AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 2005
COMMISSION FILE NO. 333-121179
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
CATALYST LIGHTING GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 6770 84-1588927
STATE OR OTHER JURISDICTION OF PRIMARY STANDARD IRS EMPLOYEE
INCORPORATION CLASSIFICATION CODE NUMBER I.D. NUMBER
7700 WYATT DRIVE
FORT WORTH, TEXAS 76108
(817) 738-8181
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
DENNIS H. DEPENBUSCH
CHIEF EXECUTIVE OFFICER
CATALYST LIGHTING GROUP, INC.
7700 WYATT DRIVE
FORT WORTH, TEXAS 76108
(817) 738-8181
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO
THE AGENT FOR SERVICE, SHOULD BE SENT TO:
DAVID FELDMAN, ESQ.
FELDMAN WEINSTEIN LLP
420 LEXINGTON AVENUE
NEW YORK, NEW YORK 10170
(212) 869-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
1
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box |X|.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
CALCULATION OF REGISTRATION FEE
----------------------- -------------------- -------------------- ---------------------- --------------------
Title of each class Amount to be Proposed maximum Proposed maximum Amount of
of securities to be registered offering price per aggregate offering registration fee
registered unit (1) price
----------------------- -------------------- -------------------- ---------------------- --------------------
Common Stock, par 2,250,000 (2) $2.70 $6,075,000 $715.03
value $.01 per share
----------------------- -------------------- -------------------- ---------------------- --------------------
Common Stock, par 572,000 (3) $2.70 $1,544,400 $195.68
value $.01 per share
----------------------- -------------------- -------------------- ---------------------- --------------------
Common Stock, par 1,095,432 (4) $2.70 $2,957,666.40 $374.73
value $.01 per share
----------------------- -------------------- -------------------- ---------------------- --------------------
All shares of common stock being registered hereunder are being offered by
selling stockholders of Catalyst Lighting Group, Inc.
(1) Offering price computed in accordance with Rule 457(c).
(2) Represents the maximum number of shares of common stock underlying a Minimum
Borrowing Note and a Revolving Note, in the maximum aggregate amount of
$3,000,000, both of which are held by Laurus Master Fund, Ltd. ("Laurus") and
both of which are convertible into shares of Registrant's common stock at a
fixed conversion price of $1.50 per share, all as more fully described herein,
plus an additional 250,000 shares of common stock that may be issuable to Laurus
pursuant to anti-dilution rights contained in these notes and in the warrants
described below that it holds.
(3) Represents shares of common stock underlying common stock purchase warrants
issued to Laurus.
(4) Represents shares of common stock, or options or warrants to acquire common
stock, held of record by those selling stockholders listed herein other than
Laurus.
Pursuant to Rule 416, this Registration Statement includes such indeterminate
number of additional securities as may be required for issuance upon the
exercise of the options or warrants as a result of any adjustment in the number
of securities issuable by reason of the options or warrants.
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The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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Catalyst Lighting Group, Inc.
3,917,432 shares of common stock
By means of this prospectus several shareholders and other holders of debt and
warrant instruments of Catalyst Lighting Group, Inc. ("Catalyst", the "Company",
"we", "us" or "our") are offering to sell up to 3,917,432 shares of our common
stock par value $.01 per share (the "Common Stock") which they own or which they
may at a later date acquire upon the exercise of debentures, options or
warrants. This prospectus also includes up to 250,000 additional shares of
Common Stock that may be issuable to Laurus pursuant to anti-dilution rights
contained in the warrants or notes it holds.
Catalyst Lighting Group, Inc. will not receive any proceeds from the sale of the
common stock by the selling holders. Catalyst Lighting Group, Inc. will pay for
the expenses of this offering.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
These securities are speculative and involve a high degree of risk. For a
description of certain important factors that should be considered by
prospective investors, see "Risk Factors" beginning on page 10 of this
prospectus.
Our Common Stock is quoted on the OTC Bulletin Board under the symbol "CYSL.OB".
On January 20, 2005 the closing bid price for one share of Catalyst's common
stock was $2.60.
The date of this prospectus is January 31, 2004
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TABLE OF CONTENTS
PAGE
----
Prospectus Summary 6
The Offering 6
Summary Financial Data 8
Risk Factors 10
Comparative Share Data 17
Management Discussion and Analysis 18
Results of Operations 19
Liquidity and Capital Resources 24
Business 26
Board of Directors and Management Team 36
Principal Stockholders and Holdings of Management 38
Selling Stockholders 39
Manner of Sale 40
Description of Securities 41
Legal Proceedings 43
Available Information 44
Financial Statements and Notes to Financial Statements 46
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus and
does not contain all of the information you should consider before investing in
our Common Stock. While we have highlighted what we believe are the key aspects
of our business and this offering, you should read the entire prospectus
carefully, especially the risks of investing in our Common Stock discussed under
"Risk Factors" beginning on page 10.
Catalyst Lighting Group, Inc.
We are a Delaware corporation, organized on March 7, 2001 as Wentworth III, Inc.
On August 27, 2003, we acquired Whitco Company, LP ("Whitco"), a marketer and
distributor of steel and aluminum outdoor lighting poles and related
accessories. Whitco is owned and operated as our wholly-owned subsidiary. The
managing member of Whitco is Whitco Management, LLC, also wholly-owned by us. We
currently have no other subsidiaries or operating businesses other than the
business of Whitco.
On September 30, 2004, we authorized the sale to Laurus Master Fund, Ltd.
("Laurus") of 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), which are convertible into Common Stock at an initial fixed
conversion price of $2.66 per share. The terms of the AR Notes are set forth
herein in more detail. In this private placement, Laurus also acquired a Common
Stock Purchase Warrant for the purchase of up to 472,000 shares of Common Stock,
exercisable until September 30, 2009 at a price of $3.00 per share (the
"Warrant"). The AR Notes mature on September 30, 2007 and are secured by a first
priority lien on all assets of Catalyst, including inventory, accounts
receivable, raw materials and all of its ownership interests in Whitco. On
December 3, 2004, these terms were amended to lower the fixed conversion price
of the AR Notes from $2.66 per share to $1.50. Additionally, 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 (together with the Warrant, the "Warrants"). Catalyst granted
registration rights with respect to the shares of Common Stock underlying the AR
Notes and Warrants, which are being registered hereunder, together with an
additional 250,000 shares of Common Stock to cover Laurus' anti-dilution
protection under the AR Notes and Warrants.
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 a
fixed exercise price of $3.00 per share. This offering was extended through
January 24, 2005. To date, we have sold $50,000 worth of units. The 33,333
shares of common stock issued and the 33,333 shares of common stock underlying
the warrants issued, as well as the 3,333 shares of common stock underlying the
warrant issued to the placement agent, are all being registered hereunder.
Additionally, 1,025,433 of the shares offered hereby are being offered by
various current shareholders and option and warrant holders of Catalyst.
We maintain our office at 7700 Wyatt Drive, Fort Worth, Texas 76108. Our phone
number is (817) 738-8181 and the fax number is 817-926-5003. Whitco maintains a
website at www.whitcopoles.com and we maintain a website at
www.catalystlighting.com. The information contained on that website is not
deemed to be a part of this prospectus.
The Offering
By means of this prospectus several of our stockholders are offering to sell up
to 3,917,432 shares of Common Stock which they own, or which they may acquire
upon exercise of options or warrants or conversion of convertible debt
securities. In this prospectus we refer to these persons as the selling
stockholders. As of December 10, 2004, we had 3,789,384 shares of Common Stock
issued and outstanding. The number of outstanding shares does not give effect to
shares which may be issued pursuant to the exercise and/or conversion of
options, warrants and convertible debt securities previously issued.
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Catalyst will not receive any proceeds from the sale of the shares by the
selling holders of Common Stock, debt and warrants.
The purchase of the securities offered by this prospectus involves a high degree
of risk. Risk factors include the lack of revenues, a history of loss and the
need for additional capital. See the "Risk Factors" section of this prospectus
for additional risk factors.
OTC Bulletin Board Symbol: CYSL.OB
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Summary Financial Data
The financial data presented below should be read in conjunction with the more
detailed financial statements and related notes included elsewhere in this
prospectus, along with the section entitled "Management's Discussion and
Analysis and Plan of Operations."
Results of Operations:
Income Statement Data:
--------------------------------------------------------------------------------
Year Ended Year Ended
September 30, 2004 September 30, 2003
--------------------------------------------------------------------------------
Sales $16,358,303 $15,758,570
--------------------------------------------------------------------------------
Gross Profit 4,663,240 4,923,626
--------------------------------------------------------------------------------
General, Selling, and
Administrative Expenses 5,895,194 4,934,542
--------------------------------------------------------------------------------
Other Expense 361,719 933,465
--------------------------------------------------------------------------------
Net Loss (1,532,539) (1,005,515)
--------------------------------------------------------------------------------
Balance Sheet Data:
---------------------------------------------------------------------
Year Ended
September 30, 2004
---------------------------------------------------------------------
Current Assets $4,974,037
---------------------------------------------------------------------
Total Assets 10,453,626
---------------------------------------------------------------------
Current Liabilities 4,843,768
---------------------------------------------------------------------
Total Liabilities 9,327,864
---------------------------------------------------------------------
Working Capital 130,269
---------------------------------------------------------------------
Stockholders' Equity 1,125,762
---------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
Statements contained in this prospectus include "forward-looking statements",
which involve known and unknown risks, uncertainties and other factors which
could cause actual financial or operating results, performances or achievements
expressed or implied by such forward-looking statements not to occur or be
realized. These forward-looking statements generally are based on our best
estimates of future results, performances or achievements, based upon current
conditions and assumptions. Forward-looking statements may be identified by the
use of forward-looking terminology such as "may," "can," "could," "project,"
"expect," "believe," "plan," "predict," "estimate," "anticipate," "intend,"
"continue," "potential," "would," "should," "aim," "opportunity" or similar
terms, variations of those terms or the negative of those terms or other
variations of those terms or comparable words or expressions. These risks and
uncertainties include, but are not limited to:
o general economic conditions in both foreign and domestic markets,
o cyclical factors affecting Whitco's industry,
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o lack of growth in Whitco's industry,
o our ability to comply with government regulations,
o a failure to manage our business effectively and profitably, and
o our ability to sell both new and existing products and services at
profitable yet competitive prices.
You should carefully consider these risks, uncertainties and other information,
disclosures and discussions which contain cautionary statements identifying
important factors that could cause actual results to differ materially from
those provided in the forward-looking statements. We undertake no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The securities being offered hereby are
highly speculative and prospective investors should consider, among other
things, the following factors related to our business, operations and financial
position.
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RISK FACTORS
An investment in our securities is highly speculative and subject to numerous
and substantial risks. These risks include those set forth below and elsewhere
in this prospectus. Readers are encouraged to review these risks carefully
before making any investment decision.
WE MAY NOT BE ABLE TO RAISE SUFFICIENT CAPITAL TO SUCCESSFULLY OPERATE OR EXPAND
OUR BUSINESS.
Our current and intended business operations require substantial capital
expenditures. If we cannot obtain additional capital, we may have to delay or
postpone acquisitions, development or research expenditures which can be
expected to harm our competitive position, business operations and growth
potential. Funding is expected to come through sales of products and services,
equity financing, current and future vendor financing, equipment leases and bank
lines of credit or loans, which may not be available on commercially reasonable
terms, if at all. If sales or revenues do not meet expectations, or cost
estimates for development and expansion of our business prove to be inaccurate,
we will require additional funding. Changes in capital markets and the cost of
capital are unpredictable. We cannot be sure that we will be able to secure
additional financing on acceptable terms. Any failure to obtain such financing,
or obtaining financing on terms not favorable to us, can be expected to have a
material adverse effect on our business, financial condition, results of
operations and future business prospects. Certain of the documents governing our
existing debt and equity securities contain restrictions on our ability to raise
additional capital, including, in certain circumstances, requiring the consent
of the holders of our existing securities.
WE ARE NOT CURRENTLY PROFITABLE AND MAY NEVER BECOME PROFITABLE.
We expect to incur losses and negative operating cash flow for the foreseeable
future, and we may never achieve or maintain profitability. Even if we succeed
with our current business plan, we may never become profitable. We also expect
to continue to incur operating and capital expenditures for items such as
salary, inventory, shipping and other ongoing business activities.
We also expect to experience negative cash flow for the foreseeable future as we
fund our operating losses and capital expenditures. As a result, we will need to
generate significant revenues in order to achieve and maintain profitability. We
may not be able to generate these revenues or achieve profitability in the
future. Our failure to achieve or maintain profitability can be expected to have
a material adverse effect on our business, financial condition, results of
operations and future business prospects.
THERE COULD BE CONFLICTS OF INTEREST AMONG MANAGEMENT WHICH MAY BE ADVERSE TO
YOUR INTERESTS.
Conflicts of interest create the risk that management may have an incentive to
act adversely to the interests of other investors. A conflict of interest may
arise between our management's personal pecuniary interest and its fiduciary
duty to our stockholders. Our officers and directors currently own approximately
46% of the outstanding common stock. Although management does not have voting
control of the Company, management will continue to have day to day operating
control of the Company and a large voting block of the common stock. Such
influence may not necessarily be consistent with the interests of our other
stockholders.
10
IF WE RAISE ADDITIONAL FUNDS THROUGH THE ISSUANCE OF OUR EQUITY SECURITIES, OR
DETERMINE IN THE FUTURE TO REGISTER ANY COMMON STOCK, YOUR PERCENTAGE OWNERSHIP
WILL BE REDUCED, YOU WILL EXPERIENCE DILUTION WHICH COULD SUBSTANTIALLY DIMINISH
THE VALUE OF YOUR STOCK AND SUCH ISSUANCE MAY CONVEY RIGHTS, PREFERENCES OR
PRIVILEGES SENIOR TO YOUR RIGHTS WHICH COULD SUBSTANTIALLY DIMINISH YOUR RIGHTS
AND THE VALUE OF YOUR STOCK.
We may issue additional shares of common stock for various reasons and may grant
additional stock options to employees, officers, directors and third parties. If
we determine to register for sale to the public additional shares of common
stock granted in any future financing or business combination, a material amount
of dilution can be expected to cause the market price of our common stock to
decline. One of the factors which generally affects the market price of publicly
traded equity securities is the number of shares outstanding in relationship to
assets, net worth, earnings or anticipated earnings. Furthermore, the public
perception of future dilution can have the same effect even if actual dilution
does not occur.
In order for us to obtain additional capital or complete a business combination,
we may find it necessary to issue securities, including but not limited to any
or all shares of preferred stock, conveying rights senior to those of the
holders of common stock. Those rights may include voting rights, liquidation
preferences and conversion rights. To the extent we convey senior rights, the
value of our common stock can be expected to decline.
In addition, substantially all of our outstanding warrants and convertible debt
contain "anti-dilution" protection, which are designed to provide the holders of
such securities with rights to additional securities should we issue, or be
deemed to issue, common stock below the exercise or conversion price of such
securities, or in certain cases, below the then effective market price for the
common stock. Such provisions will have the effect of further diluting existing
holders of our common stock.
IF WE INCUR MORE INDEBTEDNESS, WE MAY BECOME TOO HIGHLY LEVERAGED AND WOULD BE
IN RISK OF DEFAULT.
There is no contractual or regulatory limit to the amount of debt we can take
on, although we intend to follow a conservative debt policy. If our policy were
to change or be eliminated due to unforeseen circumstances, we could become more
highly leveraged, which could adversely affect our ability to meet our
obligations and we would then be in risk of default, which could have a material
adverse effect on our financial condition, results of operations, business
prospects and long term future viability.
WE LACK BUSINESS DIVERSIFICATION AS WE OPERATE IN ONE BUSINESS IN ONE INDUSTRY,
WHICH MAKES US SUBJECT TO ALL THE RISKS AND UNCERTAINTIES OF THAT INDUSTRY.
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As Whitco is currently our sole operating business, the prospects for our
success are entirely dependent upon the future performance of a single business.
Unlike other entities with resources to consummate several business
combinations, or entities operating in multiple industries, we do not expect to
have the resources to diversify our operations or benefit from the possible
spreading of risks or offsetting of losses.
THERE IS INTENSE COMPETITION IN THE LIGHTING INDUSTRY WHICH MAY ADVERSELY AFFECT
OUR FINANCIAL CONDITION AND YOUR INVESTMENT IN OUR COMMON STOCK.
There are numerous competitors in the fields in which Whitco is currently
involved and in which it intends to enter, many of which have developed product
lines and established customer followings. We also expect competition to
increase in the future. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
harm our net revenue and results of operations. Whitco competes or will
potentially compete with a variety of companies, many of which have operated for
a longer period of time and have significantly greater financial, technical,
marketing and other resources. Some of these competitors have established
relationships with leading manufacturers, suppliers, wholesalers, distributors
and sales representatives. These competitors include national wholesalers and
national and regional distributors, some of which Whitco already has existing
relationships with. Further, we face a significant competitive challenge from
alliances entered into between and among our competitors, as well as from
competitors created through industry consolidation. The combined resources of
these partnerships or consolidated entities could pose a significant competitive
challenge and could impede us in, or prevent us from, establishing relationships
which would be most beneficial.
