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 JUNE 30, 2005
[_] 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.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1588927
--------- ----------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
7700 Wyatt Drive
Fort Worth, TX 76108
-------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (817) 738-8181
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: 4,190,642 shares of Common Stock, par
value $.01 per share, outstanding as of August 15, 2005.
Traditional Small Business Disclosure Format (Check one): Yes [_] No [X].
1
CATALYST LIGHTING GROUP, INC.
TABLE OF CONTENTS
PAGE(S)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as
of June 30, 2005 (Unaudited) and
September 30, 2004 3
Condensed Consolidated Statements of
Operations for the Three Months
and Nine Months Ended June 30, 2005
and 2004 (Unaudited) 4
Condensed Consolidated Statements of
Cash Flows for the Nine Months ended
June 30, 2005 and 2004 (Unaudited) 5
Notes to Consolidated Financial Statements
(Unaudited) 6 - 9
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL 9-15
CONDITION AND RESULTS OF OPERATION
ITEM 3. CONTROLS AND PROCEDURES 17
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, SEPTEMBER 30,
2005 2004
-------------- --------------
(Unaudited) **
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash $ 213,669 $ 501,429
Trade receivables, less allowance for doubtful
accounts of $46,133 and $42,822 2,130,948 2,676,504
Trade receivable - related party 21,720
Inventories, net of reserve of $113,016 and $18,343 1,543,355 1,739,803
Prepaid expenses and other 4,224 56,301
-------------- --------------
Total current assets 3,913,916 4,974,037
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $113,016 and $95,653 139,019 163,138
OTHER ASSETS:
Goodwill, net of accumulated amortization of $330,151 and $330,151 2,971,362 2,971,362
Restricted Cash 950,932 1,927,990
Deferred Financing Cost 340,454 401,306
Other 15,793 15,793
-------------- --------------
Total other assets 4,278,541 5,316,451
-------------- --------------
TOTAL ASSETS $ 8,331,476 $ 10,453,626
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving note payable $ 2,496,502 $ 2,570,457
Current maturities of long-term debt:
Related party 250,000 250,000
Convertible Note 438,674
Other 977,599 1,112,289
Accounts payable 1,955,454 2,831,513
Accrued commissions 423,839 314,879
Other accrued liabilities 557,770 335,087
-------------- --------------
Total current liabilities 7,099,838 7,414,225
-------------- --------------
LONG-TERM DEBT, less current maturities:
Related party 200,000 200,000
Convertible note 1,234,605 1,713,639
-------------- --------------
Total long-term debt 1,434,605 1,913,639
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; authorized
10,000,000 shares, none issued
Common stock - $.01 par value; authorized 40,000,000 shares,
4,190,642 and 3,756,051 shares issued and outstanding, respectively 41,907 37,561
Additional paid-in capital 3,817,479 3,143,757
Accumulated deficit (4,062,353) (2,055,556)
-------------- --------------
Total stockholders' equity (deficit) (202,967) 1,125,762
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,331,476 $ 10,453,626
============== ==============
** Derived from the Company's audited consolidated balance sheet at September
30, 2004
The accompanying notes are an integral part of the condensed consolidated
financial statements
3
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $ 3,266,155 $ 4,275,000 $ 9,859,432 $ 12,440,537
COST OF SALES 2,225,721 2,884,195 6,892,788 8,511,721
--------------- --------------- --------------- ---------------
GROSS PROFIT ON SALES 1,040,434 1,390,805 2,966,644 3,928,816
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES
1,203,801 1,456,853 3,971,459 4,372,896
--------------- --------------- --------------- ---------------
LOSS FROM OPERATIONS (163,367) (66,048) (1,004,815) (444,080)
OTHER EXPENSE:
Interest expense 583,016 70,837 1,001,982 252,900
--------------- --------------- --------------- ---------------
LOSS BEFORE PROVISION FOR INCOME TAXES (746,383) (136,885) (2,006,797) (696,980)
BENEFIT FROM INCOME TAXES -- 50,142 -- 253,801
--------------- --------------- --------------- ---------------
NET LOSS $ (746,383) $ (86,743) $ (2,006,797) $ (443,179)
=============== =============== =============== ===============
NET LOSS PER COMMON SHARE:
Basic $ (0.18) $ (0.02) $ (0.51) $ (0.13)
=============== =============== =============== ===============
Diluted $ (0.18) $ (0.02) $ (0.51) $ (0.13)
=============== =============== =============== ===============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic $ 4,170,012 $ 3,601,809 $ 3,934,891 $ 3,482,575
=============== =============== =============== ===============
Diluted $ 4,170,012 $ 3,601,809 $ 3,934,891 $ 3,482,575
=============== =============== =============== ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements
4
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
JUNE 30,
---------------------------------
2005 2004
--------------- ---------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,006,797) $ (443,179)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Amortization of debt discount and deferred financing cost 270,212
Provision for doubtful accounts 79,779
Common stock issued for services 30,000
Common stock issued for unrestricting $400,000 cash 375,000
Cashless exercise of stock options 58,916
Depreciation and amortization 34,995 26,803
Change in operating assets and liabilities:
Trade receivables, related and other 444,058 561,074
Inventories 196,448 (390,768)
Prepaid expenses and other 52,078 18,565
Deferred taxes (253,801)
Accounts payable (782,673) 412,944
Other accrued liabilities 348,661 (57,719)
--------------- ---------------
Net cash used in operating activities (899,323) (126,081)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,876) (58,290)
Restricted Cash 1,000,000
--------------- ---------------
Net cash provided by (used in) investing activities 989,124 (58,290)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments from convertible debt (105,982)
Payments on revolving note payable (172,388) (354,088)
Payments on long-term notes payable (134,689) (45,347)
Common Stock Issuance 35,498 567,849
--------------- ---------------
Net cash provided by financing activities (377,561) 168,414
--------------- ---------------
NET CHANGE IN CASH (287,760) (15,957)
CASH, at beginning of period 501,429 96,591
--------------- ---------------
CASH, at end of period $ 213,669 $ 80,634
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 384,036 $ 178,594
=============== ===============
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Common stock issued for payments of accrued interest 36,963 $
=============== ===============
Common stock issued for forgiveness of debt 93,386
=============== ===============
Common stock issued for debt payment $ 3,000
=============== ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements
5
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 effective in making
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, 2004.
