing additional equity through a variety of methods. It
is anticipated that the proceeds, if any, will be used to pay down subordinated
debt, provide working capital and product development. If the Company does not
raise additional equity capital sufficient to provide for positive working
capital and is unable to return in the near term to profitability, it may be
required to curtail future operations and/or liquidate assets or enter into
credit arrangements on less than favorable terms than would normally be
expected, to provide for future liquidity.
ITEM 3. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief executive
officer and our chief financial officer, after evaluating the
14
effectiveness of the Company's "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and
15d-15(e)) as of a date (the "Evaluation Date") as of the end of the
period covered by this quarterly report, has concluded that, as of the
Evaluation Date, our disclosure controls and procedures were adequate and
designed to ensure that material information relating to us and our
consolidated subsidiaries would be made known to them by others within
those entities.
INTERNAL CONTROL OVER FINANCIAL REPORTING. Under Rules 13a-15 and 15d-15
of the Exchange Act, companies are required to maintain internal control
over financial reporting, as defined, and company management is required
to evaluate and report on internal control over financial reporting. Under
an extended compliance period for these rules, the Company must begin to
comply with the evaluation and disclosure requirements with its annual
report for the fiscal year ending September 30, 2005.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in our
internal controls or to our knowledge, in other factors that could
materially affect, or would be reasonably likely to materially affect, our
disclosure controls and procedures, or our internal control over financial
reporting, subsequent to the Evaluation Date.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. During the three and six months ended March 31, 2004,
there were no material legal proceedings to which the Company was a party or to
which any of its assets or properties were subject. On April 29, 2004, a
petition was filed in County Court for Tarrant County, Texas by FWT, Inc.
("FWT"), a lighting pole manufacturer and vendor of the Company. The complaint
alleges breach of contract by the Company for alleged non-payment for six
lighting poles manufactured by FWT for the Company. The complaint seeks $30,609,
plus reasonable attorney's fees and expenses. We believe the claim is without
merit and intend to defend it vigorously if it is not settled. We do not believe
this litigation will have a material adverse effect upon our business, financial
condition or results of operations.
ITEM 2. CHANGES IN SECURITIES. On March 25, 2004, Keating Reverse Merger Fund,
LLC agreed to an extension of its $250,000 unsecured promissory note held
against Whitco Company, L.L.P. (predecessor of Whitco Company, LP, our
wholly-owned subsidiary) through June 30, 2004. This note was issued to Keating
Reverse Merger Fund, LLC as consideration for a $250,000 loan made to Whitco
Company, L.L.P. on July 8, 2003.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Under the current $2,000,000 credit
facility with PNC Bank, we can borrow the lesser of $2,000,000 or the aggregate
of 80% of eligible accounts receivable and 50% of eligible inventory, as those
terms are defined in the agreement with PNC. We currently do not comply with the
following covenants of the agreement: (1) Whitco has a tangible net worth (as
defined in the PNC agreement) of less than $300,000 and (2) the ratio of (Total
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Debt - Subordinated Debt) to (Book Net Worth + Subordinated Net Worth -
Intangible Assets) is greater than 8 to 1. As of March 31, 2004, Whitco owed PNC
approximately $1,685,602. Since it is a demand note, PNC can call it at any
time, even in the absence of any non-compliance. PNC is aware of this
non-compliance and has requested that the Company seek an alternative lender.
The Company is in current negotiations with such lenders, however, no assurances
can be given that PNC will not decide to declare Whitco in default and seek to
enforce its rights pursuant to the agreement. In such event, Whitco may have to
pay such debt, be subject to the remedies available to PNC Bank or find
alternative financing to replace the PNC Bank debt. Although the Company has
received various letters indicating interest from lenders, no assurance can be
given that Whitco will be able to close alternative financing on satisfactory
terms, if at all.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
31.1 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes- Oxley Act of 2002, with respect to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004.
31.2 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes- Oxley Act of 2002, with respect to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004.
32.1 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002, with respect to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004.
32.2 Certification of Principal Financial Officer pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002, with respect to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004.
(b) Reports on Form 8-K. None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Registrant: CATALYST LIGHTING GROUP, INC.
Date: May 15, 2004 /s/ Dennis H. Depenbusch
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Dennis H. Depenbusch
Chief Executive Officer,
Chairman of the Board of Directors,
Chief Financial Officer and Secretary