WE ARE DEPENDENT ON A FEW MANUFACTURERS TO MAKE THE TUBES REQUIRED FOR OUR POLE
BUSINESS.
Our primary business is selling lighting poles in a variety of market segments.
Although we own the raw material and have this year moved the majority of our
manufacturing in-house, we use various manufacturers to supply our raw tubes. A
significant portion of these tubes are supplied by Trans America Power Products.
Although we believe we can secure other fabricators, we expect that the
deterioration or cessation of either relationship would have a material adverse
effect, at least temporarily, until the new relationships are satisfactorily in
place.
WE SUTAINED LOSSES IN THE FISCAL YEARS ENDED SEPTEMBER 30, 2004 AND 2003.
The Company incurred a net loss for fiscal years 2004 and 2003 of ($1,532,539)
and ($1,005,515). The losses were partly attributable in 2004 to significant
price increases in raw materials, manufacturing inefficiencies associated with
the move to in-house production, charges associated with early termination of
our factoring agreement with Marquette Commercial Finance, and expenses
associated with being a public company. In 2003, the losses were partly
attributable to nonrecurring expenses related to the merger and preparing for
the public offering which ended on May 26, 2004.
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WE MAY BE SUBJECT TO LAWSUITS AS A RESULT OF THE MANUFACTURE, DESIGN AND
INSTALLATION OF OUR LIGHTING POLES, WHICH COULD BE COSTLY AND DIVERT NEEDED
RESOURCES AWAY FROM OPERATIONS.
We are currently involved in three legal proceedings, as described in the "Legal
Proceedings" section herein. Although we do not believe any of the current
lawsuits will have a material adverse effect on our business or future
prospects, we face the risk of lawsuits from property owners, federal and state
governments and any injured parties from accidents alleged to occur as a result
of the manufacture, design or installation of the lighting poles and fixtures.
Any lawsuit, even if without merit, could divert needed time, money and other
resources from our business. Although we currently have property, general
liability and product liability insurance in amounts we believe to be adequate,
we can give no assurance such insurance will remain available at a reasonable
price, if at all, or that any insurance policy would offer coverage sufficient
to meet any liability arising as a result of a claim. The obligation to pay any
substantial liability claim could render us insolvent and could force it to
curtail or suspend operations, which would have a material adverse effect on
your investment. Additionally, failure to implement and maintain a quality
control program with respect to the manufacture and installation of poles could
increase the risk of liability for any injury that may occur from one of our
poles.
EFFORTS TO PROTECT INTELLECTUAL PROPERTY OR THE ALLEGED MISUSE OF THE
INTELLECTUAL PROPERTY OF OTHERS MAY CAUSE US TO BECOME INVOLVED IN COSTLY AND
LENGTHY REGULATORY PROCESSES OR LITIGATION WHICH COULD DIVERT NEEDED RESOURCES
AWAY FROM OPERATIONS.
Our success depends, in part, on our ability to obtain and preserve patent,
trademark and other intellectual property rights, including with respect to the
software created in connection with our business, services, products and the
pole designs they create. The process of seeking trademark and patent protection
and defending claims is time consuming and expensive and no assurances can be
given that (i) patents or trademarks will actually be issued, (ii) new patents
will be sufficient in scope to provide meaningful protection or any commercial
advantage or (iii) others will not independently develop similar products or
design around any patents we may obtain. If we fail to protect intellectual
property from infringement, other companies may offer competitive products.
Additionally, we may have to defend ourselves against claims we infringe the
intellectual property rights of others. Protection of our intellectual property,
and defense of our own products and services, could result in costly and lengthy
litigation, diverting resources which would otherwise be dedicated to managing
the business.
WE MAY NEED TO EXPEND TIME AND FINANCIAL RESOURCES TO LEARN AND COMPETE IN THOSE
PARTS OF THE INDUSTRY WHICH WE INTEND TO ENTER FOR THE FIRST TIME WHICH COULD
DIVERT NEEDED RESOURCES AWAY FROM OPERATIONS.
Our current business strategy contemplates entering parts of the lighting
industry in which we have not previously competed, through either acquisitions
of current participants in those markets or in-house development of such
capabilities. Although these segments of the market are directly related to the
current market in which we compete, we expect to take time and financial
resources to learn the nuances of these segments, as well as to execute on the
business plan and integrate these new parts of the business into our existing
business. Any failure in these new markets or failure to successfully integrate
them into our existing business could be expected to have a material adverse
effect on our financial condition, results of operations and future prospects.
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WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES, IF ANY, WHICH
COULD RESULT IN A DECREASE IN OUR CASH RESOURCES AND ULTIMATELY LEAD TO
INCREASES IN ACCOUNTS RECEIVABLE WRITE-OFFS.
Although we are continuously seeking out possible acquisition candidates, the
Company has not completed an acquisition to date. Once a candidate is found and
an acquisition completed, we anticipate that our acquisition strategy will
result in a labor-intensive process to integrate new businesses into our
existing business. This can shift focus away from our existing business. The
successful integration of an acquired business is also dependent on the size of
the acquired business, the complexity of system conversions, the resolution of
disputes regarding multiple sales representatives in a given geographic area and
management's execution of the integration plan. If we are not successful in
integrating acquired businesses, our results may be adversely affected.
A SLOWDOWN IN THE CONSTRUCTION CYCLE OR ANY REDUCTION IN THE INFRASTRUCTURE
NEEDS OF FEDERAL, STATE AND LOCAL GOVERNMENTS COULD HAVE A MATERIAL ADVERSE
IMPACT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
Our primary market segments include sports arenas, area lighting, such as
parking lot lighting for shopping malls and apartment complexes, high mast
lighting and roadway lighting. In the private sector, we are dependent on the
construction industry to continue building the arenas and other complexes which
require lighting poles. With regard to roadway lighting, we are dependent on the
needs and financial health of federal, state and local governments. Both the
private and public sectors are highly dependent on general economic conditions.
Accordingly, any reduction in the construction cycle, dip in the economy or
deterioration of the financial health of the federal and state governments could
be expected to have a material adverse effect on our business and financial
condition.
WE ARE DEPENDENT ON THE PRICE OF STEEL AND PRICE INCREASES COULD HAVE AN IMPACT
ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Because we make the majority of our lighting poles out of steel, our profit
margins are dependent on the price of the raw steel tubes purchased from time to
time. We have no impact on or ability to control or otherwise manage the price
we pay for raw steel. The major steel purchasers could either mark prices down,
which could result in decreased revenues for us as we pass the savings on to
customers, or cause an increase in prices, which could also reduce our profit
margin if it is determined that customers would rather delay their purchases
than pay higher prices or if customers purchase poles from a cheaper source. The
Company experienced such an increase in fiscal year 2004 which had a material
impact on gross profit. Although we could buy more steel when prices are low and
less when prices are high, such a strategy could lead to either excess
inventory, which would lead to increased fabrication and storage costs, or
insufficient inventory.
14
THE EXISTENCE OF OUTSTANDING OPTIONS AND WARRANTS MAY HARM OUR ABILITY TO OBTAIN
ADDITIONAL FINANCING AND THEIR EXERCISE WILL RESULT IN DILUTION TO YOUR
INTERESTS.
We have outstanding (a) 644,100 warrants outstanding to purchase an aggregate of
644,100 shares of common stock and (b) incentive options to purchase 843,632
shares of common stock, with 630,519 of such options currently vested.
Additionally, our option plan reserves an additional 656,368 shares for future
issuance. While these warrants and options are outstanding, our ability to
obtain future financing may be harmed. Upon exercise of these options and
warrants, dilution to your ownership interests will occur as the number of
common shares outstanding increases.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE EVENT A PORTION OF
THE UNISSUED SHARES BEING REGISTERED HEREUNDER ARE ACTUALLY ISSUED.
Of the 3,917,432 shares of Common Stock being registered hereunder, only 668,064
have been issued to date. The remainder are issuable only upon conversion of
promissory notes or exercise of various warrants and options. However, in the
event all or even a portion of the remaining 3,249,368 shares of Common Stock
being registered hereunder are actually issued, this dilution can be expected to
be material and can be expected to cause the market price of our Common Stock to
decline. One of the factors which generally affects the market price of publicly
traded equity securities is the number of shares outstanding in relationship to
assets, net worth, earnings or anticipated earnings. Furthermore, the public
perception of future dilution can have the same effect even if actual dilution
does not occur.
RELIANCE UPON THIRD-PARTY SUPPLIERS FOR COMPONENTS AND RAW MATERIALS MAY PLACE
US AT RISK OF INTERRUPTION OF SUPPLY OR INCREASE IN COSTS.
We rely on third-party suppliers for the component parts used in the
manufacturing process and we do not have any long-term supply agreements. We run
the risk of supplier price increases and component shortages. Additionally,
competition for materials in short supply can be intense, and we may not be able
to compete effectively against other purchasers who have higher volume
requirements or more established vendor relationships. Even if suppliers have
adequate supplies of components, they may be unreliable in meeting delivery
schedules, experience their own financial difficulties, provide components of
inadequate quality or provide them at prices which reduce our profit. Any
problems with our third-party suppliers can be expected to have a material
adverse effect on our financial condition, business, results of operations and
continued growth prospects.
MANUFACTURING OPERATIONS INVOLVE INVENTORY RISK.
Our manufacturing projects involve a substantial amount of resources and
inventory risk. We may have to expend resources for parts, manufacturing,
inventory and warehousing prior to payment for these services. In light of
normal business risks to our customers, there can be no guarantee that we will
receive payment in full for these expenditures. Additionally, pricing changes
could adversely impact our selling price, gross margins and operating results.
BECAUSE OF THE MANY VARIABLES OF THE MANUFACTURING INDUSTRY, THERE CAN BE NO
ASSURANCE THAT WE CAN SUCCESSFULLY EXECUTE OUR BUSINESS PLAN.
Our business plan includes a number of inherent execution risks. As
manufacturers of lighting poles and accessories, we run the risk of, among other
things, failing to provide products or providing inadequate products. Because
our business requires substantial fixed assets, we will not be profitable if we
do not realize sufficient revenue growth to make maximum use of our capacity.
The continued success of our business will depend upon our ability to deliver
quality products as a value-added partner. In order to do this effectively, we
must hire, train and expand our qualified engineering and technical staff.
Failure to realize some or all of our business objectives can be expected to
have a material adverse impact on our financial condition and continued
viability.
15
ONGOING SUCCESS AND ABILITY TO COMPETE DEPEND UPON RETENTION OF KEY PERSONNEL.
Our future success depends on the continued services of our executive staff, as
well as our key engineering, technical, sales and support personnel. These
individuals have critical industry experience and relationships upon which we
rely. The loss of services of any of our key personnel could divert time and
resources, delay the development of our business and negatively affect our
ability to sell our services or execute our business. Such problems might be
expected to have a material adverse impact on our financial condition, results
of current operations and future business prospects.
FAILURE TO EXECUTE ON OUR ACQUISITION AND NEW MARKET STRATEGY MAY HAVE AN IMPACT
ON OUR ABILITY TO REMAIN A PUBLICLY TRADED COMPANY.
Part of our business strategy involves growth either through acquiring companies
in complementary areas of the lighting industry or entering directly into those
markets ourselves. In either event, this requires a substantial expenditure of
time, money and other valuable resources. Not only does this take resources away
from our current business, but there is the chance that our strategy will not
ultimately be successful. In such event, it is likely the continued costs
associated with being a public reporting company will outweigh the anticipated
organic growth of our current business, which could result in our being
delisted, going private or seeking a sale of the company.
THERE IS, AT PRESENT, ONLY A LIMITED MARKET FOR OUR COMMON STOCK AND THERE CAN
BE NO ASSURANCE THIS MARKET WILL CONTINUE.
Our common stock is traded on the OTC Bulletin Board. Trades are subject to Rule
15g-9 of the Securities and Exchange Commission, which imposes certain
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors. For transactions covered by this
rule, broker-dealers must make a special suitability determination for
purchasers of the securities and receive the purchaser's written agreement to
the transaction prior to sale. The SEC also has rules that regulate
broker-dealer practices in connection with transactions in "penny stocks". Penny
stocks generally are equity securities with a price per share of less than $5.00
(other than securities registered on certain national securities exchanges or
quoted on the NASDAQ system, provided that current price and volume information
with respect to transactions in that security are provided by the exchange or
system). The penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document prepared by the SEC that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information, must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer's
confirmation. These disclosure requirements have the effect of reducing the
level of trading activity in the secondary market for our common stock. As a
result of these rules, investors may find selling their shares to be complex and
time consuming.
16
THE VALUE OF THE COMMON STOCK MAY BE DIMINISHED BY THE ISSUANCE OF PREFERRED
STOCK.
Our Board of Directors is authorized by our certificate of incorporation to
designate and issue up to 10,000,000 shares of one or more series of preferred
stock, which will have such designations, rights and preferences as may be
determined from time to time by the Board. Accordingly, the Board of Directors
is empowered, without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of the common stock. The
preferred stock could be utilized to discourage, delay or prevent a change in
control. Although we have no present intention to issue any shares of preferred
stock, there can be no assurance we will not do so in the future.
COMPARATIVE SHARE DATA
Shares offered by this prospectus by the selling shareholders, debt holders and
warrant holders: 3,917,432
As of December 10, 2004, we had 3,789,384 outstanding shares of Common Stock,
excluding shares which may be issued upon the conversion of promissory notes or
the exercise of options and warrants.
The issuance of additional shares and the eligibility of issued shares for
resale will dilute our Common Stock and may lower its price. Investors in this
offering will suffer immediate dilution, since the price paid for the securities
offered will likely be more then the net tangible book value of our Common
Stock. Net tangible book value is calculated by dividing our total assets, less
intangible assets and liabilities, by the number of outstanding shares of Common
Stock.
Other Shares Which May Be Issued:
The following table lists additional shares of Common Stock which may be issued
as the result of the conversion of promissory notes or the exercise of
outstanding options or warrants:
--------------------------------------------------------------------------------
Shares issuable upon conversion of promissory notes, 1,524,398 (1)
conversion of warrants or exercise of options
--------------------------------------------------------------------------------
(1) If we sell any additional shares of Common Stock, or any securities
convertible into Common Stock at a price below the then applicable conversion or
exercise price of any of the Notes, other than any shares issuable pursuant to
the Offering, the conversion or exercise price will be lowered pursuant to a
formula providing weighted average anti-dilution protection. Options and
warrants are exercisable at prices between $.30 and $4.00 per share and expire
between May 2008 and February 2014.
17
MARKET FOR COMMON STOCK
As of January 20,2005, there were approximately 72 record owners of our Common
Stock, which is traded on the OTC Bulletin Board under the symbol "CYSL.OB." Our
Common Stock began trading on the OTC Bulletin Board on June 28, 2004. Set forth
below are the range of high and low bid quotations for the periods indicated as
reported by the OTC Bulletin Board. The market quotations reflect interdealer
prices, without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
Quarter Ending High Low
06/30/04 $3.00 $2.75
09/30/04 $2.85 $2.50
Holders of Common Stock are entitled to receive dividends as may be declared by
our Board of Directors and, in the event of liquidation, to share pro rata in
any distribution of assets after payment of liabilities. The Board of Directors
is not obligated to declare a dividend. We have not paid any dividends and do
not have any current plans to pay any dividends. The Notes issued to Laurus on
September 30, 2004 restrict our ability to pay dividends. In addition, the terms
of such indebtedness prevents Whitco from paying dividends to us, which has the
effect of precluding us from paying dividends with respect to our Common Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
This report on Form SB-2 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.
PLAN OF OPERATION
We were organized as a vehicle to seek, investigate and, if such investigation
warrants, acquire a target company or business that primarily desires to seek
the perceived advantages of a publicly-held corporation.
We formed under the name Wentworth III, Inc. in March, 2001 as a blank check
company, which is essentially a vehicle to pursue a business combination. We
offered our common stock to the public pursuant to Rule 419 promulgated under
the Securities Act of 1933, as amended, and closed our offering, raising
proceeds of $50,000 from the sale of 50,000 shares, in November, 2002. We had no
operating business and all our activities since inception, and prior to the
share exchange with Whitco, had been related to formation, completing the public
offering and finding suitable merger or acquisition candidates. Pursuant to Rule
419, the gross proceeds from the offering of $50,000, less 10% for expenses
incurred in connection with the IPO, were held in escrow subject to the closing
of the transaction with Whitco. We paid no cash compensation to any officer or
director in their capacities as such prior to the transaction with Whitco. On
August 27, 2003, we completed the share exchange transaction with Whitco,
whereupon Whitco became our sole wholly-owned subsidiary. On September 3, 2003,
we changed our name to Catalyst Lighting Group, Inc.