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 June 30, 2005 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 and nine months ended June 30, 2005 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.
The Company accounts for stock options using the intrinsic value method
wherein compensation expense is recognized on stock options granted only for
the excess of the market price of our common stock over the option exercise
price on the date of grant. All options of the Company are granted at amounts
equal to or higher than the fair-value of our stock so no compensation
expense is recorded.
Some companies also recognize compensation expense for the fair value of the
option right itself. The Company has elected not to adopt this accounting
method because it requires the use of subjective valuation models which the
Company believes are not representative of the real value of the option to
either the Company or the optionees. However, we are required to disclose the
pro forma effect of accounting for stock options using such a valuation for
all options granted. The fair value of the options was estimated at the date
of grant using a Black-Scholes option-pricing model with the following
weighted average assumptions:
Nine Months Ended
June 30, 2005
-----------------
Risk-free interest rate 4.74%
Expected dividend yield 0%
Expected lives 10 years
Expected volatility 34.47%
The total fair value of options granted was computed to be approximately $0
and $48,300 for the nine months ended June 30, 2005 and 2004, respectively.
These amounts are amortized ratably over the vesting periods of the options
or recognized at the date of grant if no vesting period is required. Pro
forma stock-based compensation was $4,025, $4,025, $12,075 and $5,367 for the
quarters ended June 30, 2005 and 2004 and the nine months ended June 30, 2005
and 2004, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net income and net income per
common share would have been reported as follows:
6
---------------- ---------------- ---------------- ----------------
2005 2004 2005 2004
---------------- ---------------- ---------------- ----------------
Net loss, as reported $ (746,383) $ (86,743) $ (2,006,797) $ (443,179)
Stock based compensation included in net loss -- -- -- --
Fair value of stock based compensation 4,025 4,025 12,075 5,367
---------------- ---------------- ---------------- ----------------
Pro forma net loss $ (742,358) $ (82,718) $ (1,994,722) $ (437,812)
================ ================ ================ ================
Net loss per common share, basic:
As reported $ (0.18) $ (0.02) $ (0.51) $ (0.13)
Stock based compensation included in net loss -- -- -- --
Fair value of stock based compensation -- (0.01) -- (0.01)
---------------- ---------------- ---------------- ----------------
Pro forma net loss per common share $ (0.18) $ (0.03) $ (0.51) $ (0.14)
================ ================ ================ ================
Net loss per common share, diluted:
As reported $ (0.18) $ (0.02) $ (0.51) $ (0.13)
Stock based compensation included in net loss -- -- -- --
Fair value of stock based compensation -- (0.01) -- (0.01)
---------------- ---------------- ---------------- ----------------
Pro forma net loss per common share $ (0.18) $ (0.03) $ (0.51) $ (0.14)
================ ================ ================ ================
For the three and nine months ended June 30, 2005 net loss and proforma net
loss differs by the fair value of stock bases compensation.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123(R) is effective for public companies interim or for annual
periods beginning after June 15, 2005, supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement
of Cash Flows. SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in
the income statement based on their fair values. Pro-forma disclosure is no
longer an alternative. The new standard will be effective for the company,
beginning January 1, 2006. The company has not yet completed their evaluation
but expects the adoption to have an effect on the financial statements
similar to the pro-forma effects reported above.
In November 2004, the FASB issued SFAS 151, "Inventory Costs", which revised
ARB 43, relating to inventory costs. This revision is to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage). This Statement requires that these
items be recognized as a current period charge regardless of whether they
meet the criterion specified in ARB 43. In addition, this Statement requires
the allocation of fixed production overheads to the costs of conversion be
based on normal capacity of the production facilities. SFAS 151 is effective
for inventory costs incurred during fiscal years beginning after June 15,
2005. The Company does not believe the adoption of SFAS 151 will have a
material impact on the Company's financial statements.
The FASB issued SFAS 153, Exchanges of Nonmonetary Assets, which changes the
guidance in APB Opinion 29, Accounting for Nonmonetary Transactions. This
Statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected
7
to change significantly as a result of the exchange. SFAS 153 is effective
during fiscal years beginning after June 15, 2005. The Company does not
believe the adoption of SFAS 153 will have a material impact on the Company's
financial statements.
2. RELATED PARTY TRANSACTIONS:
During the three months ended June 30, 2005 and 2004, and for the nine months
ended June 30, 2005 and 2004 the Company paid $0, $3,600, $0, and $19,315,
respectively, for accounting and administrative services to an entity related
through common ownership.
During the three months ended June 30, 2005 and 2004, and for the nine months
ended June 30, 2005 and 2004, the Company had sales of $18,860, $65,238,
$83,682, and $80,151, respectively, to an entity whose principal owner is the
brother of an employee of the Company. Accounts receivable from this related
entity were $21,720 at June 30, 2005 and $ 0 at September 30, 2004.