18
Based on the above transactions, we have provided management's discussion and
analysis of financial condition and results of operations for Whitco for the
year ending September 30, 2004 and 2003 and for Catalyst Lighting Group, Inc.,
from the date of acquisition, August 27, 2003. For financial statement purposes,
this transaction has been treated as a reverse merger, whereby Whitco LP is
considered the acquiring company.
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
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 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 of America. 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.
19
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 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 its reserve for potential warranty
costs.
Impact of Recently Issued Accounting Pronouncements - None
Year ended September 30, 2004 compared to the year ended September 30, 2003
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 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 is
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. In all cases, we anticipate these acquisitions will be accretive to
earnings immediately. As a rule of thumb, we expect we will be able to purchase
businesses at multiples of 3x to 6x EBITDA. 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.
We have benefited from having our own manufacturing facility, as we were
recently awarded a contract for the production of straight square steel poles
for distribution through one of the top five OEM lighting fixture manufacturers
in the country. The contract, although currently valued at less than $1 million
per year in revenue, could become more lucrative for additional pole business,
as the OEM considers outsourcing more of its pole production.
Over the past four years, management has invested heavily in the first three
initiatives and also incurred significant expenses by going public. The Company
grew revenues by 30% and 14% in fiscal years 2002 and 2003, respectively,
compared to increases of 6% and 8% by Valmont Industries, the industry leader in
outdoor lighting poles. For the year ended September 30, 2004, the Company grew
revenues by 4 %, compared to the year ended September 30, 2003. With adequate
working capital, the Company believes it has the strategy in place to exact
future market share gains.
On September 30, 2004, we authorized the sale to Laurus of (1) a Secured
Convertible Term Note in the principal amount of two million dollars
($2,000,000), which is convertible into Common Stock at an initial fixed
conversion price of $2.66 per share (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), which
are convertible into Common Stock at an initial fixed conversion price of $2.66
per share. In this private placement, Laurus also acquired a Common Stock
Purchase Warrant for the purchase of up to 472,000 shares of Common Stock,
exercisable until September 30, 2009 at a price of $3.00 per share (the
"Warrant"). The Term Note and AR Notes (collectively, the "Notes") mature on
September 30, 2007 and are secured by a first priority lien on all assets of
Catalyst, including inventory, accounts receivable, raw materials and all of its
ownership interests in Whitco. On December 3, 2004, these terms were amended
such that Catalyst received an advance on $600,000 of funds under the Term Note
in exchange for lowering the fixed conversion price of the Notes from $2.66 per
share to $1.50. Additionally, 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 (together with
the Warrant, the "Warrants"). Catalyst granted registration rights with respect
to the shares of Common Stock underlying the AR Notes and Warrants, which are
being registered hereunder, together with an additional 250,000 shares of Common
Stock to cover Laurus' anti-dilution protection under the Notes and Warrants.
None of the shares of Common Stock underlying the Term Note are being registered
hereunder.
20
Our strategy has been further enhanced by the $2 million restricted cash
investment made by Laurus Master Fund Ltd. to finance mergers, joint ventures or
other strategic business alliances as the need arises. This is in addition to
the $3 million revolving line of credit at a floor rate of 6%. The Laurus
transactions have improved the Company's liquidity and cash position by
increasing borrowing availability to fund operating obligations of the Company
over the next few months.
The table below was adjusted for pro forma taxes, for periods before the twelve
months ending September 30, 2003, as if Whitco, the fully owned subsidiary of
Catalyst Lighting Group, Inc., was a C-corporation for state and federal tax
purposes.
21
12 Months 12 Months
Ended Ended
9/30/2004 9/30/2003
Sales $ 16,358,303 $ 15,758,570
--------------------------------------------------------------------------------
Cost of Sales $ 11,695,063 $ 10,834,944
--------------------------------------------------------------------------------
Gross margin on Sales $ 4,663,240 $ 4,923,626
--------------------------------------------------------------------------------
General Selling and
Administrative Expenses $ 5,895,194 $ 4,934,542
--------------------------------------------------------------------------------
Loss from Operations $ (1,231,954) $ (10,916)
--------------------------------------------------------------------------------
Reverse Merger Expense $ -- $ 606,621
--------------------------------------------------------------------------------
Interest Expense $ 361,719 $ 326,844
--------------------------------------------------------------------------------
Loss Before Taxes and
Pro Forma Income Taxes $ (1,593,673) $ (944,381)
--------------------------------------------------------------------------------
Provision for (Benift From)
Taxes $ (61,134) $ 61,134
--------------------------------------------------------------------------------
Loss Before Pro Forma
Taxes $ (1,532,539) $ (1,005,515)
--------------------------------------------------------------------------------
Pro Forma Income Taxes $ -- $ (214,000)
--------------------------------------------------------------------------------
Pro Forma Net Loss $ (1,532,539) $ (791,515)
--------------------------------------------------------------------------------
Revenue. For the twelve months ended September 30, 2004, the recognized revenue
was $16,358,303. For the twelve months ended September 30, 2003, the recognized
revenue was $15,758,571. Cost of goods sold in the twelve months ended September
30, 2004 was $11,695,063, which generated a gross margin of 28.5%, versus 31.2%
for the twelve months ended September 30, 2003. Excluding commissions from sales
(See table below), the increase in revenue can be attributed to an $820,059
(15.9%) increase in steel area lighting poles, and a $441,213 (64.3%) increase
in aluminum sales. These increases were partially offset by a $446,425 (23.7%)
decrease in sales to an OEM customer, a $147,267 (21.2%) decrease in highmast
lighting pole sales, and a $265,539 (6.4%) decrease in sports lighting pole
sales.
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.
22
For the 12 Months Ended September 30,
2004 2003
---------- ----------
Base Price Revenue 13,490,210 13,200,725
Commission Revenue 2,868,092 2,557,846
---------- ----------
Gross Sales 16,358,302 15,758,571
========== ==========
General, selling, and administrative expense (GSA expenses). For the twelve
months ended September 30, 2004, GSA expense totaled $5,895,194, compared to
$4,934,542 for the twelve months ended September 30, 2003. The increase in GSA
expense resulted from the increase in commission expenses paid, Salaries, wages,
and labor related expenses, bad debt expense, warranty expense, bank charges,
investment advisor expenses, and investor relations expense as described below.
Commission expense. For the twelve months ended September 30, 2004, commission
expense totaled $2,868,092, compared to $2,557,846 for the twelve months ended
September 30, 2003. The increase in commissions is the result of an increase in
total revenues as compared to the previous comparative period.
Salaries, wages, and labor related. For the twelve months ended September 30,
2004, salaries, wages, and labor related expenses totaled $1,428,614, compared
to $1,328,666 for the twelve months ended September 30, 2003. The increase in
salaries and wages can be attributed to additional personnel hired during the
third and fourth quarter of fiscal year 2003. The expenses associated with the
additional personnel had a more significant impact on fiscal year 2004 as the
Company incurred a full year of salary, wages, and benefits.
Bad debt expense. For the twelve months ended September 30, 2004, bad debt
expense totaled $87,189, compared to $606 for the twelve months ended September
30, 2004. The increase in bad debt expense is the result of an increase in total
revenues as compared to the previous comparative period and an increase in
actual uncollectible accounts during the period.
Warranty expense. For the twelve months ended September 30, 2004, warranty
expense totaled $136,272, compared to $85,395 for the twelve months ended
September 30, 2004. The increase in warranty expense is the result of an
increase in total revenues as compared to the previous comparative period, an
increase in actual warranty work related to defective product produced by an
outsourced manufacturer, and approximately $25,000 in field work for an
individual job to correct a shipping error.
Bank Charges. For the twelve months ended September 30, 2004, bank charges
totaled $226,166, compared with $27,856 for the twelve months ended September
30, 2003. The increases in bank charges for the comparative periods reflects
charges associated with loan financing fees and the early termination of one of
our loan agreements.
23
Investment advisor expenses. For the twelve months ended September 30, 2004,
investment advisor expenses totaled $199,500, compared with $0 for the twelve
months ended September 30, 2003. Keating Investments was the investment advisor
for the reverse merger and received an investment banking fee in common stock of
70,000, which was due upon the Company's common stock trading on the
Over-the-Counter Bulletin Board. The stock began trading on June 26, 2004.
Investor relations expense. For the twelve months ended September 30, 2004,
investor relations expense totaled $95,126, compared with $254 for the twelve
months ended September 30, 2003. The increases in investor relations expense for
the comparative periods are related to the registered offering and the
transition to a publicly traded company.
Interest expense. Interest expense for the twelve months ended September 30,
2004 was $361,719, compared with $326,844 for the twelve months ended September
30, 2003. The increase in interest expense for the comparative periods reflect
the increase in both the operating credit line as well as an increase in
interest rate associated with the factoring agreement between the Company and
Marquette Commercial Finance.
Other expense. For the twelve months ended September 30, 2004 Catalyst Lighting
Group incurred $0 in expense associated with the merger compared to $606,621 for
the twelve months ended September 30, 2003. The Company recognized a $17,768
loss for disposal of fixed assets during the twelve months ended September 30,
2003.
Liquidity and Capital Resources
At September 30, 2004, Catalyst Lighting Group's working capital was $130,269,
which represented an increase in working capital of $1,003,919 over September
30, 2003. Working capital account changes include an increase in cash from
$96,591 at September 30, 2003 to $501,429 at September 30, 2004, an increase in
inventory from $1,311,130 at September 30, 2003 to $1,739,803 at September 30,
2004, a decrease in revolving note payable from $2,072,522 at September 30, 2003
to $0 at September 30, 2004, and a decrease in accrued liabilities from $806,936
at September 30, 2003 to $649,966 at September 30, 2004. Other account changes
include a decrease accounts receivable of $796,272, a decrease in deferred tax
asset of $47,699, an increase in accounts payable of $383,757, an increase
current maturities of long-term debt of $838,155, and an increase in pre-paid
expenses of $6,799. The increase in payables and inventory was partially
attributed to increased raw material cost for delivery of product in 2004. The
changes in accrued liabilities and pre-paid expenses are related to normal
timing of the different category of accounts through this year. The increase in
the working capital is primarily the result of the $2,573,457 transition of the
revolving note payable to a long term liability. This was partially offset by a
net loss of $1,532,539 for the year ended September 30, 2004.
The Company is also seeking to increase both cash flow and profitability by
growing sales internally as well as through acquisitions. 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.
Cash used in operations for the years ended September 30, 2004 and 2003 was
($594,014) and ($897,521), respectively. The cash used by operations for the
twelve months ended September 30, 2004 resulted primarily from a loss of
$1,532,539 and an increase in inventories of $428,674. This was partially offset
by a decrease in trade receivables of $796,271, an increase in accounts payable
of $383,759, and common stock issued for services of $311,169.
24
Cash provided by (used in) investing activities for years ended September 30,
2004 and 2003, was ($2,013,690) and $16,260, respectively. This was primarily a
result of the addition of $1,927,990 of restricted cash for the period ending
September 30, 2004 and the purchases of property and equipment for both periods.
Cash provided by financing activities for the years ended September 30, 2004 and
2003 was $3,012,544 and $977,852, respectively. For the twelve months ended
September 30, 2004 there was an increase in revolving notes payable of $259,091,
proceeds from issuance of long-term debt of $1,928,000, proceeds from long-term
revolving payable of $408,887, and common stock issuance of $567,849. Payments
on notes payable were ($151,283). For the twelve months ended September 30, 2003
there was an increase in revolving notes payable of $985,497 and payments on
notes payable of $7,645.
Material cash requirements for the next twelve months not in the ordinary course
of business relate to the securities offering described herein. Regarding
repayment of debt, over the next 12 months Whitco's current maturities of long
term debt as of September 30, 2004 is $1,362,289, consisting of subordinated
debt. For the next 12 months, one $250,000 payment is due on January 6, 2004,
one $142,850 was due on June 30, 2004, one $217,850 payment is due on June 30,
2005, and one $700,000 payment is due on July 31, 2005, 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, further utilization
of its existing credit facility, and adding additional sub-debt. The Company is
also pursuing additional equity through a private placement offering of units,
each units consisting of one share of common stock and one five year warrant to
purchase one share of common stock for $3.00.
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 (the "Borrowing Note", together with the Revolving Note, the "AR
Notes" and together with the Term Note, the "Notes") 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. Additionally, 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 this registration statement, we are registering the Common Stock
issuable to Laurus underlying the AR Notes, assuming conversion of the maximum
amounts thereunder and the maximum number of 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 is being registered hereunder.
The Notes bear interest at "prime" plus 2%. 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 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 all of the Notes have been
registered for re-sale or are exempt from the registration requirements.
Catalyst has the option of prepaying the Term Note and Borrowing Note by paying
120% of all amounts then due and owing to Laurus. 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.
25
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 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. Pursuant to the SPA, Catalyst also granted to Laurus, until the Term
Note is paid in full, a right of first refusal to provide any additional debt or
equity financing the Company may seek.
The Security Agreement pursuant to which the AR Notes were issued also contain
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.
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 was extended through January
24, 2005. To date, we have sold $50,000 worth of units. The 33,333 shares of
common stock issued and the 33,333 shares of common stock underlying the
warrants issued, as well as the 3,333 shares of common stock underlying the
warrant issued to the placement agent, are all being registered hereunder.
Employment Agreements
As of December 31, 2002, Whitco entered into an employment agreement with Henry
Glover, which expired December 31, 2003, providing for him to serve as Whitco's
President and Chief Executive Officer at an annual rate of $150,000. Mr. Glover
is also eligible for medical and dental benefits, as well as such other benefits
as may be offered to executive officers from time to time. Currently, we have no
written employment agreements with any of our officers, however, we anticipate
entering into employment agreements with them on terms to be agreed upon.
Additional Employee Benefits: All employees are provided certain insurance
coverages including health, dental and long term disability. The Company
reserves the right to change its benefits plans as it deems necessary or
appropriate.
BUSINESS
We were formed as a "blank check" Delaware corporation in March 2001 to effect a
merger, exchange of capital stock, asset acquisition or other similar business
combination with an operating business which we believe has significant growth
potential. As of February 12, 2003, we entered into a Securities Exchange
Agreement with Whitco Company, L.L.P., a Texas limited liability partnership
which manufactures, markets and distributes outdoor lighting poles. 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 Catalyst common stock, and options to
purchase 808,632 shares of Catalyst common stock. Whitco became our wholly-owned
subsidiary.
Whitco is a nationwide manufacturer, 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 manufacturer, marketer and distributor of steel and aluminum
lighting pole structures and accessories, and we may attempt to acquire or
develop additional subsidiaries to pursue additional market opportunities. We
believe the necessary systems and people are in place to aggressively grow and
expand among the specialty markets within the lighting industry.
26
The Industry
According to the United States Department of Commerce and the National
Electrical Manufacturer's Association the overall U.S. outdoor lighting
industry, including fixtures, poles and accessories, represents a nearly $2
billion market. This market has grown by more than 75% over the last 10 years,
driven in part by the growth in commercial real estate development. We believe
this market, coupled with recent merger and acquisition activity within the
industry, bodes well for our expected "build-up" acquisition strategy discussed
below. As the demand for, and value of, businesses in this sector continues to
increase, we believe we are well positioned to pursue opportunistic
acquisitions, gain new customers, expand product offerings, increase market
share and become an attractive acquisition candidate ourselves.
The U.S. outdoor lighting pole market alone is estimated at $750 million,
including an estimated $250 million in Department of Transportation ("DOT") and
traffic control poles (a market in which we do not participate). The market is
comprised primarily of four material types: steel poles (60%), aluminum (18%),
concrete (12%) and composite (10%).
The outdoor lighting pole industry tends to be cyclical based on general
economic conditions and, more specifically, non-residential construction
spending and public and private highway/roadway construction and improvements.
The U.S. Department of Commerce reported declines in non-residential
construction spending of 18% and 5% in 2002 and 2003, respectively. These
declines have been partially offset by continued spending on highway
construction under the U.S. Highway Transportation bill, the growth in outdoor
sports venues and added concerns about safety and "light spill." We have
attempted to limit our exposure to these outside factors by offering diverse
products with many applications through a sales network that has nearly 100%
geographic coverage in the United States.
Whitco has and will continue to operate primarily in the commercial and
industrial lighting ("C&I") markets. However, we also seek opportunities in the
city and county and utility and municipality markets. The C&I market represents
the commercial sales area of the market, primarily commercial real estate
developments and industrial development areas not related to government. City
and county areas are those developments directed by local governments without
the involvement of federal highway funds. In some cases, our lighting agents
also place sales emphasis on local developments by cities and counties. Utility
and municipality segment represents those developments directed by local
utilities or municipal developments in which the local utility controls the
lighting aspects of the real estate development, without the involvement of
federal highway funds. In local areas, a utility may direct the installation of
lighting and provide a usage fee to the local government for that lighting area.