3. LONG-TERM DEBT
On September 30, 2004, the Company entered into a financing arrangement with
Laurus Master Fund, Ltd. ("Laurus") which included (1) a Secured Convertible
Term Note in the principal amount of two million dollars ($2,000,000, balance
of $1,894,018 at June 30, 2005), (the "Term Note") and (2) a Secured
Revolving Note (the "Revolving Note") and a Secured Convertible Minimum
Borrowing Note (together with the Revolving Note, the "AR Notes") in the
aggregate principal amount of up to three million dollars ($3,000,000,
balance of $2,827,612 at June 30, 2005). As of June 30, 2005 the Term Note
and the AR Notes have a discount related to the warrants and a beneficial
conversion feature of $220,739 and $331,110, respectively. The Company's
customers are required to remit payments directly to a lock box and amounts
received are applied to reduce the AR Note outstanding. The Term Note and AR
Notes are convertible into the Company's common stock at an initial fixed
conversion price of $2.66 per share. In connection with the Term Note and AR
Notes, the Company issued Laurus a Common Stock Purchase Warrant for the
purchase of up to 472,000 shares of our common stock, exercisable until
September 30, 2009 at a price of $3.00 per share (the "Warrant"). On December
3, 2004, the terms of the Term Note and AR Notes were amended such that
Catalyst received an advance on $600,000 of the funds agreed to be advanced
in exchange for lowering the fixed conversion price of the Term Note and AR
Notes from $2.66 per share to $1.50 per share (the fair value of the
Company's stock on that date). Additionally, Laurus also acquired an
additional Common Stock Purchase Warrant (together with the Warrant, the
"Warrants") for the purchase of up to 100,000 shares of Common Stock,
exercisable until December 3, 2009 at a price of $3.00 per share. The fair
value of these warrants was stated at approximately $27,000 using the
Black-Scholes pricing model.
On April 19, 2005, Laurus agreed to the early release to the Company of
$400,000 (less any accrued but unpaid interest) under the Term Note, and in
connection therewith, the Company has agreed to issue to Laurus 250,000
shares of common stock of the Company at an estimated fair market value of
$1.50 per share. The released amount is payable on demand and is, therefore,
classified as a current liability. The associated fair market value of the
250,000 shares of common stock ($375,000) has been expensed.
The Term Note and AR Notes (collectively, the "Notes") mature on September
30, 2007 and are collateralized by a first priority lien on inventory,
accounts receivable, raw materials and all of its ownership interests in
Whitco. Payments on advances against the Term Note are due in monthly
installments beginning January 1, 2005. Approximately, $33,162 is payable in
monthly installments. The Notes accrue interest at a rate per annum equal to
the "prime rate" published in The Wall Street Journal from time to time, plus
two percent (2%), but shall in no event be less than six percent (6%) per
annum. The Company also granted registration rights with respect to all
shares of Common Stock underlying the Notes and Warrants.
The Term Note was placed into an escrow account solely controlled by Laurus
(the "Escrow Account"). The Company may request that Laurus release all or
any portion of the amounts contained in the Escrow Account following, or in
connection with, the consummation of an acquisition, joint venture or capital
investment (a "Transaction") by the Company. Such a release is subject to
Laurus' evaluation of all factors it considers, in its sole discretion,
relevant at the time of such requested release. Laurus is under no obligation
to release any amounts and the release of such amounts is in Laurus' sole and
absolute discretion.
On August 6, 2003, the Company received a bridge loan of $250,000 from
Keating Reverse Merger Fund ("Lender"). In consideration for the note, the
Company agreed to issue warrants for the purchase of up to 125,000 shares
(the "Warrant
8
Shares") of the common stock of the Company upon consummation of the merger
consummated in August 2003 by and between the Company and Whitco, LP. at a
price of $2.00 per Warrant Share. On August 22, 2004, in consideration for
extending the due date on the note to December 31, 2004, we issued an
additional 40,000 warrants for the purchase of our common stock at a price of
$4.00 per share. On December 29, 2004 in consideration for extending the due
date on the note to December 31, 2005, we issued 20,000 shares of our common
stock valued at $1.50 per share. The Company also issued an additional 24,642
shares of our common stock as payment for accrued interest on the original
note. The total value of the accrued interest was $36,963.
On July 26, 2000, the Company made a promissory note payable to Robert D.
Brown, Jr. in the amount of $700,000. On November 7, 2000, the note was
subordinated to a bank and it was transferred to A. M. Rhyne LP on December
27, 2001. The note matures July 31, 2005. Effective July 29, 2005, the
Company and A.M. Rhyne LP executed a Note Extension Agreement whereas the
Subordinate Promissory Note was extended to December 1, 2005.
4. STOCKHOLDER'S EQUITY
On October 12, 2004, the Company commenced a private placement offering of up
to 2,666,667 units at $1.50 per unit, each unit consisting of one share of
Catalyst common stock and one five year warrant to purchase Catalyst common
stock at an exercise price of $3.00 per share. This offering terminated on
January 24, 2005, having sold units worth $50,000.
On April 19, 2005, $400,000 of the Term Note funds held in the escrow account
were released by Laurus. Laurus received 250,000 shares of the Company's
common stock valued at $375,000 which was expensed immediately as interest
expense as a result of the note being due on demand.
5. RESTATED YEAR-END BALANCE SHEET
The Company filed a restated balance sheet as of September 30th, 2004, which
was included in the Company's Form 10-KSB. This restatement relates to the
reclassification of $3,000,000 debt to a short term liability which was
previously recorded as long term. Even though the note is due September 30th,
2007 and the Company does not believe the note holder will call the note, the
fact that the note has a "lock box" arrangements whereby customer remittances
are deposited directly into the lock box, and utilized by the bank to reduce
the AR Notes. Generally accepted accounting principles require such notes to
be reflected as short term.
6. SUBSEQUENT EVENTS
On July 6, 2005 the Company and Laurus executed Amendment No. 3, whereby
Laurus agreed to release to the Company $950,392 from the Restricted Account,
provided that $832,453 of such released amount was applied by the Company to
repay the excess funding on the A/R Notes and no less than $53,138 of such
released amount was applied to repay accrued and unpaid interest on the Term
Loan. The remaining $64,801 was to be used by the Company solely for working
capital.
Effective July 29, 2005, the Company and A.M. Rhyne LP executed a Note
Extension Agreement whereby the Subordinate Promissory Note totaling $700,000
and expiring on July 31, 2005 was extended to December 1, 2005.
On August 15, 2005, the Company and Laurus executed Amendment No. 4 whereby
Laurus agreed to postpone amortizing payments of the aggregate principal
amount of the Term Note until December 1, 2005 at which time the Company
shall make monthly payments to Laurus on each repayment date, each such
payment in the amount of $86,091 together with any accrued and unpaid
interest on such portion of the principal amount plus any and all other
unpaid amounts which are then owing under the Term Note and related
documents.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
9
This quarterly report on Form 10-QSB contains forward looking statements.
Forward looking statements are statements not based on historical information
and that relate to future operations, strategies, financial results or other
developments. Forward looking statements are necessarily based upon estimates
and assumptions that are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond our
control and many of which, with respect to future business decisions, are
subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward looking statements made by us or on our behalf. We disclaim any
obligation to update forward looking statements.
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 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, 2004. The estimates used by management are based upon
their historical experiences combined with management's understanding of current
facts and circumstances. Certain of our 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 the critical
accounting policies of Whitco as described in Financial Reporting Release No.
60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies,"
which was issued by the Securities and Exchange 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 effective, 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 of America. Collateral is generally not required for trade receivables.
While we consider our process 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 or 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 effective to quantify 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
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No.
123(R) is effective for public companies for interim or annual periods beginning
after June 15, 2005, supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro-forma disclosure is no longer an alternative. The new standard will
be effective for the company, beginning January 1, 2006. The company has not yet
completed their evaluation but expects the adoption to have an effect on the
financial statements similar to the pro-forma effects reported above.
10
In November 2004, the FASB issued SFAS 151, Inventory Costs, which revised ARB
43, relating to inventory costs. This revision is to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage). This Statement requires that these items be recognized as a
current period charge regardless of whether they meet the criterion specified in
ARB 43. In addition, this Statement requires the allocation of fixed production
overheads to the costs of conversion be based on normal capacity of the
production facilities. SFAS 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company does not believe the
adoption of SFAS 151 will have a material impact on the Company's financial
statements.
The FASB issued SFAS 153, Exchanges of Nonmonetary Assets, which changes the
guidance in APB Opinion 29, Accounting for Nonmonetary Transactions. This
Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
153 is effective during fiscal years beginning after June 15, 2005. The Company
does not believe the adoption of SFAS 153 will have a material impact on the
Company's financial statements.
OVERVIEW
We are now at a critical inflection point in our business development. First, we
are poised to benefit from the investments we have made in our organic business.
Secondly, we now have publicly traded stock, which we hope to use to partially
fund a series of acquisitions in order to realize our final primary strategic
objective. Because of the significant investments we have made in our
distribution network, we believe we can now leverage that network by acquiring
small niche-technology structures, fixture and accessory businesses and
introducing those products into our existing distribution channel. This would be
expected to benefit the Company immediately in two ways. First, we will be able
to increase sales of new products by virtue of the fact that we believe our
distribution network appears to be better developed (both in scale as well as
technology) than the ones used by the companies we seek to acquire. Secondly,
the added product offerings may help us gain additional consideration with our
lighting agency and OEM customers. We believe having specialty products on our
Web site and catalogue not only differentiates us from competitors, but also
increases the likelihood that customers will place additional orders for more
commodity product at the time of purchase of the specialty product.
We have been reviewing business acquisition and alliance opportunities, which
are intended to be our primary vehicle for creating long-term growth for
investors. Our "opportunistic" growth strategy is targeted to specific
candidates in the outdoor lighting (primarily fixtures and accessories) or pole
structure industry. More specifically, we intend to focus initially on small,
privately owned companies with positive earnings on a stand alone basis or with
the ability to be positive immediately after acquisition through operating
efficiencies. Further, we continue to discuss various alliance opportunities
with manufacturers of alternative materials that can create structures and with
different component manufacturers in need of a vertical structure to deliver a
solution to customers. Examples of these alliances include composite pole
manufacturers as well as camera and antenna manufacturers for security and
wireless technology solutions. Without significant incremental expenditure, it
is anticipated that annual revenue of the target companies can be increased in
the near future by introducing the new products into our existing distribution
channels. Further, our strategy has been expanded by considering other strategic
alternatives with companies or investors with the capability to aggressively
expand our distribution network and profitability through consolidation or
acquisitions.
We believe we have benefited from initiating our own manufacturing operations
beginning in December 2004. We have been able to control our production
deliveries and quality more closely.
Our strategy has been further enhanced by the $2 million restricted cash
investment by Laurus Master Fund Ltd., less advances described herein. Laurus
has also provided an additional $3 million revolving line of credit at a floor
rate of 6%.
On September 30, 2004, the Company entered into a financing arrangement with
Laurus which included (1) a Secured Convertible Term Note in the principal
amount of two million dollars ($2,000,000), (the "Term Note") and (2) a Secured
Revolving Note (the "Revolving Note") and a Secured Convertible Minimum
Borrowing Note (together with the Revolving Note, the "AR Notes") in the
aggregate principal amount of up to three million dollars ($3,000,000). The Term
Note and AR Notes are convertible into the Company's common stock at an initial
fixed conversion price of $2.66 per share. In connection with the Term Note and
AR Notes, the Company issued Laurus a Common Stock Purchase Warrant for the
purchase of up to 472,000 shares of our common stock,
11
exercisable until September 30, 2009 at a price of $3.00 per share (the
"Warrant"). On December 3, 2004, the terms of the Term Note and AR Notes were
amended such that Catalyst received an advance on $600,000 of the funds agreed
to be advanced in exchange for lowering the fixed conversion price of the Term
Note and AR Notes from $2.66 per share to $1.50 per share. Additionally, Laurus
also acquired an additional Common Stock Purchase Warrant (together with the
Warrant, the "Warrants") for the purchase of up to 100,000 shares of Common
Stock, exercisable until December 3, 2009 at a price of $3.00 per share.