In some cases, Whitco lighting agents sell to utilities. Department of
Transportation sources represent those areas involving the deployment of both
local and federal highway funds with specifications directed by the local or
state governments, as well as the federal government. We rarely participate in
business with the Department of Transportation as it is a different sales
channel than Whitco has traditionally served. Whitco markets area and sports
lighting products through its catalog and via the Internet at
www.whitcopoles.com.
27
Products and Services
All of our poles are made to order and are sold either directly to OEM's from
our primary offices in Fort Worth, Texas or indirectly through sales
representatives, known in the lighting industry as lighting agencies.
Some OEM's only sell existing lines of lighting fixtures, while some manufacture
lighting poles and others source pole manufacturing on a private label basis
through companies such as ours. We sell poles which complement existing fixture
lines, provide engineering expertise and have specialty design features to allow
the poles to be easily integrated with the lighting fixture. The entire unit,
consisting of the pole and fixtures, is then shipped to the customer under the
OEM brand name. Although some OEM's manufacture their own poles, they often
require our poles because they do not have the capability to manufacture the
poles required for a specific order. When selling to an OEM, we arrange shipment
directly to the project location for final assembly and installation by third
parties. We have the capability to join an OEM on national account bids. In
2004, we sold to approximately 20 OEM customers.
We have contracts in place with approximately 75 lighting agencies, each in
separate, defined geographic territories covering nearly 100% of the United
States. Each lighting agency contract typically gives the lighting agency the
exclusive right to sell our poles in a given geographical location in exchange
for such agency agreeing to sell only poles we manufacture. The typical
exception allows lighting agencies to sell poles from their OEM fixture
providers and us to sell poles to OEMs to deliver into the lighting agency's
territory. Lighting agency contract terms vary by territory, although all our
contracts with lighting agencies may be terminated by us on 30 days' notice. No
individual lighting agency accounted for more than 10% of sales for the fiscal
years ended September 30, 2004 and 2003. These agencies primarily sell fixtures
and our poles complement their product lines. We work diligently to find the
appropriate agency in a territory to sell our products, and further strive to
have that agency sell only poles we manufacture. A typical order will come from
an agency for shipment direct to a construction location, with billing directed
to the electrical distributor or contractor. Terms are predominantly net 30
days. We believe we gain and keep top lighting agents and OEMs through
competitive pricing, timeliness and the ability to effectively deliver needed
technical information on specified products.
During the years ended September 30, 2004 and 2003 one customer accounted for
more than 10% of our sales, totaling 11% and 14%, respectively. No other single
customer accounted for more than 10% of total revenues.
Design, Manufacturing and Distribution
In fiscal year 2004, we opened our first manufacturing facility and began
producing poles in-house. Historically, Whitco outsourced the manufacturing of
poles. We believe this transition, once complete, will increase our competitive
advantage in the market and allow us to lower cost and reduce lead times to our
customer base. As of the end of the fiscal year ended September 30, 2004, the
Company still outsourced a portion of its manufacturing process.
28
We design all of our own poles and complete specification and stress
calculations using an in-house engineering team. We assist our sales agents and
OEM's with specific project submittals to engineers. We then submit a work order
to our manufacturing facility or to an outsourced manufacturer based on the
product specified. We purchase raw steel tubes from both domestic and foreign
suppliers, primarily relying on Trans America Power Products to supply steel
tubes. We also place orders with several other suppliers. The raw steel tubes
are held in inventory either at our manufacturing facility or a designated
outsource manufacturer, also located in Fort Worth, Texas. Either the Company or
the outsource manufacturer completes all stages of pole fabrication. All
operational aspects of manufacturing, including inventory control, purchasing,
adherence to specifications and shipping are performed by us. We have limited
financial responsibility for raw aluminum product inventory as a significant
portion of our aluminum poles are made to order from one of two pole
manufacturers.
Once an order has been placed, production time until completed poles are ready
for shipment is approximately one week, while larger orders can take up to three
weeks. Once completed, the lighting poles are shipped directly to the customer
from our manufacturing facility or the outsourced manufacturer, as applicable.
Employees
We currently have 34 full-time employees, including our three executive
officers. Fifteen of these, all of whom work in our manufacturing facility, are
employees of an outsourced human resources firm.
We have sales representative agreements in place with approximately 75 sales
representatives across the continental United States. They are not employees,
but receive commissions based on sales. Our commission structure pays agents
100% of the overage above our base price, compared to an industry average of
75%.
Trademark and Copyright Protection
Whitco has applied for trademark protection for its logo, as well as the logo of
Catalyst Lighting Group, Inc. We have submitted initial applications for these
logos to the United States Patent and Trademark Office. We currently have an
application in review with the United States Patent and Trademark Office for an
elliptical crossarm. This design has the ability to reduce wind resistance by a
substantial amount compared to the traditional designs in the market place.
Business Strategy
Virtually all of our revenues are generated in the C&I market. We intend to
continue serving this niche while seeking to acquire or start new business
ventures within the lighting industry in an attempt to increase market share.
Our focus on the C&I market is the result of our historical expertise in this
market and the fact that most of our lighting agents and OEM customers are
focused in this area.
We place particular emphasis on the sports, high mast and area lighting sectors
within the commercial and industrial markets. The sports lighting area
represents those venues lit by outdoor lighting for night time play. This ranges
from professional sports venues to local parks and recreation areas. We have the
ability to complete pre-wiring for our sports lighting products prior to
shipment. High mast refers to those installations requiring large area lighting
needs of commercial areas. These represent typical heights of 55 feet or higher
with multiple fixtures installed at the top of the pole. Area lighting typically
represents the lighting of an outdoor area, such as a parking lot.
29
Management's long-term objective is to transform Catalyst from a broker of
commodity lighting poles to a value-added manufacturer and distributor of
lighting fixtures, poles and other accessories. This strategy has four
cornerstone initiatives. The first is the upgrade of our sales distribution
network by (a) hiring Henry Glover, a 20-year veteran of the lighting industry,
as President, (b) establishing formal sales agency relationships with nearly 75
lighting manufacturers' representatives providing nearly 100% geographic
coverage in the United States, and (c) establishing direct relationships with
over 25 OEM's and national accounts.
Secondly, we are completing the process of moving fabrication of select products
in-house to eliminate intermediaries, maintain gross margins and create
opportunities for additional profitability as operating efficiencies and
economies of scale are achieved. This move has also placed us in geographic
proximity with our powder-coating vendor, which has facilities adjacent to ours.
We recently moved to new facilities and transitioned fabrication and assembly of
round and square steel poles from a third party contract supplier to an in-house
function. We felt this initiative was required to keep pricing competitive in an
important product segment. The internal fabrication and assembly operations have
thus far produced fewer defects, reducing overall warranty costs, enhancing
production scheduling and freight consolidation.
We have historically offered aluminum poles on a brokered basis as an
accommodation to our sales agents. With two aluminum pole manufacturers holding
more than 80% of this market, sales agents that do not carry these lines have
little alternative than to work with the leading fixture OEMs. Sales agents and
fixture OEMs have expressed an interest in our producing aluminum poles,
indicating a ready market that, historically, will pay a premium for shorter
lead times (typical lead times in peak season run 12 to 18 weeks). To take
advantage of this potentially lucrative market, we must be able to efficiently
produce quality aluminum poles in-house. We believe the sales potential is
significant over a two-to-three-year time frame.
We began producing non-tapered aluminum poles, which is a less capital intensive
process than round tapered poles, in October, 2004. We expect to begin producing
round tapered poles during late fiscal year 2005 upon successful integration of
non-tapered aluminum poles. In peak season, we will need to carry approximately
$500,000 in inventory in order to supply poles in four to six weeks (a time
frame nearly half the industry standard). Our current gross margin on brokered
aluminum pole products is approximately 10% to 15%. Based on preliminary
assessments, we expect to generate a gross margin closer to 30% on aluminum pole
sales as a result of producing these poles in-house. To fully leverage the sales
opportunity in this market, we will need both the non-tapered and tapered
capabilities in place. With only two competitors in this market, we believe we
can become a true "player" in this, the second largest segment of the outdoor
lighting pole market, in short order and with little capital investment. Once
production is fully up and running, we intend to establish a new branded
aluminum pole line and market it through a separate agency network. We believe
that with only two competitors in this market, many of our existing agents may
already represent one of these manufacturers. Where this occurs, we would keep
our existing agent and still market the different brand of aluminum poles to
other agents in order to gain maximum penetration in each geographic market.
30
Our third strategic initiative was to add an engineering department and leverage
our existing database of product designs and engineering specifications to
expand product offerings for sale through our distribution network. We now have
over 500 SKU's, which include steel, galvanized and aluminum poles for area,
sports, high mast and roadway applications for sale to the
commercial/industrial, municipal and utility market segments.
We believe we are one of the first in the outdoor lighting pole industry to
provide access to our catalog items through the Internet. Through the addition
of an engineering department, we further enhanced our value added capabilities
by completing an electronic database of all product drawings and engineering
calculations. This information is now delivered electronically to our sales
representatives on a customized, project specific format minutes from the time
requested. This service provides critical information for the sales
representative to deliver to architects and engineers responsible for specifying
projects. This database now houses well over 1,000 product designs and
calculations.
In the process of completing the database, we also created a unique engineering
calculation program allowing for quick turnaround of custom pole designs. This
program also provides the capability of completing multiple iterations for the
end customers' designers to utilize during the creation process. This combined
ability, unique in the pole industry, keeps the sales representative and the end
customer in close contact from creation to completion without unnecessary
delays.
Our catalog database, drawings and calculations have led to prompt delivery of
project specific information and the manufacture and delivery of a highly
diverse product offering, which we believe has differentiated us from our
competitors. This integrated system is easily usable and scalable for additional
product offerings.
The final component of our strategy involves the potential acquisition of
additional niche product companies using public stock, cash or a combination
thereof in an attempt to dramatically increase the sales of those products by
introducing them into our own distribution network.
According to the United States Department of Commerce and the National
Electrical Manufacturer's Association, the U.S. outdoor lighting industry -
including fixtures, poles and accessories - represents a nearly $2 billion
market that has grown by more than 75% over the last 10 years, driven in part by
the growth in commercial development. This market has various participants,
including companies concentrating solely on structures, poles or lighting
fixtures, with a limited line of pole products. We believe this fragmented
market presents the opportunity to continue our growth plan with a more
diversified product line and expanded sales agency coverage. Management believes
this market, coupled with recent merger and acquisition activity within the
industry, bodes well for a "build-up" acquisition strategy. As the demand for,
and value of, businesses in this highly fragmented sector continues to increase,
we believe we are well positioned to pursue accretive acquisitions at value
prices, gain new customers and product offerings, and become an attractive
acquisition candidate ourselves as we seeks increased market share.
31
We seek to acquire one or two companies at the lower end of the revenue range
initially. Based on the initial results of these early acquisitions, and many
other factors to be determined, we intend on targeting larger acquisitions to
aggressively grow our consolidated revenues and potential profitability.
We sought to make acquisitions during fiscal year 2004. However, despite
preliminary discussions with, and bids on, potential targets, we were ultimately
unsuccessful in our efforts. In some cases, our bid was lower than that of a
third party, as companies with greater financial, distribution or other
resources value a potential acquisition differently than we do, enabling them to
make a higher offer. Additionally, the absence of either immediately available
acquisition financing or a more developed trading market for our common stock
for use as acquisition currency have presented obstacles. We anticipate
continuing to be an aggressive shopper but a conservative buyer as we attempt
growth through acquisition.
Competition
Catalyst competes with pole manufacturers as well as those OEM's which
manufacture poles themselves. In terms of sales, we believe we are approximately
in the bottom half of the top 10 pole manufacturing companies. We compete
against exclusive pole manufacturers such as K-W Industries, United Lighting
Standards, Hapco and Valmont Industries. Some OEM's that also manufacture poles
include Hubbell Lighting, Cooper Lighting, Musco Lighting (in the sports segment
only) and Ruud Lighting. We compete with other pole companies on a price and
service basis and by seeking the most qualified, most connected sales agents and
OEM's in a given territory.
History
Whitco Sales, Inc. dates its original history to 1969, when it was formed by the
Pritchard family in Fort Worth, Texas. Whitco was originally formed to provide
both lighting and pole products. During the 1980's, Whitco made the decision to
concentrate on steel pole products sold through agents and OEM's throughout the
United States. Whitco Company, L.L.P., a partnership consisting of three
investors led by Dennis H. Depenbusch, was formed on June 27, 2000 and acquired
the assets of Whitco Sales Inc. from the Pritchard family on June 30, 2000. At
the time of the acquisition, Whitco Sales, Inc. was an S Corporation 50% owned
by James and Patsy Pritchard and 50% owned by James K. "Kip" Pritchard. Dennis
H. Depenbusch currently serves as our Chief Executive Officer, Secretary and
Chairman of our Board of Directors. Whitco has no subsidiaries.
Upon acquisition of Whitco in June 2000, Whitco expanded its product offering to
include additional steel products as well as aluminum poles. In 2002, Whitco
further expanded its product line to include pre-wired products for the sports
lighting segment. On May 1, 2002, two of the three original investors were
bought out by a replacement investor group again led by Dennis H. Depenbusch.
The original investors, along with Mr. Depenbusch, were Mega Investment Group,
LLC and Quest Financial Partners, LP. Their 2/3 partnership interest was
purchased on May 1, 2002 for $1.2 million through the sale of partner units and
the issuance of additional subordinated debt. Four individual investors
purchased partnership units for a cumulative price of $654,000 and subordinated
debt was issued to four individual investors for $546,000.
32
As of February 12, 2003, Whitco entered into the Securities Exchange Agreement
with Wentworth III, Inc., pursuant to which its partners received, through an
exchange of all of their partnership units and options to purchase partnership
units, 2,991,368 shares of common stock, and options to purchase 808,632 shares
of common stock. This transaction closed on August 27, 2003, at which time
Whitco became Wentworth III, Inc.'s wholly-owned subsidiary.
Catalyst was formed under the name Wentworth III, Inc. as a "blank check"
Delaware corporation in March 2001 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 with the Securities and
Exchange Commission, which became effective August 6, 2002, and the Company
commenced an offering of its common stock pursuant to this effective
Registration Statement. This 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 offering was subject to Rule 419 of Regulation C under the Securities Act of
1933, as amended. 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 Securities Exchange 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 SEC describing
Whitco and its business, and included audited financial statements which, upon
being declared effective by the SEC, were delivered to all investors in
Wentworth's initial 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 Wentworth. 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.
The selection of Whitco was complex and risky because of competition for such
business opportunities among all segments of the financial community. In
evaluating Whitco, the Company considered various factors, including, but not
limited to:
o costs associated with effecting a business combination
33
o equity interest in and possible management participation in
Whitco
o growth potential of Whitco and its industry
o experience and skill of management and availability of
additional personnel of Whitco
o capital requirements of Whitco
o competitive position of Whitco
o potential for further research, development or exploration
o degree of current or potential market acceptance of
product/service
o risk factors
o regulatory environment of Whitco's industry
o profit potential
The evaluation of the business combination with Whitco was based on relevant
factors as listed above as well as other considerations consistent with the
Company's business objective. Management conducted a due diligence review which
encompassed, among other things, meeting with management and inspection of
facilities, as well as a review of financial or other information made available
to the Company.
Currently, we conduct all of our business through Whitco, our wholly owned
subsidiary.
Seasonality
The lighting and pole industry is seasonal in nature, as construction of the
facilities or roads where the lighting structures may be placed is seasonal
depending on the geographic location of the project.
Governmental and Environmental Regulations
We do not need government approval to offer our products and services. In order
to comply with federal, state and local environmental laws, we expend such sums
of money as is reasonably required in the ordinary course of our manufacturing
business. In fiscal year ended September 30, 2004, we spent $0 on such
compliance. Compliance with all such environmental laws has had a negligible
impact on our business, financial condition and results of operations.
Research and Development
For the twelve months ended September 30, 2004, product development expense was
$0, compared with $138,863 for the twelve months ended September 30, 2003. The
decrease in product development for the comparative twelve-month period is
principally attributable to ceasing further development of Whitco's sports
lighting product offering.
Accounting Treatment
Although we are the parent corporation, for accounting purposes, our acquisition
of Whitco was treated as the acquisition of us by Whitco. This is known as a
reverse acquisition and a recapitalization of Whitco. Whitco is the acquirer for
accounting purposes because the former partners of Whitco received the larger
percentage of our common stock and voting rights than our stockholders prior to
the acquisition.
34
Public Filings
Our annual, quarterly and periodic and other filings with the SEC, including any
amendments thereto, may be accessed, at no cost, directly through the SEC's web
site at www.sec.gov.
Stock Option Plan
We have a stock option plan, adopted by our Board in August 2003 and approved by
our stockholders in March 2004, pursuant to which up to 1,500,000 incentive and
non-incentive options may be granted (the "Plan"). The Plan will remain in
effect until August 27, 2013, unless terminated earlier by action of our Board
of Directors.