To borrow money from Laurus pursuant to the AR Notes, once Catalyst is entitled
to payment from the sale of goods, it submits a copy of such receivable to
Laurus, and, if such receivable falls within Laurus' definition of an "eligible"
accounts receivable, Laurus will advance Catalyst up to 90% of the net face
amount of such eligible account receivable. The account debtor is notified to
make payment to a lockbox controlled, and periodically swept, by Laurus. Once
payment is received into this lockbox pursuant to an eligible account
receivable, such proceeds are used to repay sums advanced against, and interest
earned on, such eligible account receivable. The remainder of the payment from
such account debtor is, in Laurus' discretion, either remitted to the Company or
credited against other costs, fees and expenses then outstanding under the AR
Notes.
The specific change reclassifies certain debt associated with Laurus to Current
Liabilities from Long Term Debt, in accordance with the accounting
pronouncements guiding the change. Although $2,570,457 of debt was reclassified,
this adjustment did not affect Total Assets, Total Liabilities or Stockholders
Equity on the Balance Sheet, nor create any change on the Consolidated Statement
of Operations. The change also did not affect our borrowing ability with Laurus.
Management believes this reclassification could possibly impact the Company by
impairing our ability to secure future third party financing, but management
also believes this is the only impact on the Company as a result of the
reclassification itself.
In accordance with generally accepted accounting principles, such an arrangement
requires classification as current debt instead of the long term debt
classification as it was originally recorded in the Company's Form 10-KSB
financial statements. Accordingly, on February 17, 2005, we filed an amended
Form 10-KSB for the fiscal year ended September 30, 2004.
On April 19, 2005, Laurus agreed to the early release to the Company of $400,000
(less any accrued but unpaid interest) under the Term Note, and in connection
therewith, the Company has agreed to issue to Laurus 250,000 shares of common
stock of the Company.
On July 6, 2005 the Company and Laurus executed Amendment No. 3, whereby Laurus
agreed to release to the Company $950,392 from the Restricted Account, provided
that $832,453 of such released amount was applied by the Company to repay the
excess funding on the A/R Notes and no less than $53,138 of such released amount
was applied to repay accrued and unpaid interest on the Term Loan. The remaining
$64,801 was to be used by the Company solely for working capital.
Effective July 29, 2005, the Company and A.M. Rhyne LP executed a Note Extension
Agreement whereas the Subordinate Promissory Note totaling $700,000 and expiring
on July 30, 2005 was extended to December 1, 2005.
On August 15, 2005, the Company and Laurus executed Amendment No. 4 whereby
Laurus agreed to postpone amortizing payments of the aggregate principal amount
of the Term Note until December 1, 2005 at which time the Company shall make
monthly payments to Laurus on each Repayment Date, each such payment in the
amount of $86,091 together with any accrued and unpaid interest on such portion
of the Principal Amount plus any and all other unpaid amounts which are then
owing under the Term Note, the purchase agreement pursuant to which the Term
Note was entered into and/or any other related agreement.
The Company's Chief Financial Officer, Brady Basil, resigned on June 14, 2005
but remained with the Company in a consulting role through the end of June 2005
for transition purposes. Dennis Depenbusch, the Company's Chairman, President
and Chief Executive Officer, has been serving as principal financial officer
since Mr. Basil's departure.
Despite the positive developments for our business and finance, cash flow and
lack of profitability remain significant challenges. We are seeking to increase
both cash flow and profitability by growing sales internally as well as through
acquisitions or other strategic alternatives. If we do not raise additional
equity capital sufficient to provide for positive working capital and are unable
to return in the near term to profitability, we 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. The Company will examine all options available to it if these
acquisitions and/or additional equity or other strategic alternatives are not
available.
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2004
Revenue. Revenues decreased for the three months ended June 30, 2005 by
$1,088,845 or 24% compared to the corresponding prior period. The decrease was
due to slower spot sales compared to the corresponding prior period, a decline
in steel area lighting pole sales and a decline in sales to one of our OEM
customers. Excluding commissions from sales (See table below), the decrease in
revenue can be attributed to a $583,904 (53%) decrease in sales to an OEM
customer, a $350,295 (22%) decrease in sports lighting pole sales, and a
$156,840 (93%) decrease in sales to an OEM customer who previously held a
lighting contract with Wal-Mart that expired in March 2004.
Cost of Goods Sold. Cost of goods sold decreased for the three months ended June
30, 2005 by $658,474 or 23% compared to the corresponding prior period. Gross
margins of 32% for the quarter compared to 33% in the corresponding prior period
were fairly constant between the two reporting periods.
Gross Margin. The decrease in gross margin is due to product mix, raw material
cost, pricing demands in the market, freight, and manufacturing inefficiencies.
Cost of goods sold for the three months ended June 30, 2005 was $2,225,721,
which generated a gross margin of 32%, compared to 33% for corresponding prior
period.
Our agents have the ability to sell our products at or above the base price of
our products, and our commission structure pays agents 100% of the overage above
our base price. The table below itemizes commission revenue generated from the
100% overage and revenue generated from our base price.
2005 2004
------------------- ------------------
Base Price Revenue $ 2,610,525 $ 3,471,283
Commission Revenue 655,630 803,717
------------------- ------------------
Gross Sales $ 3,266,155 $ 4,275,000
=================== ==================
General, selling, and administrative expense (GSA expense). GSA decreased
$253,052 or 17% for the three months ended June 30, 2005. The GSA decrease was
the result of a decrease of expenses paid related to commissions of $148,017 and
reductions in salary, wages and benefits of $74,267.