Officers, directors, employees, advisors and consultants may be granted options
under the Plan. The Plan is administered by our Board or a committee appointed
by the Board, which has the authority to interpret the provisions of the Plan
and supervise its administration. In addition, the Board is empowered to select
those persons to whom shares or options are to be granted, to determine the
number of shares subject to each such grant and to determine when, and upon what
conditions, shares or options granted under the Plan will vest or otherwise be
subject to forfeiture and cancellation. Options granted pursuant to the Plan
which are not exercised, terminate upon the date specified at the time the
option was granted.
In the discretion of the Board, any option granted pursuant to the Plan may
include installment exercise terms such that the option becomes fully
exercisable in a series of cumulating portions. The Board may also accelerate
the date upon which any option (or any part of any options) is first
exercisable. Any shares issued pursuant to the Plan will be forfeited if the
"vesting" schedule established by the Board of Directors at the time of the
grant is not met. For this purpose, vesting means the period during which the
employee must remain an employee of Catalyst or Whitco, or the period of time a
non-employee must provide services. At the time an employee ceases working for
Catalyst or Whitco (or at the time a non-employee ceases to perform services),
any shares or options not fully vested will be forfeited and cancelled. At the
discretion of the Board, payment for the shares of Common Stock underlying
options may be paid through the delivery of shares of Common Stock having an
aggregate fair market value equal to the option price, provided such shares have
been owned by the option holder for at least one year prior to such exercise. A
combination of cash and shares of Common Stock may also be permitted as payment
for options at the discretion of the Board.
Options are generally non-transferable except upon death of the option holder.
Shares issued pursuant to the Plan will generally not be transferable until the
person receiving the shares satisfies the vesting requirements imposed by the
Board when the shares were issued.
The Board may, at any time and from time to time, amend, terminate or suspend
the Plan in any manner it deems appropriate, provided that such amendment,
termination or suspension cannot adversely affect rights or obligations with
respect to shares or options previously granted.
The Plan is not qualified under Section 401(a) of the Internal Revenue Code, nor
are they subject to any provisions of the Employee Retirement Income Security
Act of 1974.
35
There are currently 843,632 options granted to employees. The strike price
ranges from $.30 to $2.50 per share, dependent upon the strike price under which
they were issued.
MANAGEMENT
Executive Compensation
The following table sets forth information regarding the compensation paid
during the years ended September 30, 2004 and 2003, the nine months ended
September 30, 2002 and the year ended December 31, 2001 to Dennis H. Depenbusch,
Henry Glover and Brady Basil. Mr. Depenbusch is Chairman, Secretary and CEO of
Catalyst and Mr. Glover is a Board Member and President. Brady Basil is the
Chief Financial Officer. These three are the only executive officers of
Catalyst. There are no other anticipated officer assignments at the present
Name and All Other Other Securities All
Principal Positions Annual Underlying LTIP Other
Salary Bonus Compensation Options Payouts Comp.
($) ($) ($) (#) ($) ($)
Dennis Depenbusch
Managing Partner/CEO
and Chairman (1)
2004 $130,000 $ 0 $ 0 0 0 0
2003 $130,000 $ 0 $ 0 0 0 0
2002 $ 97,499 $ 0 $ 0 0 0 0
2001 $100,000 $ 0 $ 0 0 0 0
Henry Glover
President (2)
2004 $150,000 $ 6,000 $ 0 0 0 0
2003 $145,000 $ 0 $ 0 58,633(5) 0 0
2002 $ 97,499 $ 0 $ 24,706(4) 191,589(5) 0 0
2001 $ 0 $ 0 $ 0 0 0 0
K. Brady Basil
Chief Financial Officer (3)
2004 $89,615 $ 3,000 $ 0 20,000 0 0
2003 $35,308 $ 0 $ 0 0 0 0
2002 $0 $ 0 $ 0 0 0 0
2001 $0 $ 0 $ 0 0 0 0
(1) Mr. Depenbusch was the managing partner of Whitco prior to consummation of
the merger transaction with Catalyst and is currently the CEO and Chairman of
the Board of Directors of Catalyst. As the merger transaction was not
consummated until August 27, 2003, $119,167 of salary was paid to Mr. Depenbusch
by Whitco through August 31, 2003 and $10,833 was paid by Catalyst through
September 30, 2003.
(2) Henry Glover began employment with Whitco on January 2, 2002. Mr. Glover was
the President of Whitco prior to consummation of the merger transaction with
Catalyst and is currently the President and a member of the Board of Directors
of Catalyst. As the merger transaction was not consummated until August 27,
2003, $137,500 of salary was paid to Mr. Glover by Whitco through August 31,
2003 and $12,500 was paid by Catalyst through September 30, 2003.
36
(3) Brady Basil began employment with Whitco on April 23, 2003. Mr. Basil was
the Controller of Whitco prior to consummation of the merger transaction with
Catalyst and is currently the Chief Financial Officer of Catalyst. As the merger
transaction was not consummated until August 27, 2003, $28,225 of salary was
paid to Mr. Basil by Whitco through August 31, 2003 and $7,083 was paid by
Catalyst through September 30, 2003.
(4) Represents compensation related to relocation expenses associated with the
hiring of Mr. Glover.
(5) These were options to purchase 74.6825 partnership units of Whitco which,
upon consummation of the merger with Whitco on August 27, 2003, were converted
into options to purchase 250,222 shares of common stock.
For the year ended September 30, 2003, and the nine months ended September 30,
2002 options to purchase 17.5 and 57.1825 partner units, respectively, were
granted to Henry Glover at a strike price of approximately $2,890 per unit.
These options, on a converted basis represent 250,222 shares of Catalyst common
stock at a strike price of $0.86 per share. 58,633 of these options became fully
vested when Catalyst became subject to the periodic reporting under the
Securities Exchange Act of 1934. The remaining 191,589 options vest equally over
a 5 year period, but immediately vest in full in the event Catalyst receives an
offer to sell substantially all of its assets which offer Catalyst desires to
accept
Compensation of Directors
Each of our three outside directors, Kevin R. Keating, Mary Titus and Tracy
Taylor, are to each receive $2,000 for each board meeting attended in person and
$1,000 for each telephonic board meeting during fiscal year 2004. Members of our
Board who serve on the audit committee shall receive an additional $2,000 per
meeting for the first year of service and $1,000 per meeting for each year
thereafter. The audit committee chairman will receive $4,000 for the first year
of service and $2,000 for each year thereafter in addition to the audit
committee meeting fees. In lieu of cash compensation for their services as board
members and committee members, the board agreed to be compensated through the
issuance of restricted shares of Catalyst common stock for their services
provided through their attendance at the June 2004 board meeting. Mr. Keating
received 5,594 shares of Common Stock, Ms. Titus received 10,490 shares and Mr.
Taylor received 2,098 shares of Common Stock for the same time period. Messrs.
Depenbusch, Glover and Basil do not and are not anticipated to receive any
additional compensation for serving on our Board or attending meetings. To date,
other than reimbursement for out-of-pocket expenses, no Board of Directors' fees
have been paid. However, the above-referenced shares of Common Stock were
issued.
Whitco Company, LP is a limited partnership and has no directors. Whitco does
have a general partner, Whitco Management, LLC, which is wholly owned by
Catalyst. The general partner receives no additional compensation for serving in
such capacity. Other than the compensation listed above to Dennis Depenbusch and
tax distributions made to partners for their personal income tax liabilities, no
additional compensation has been made to any partner.
37
Management's Statement as to Indemnification
Section 145 of the Delaware General Corporation Law provides for indemnification
of our officers, directors, employees and agents. Under Article XI of our
by-laws, we will indemnify and hold harmless to the fullest extent authorized by
the Delaware General Corporation Law, any of our directors, officers, agents or
employees, against all expense, liability and loss reasonably incurred or
suffered by such person in connection with activities on our behalf. Complete
disclosure of relevant sections of our certificate of incorporation and by-laws
is provided in Part II of the registration statement of which this prospectus
forms a part. This information can also be examined as described in "Further
Information."
Additionally, we agree to indemnify broker-dealers selling shares in this
offering, if any, against certain liabilities that may be incurred in connection
with this offering, including certain civil liabilities under the Securities
Act, and, where such indemnification is not available, to contribute to the
payments they may be required to make in respect of such liabilities. Insofar as
indemnification for liabilities arising out of the Securities Act may be
permitted to such broker-dealers pursuant to the foregoing, and to our
directors, officers or persons controlling us pursuant to the charter, as
amended, and our Bylaws, we have been informed that in the opinion of the SEC
such indemnification is against public policy and is therefore unenforceable.
PRINCIPAL STOCKHOLDERS AND HOLDINGS OF MANAGEMENT
Principal Stockholders
The table below sets forth certain information regarding the beneficial
ownership of our common stock as of the date of this prospectus, including each
person who is known by us to own beneficially more than 5% of our outstanding
common stock, each of our officers and directors and all of our directors and
officers as a group. The table is based on the 3,789,384 currently issued and
outstanding shares of Common Stock and was increased for certain persons, as
necessary, to reflect shares of Common Stock beneficially owned by that person
which are issuable upon conversion or exercise of options or warrants held by
that person. The table below does not include shares of Common Stock being
registered hereunder for which the holder is not, as of the date hereof, deemed
to be the beneficial owner. For example, Laurus is deemed to be the beneficial
owner of 572,000 shares of Common Stock as of the date hereof, as 472,000 of the
common stock purchase warrants issued to Laurus are exercisable any time from
the date hereof through September 30, 2009 and the remaining 100,000 common
stock purchase warrants issued to Laurus are exercisable any time through
December 3, 2009. The shares of Common Stock underlying the Notes are not
issuable until (a) money has been advanced pursuant to any of the Notes and (b)
the shares of Common Stock underlying the Notes have been registered for re-sale
or are exempt from the registration requirements.
Amount and Percentage
Nature of of Shares
Beneficial Beneficially
Name of Stockholder Ownership Owned
-------------------- --------------- ----------------
Kevin R. Keating (1) ....................... 102,261 2.72%
Dennis H. Depenbusch (2) ................... 1,610,974(3) 42.51%
Henry Glover(4) ............................ 135,269(5) 3.47%
Brady Basil (6) ........................ 6,666 .18%
Mary Titus (7) ............................. 17,157 .45%
Tracy B. Taylor (8) ........................ 8,765 .23%
Keating Investments, LLC ................... 270,000 7.13%
Larry Doskocil Trust (9) ................... 693,004 18.29%
Celestine Depenbusch (10) ................. 472,048 12.48%
James "Kip" Pritchard (11) ................. 350,125 9.24%
Laurus Master Fund, Ltd.................. 572,000 (12) 13.12%
38
(1) Mr. Keating is a member of our Board of Directors.
(2) Mr. Depenbusch is our chief executive officer and chairman of our Board of
Directors.
(3) Represents 3,350 shares of common stock owned by Mr. Depenbusch and
1,607,624 shares owned by the Dennis H. Depenbusch Revocable Trust, an
entity of which Mr. Depenbusch is a co-trustee.
(4) Mr. Glover is President and a member of our Board of Directors.
(5) Represents 135,269 shares of common stock issuable upon exercise of
currently vested options granted to Mr. Glover.
(6) Mr. Basil is our Chief Financial Officer
(7) Ms. Titus is a member of our Board of Directors.
(8) Mr. Taylor is a member of our Board of Directors.
(9) Larry Doskocil is the sole trustee of the Larry Doskocil Trust.
(10) Celestine Depenbusch is the mother of Dennis H. Depenbusch. Mr. Depenbusch
exercises no voting or other control over Celestine Depenbusch's shares.
(11) Represents 350,125 shares of common stock issuable upon exercise of
currently vested options granted to Mr. Pritchard.
(12) Represents 572,000 common stock purchase warrants issued to Laurus, all of
which are being registered hereunder. Does not include any shares of
Common Stock underlying any of the Notes (as defined and described
elsewhere herein) issued in favor of Laurus.
SELLING SHAREHOLDERS
This prospectus relates to the sale of shares of our Common Stock by several of
our shareholders, as well as holders of our debentures and warrants. The shares
offered by this prospectus include shares owned by these shareholders as well as
shares issuable upon the conversion of such debentures and exercise of the
warrants. The shares, debentures and warrants were issued for services rendered
and in private offerings for cash.
We will not receive any proceeds from the sale of the shares by the selling
shareholders. The selling shareholders may resell the shares they acquire by
means of this prospectus from time to time in the public market. The costs of
registering the shares offered hereby are being paid by Catalyst. The selling
shareholders will pay all other costs of the sale of the shares offered by them.
The following table identifies the selling shareholders and the shares that are
being offered for sale by the selling shareholders.
39
--------------------- ---------------- ----------------- ---------------- ----------------- -----------------
Name Shares Owned Shares Issuable Shares to be Share Ownership Share Ownership
Upon the Sold in this After Offering After Offering
Exercise of Offering - Number of - % of Class
Notes, Options Shares
or Warrants
--------------------- ---------------- ----------------- ---------------- ----------------- -----------------
Laurus Master Fund, 0 4,155,334 (2) 2,822,000 (3) 0 0
Ltd. (1)
--------------------- ---------------- ----------------- ---------------- ----------------- -----------------
Kevin R. Keating 102,261 0 102,261 0 0
--------------------- ---------------- ----------------- ---------------- ----------------- -----------------
Mary Titus 17,157 0 17,157 0 0
--------------------- ---------------- ----------------- ---------------- ----------------- -----------------
Henry Glover 0 135,269 (4) 135,269 0 0
--------------------- ---------------- ----------------- ---------------- ----------------- -----------------
Tracy B. Taylor 8,765 0 8,765 0 0
--------------------- ---------------- ----------------- ---------------- ----------------- -----------------
The Dennis H. 1,607,624 0 236,548 1,371,076 36.50%
Depenbusch
Revocable Trust (5)
--------------------- ---------------- ----------------- ---------------- ----------------- -----------------
Keating Securities, 270,000 0 270,000 0 0
LLC (6)
--------------------- ---------------- ----------------- ---------------- ----------------- -----------------
Keating Reverse 0 165,000 (7) 165,000 0 0
Merger Fund, LLC (6)
--------------------- ---------------- ----------------- ---------------- ----------------- -----------------
John Sanderson 0 7,100 (8) 7,100 0 0
--------------------- ---------------- ----------------- ---------------- ----------------- -----------------
The Wilkinson 33,333 33,333 (10) 66,666 0 0
Family Trust (9)
--------------------- ---------------- ----------------- ---------------- ----------------- -----------------
The Seidler 0 86,666 (12) 86,666 0 0
Companies, Inc. (11)
--------------------- ---------------- ----------------- ---------------- ----------------- -----------------
(1) Laurus Capital Management, LLC is the entity that exercises voting and
investment power on behalf of Laurus Master Fund, Ltd. David Grin and Eugene
Grin are the natural persons who exercise voting power and investment control
over Laurus Capital Management, LLC. Each has the authority to act
independently.
(2) Represents all shares of Common Stock issuable to Laurus pursuant to the
Notes and Warrants, as described herein. Specifically, 3,333,334 is the maximum
number of shares of common stock underlying a Minimum Borrowing Note and a
Revolving Note, in the maximum aggregate amount of $3,000,000, all of which are
held by Laurus Master Fund, Ltd. ("Laurus") and all of which are convertible
into shares of Registrant's common stock at a fixed conversion price of $1.50
per share, all as more fully described herein, plus an additional 250,000 shares
of common stock that may be issuable to Laurus pursuant to anti-dilution rights
contained in these Notes and Warrants. Also represents 572,000 shares of common
stock underlying the Warrants.
(3) Represents shares underlying the AR Notes, Warrants and 250,000 additional
shares of Common Stock for anti-dilution protection contained in the AR Notes
and Warrants. Does not include any shares of Common Stock underlying the Term
Note.
(4) Represents options to purchase up to 135,269 shares of Common Stock, 58,633
of which are exercisable at $0.8626 per share through December 31, 2012 and the
remainder of which are exercisable at $0.8616 per share through January 9, 2012.
(5) Dennis H. Depenbusch, the CEO, Chairman and Secretary of Catalyst,
is the individual with voting and investment control of the securities listed
for this entity.
(6) Timothy J. Keating is the individual with voting and investment control of
the securities listed for this entity.
40
(7) Represents a common stock purchase warrant exercisable for 125,000 shares of
Common Stock at an exercise price of $2.00 per share, which expires on August 9,
2008 and a common stock purchase warrant exercisable for 40,000 shares of Common
Stock at an exercise price of $4.00 per share, which expires on August 10, 2009.
(8) Represents a common stock purchase warrant to purchase up to 7,100 shares of
Common Stock at an exercise price of $3.125 per share through May 26, 2008.
(9) Hutton Wilkinson and Ruth Wilkinson are the trustees with voting and
investment control of the securities listed for this entity.
(10) Represents a five year warrant to purchase up to 33,333 shares of Common
Stock at an exercise price of $3.00 per share.
(11) Paul Beck, Peter Seidler and Roland Seidler are the individuals who each,
independently, have voting and investment control of the securities listed for
this entity.
(12) Represents (a) a common stock purchase warrant for 83,333 shares of Common
Stock, exercisable at $3.00 per share through September 30, 2009 and (b) a
common stock purchase warrant for 3,333 shares of Common Stock, exercisable at
$3.00 per share through December 10, 2009.
Manner of Sale
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; or
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of Common Stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of Common Stock from time to time under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
The selling stockholders may also transfer the shares of Common Stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus.
The selling stockholders and any broker-dealers or agents involved in selling
the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. The selling stockholders have informed us
they do not have any agreement or understanding, directly or indirectly, with
any person to distribute the Common Stock. Keating Securities, LLC and The
Seidler Companies, Inc. are each broker-dealers and are underwriters with
respect to their own shares of Common Stock being offered for resale hereunder.
Keating Reverse Merger Fund, LLC is an affiliate of Keating Securities, LLC but
purchased its shares of Common Stock in the ordinary course of its business. At
the time of the purchase of the securities being registered hereunder, Keating
Reverse Merger Fund, LLC had no agreement or understanding, directly or
indirectly, with any person to distribute them.
Catalyst has advised each selling shareholder that in the event of a
"distribution" of the shares owned by the selling shareholder, such selling
shareholder, any "affiliated purchasers", and any broker/dealer or other person
who participates in such distribution may be subject to Rule 102 under the
Securities Exchange Act of 1934 ("1934 Act") until their participation in that
distribution is completed. Rule 102 makes it unlawful for any person who is
participating in a distribution to bid for or purchase stock of the same class
as is the subject of the distribution. A "distribution" is defined in Rule 102
as an offering of securities "that is distinguished from ordinary trading
transactions by the magnitude of the offering and the presence of special
selling efforts and selling methods". Catalyst has also advised the selling
shareholders that Rule 101 under the 1934 Act prohibits any "stabilizing bid" or
"stabilizing purchase" for the purpose of pegging, fixing or stabilizing the
price of the common stock in connection with this offering.
As stated above, Keating Securities, LLC and The Seidler Companies, Inc. are
each broker-dealers and are underwriters with respect to their own shares of
Common Stock being offered for resale hereunder. Both Keating Securities, LLC
and The Seidler Companies, Inc. intend to engage in passive market making by
maintaining a continuous bid and offer in the Common Stock for the purpose of
facilitating customer orders to buy or sell the stock and keeping trading
spreads narrow to reduce volatility of the Common Stock. In connection
therewith, Keating Securities, LLC and The Seidler Companies, Inc. intend to
comply at all times with all requirements of Regulation M. Neither intends to
conduct any transaction during the offering that stabilizes, maintains, or
otherwise affects the market price of the securities offered hereby. None of the
selling shareholders intends, directly or indirectly, (1) to stabilize, to
effect any syndicate covering transaction, or to impose a penalty bid, in
connection with an offering of any securities being registered hereunder or (2)
to cover a short sale with offered securities purchased from an underwriter or
broker or dealer participating in the offering.
DESCRIPTION OF SECURITIES
General
We have authorized 40,000,000 shares of Common Stock, par value $.01 per share,
and 10,000,000 shares of preferred stock, par value $.01 per share, whose rights
and designation(s) have not yet been established. We have 3,789,384 shares of
Common Stock outstanding as of the date of this prospectus. We currently have no
outstanding shares of preferred stock.
Common Stock
41
Each share of Common Stock entitles its holder to one vote upon all matters on
which holders of Common Stock are entitled to vote under applicable law or
otherwise. Stockholders are not permitted to vote their shares cumulatively.
Accordingly, the holders of more than 50% of the issued and outstanding Common
Stock can elect all of our directors. Holders of common stock have no preemptive
or other subscription rights, conversion rights, redemption or sinking fund
provisions. In the event of our liquidation, dissolution or winding up, whether
voluntary or involuntary, each share of Common Stock will be entitled to share
ratably in any assets available for distribution to holders of our equity
securities after satisfaction of all liabilities and after providing for each
class of stock, if any, having preference over the Common Stock.
The rights of the holders of Common Stock are subject to any rights that may be
fixed for holders of preferred stock, when and if any preferred stock is issued.
Preferred Stock
Our Board is authorized by our certificate of incorporation to designate and
issue up to 10,000,000 shares of one or more series of preferred stock. No
shares of preferred stock have been authorized or designated for future issuance
by our Board as of the date of this prospectus. We have no present plans to
issue any such shares.
In the event our Board authorizes, designates and issues shares of preferred
stock, it may exercise its discretion in establishing the terms of such
preferred stock. In the exercise of such discretion, our Board may determine the
voting rights, if any, of the series of preferred stock being issued, which
could include the right to vote separately or as a single class with our Common
Stock and/or other series of preferred stock; to have more or less voting power
per share than that possessed by our Common Stock or other series of preferred
stock; and to vote on certain specified matters presented to the shareholders or
on all of such matters or upon the occurrence of any specified event or
condition. On our liquidation, dissolution or winding up, the holders of
preferred stock may be entitled to receive preferential cash distributions fixed
by our board before the holders of our Common Stock are entitled to receive
anything. Preferred stock authorized by our board could be redeemable or
convertible into shares of any other class or series of our capital stock.
The issuance of preferred stock by our board of directors could adversely affect
the rights of holders of Common Stock by, among other things, establishing
preferential dividends, liquidation rights or voting powers. The issuance of
preferred stock could be used to discourage or prevent efforts to acquire
control of Catalyst through the acquisition of shares of Common Stock, even if a
change in control were in our stockholders' interest.
We will not offer, sell or issue shares of any class of our preferred stock to
any of our directors or executive officers, nor any affiliate of such persons,
except:
o if the offer, sale or issuance is on the same terms as we offer such
securities to all other existing stockholders or to new
stockholders, or
o if the offer, sale or issuance is approved by a majority of our
independent directors who do not have an interest in the transaction
and who have access, at our expense, to our or other independent
counsel.
42
The only convertible debentures we have are those granted to Laurus, as
described elsewhere herein. As of September 30, 2004, we had outstanding 644,100
warrants outstanding to purchase an aggregate of 644,100 shares of common stock
at a weighted average exercise price of $2.87 per share and incentive options to
purchase 843,632 shares of common stock, with 630,519 of such options currently
vested. Since September 30, 2004, we have issued (1) to Laurus 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, (2) to
the purchaser of units in our offering, 33,333 warrants to purchase Common Stock
through December 10, 2009 at a price of $3.00 per share and (3) to one of the
placement agents in the offering, 3,333 warrants to purchase Common Stock
through December 10, 2009 at a fixed conversion price of $1.50 per share. See
"Subsequent Events." Additionally, our option plan reserves an additional
656,368 shares for future issuance.
Transfer Agent
Corporate Stock Transfer of Denver, Colorado is the transfer agent for the
Common Stock.
LEGAL PROCEEDINGS
During the year ended September 30, 2004, there were three legal proceedings to
which we became a party or to which any of our assets or properties were
subject.
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 $30,609.00 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. ("Double R"). 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.
The second matter was an Application for Mechanic's and Materialman's Lien;
Demand for Payment; Notice of Mechanic's and Materialman's Lien and Demand for
Payment 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. Although the
next appearance before the court on the Application is currently scheduled for
January 12, 2005, we have been notified verbally that once all written approvals
have been received by GE, the Application will be withdrawn.
On September 27, 2004, the Trustee for the Warren Electric Group, Ltd.
bankruptcy estate sued the Company for recovery of $17,250.00 allegedly paid to
the Company in the 90 days prior to Warren Electric's bankruptcy. The Company
intends to vigorously defend itself against this claim.
EXPERTS
43
Our audited financial statements as of September 30, 2004, and for each of the
two years then ended, included in this prospectus, and the registration
statement of which this prospectus is a part, have been included herein in
reliance on the report of Hein & Associates LLP, an independent registered
public accounting firm, given on the authority of such firm as an expert in
accounting and auditing.
INDEMNIFICATION
Section 145 of the Delaware General Corporation Law provides for indemnification
of our officers, directors, employees and agents. Under Article XI of our
by-laws, we will indemnify and hold harmless to the fullest extent authorized by
the Delaware General Corporation Law, any of our directors, officers, agents or
employees, against all expense, liability and loss reasonably incurred or
suffered by such person in connection with activities on our behalf. Complete
disclosure of relevant sections of our certificate of incorporation and by-laws
is provided in Part II of the registration statement of which this prospectus
forms a part. This information can also be examined as described in "Further
Information."
Additionally, we agree to indemnify broker-dealers selling shares in this
offering, if any, against certain liabilities that may be incurred in connection
with this offering, including certain civil liabilities under the Securities
Act, and, where such indemnification is not available, to contribute to the
payments they may be required to make in respect of such liabilities. Insofar as
indemnification for liabilities arising out of the Securities Act may be
permitted to such broker-dealers pursuant to the foregoing, and to our
directors, officers or persons controlling us pursuant to the charter, as
amended, and our Bylaws, we have been informed that in the opinion of the SEC
such indemnification is against public policy and is therefore unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2, including exhibits and schedules thereto, under the
Securities Act with respect to the securities sold in our IPO, and a
reconfirmation prospectus on Form SB-2 with respect to the consummation of the
transaction with Whitco. We have filed with the SEC periodoc reports for the
periods beginning September 30, 2003. We have also filed this registration
statement and prospectus on Form SB-2. This prospectus, which constitutes a part
of the registration statement, does not contain all the information set forth in
the registration statement and the exhibits filed with it. For further
information with respect to us and the securities sold in our initial public
offering, reference is made to the registration statement and to the exhibits
filed therewith. Statements contained in this prospectus as to the contents of
any contract, agreement or other document referred to are not necessarily
complete. In each instance, we refer you to the copy of the contracts,
agreements and other documents filed as exhibits to the registration statement
or filed in out Form 10-KSB filed for our fiscal year ended September 30, 2003,
and these statements are deemed qualified in their entirety by reference to the
contract or document.
You may inspect, without charge, all or any portion of the registration
statement or any reports, statements or other information we file with the SEC
at the SEC's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, NW, Washington, D.C. 20549 and at the regional offices of the SEC
located at 233 Broadway, New York, New York 10007 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these documents
may also be obtained from the SEC's Public Reference Room at 450 Fifth Street,
NW, Room 1024, Washington, D.C. 20549 upon payment of the prescribed fees. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330.
44
In addition, registration statements and other filings with the SEC are publicly
available through its Electronic Data Gathering, Analysis and Retrieval, or
EDGAR, system, located at www.sec.gov. The registration statement, including all
exhibits and schedules and amendments, has been filed with the commission
through the EDGAR system.
We are subject to the reporting requirements of the Exchange Act and, in
accordance with these requirements, we have and will continue to file reports,
proxy statements and other information with the SEC. We furnish our stockholders
with annual reports containing audited financial statements and other periodic
reports as we deem appropriate or as may be required by law.
45
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM...............................................................47
CONSOLIDATED BALANCE SHEET - as of September 30, 2004.................................................................48
CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years Ended September 30, 2004 and 2003...............................49
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - For the Years Ended September 30, 2004 and 2003..........50
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years Ended September 30, 2004 and 2003...............................51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................................................52
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders
Catalyst Lighting Group, Inc.
Ft. Worth, Texas
We have audited the accompanying consolidated balance sheet of Catalyst Lighting
Group, Inc. and Subsidiary as of September 30, 2004, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended September 30, 2004 and 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Catalyst Lighting Group, Inc. and Subsidiary as of September 30, 2004 and 2003
and the results of their operations and their cash flows for the years ended
September 30, 2004 and 2003 in conformity with accounting principles generally
accepted in the United States of America.
HEIN & ASSOCIATES LLP
Denver, Colorado
November 5, 2004, except for
the first paragraph of Note 10,
for which the date is December 3, 2004.
47
CATALYST LIGHTING GROUP, INC.
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2004
SEPTEMBER 30,
2004
------------
ASSETS
CURRENT ASSETS:
Cash $ 501,429
Trade receivables, less allowance for doubtful accounts of $42,822 2,676,504
Inventories, net of reserve of $18,343 1,739,803
Prepaid expenses and other 56,301
------------
Total current assets 4,974,037
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $95,653 163,138
OTHER ASSETS:
Goodwill 2,971,362
Restricted cash 1,927,990
Deferred financing cost 401,306
Other 15,793
------------
Total other assets 5,316,451
------------
TOTAL ASSETS $ 10,453,626
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt:
Related party $ 250,000
Other 1,112,289
Accounts payable 2,831,513
Accrued commissions 314,879
Other accrued liabilities 335,087
------------
Total current liabilities 4,843,768
------------
LONG-TERM DEBT, less current maturities:
Related party 50,000
Other 4,434,096
------------
Total long-term debt 4,484,096
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; authorized 10,000,000 shares, none issued --
Common stock - $.01 par value; authorized 40,000,000 shares,
3,756,051 and 3,391,368 shares issued and outstanding, respectively 37,561
Additional paid-in capital 3,143,757
Accumulated deficit (2,055,556)
------------
Total stockholders' equity 1,125,762
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,453,626
============
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
48
CATALYST LIGHTING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------
2004 2003
------------ ------------
NET SALES $ 16,358,303 $ 15,758,570
COST OF SALES 11,695,063 10,834,944
------------ ------------
GROSS PROFIT ON SALES 4,663,240 4,923,626
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES:
General, selling and administrative expenses 5,895,194 4,795,679
Research and development -- 138,863
------------ ------------
Total general, selling and administrative expenses 5,895,194 4,934,542
------------ ------------
LOSS FROM OPERATIONS (1,231,954) (10,916)
OTHER EXPENSE:
Reverse merger costs -- 606,621
Interest expense 361,719 326,844
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,593,673) (944,381)
PROVISION FOR (BENEFIT FROM) INCOME TAXES (61,134) 61,134
------------ ------------
NET LOSS $ (1,532,539) $ (1,005,515)
------------ ------------
PRO FORMA INCOME TAX AND NET LOSS:
Net loss before pro forma income taxes $ (1,532,539) $ (1,005,515)
Pro forma income tax expense (benefit) (unaudited) -- (214,000)
------------ ------------
PRO FORMA NET LOSS (unaudited) $ (1,532,539) $ (791,515)
============ ============
NET LOSS PER COMMON SHARE:
Basic $ (.43) $ (.34)
============ ============
Diluted $ (.43) $ (.34)
============ ============
PRO FORMA NET LOSS PER COMMON SHARE (unaudited):
Basic $ (.43) $ (.27)
============ ============
Diluted $ (.43) $ (.27)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic $ 3,523,309 $ 2,971,242
============ ============
Diluted $ 3,523,309 $ 2,971,242
============ ============
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
49
CATALYST LIGHTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003
COMMON STOCK ADDITIONAL STOCK-
------------------------ PAID-IN ACCUMULATED HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ----------- ----------- ----------- -----------
BALANCE, October 1, 2002 2,800,995 $ 28,010 $ 626,990 $ 482,498 $ 1,137,498
Issuance of shares in reverse merger 200,000 2,000 (1,200) -- 800
Common stock issued for services 200,000 2,000 386,000 -- 388,000
Retirement of long term debt by conversion to
equity interest 190,373 1,904 373,096 -- 375,000
Warrants issued as consideration for debt -- -- 70,098 -- 70,098
Net loss -- -- -- (1,005,515) (1,005,515)
----------- ----------- ----------- ----------- -----------
BALANCE, September 30, 2003 3,391,368 $ 33,914 $ 1,454,984 $ (523,017) $ 965,881
Common stock issued, net of offering cost of
$70,904 255,501 2,555 565,293 -- 567,848
Common stock issued for services 109,182 1,092 310,077 -- 311,169
Warrants and beneficial conversion feature in
association with debt -- -- 813,403 -- 813,403
Net loss -- -- -- (1,532,539) (1,532,539)
----------- ----------- ----------- ----------- -----------
BALANCE, September 30, 2004 3,756,051 $ 37,561 $ 3,143,757 $(2,055,556) $ 1,125,762
=========== =========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
50
CATALYST LIGHTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,532,539) $(1,005,515)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Amortization of debt discount 35,449 35,449
Provision for doubtful accounts 87,189 --
Loss on sale of property and equipment -- 17,768
Depreciation and amortization 37,759 29,648
Common stock issuance for services 311,169 388,000
Deferred Taxes (61,134) 61,134
Change in operating assets and liabilities:
Trade receivables, related and other 709,082 (1,192,666)
Inventories (428,674) (459,097)
Prepaid expenses and other 20,894 (29,473)
Other assets -- 2,018
Accounts payable 383,759 1,151,820
Other accrued liabilities (156,968) 103,393
----------- -----------
Net cash provided by (used in) operating activities (594,014) (897,521)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash assumed in acquisition -- 45,000
Purchase of property and equipment (85,700) (28,740)
Restricted cash (1,927,990) --
----------- -----------
Net cash used in investing activities (2,013,690) 16,260
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in due on demand revolving note payable 259,091 985,497
Proceeds from issuance of long-term debt 1,928,000 --
Proceeds from long-term revolving payable 408,887 --
Payments on notes payable (151,283) (7,645)
Common stock issuance 567,849 --
----------- -----------
Net cash provided by financing activities 3,012,544 977,852
----------- -----------
NET CHANGE IN CASH 404,839 96,591
CASH, at beginning of period 96,591 --
----------- -----------
CASH, at end of period $ 501,430 $ 96,591
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 298,071 $ 326,020
=========== ===========
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Conversion of long-term debt to equity interest $ -- $ 375,000
=========== ===========
Issuance of common stock for acquisition $ -- $ 800
=========== ===========
Warrants issued in association with debt $ 813,403 $ --
=========== ===========
Payoff of revolving note payable through issuance of debt $ 3,930,427 $ --
=========== ===========
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
51
1. SUMMARY OF ACCOUNTING POLICIES:
Nature of Operations - Catalyst Lighting Group, Inc., located in Fort
Worth, Texas, sells sports and area lighting poles to distributors
throughout the United States of America. See Note 2 for a description of a
merger between Catalyst Lighting Group, Inc. and Whitco Company, LLP
(Whitco LLP) during fiscal 2003. (Whitco LLP, prior to the merger with
Catalyst Lighting Group, Inc. in August 2003 and Catalyst Lighting Group,
Inc. after the merger are referred to herein as the Company.)