Interest Expense. Interest expense increased $512,179 for the quarter ended June
30, 2005 compared to the corresponding prior period. The increase was due to an
increase in interest expense of $61,261 and an increase in non-cash charges of
warrant expense and debt discounts of $450,918.
NINE MONTHS ENDED JUNE 30, 2005 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2004
Revenue. Revenues decreased for the nine months ended June 30, 2005 by
$2,581,105 or 21% compared to the corresponding prior period. The decrease was
due to a decline in sales to one OEM customer, slower sports sales compared to
the corresponding prior period, less steel area lighting pole sales and less
commission revenue. Excluding commissions from sales (See table below), the
decrease in revenue can be attributed to a $1,345,924 (97%) decrease in sales to
an OEM customer, a $1,111,372 (38%) decrease in sports lighting pole sales, and
a $577,225 (14%) decrease in steel area lighting poles. The OEM customer
referred to herein previously held a lighting contract with Wal-Mart that
expired in March 2004.
Cost of Goods Sold. Cost of goods sold decreased for the nine months ended June
30, 2005 by $1,618,933 or 19% compared to the corresponding prior period. Gross
margins of 30% for the nine months ended June 30, 2005 compared to 32% in the
corresponding prior period were fairly constant between the two reporting
periods. The decrease was mainly due to product mix, raw material cost and
pricing demands in the market.
13
Gross Margin. The decrease in gross margin is due to product mix, raw material
cost, pricing demands in the market, freight, and manufacturing inefficiencies.
Cost of goods sold for the nine months ended June 30, 2005 was $6,892,788, which
generated a gross margin of 30%, compared to 32% for corresponding prior period.
Our agents have the ability to sell our products at or above the base price of
our products, and our commission structure pays agents 100% of the overage above
our base price. The table below itemizes commission revenue generated from the
100% overage and revenue generated from our base price.
2005 2004
------------------- ------------------
Base Price Revenue $ 7,960,881 $ 10,067,015
Commission Revenue 1,898,551 2,373,522
------------------- ------------------
Gross Sales $ 9,859,432 $ 12,440,537
=================== ==================
General, selling, and administrative expense (GSA expense). GSA decreased
$401,437 or 9% for the nine months ended June 30, 2005 compared to the
corresponding prior period. The GSA decrease was the result of a decrease of
expenses paid related to commissions of $474,500 and reductions in salary, wages
and benefits of $94,569. These savings were off-set by increases in property
taxes of $56,475, legal fees of $49,114, and accounting fees of $33,320.
Interest Expense. Interest expense increased $749,082 for the nine months ended
June 30, 2005 compared to the corresponding prior period. The increase was due
to an increase in interest expense of $131,137 and in increase in non-cash
charges of warrant expense and debt discount of $617,945.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2005, we had a working capital deficit of $3,185,922. We also
incurred a net loss for both the three month and nine month periods ending June
30, 2005 of $(746,383) and $(2,006,797), respectively. We believe the loss is
due to the decline in the sports and area lighting pole business, the decrease
in gross margin, and the impact of the loss of Wal-Mart business through an OEM
customer.
We are also seeking to increase both cash flow and profitability by growing
sales internally as well as through acquisitions or other strategic
alternatives. If we do not raise additional equity capital sufficient to provide
for positive working capital and are unable to return in the near term to
profitability, we 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. The Company will examine
all options available to it if these acquisitions and/or additional equity or
other strategic alternatives are not available.
Cash used in operations for the nine months ended June 30, 2005 and 2004 was
$(899,323) and $(126,080), respectively. The June 30, 2005 increase in the use
of cash compared to the prior period resulted primarily from an increased loss
of $1,563,618.
Cash provided by (used in) investing activities for nine months ended June 30,
2005 and 2004, was $989,124 and $(58,290), respectively. This was primarily a
result of the increase of $1,000,000 of restricted cash from the Term Note
during the nine months ended June 30, 2005.
Cash provided by (used in) financing activities for the nine months ended June
30, 2005 and 2004 was $(377,561) and $168,414, respectively. For the nine months
ended June 30, 2005 cash flows from financing activities decreased primarily due
to a decrease in common stock issuance.
14
Material cash requirements for the next twelve months not in the ordinary course
of business relate to the soliciting and closing of possible acquisition targets
or other strategic opportunities. Regarding repayment of debt, over the next 12
months our current maturities of long term debt as of June 30, 2005 is
$1,666,273, consisting of subordinated debt and repayment of the release of
restricted cash by Laurus Master Fund, Ltd from the Term Note. For the next 12
months, one $250,000 payment is due on December 31, 2005, and one $700,000
payment plus accrured interest is due on December 1, 2005. On August 15, 2005,
the Company and Laurus executed Amendment No. 4 whereby Laurus agreed to
postpone amortizing payments of the aggregate principal amount of the Term Note
until December 1, 2005 at which time the Company shall make monthly payments to
Laurus on each repayment date, each such payment in the amount of $86,091
together with any accrued and unpaid interest on such portion of the principal
amount plus any and all other unpaid amounts which are then owing under the Term
Note, the purchase agreement pursuant to which the Term Note and related
documents. Any remaining payments are spread evenly over the entire year.
We intend to fund future payments on these obligations through operational cash
flow, further utilization of our existing credit facility with Laurus,
conversion of the AR Notes into Common Stock, and adding additional subordinated
debt. We also believe future capital raises or other strategic alliances,
mergers, or sales are possible to fund growth, operations, and other business
opportunities. However, we cannot assure that any of these sources is available
to us.
On September 30, 2004, the Company entered into the financing arrangements with
Laurus, as set forth above, in the aggregate principal amount of up to three
million dollars ($3,000,000). Laurus also received a common stock purchase
warrant to purchase up to 472,000 shares of Common Stock at an exercise price of
$3.00 per share.
On December 3, 2004, the terms of the Notes were amended such that Catalyst
received an advance on $600,000 of the funds agreed to be advanced pursuant to
the Term Note in exchange for lowering the fixed conversion price of the Notes
from $2.66 per share to $1.50 per share. Laurus also acquired an additional
Common Stock Purchase Warrant for the purchase of up to 100,000 shares of Common
Stock, exercisable until December 3, 2009 at a price of $3.00 per share.
Pursuant to our registration statement filed on Form SB-2 on March 24, 2005 (the
"Registration Statement") which became effective April 11, 2005, we registered
the Common Stock issuable to Laurus underlying the AR Notes, assuming conversion
of the maximum amounts thereunder and conversion of all Warrants, plus an
additional 250,000 shares of Common Stock to cover any future anti-dilution
protection Laurus may receive pursuant to the AR Notes and Warrants. None of the
Common Stock underlying the Term Note was registered in the Registration
Statement.
On April 19, 2005, $400,000 of the Term Note funds held in the escrow account
was released by Laurus. Laurus received 250,000 shares of the Company's Common
Stock as consideration for the advance.
The Notes currently bear interest at "prime" (currently 5.25%) plus 2%, or a
current aggregate of 7.50%. Laurus is prohibited from converting money owed
under the Notes, in the aggregate, into more than 4.99% percent of the Common
Stock. The Term Note and the Borrowing Note also each prohibit conversion into
Common Stock until (a) money has been advanced pursuant to any of such notes and
(b) the shares of Common Stock underlying the respective Notes have been
registered for re-sale or are exempt from the registration requirements. Since
the Common Stock underlying the Term Note is not being registered in the
Registration Statement, the Term Note cannot currently be converted. However,
sums advanced pursuant to the AR Notes may be converted into shares of Common
Stock being registered hereunder at $1.50 per share.
As of June 30, 2005, $2,827,612 has been advanced pursuant to the AR Notes and
$1,894,018 (including the $600,000 and the $400,000 referenced above) has been
advanced pursuant to the Term Note. Catalyst has the option of prepaying the
Term Note and Borrowing Note by paying 120% of all amounts then due and owing to
Laurus. The AR Notes, aggregating $3,000,000, are for accounts receivable
financing provided by Laurus and, once received, there is no restriction on the
use of such funds. The Term Note provides up to $2,000,000 for acquisitions
and/or general working capital, with its use subject to the approval of Laurus.
The Securities Purchase Agreement pursuant to which the Term Note was issued
(the "SPA") also contains restrictions for so long as at least 25% of the Term
Note is still outstanding. During such time, Catalyst is prohibited from, among
other things, (i) declaring or paying any dividends, (ii) issuing any preferred
stock that is mandatorily redeemable prior to payment in full of all
indebtedness and liabilities of the Company to Laurus, (iii) redeeming any of
its preferred stock or other equity interests, (iv) liquidating, dissolving or
effecting a material reorganization (it being understood that in no event shall
the Company dissolve, liquidate or merge with any other person or entity unless
the Company is the surviving entity) and (v) materially altering or changing the
scope of the business of the Company.
15
The existence of the AR and Term Notes could impact our ability to obtain future
financing, as Laurus holds a $5,000,000 first priority security interest in all
of our accounts receivable and other assets. Additionally, until the Term Note
is paid in full, Laurus holds a right of first refusal to provide any additional
debt or equity financing the Company may seek. The further leveraging of our
balance sheet and dilution of our Common Stock could prevent future financing
arrangements for the Company.
On July 6, 2005 the Company and Laurus executed Amendment No. 3, whereby Laurus
agreed to release to the Company $950,392 from the Restricted Account, provided
that $832,453 of such released amount was applied by the Company to repay the
excess funding on the A/R Notes and no less than $53,138 of such released amount
was applied to repay accrued and unpaid interest on the Term Loan. The remaining
$64,801 was to be used by the Company solely for working capital.
On August 15, 2005, the Company and Laurus executed Amendment No. 4 whereby
Laurus agreed to postpone amortizing payments of the aggregate principal amount
of the Term Note until December 1, 2005 at which time the Company shall make
monthly payments to Laurus on each repayment date, each such payment in the
amount of $86,091 together with any accrued and unpaid interest on such portion
of the principal amount plus any and all other unpaid amounts which are then
owing under the Term Note and related documents.
If (i) Catalyst shall have registered all Common Stock underlying the Notes and
Warrants and (ii) the market price of the Common Stock for the five trading days
immediately preceding the last day of the most recent month exceeds the then
applicable fixed conversion price by at least twenty five percent (25%), the
interest rate for the succeeding calendar month shall automatically be reduced
by 200 basis points, or 2%, for each incremental twenty five percent (25%)
increase in the market price of the Common Stock above the then applicable fixed
conversion price. If (i) the Company shall not have registered the shares of
Common Stock underlying the Notes and Warrants and (ii) the market price of the
Common Stock as reported by Bloomberg, L.P. on the principal market for the five
trading days immediately preceding the last day of the most recent month exceeds
the then applicable fixed conversion price by at least twenty five percent
(25%), the interest rate for the succeeding calendar month shall automatically
be decreased by 100 basis points, or 1%, for each incremental twenty five
percent (25%) increase in the market price of the Common Stock above the then
applicable fixed conversion price. As the Common Stock underlying the Term Note
is not being registered pursuant to the Registration Statement, we anticipate
that we may only be able to reduce the interest rate under the Notes at the 1%
rate set forth in the immediately preceding sentence. Failure to decrease the
interest rate by 2%, as set forth above, is not expected to affect the Company
in a material way as the aggregate annual difference, even if all $5,000,000
under the Notes were currently outstanding, is only $50,000. Currently, there is
only $4,622,629 outstanding under all Notes, $2,827,611 having been advanced
pursuant to the AR Notes and $1,894,018 (including the $600,000 and $400,000
referenced above) having been advanced pursuant to the Term Note. Interest under
the Notes is not payable in shares of Common Stock.