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary Whitco
Company, L.P. ("Whitco"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Liquidity and Basis of Presentation - At September 30, 2004, working
capital was $130,269. The Company also incurred a net loss for fiscal 2004
of $1,532,539.
On September 30, 2004, the company entered into a financing arrangement
with an entity (the "entity") 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). See Note 4 for terms.
The Company also sought additional equity through a private placement
offering of units at $1.50 per unit, each unit consisting of one share of
common stock and one five year warrant to purchase one share of common
stock for $3.00; however, no funds were raised in such offering. See
"Subsequent Events" below. The Company is also seeking to increase both
cash flow and profitability by growing sales internally as well as through
acquisitions. 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.
Inventories - Inventories are stated at the lower of cost or market,
determined under the first-in, first-out method.
Cost of Sales - Cost of sales consists of the actual cost of purchased
parts, manufacturing labor and overhead, related in-bound shipping charges
and out-bound freight costs.
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization of property and equipment is provided using
the straight-line method over the following estimated useful lives of 5 to
7 years.
Depreciation expense for the years ended September 30, 2004 and 2003 was
$37,759 and $29,650, respectively. Maintenance, repairs and renewals which
neither materially add to the value of property and equipment nor
appreciably prolong its life are charged to operations as incurred. Gains
or losses on disposals of property and equipment are included in income.
Impairment of Long-Lived Assets - Management of the Company assesses
impairment whenever events or changes in circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable. If the net
carrying value exceeds the net cash flows, then impairment will be
recognized to reduce the carrying value to the estimated fair value.
Goodwill - Beginning January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142 (SFAS 142) "Goodwill and Other
Intangible Assets," and as a result ceased amortizing goodwill. The
Company tests goodwill for impairment annually (in the fourth quarter) 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.
52
The Company completed the goodwill impairment test required by SFAS 142 as
of September 30, 2004 and no impairment was identified. In completing this
assessment, the Company compared the estimated fair value to the current
carrying value of goodwill. The fair value was derived using an income
based analysis using an average EBIT (earnings before interest and taxes)
for the three fiscal years preceding 2004 as a more representative measure
of normal earnings power which excludes non-recurring expenses associated
with going public.
Income Taxes - The Company accounts for income taxes in accordance with
the Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," which requires the recognition of deferred tax liabilities
and assets at currently enacted tax rates for the expected future tax
consequences of events that have been included in the financial statements
or tax returns. A valuation allowance is recognized to reduce the net
deferred tax asset to an amount that is more likely than not to be
realized. State minimum taxes are expensed as incurred. Prior to the
reverse merger between Catalyst Lighting Group, Inc. (formerly Wentworth
III, Inc.) and Whitco Company, LP (see Note 2), income taxes related to
Whitco Company, LLP were generally the responsibility of the members. The
Company has included unaudited estimated pro forma taxes as if Whitco LLP
was a C-corporation prior to its merger with Wentworth III and the
resulting pro forma net income (loss) in the statements of operations.
Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of
trade receivables. The Company grants credit to distributors of sports and
area lighting poles located throughout the United States of America.
Receivables and Credit Policies - Trade receivables consist of
uncollateralized customer obligations due under normal trade terms
requiring payment within 30 days of the invoice date, with the exception
of certain OEM customers who mandate extended terms. Past due receivables
do not bear interest. Payments on trade receivables are applied to the
earliest unpaid invoices. Management reviews trade receivables
periodically and reduces the carrying amount by a valuation allowance that
reflects management's best estimate of the amount that may not be
collectable.
Use of Estimates - In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents and Restricted Cash - For purposes of the statements of
cash flows, the Company considers all highly liquid investments with a
maturity of three months or less to be cash equivalents. There were no
cash equivalents at September 30, 2004 and 2003. Restricted cash
represents the proceeds for a debt financing, which are limited to use in
an acquisition, joint venture, or capital transaction (see Note 4).
Fair Value of Financial Instruments - The estimated fair values for
financial instruments are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and
cannot be determined with precision. The carrying amounts of the accounts
receivable, accounts payable and accrued liabilities approximate fair
value because of the short-term maturities of these instruments. The
carrying value of the debt approximates fair value due to its issuance at
the end of the fiscal year.
Revenue Recognition - The Company recognizes revenue in accordance with
SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101), as amended by SAB 101A and 101B. SAB 101 requires
that four basic criteria must be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed and determinable; and (4)
collectibility is reasonably assured. Company product is made to customer
or industry specifications at an agreed upon price as typically specified
in the customer purchase order. Title passes to the customer at the point
of shipment along with all the risks and rewards of ownership. Customers
receive a one-year product warranty for defects in materials and
workmanship providing repair or replacement or refund of purchase price.
The Company provides an accrual as a reserve for potential warranty costs,
which historically have not been significant.
53
Research and Development - The costs associated with research and
development for new products and significant product improvements are
expensed as incurred. The Company had $0 and $138,863 in research and
development costs for the years ended September 30, 2004 and 2003,
respectively, primarily for further development of Whitco's sports
lighting product offering.
Stock-Based Compensation - The Company accounts for stock-based
compensation for employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, compensation cost for
options granted to employees is measured as the excess, if any, of the
market price of the Company's common stock at the measurement date
(generally, the date of grant) over the amount an employee must pay to
acquire the common stock.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled Accounting for Stock-Based Compensation (SFAS No. 123).
SFAS No. 123 requires that options, warrants, and similar instruments
which are granted to non-employees for goods and services be recorded at
fair value on the grant date. Fair value is generally determined under an
option pricing model using the criteria set forth in SFAS No. 123. The
Company did not adopt SFAS No. 123 to account for stock-based compensation
for employees but is subject to the pro forma disclosure requirements.
SFAS No. 123 requires the Company to provide pro forma information
regarding net income as if compensation costs for the Company's option
plans and other awards had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. The Company estimates the
fair value of each award at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
September 30, September 30,
2004 2003
------------- -------------
Dividend yield 0% 0%
Volatility** 34.47% 0%
Risk free interest rate 4.74% 3.83%
Expected life 10 years 10 years
** Volatility is assumed to be 0% for options issued to employees
prior to the Company going public in a reverse merger (see
Note 2)
The total fair value of options granted was computed to be approximately
$48,300 for the year ended September 30, 2004. 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 $21,467 for the year ended September 30, 2004.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net loss and net loss per
common share would have been reported as follows:
54
Year Ended
September 30, 2004
------------------
Net loss, as reported $ (1,532,539)
Stock based compensation included in net income --
Fair value of stock based compensation (21,467)
-------------
Pro forma net loss $ (1,554,006)
=============
Net loss per common share, basic:
As reported $ (0.43)
Stock based compensation included in net income --
Fair value of stock based compensation (0.01)
-------------
Pro forma net loss per common share $ (0.44)
=============
Net loss per common share, diluted:
As reported $ (0.43)
Stock based compensation included in net income --
Fair value of stock based compensation (0.01)
-------------
Pro forma net loss per common share $ (0.44)
=============
For the fiscal year ended September 30, 2003 there was no differences
between net loss and pro forma net loss under the accounting provisions of
SFAS No. 123.
Net Income (Loss) Per Share - Basic earnings per share (EPS) is calculated
by dividing the income or loss available to common shareholders by the
weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock.
Comprehensive Income (Loss) - Comprehensive income is defined as all
changes in stockholders' equity, exclusive of transactions with owners,
such as capital investments. Comprehensive income includes net income or
loss, changes in certain assets and liabilities that are reported directly
in equity such as translation adjustments on investments in foreign
subsidiaries and unrealized gains (losses) on available-for-sale
securities. During the periods presented, the Company's comprehensive loss
was the same as its net loss.
2. REVERSE MERGER WITH WHITCO LLP:
Effective August 27, 2003, Wentworth III merged with Whitco LP, a
privately held Texas-based manufacturer and marketer of steel outdoor
lighting pole structures. Whitco LP (as successor in interest toWhitco
Company LLP) completed the merger to become a publicly reporting entity to
pursue acquisitions and other strategic opportunities as well as raise
capital from the public markets. Whitco LP's management and board assumed
significant majority control of Wentworth III through a merger structure
whereby Whitco LP became a wholly-owned subsidiary of Wentworth III, Inc.
Subsequent to the merger, Wentworth III changed its name to Catalyst
Lighting Group, Inc. For financial statement purposes, this transaction
has been treated as a reverse merger, whereby Whitco LP is considered the
acquiring company. 200,000 shares of the Company's common stock were
effectively issued to the shareholders of Wentworth III in the merger. The
ownership units of Whitco LP outstanding prior to the merger have been
converted to common stock and treated as outstanding as of the beginning
of the periods presented. The results of operations of Catalyst Lighting
Group, Inc. are included in the Consolidated Statements of Operations for
the period from August 28, 2003 to September 30, 2003.
55
As a result of the reverse merger with a shell company, the value assigned
to the assets and liabilities was their fair value, which approximated its
historical basis. The following table summarizes the values of the
tangible assets and liabilities assumed at August 27, 2003, the date of
acquisition:
Cash $ 45,000
Current liabilities (45,000)
-------------
Net assets acquired $ --
=============
Keating Investments, LLC ("KI") is a Colorado state registered investment
advisor and owns 89% of Keating Securities, LLC ("KS"), a registered
broker-dealer. In connection with the reverse merger, KS received an
investment banking fee, part of which has been paid through the issuance
of 200,000 shares of the Company's common stock. The son of a shareholder
and director of the Company is the Managing Member of, and holds a 60%
interest in KI. KI has been engaged by and is representing the Company as
its investment banker.
Pro Forma Combined Results of Operations - The following pro forma
combined results of operations for the year ended September 30, 2003 have
been prepared as though the reverse merger with Whitco LLP had occurred as
of the beginning of the periods presented. This pro forma financial
information does not purport to be indicative of the results of operations
that would have been attained had the acquisitions been made as of October
1, 2002 or of results of operations that may occur in the future:
--------------------------------------------------------------------------------
For the Year Ended
September 30, 2003
--------------------------------------------------------------------------------
(unaudited)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Net sales $ 15,758,571
--------------------------------------------------------------------------------
Net income (loss) before pro forma income tax (1,027,962)
--------------------------------------------------------------------------------
Net income (loss) after pro forma income tax (805,634)
--------------------------------------------------------------------------------
Income (loss) per share (diluted) before pro forma income tax (0.35)
--------------------------------------------------------------------------------
3. INVENTORIES:
Inventories are comprised of the following:
--------------------------------------------------------------------------------
September 30, 2004 September 30, 2003
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Raw materials $ 1,267,100 $ 1,096,952
--------------------------------------------------------------------------------
Work in process 0 238,098
--------------------------------------------------------------------------------
Finished goods 491,046 40,778
----------- -----------
--------------------------------------------------------------------------------
1,758,146 1,375,828
--------------------------------------------------------------------------------
Less reserve (18,343) (64,698)
----------- -----------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$ 1,739,803 $ 1,311,130
=========== ===========
--------------------------------------------------------------------------------
4. LONG-TERM DEBT:
Long-term debt at year end consists of the following:
56
------------------------------------------------------------------------------------------------------------------
September 30,
2004
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Noninterest-bearing note payable to an individual, discounted at 6.3% (unamortized discount
of $13,102 at September 30, 2004), payable in annual installments of $217,851, The Company
is delinquent on $142,851 of a payment that was due on June 30, 2004 (a). $ 347,599
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Noninterest-bearing note payable to an individual, discounted at 6.22% (unamortized discount
of $1,688 at September 30, 2004), payable in monthly installments of $7,375 (a). 64,690
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Note payable to an entity, principal due July 31, 2005, interest payable monthly at a fixed
rate of 15% (b). 700,000
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Subordinated note payable to a former owner of Whitco LLP, due April 30, 2007, rate 15%,
unsecured. 150,000
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Note payable to an entity related to a stockholder, principal and 10% interest due on
December 31, 2004 (c). 250,000
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Subordinated note payable to a stockholder, due April 30, 2007, rate 15%, unsecured. 50,000
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Convertible term note to an entity, principal due September 30, 2007, (original and
unamortized discount of $286,361 at September 30, 2004) (d). 1,713,639
------------------------------------------------------------------------------------------------------------------
Convertible revolving note to an entity, principal due September 30, 2007, discounted
(original and unamortized discount of $429,543 at September 30, 2004) (d). 2,570,457
---------------
------------------------------------------------------------------------------------------------------------------
5,846,385
------------------------------------------------------------------------------------------------------------------
Less current maturities (1,362,289)
---------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
$ 4,484,096
===============
------------------------------------------------------------------------------------------------------------------
(a) Notes are collateralized by all assets of the Company. The security
interest in inventory and accounts receivable is subordinated to the
revolving bank note and the security interest in all assets is
subordinated to notes marked as (b).
(b) Notes are collateralized by all assets of the Company but are
subordinated to the revolving bank note.
(c) On August 6, 2003, Whitco Company LLP 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 Shares") of the
common stock of the Company upon consummation of the Merger 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 purchase of our
common stock at a price of $4.00 per share. The fair value of the
warrants was estimated on the grant date using the Black-Scholes
pricing model with the following assumptions: common stock based on
a market price of $2.85 per share, zero dividends, expected
volatility of 34%, risk free interest rate of 3.42% and an expected
life of 5 years. The warrants were valued at $27,693 and recorded as
deferred financing. The agreement carries certain rights to repay
the note early following any capital raised by the company. KI is
the investment advisor and managing member of the Lender.
Additionally, the KI Principal is an investor in the Lender.
(d) On September 30, 2004, the Company entered into the 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). In connection with the Term Note and AR Notes, the
Company issued to 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 covered by the Term Note 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 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.
57
The fair value of the warrants issued September 30, 2004 was
estimated on the grant date using the Black-Scholes pricing model
with the following assumptions: common stock based on a market price
of $2.65 per share, zero dividends, expected volatility of 34%, risk
free interest rate of 3.42% and an expected life of 5 years. The
warrants were valued at $396,480 which resulted in a relative fair
value of $367,351 and also resulted in a beneficial conversion
feature of $348,554. The total discount of $715,904 was allocated to
the Term Note and the AR Notes proportionately based on the loan
size and will be amortized over the life of the loans.
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. 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 Warrant.
The Term Note was placed into an escrow account solely controlled by
the Entity (the "Escrow Account"). The Company may request that the
Entity 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 the
Entity's evaluation of all factors it considers, in its sole
discretion, relevant at the time of such requested release. The
Entity is under no obligation to release any amounts and the release
of such amounts is in the Entity's sole and absolute discretion.
Aggregate annual maturities of long-term debt at September 30, 2004, not
including the related discounts, are as follows:
-----------------------------------------------------------------------
2005 $ 1,377,078
-----------------------------------------------------------------------
2006 --
-----------------------------------------------------------------------
2007 5,200,000
---------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
$ 6,577,078
===============
-----------------------------------------------------------------------
During the years ended September 30, 2004 and 2003, the Company had
$36,531 and $33,416, respectively, of accrued interest expense on notes
due to related parties.
5. MAJOR CUSTOMERS, MAJOR SALES AGENCIES AND SIGNIFICANT CONCENTRATIONS:
During the years ended September 30, 2004 and 2003, one customer accounted
for more than 10% of the Company's sales, totaling 11% and 14%,
respectively. The Company grants lighting agencies the exclusive right to
sell the Company's products in given geographical locations. No individual
lighting agency accounted for more than 10% of the Company's sales for the
fiscal year ended September 30, 2004 and 2003.