The AR Notes, aggregating $3,000,000, are for accounts receivable financing
provided by Laurus and there is no restriction on the use of such funds.
However, the Term Note was to provide up to $2,000,000 for acquisitions approved
by Laurus and general working capital purposes only.
The Security Agreement pursuant to which the AR Notes were issued contains
restrictions requiring Laurus' consent in order to (i) create, incur, assume or
suffer to exist any indebtedness (exclusive of trade debt) whether secured or
unsecured, (ii) cancel any debt owing to it in excess of $50,000 in the
aggregate during any 12 month period, (iii) assume, guarantee, endorse or
otherwise become directly or contingently liable in connection with any
obligations of any other Person, except for transactions in the ordinary course
of business, (iv) directly or indirectly declare, pay or make any dividend or
distribution on any class of its stock or assets, (v) purchase, redeem or retire
any Company stock, (vi) directly or indirectly prepay any indebtedness (other
than to Laurus and in the ordinary course of business), or repurchase, redeem,
retire or otherwise acquire any indebtedness (other than to Laurus and in the
ordinary course of business) except to make scheduled payments of principal and
interest thereof, (vii) enter into any merger, consolidation or other
reorganization with or into any other person or acquire all or a portion of the
assets or stock of any person or permit any other person to consolidate or merge
with it, unless (1) Company is the surviving entity of such merger or
consolidation, (2) no event of default shall exist immediately prior to and
after giving effect to such merger or consolidation, (3) Company shall have
provided Laurus copies of all documentation relating to such merger or
consolidation and (4) Company shall have provided Laurus with at least thirty
(30) days' prior written notice of such merger or consolidation, (viii)
materially change the nature of the business in which it is presently engaged,
(ix) change its fiscal year or make any changes in accounting treatment and
reporting practices, except as required by GAAP or in the tax reporting
treatment or except as required by law or (x) enter into any transaction with
any employee, director or affiliate of Catalyst, except in the ordinary course
on arms-length terms.
16
ITEM 3. CONTROLS AND PROCEDURES
-----------------------
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief executive
officer, who is also currently our chief financial officer, after
evaluating the 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, disclosure controls and procedures were
effective and designed to ensure that material information relating to
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, 2006, and the
Company must begin to comply with a requirement to perform a quarterly
evaluation of changes to internal control over financial reporting that
occur thereafter.
We are in the process of performing a detailed assessment of our internal
controls as required by the Sarbanes-Oxley Act of 2002. We are in the
scoping phase and have identified potential control deficiencies in our
system of internal controls and will implement policies and procedures to
remediate these deficiencies during the testing and remediation phase. To
ensure that we address these issues thoroughly, effectively and timely,
we have supplemented our internal project team with the services of an
outside specialist.
(b) CHANGES IN INTERNAL CONTROLS. There were no changes in internal controls
or to our knowledge, in any other factors that could materially affect,
or would be reasonably likely to materially affect, disclosure controls
and procedures, or internal control over financial reporting, subsequent
to June 30, 2005.
PART II - OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS.
On April 28, 2004, FWT, Inc. sued the Company for breach of contract and
attorney's fees. The lawsuit relates to an unpaid purchase order in the amount
of $30,609 which is disputed by the Company. The Company filed an answer on June
8, 2004 and in addition to denying liability to FWT, the Company asserted claims
for breach of contract and negligence against a third party, Double R Transport
and Farms, Inc. The Company has reached an agreement in principle to settle its
claims against Double R and it intends to vigorously defend itself against FWT's
claims if that settlement is not finalized.
An Application for Mechanic's and Materialman's Lien; Demand for Payment; Notice
of Mechanic's and Materialman's Lien and Demand for Payment was filed in the
Circuit Court of the Third Circuit, State of Hawaii filed June 4, 2004 (the
"Application"). This application was filed by GE Sports Lighting Systems, LLP
("GE") against Whitco and Kamehameha Schools/Bernice Pauahi Bishop Estate (the
"Estate"), Hawaiian Dredging/Kajima and Does 1-50. GE is a contractor of a
project to build sports complexes at two different schools on property owned by
the Estate and hired us to provide lighting poles for the project. GE claims it
is owed $313,385. Although it is not expressly stated in the Application, based
on subsequent discussions with all parties, it appears the Estate withheld
payment from GE due to the installation of the lighting poles using bolts that
were different from those originally ordered. We proposed a fix which was
approved in writing by both GE and the Estate. We then implemented this fix and
have received verbal approval of such fix from all parties, including an
independent architect hired by the Estate. On February 16, 2005 GE dismissed the
Application.
On September 27, 2004, the Trustee for the Warren Electric Group, Ltd.
bankruptcy estate sued the Company for recovery of $17,250 allegedly paid to the
Company in the 90 days prior to Warren Electric's bankruptcy. The Company
reached a settlement on December 20, 2004 by which it paid the Warren
Liquidating Trust $8,625 and the suit was dismissed.
17
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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 June 30, 2005.
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 June 30, 2005.
(b) Reports on Form 8-K.
Form 8-K filed April 20, 2005
Form 8-K filed June 20, 2005
18
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: August 22, 2005 /s/ Dennis H. Depenbusch
-------------------------------------------
Dennis H. Depenbusch
Chief Executive Officer,
Chairman of the Board of Directors,
Chief Financial Officer and Secretary
19