During the years ended September 30, 2004 and 2003, 54% and 70% of the
Company's material and assembly purchases of lighting poles were from two
vendors. Although there are multiple vendors with which the Company could
enter into agreements, the deterioration or cessation of either
relationship could have a material adverse effect, at least temporarily,
on the Company as it attempts to negotiate agreements with other
manufactures of lighting poles. Accounts payable to these two vendors were
$710,016 and $1,060,484 as of September 30, 2004 and 2003, respectively.
58
6. STOCKHOLDERS' EQUITY:
Equity Transactions - The Company's Certificate of Incorporation
authorizes the issuance of 50,000,000 shares of stock. They are divided
into 10,000,000 shares of preferred stock and 40,000,000 shares of common
stock. At September 30, 2004, none of the preferred stock has been issued.
However, such preferred shares may later be issued in such series with
whatever preferences as may be determined by the Board of Directors.
See Notes 2 and 4 for additional equity transactions.
Option Plans - In June 2000, the Company began issuing options for the
purchase of common stock to certain key employees. Due to the reverse
merger with Wentworth III, all options previously reported in units have
been converted into options for the purchase of common stock.
Approximately 843,632 options have been issued through September 30, 2003
and there remains 656,368 options that can be issued under the plan.
Following is a summary of option activity:
Range of Weighted
Employee Exercise Prices Average
Options ---------------------------- Exercise
Outstanding Low High Price
-------------- ------------- -------------- ----------------
Balances, October 1, 2002 690,197 $ .30 $ .86 $ .58
Granted 118,435 .86 .86 .86
-------------- -------- -------- ---------
Balances, September 30, 2003 808,632 $ .30 $ .86 $ .62
Granted 35,000 2.50 2.50 2.50
-------------- -------- -------- ---------
Balances, September 30, 2004 843,632 $ .30 $ 2.50 $ .70
============== ======== ======== =========
Vested options 630,519 $ .30 $ 2.50 $ .58
============== ======== ======== =========
If not previously exercised, options expire as follows:
Weighted
Average
Year Ending Number of Exercise
September 30, Shares Price
------------ ---------------- ------------------
2010 423,836 $ .40
2011 75,386 .86
2012 309,410 .86
2014 35,000 2.50
--------------
843,632
==============
All options were granted at exercise prices that approximated market on
the dates of the grant. The weighted average per share fair value of
options granted during fiscal years 2004 and 2003 was $2.50 and $.86.
Stock Purchase Warrants - The Company has granted warrants (see note 4),
which are summarized as follows for the years ended September 30, 2004 and
2003:
59
Weighted
Average
Warrants Exercise
Outstanding Price
--------------- -------------
Balances, October 1, 2002 -- $ --
Granted 125,000 2.00
Exercised -- --
--------------- ------------
Balances, September 30, 2003 125,000 $ 2.00
Granted 519,100 3.08
Exercised -- --
--------------- ------------
Balances, September 30, 2004 644,100 $ 2.87
=============== ============
7. RELATED PARTY TRANSACTIONS:
During the years ended September 30, 2004 and 2003, the Company paid
$7,200 and $60,800, respectively, for accounting and administrative
services to an entity related through common ownership through May 2002.
During the years ended September 30, 2004 and 2003, the Company had sales
of $209,805 and $423,760, respectively, to an entity whose principal owner
is the brother of an employee of the Company. Accounts receivable from
this related entity were $0 and $92,305 at September 30, 2004 and 2003.
See Notes 2, 4 and 10 for other related party transactions.
8. COMMITMENTS AND CONTINGENCIES:
The Company leases a facility and equipment under operating leases
expiring at various dates through fiscal year ended September 30, 2009.
The future minimum payments required under these operating leases are as
follows:
Year Ending
September 30,
2005 $ 139,178
2006 136,958
2007 136,958
2008 136,764
2009 21,964
--------------
$ 571,822
==============
Rent expense for the years ended September 30, 2004 and 2003 was $103,090
and $46,882, respectively.
During the year ended September 30, 2004, there were three legal
proceedings to which we became a party or to which any of our assets or
properties were subject. The Company does not believe the result of these
proceedings will have a material impact on our financial statements.
60
9. INCOME TAXES:
The Company has a net operating loss carryforward of approximately
$1,800,000 available to offset taxable income with portions beginning to
expire in 2021. A portion of the net operating loss may be subject to
Section 382 limitations.
The components of the net deferred tax assets and liabilities as of
September 30, 2004 are as follows:
Deferred tax assets (liabilities):
Current -
Allowance for bad debts $ 16,000
Inventory reserve 7,000
Warranty reserve 8,000
Section 263A 8,000
Accrued Commissions 29,000
Non-current -
Net operating loss carryforwards 647,000
Property and equipment (30,000)
Goodwill and intangibles (156,000)
-----------
Net deferred tax assets 529,000
Less valuation allowance (529,000)
-----------
Net deferred tax assets $ --
===========
During the fourth quarter, the Company decided that it was more probable
than not that the net deferred tax assets will not be realized in the
future and recorded the valuation allowance. Thus, the valuation allowance
increased from $0 at September 30, 2003 to $529,000 at September 30, 2004.
The difference between income taxes and the provision for income taxes for
the years ended September 30, 2004 and 2003 relates to the following:
2004 2003
------------- -------------
Benefit provision at federal statutory rate $ (542,000) $ (321,000)
State income tax benefit, net of Federal income tax benefit
(49,000) (30,000)
Non-deductible legal fees associated with merger -- 185,000
Tax effects of Whitco LLP losses prior to merger -- 161,000
Other 1,000 66,134
Valuation allowance 529,000 --
------------- -------------
$ (61,000) $ 61,134
============= =============
10. SUBSEQUENT EVENTS:
On December 3, 2004, the terms of the Notes with Laurus 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. Additionally, 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.
On October 12, 2004, the Company commenced a private placement offering
61
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 was extended through January 24, 2005. To date, we have sold
$50,000 worth of units. The 33,333 shares of common stock issued and the
33,333 shares of common stock underlying the warrants issued, as well as
the 3,333 shares of common stock underlying the warrant issued to the
placement agent, are all being registered hereunder.
62
PART II
Information Not Required in Prospectus
Item 24. Indemnification of Officers and Directors
The following certificate of incorporation and statute provisions are the only
charter and statute provisions, by-laws, contracts or other arrangements known
to the registrant that insure or indemnify a controlling person, director or
officer of the registrant in any manner against liability which he or she may
incur in his or her capacity as such.
Article SEVENTH of the registrant's Certificate of Incorporation provides that:
No director shall be personally liable to the Corporation or its stockholders
for monetary damages for any breach of fiduciary duty by such director as a
director. Notwithstanding the foregoing sentence, a director shall be liable to
the extent provided by applicable law, (i) for breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the Delaware General Corporation Law, or
(iv) for any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this Article Seventh shall apply to or
have any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director prior
to such amendment.
Under Article XI of our by-laws, we will indemnify and hold harmless to the
fullest extent authorized by the Delaware General Corporation Law, any of our
directors, officers, agents or employees, against all expense, liability and
loss reasonably incurred or suffered by such person in connection with
activities on our behalf.
Section 145 of the Delaware General Corporation Law ("GCL"), provides that:
(a) A corporation shall have power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that the person is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by the person in
connection with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
63
(c) To the extent that a present or former director or officer of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of this section, or in defense
of any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the present or former
director, officer, employee or agent is proper in the circumstances because the
person has met the applicable standard of conduct set forth in subsections (a)
and (b) of this section. Such determination shall be made, with respect to a
person who is a director or officer at the time of such determination, (1) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (2) by a committee of such
directors designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or director in
defending any civil, criminal, administrative or investigative action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of such director or officer to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the corporation
as authorized in this section. Such expenses (including attorneys' fees)
incurred by former directors and officers or other employees and agents may be
so paid upon such terms and conditions, if any, as the corporation deems
appropriate.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under this section.
(h) For purposes of this section, references to "the corporation" shall include,
in addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its separate
existence had continued.
64
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear
and determine all actions for advancement of expenses or indemnification brought
under this section or under any bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees).
Item 25. Other Expenses of Issuance and Distribution.
--------------------------------------------------------------------------------
Type of Expense Amount of Anticipated Expense
--------------------------------------------------------------------------------
Legal Fees $ 20,000
--------------------------------------------------------------------------------
Accounting Fees 10,000
--------------------------------------------------------------------------------
Printing Costs --
--------------------------------------------------------------------------------
Transfer Agent Fee 2,500
--------------------------------------------------------------------------------
Miscellaneous Fees and Expenses 5,000
--------------------------------------------------------------------------------
Total Expenses $ 37,500
--------------------------------------------------------------------------------
Item 26. Recent Sales of Unregistered Securities.
On September 30, 2004, Catalyst Lighting Group, Inc. authorized the sale to
Laurus Master Fund, Ltd. of (1) a Secured Convertible Term Note in the principal
amount of two million dollars ($2,000,000), which is convertible into the
Registrant's common stock at an initial fixed conversion price of $2.66 per
share (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), which are convertible into the Registrant's common stock
at an initial fixed conversion price of $2.66 per share. Laurus also acquired a
Common Stock Purchase Warrant for the purchase of up to 472,000 shares of Common
Stock, exercisable until September 30, 2009 at a price of $3.00 per share (the
"Warrant"). The Term Note and AR Notes (collectively, the "Notes") mature on
September 30, 2007 and are secured by a first priority lien on all collateral of
the Registrant, including inventory, accounts receivable, raw materials and all
of its ownership interests in Whitco Company, LP, its wholly-owned subsidiary.
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. Laurus also
received registration rights with respect to all shares of Common Stock
underlying the Notes and Warrant. The shares underlying the AR Notes are
included in this registration statement. Closing and funding occurred on
September 30, 2004.
On December 3, 2004, the terms of the Notes with Laurus 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. Additionally, 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.
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 was extended through January
24, 2005. To date, we have sold $50,000 worth of units. The 33,333 shares of
common stock issued and the 33,333 shares of common stock underlying the
warrants issued, as well as the 3,333 shares of common stock underlying the
warrant issued to the placement agent, are all being registered hereunder.
65
Whitco Company, L.L.P.:
On May 1, 2002, the partnership interests of two of the three then-existing
partners of Whitco Company, L.L.P. were purchased for a total of $1.2 Million. A
total of 436 2/3 partnership units (1,463,040 equivalent common shares) were
sold for $655,000, at a price per partnership unit of $1,500, and $545,000 in
subordinated debt. There were no underwriters or commissions paid with respect
to this or any other transaction set forth in this Item 26. These securities
were sold pursuant to an exemption from the securities laws pursuant to Section
4(2) of the Securities Act of 1933, as the offering of partnership interests was
to a limited number of offerees made without general solicitation in a
non-public offering. Further, these securities were exempted from the
registration requirements pursuant to the safe harbor of Regulation D, as Whitco
also had a reasonable belief all investors were "accredited", based on the
subscription agreements executed by each investor. Additionally, each investor
made a representation they were accredited investors under Rule 501(a) and that
they had the necessary sophistication to be able to fend for themselves. The
following tables set out the purchase price and amount of partnership units and
subordinated debt issued with respect to this transaction:
Partnership Units Issued:
------------------------------------------------------------------------------------------------------------------------------------
NAME TOTAL PURCHASE AMOUNT PARTNER UNITS PURCHASED EQUIVALENT COMMON STOCK BASED
ON MERGER EXCHANGE
------------------------------------------------------------------------------------------------------------------------------------
Celestine C. Depenbusch $200,000 133 1/3 446,729
------------------------------------------------------------------------------------------------------------------------------------
Larry D. Doskocil, Trustee of the $250,000 166 2/3 558,412
Larry D. Doskocil Living Trust
UAD February 20, 1986, as amended
------------------------------------------------------------------------------------------------------------------------------------
John and Jacqueline Middlekamp, $50,000 33 1/3 111,683
JTWROS
------------------------------------------------------------------------------------------------------------------------------------
June M. Ochsner, Trustee of the $50,000 33 1/3 111,683
June M. Ochsner Revocable Trust
dated October 21, 1997
------------------------------------------------------------------------------------------------------------------------------------
Dennis H. Depenbusch and Darcilyn $103,500 69 231,183
H. Depenbusch as co-trustees, or
their successors in trust, of the
Dennis H. Depenbusch Revocable
Trust, dated December 21, 1998
------------------------------------------------------------------------------------------------------------------------------------
66
Subordinated Debt Issued:
------------------------------------------------------------------------------------------------------------------------------------
NAME TOTAL EXPIRATION DATE INTEREST RATE
------------------------------------------------------------------------------------------------------------------------------------
Larry D. Doskocil, Trustee of the $250,000 May 1, 2004 15%
Larry D. Doskocil Living Trust
UAD February 20, 1986, as amended
------------------------------------------------------------------------------------------------------------------------------------
$20,000 May 1, 2007 15%
------------------------------------------------------------------------------------------------------------------------------------
James K. "Kip" Pritchard $150,000 May 1, 2007 15%
------------------------------------------------------------------------------------------------------------------------------------
Dennis H. Depenbusch and Darcilyn $75,000 May 1, 2007 15%
H. Depenbusch as co-trustees, or
their successors in trust, of the
Dennis H. Depenbusch Revocable
Trust, dated December 21, 1998
------------------------------------------------------------------------------------------------------------------------------------
Jacqueline N. Middlekamp $50,000 May 1, 2007 15%
------------------------------------------------------------------------------------------------------------------------------------
On January 31, 2003, all subordinated debt holders were offered the opportunity
to convert such debt into partnership units. These securities were sold pursuant
to an exemption from the securities laws pursuant to Section 4(2) of the
Securities Act of 1933, as the offering of partnership interests was to a
limited number of offerees with an ongoing relationship with Whitco and its
management, made without general solicitation in a non-public offering. The
following table sets out those note holders who chose to convert from debt to
equity:
------------------------------------------------------------------------------------------------------------------------------------
NAME TOTAL PARTNERSHIP UNITS ISSUED EQUIVALENT COMMON STOCK
------------------------------------------------------------------------------------------------------------------------------------
Celestine C. Depenbusch $50,000 7.56 25,330
------------------------------------------------------------------------------------------------------------------------------------
Larry D. Doskocil, Trustee of the $250,000 37.78 126,581
Larry D. Doskocil Living Trust
UAD February 20, 1986, as amended
------------------------------------------------------------------------------------------------------------------------------------
Dennis H. Depenbusch and Darcilyn $75,000 11.48 38,462
H. Depenbusch as co-trustees, or
their successors in trust, of the
Dennis H. Depenbusch Revocable
Trust, dated December 21, 1998
------------------------------------------------------------------------------------------------------------------------------------
Additionally, Whitco granted a total of 241.3485 (808,632 equivalent options in
the merger exchange) qualified options to five employees of Whitco, giving each
employee options to purchase partnership units of Whitco. There were no
underwriters, discounts or commissions paid in connection with the granting of
such options. Whitco did not receive any compensation for the granting of such
options as all options were issued in consideration for the option holder's
employment with Whitco. However, all options were exercisable for cash
consideration as set forth below. None of the options have been exercised, but
all were converted on August 27, 2003 to options to purchase our common stock
pursuant to the Securities Exchange Agreement with Whitco. All options were
issued without registration in reliance on one or more of the following
exemptions: Rule 701 and Section 4(2) of the Securities Act of 1933. Below is a
chart setting forth all such issuances:
67
----------------------------------------------------------------------------------------------------------------------------------
NAME ISSUE DATE PERIOD VESTING EXERCISE PRICE VESTING EXERCISE PRICE
PARTNERSHIP PER UNIT EQUIVALENT COMMON PER EQUIVALENT
UNITS GRANTED STOCK OPTIONS OPTION
PURSUANT TO
OPTION
----------------------------------------------------------------------------------------------------------------------------------
Kip Pritchard 6/30/00 0 104.5 $1,000 350,125
----------------------------------------------------------------------------------------------------------------------------------
Kip Pritchard 6/30/00 0 .5 $1,000 1,675
----------------------------------------------------------------------------------------------------------------------------------
Mark Wendt (a) 6/30/00 $5 years 104.5
----------------------------------------------------------------------------------------------------------------------------------
Tom Lach 10/30/00 5 years 22 $2,913 73,710
----------------------------------------------------------------------------------------------------------------------------------
Kevin Medlin 10/1/01 5 years 22 $2,916 73,710
----------------------------------------------------------------------------------------------------------------------------------
Henry Glover 1/1/02 5 years 57 $2,916 190,977
----------------------------------------------------------------------------------------------------------------------------------
Henry Glover 12/31/02 0 17.5 $2,890 58,633
----------------------------------------------------------------------------------------------------------------------------------
Tom Lach 12/31/02 0 7 $2,890 23,453
----------------------------------------------------------------------------------------------------------------------------------
Kevin Medlin 12/31/02 0 7 $2,890 23,453
----------------------------------------------------------------------------------------------------------------------------------
Ben Mosqueda 12/31/02 0 3.5 $2,980 11,727 $.86
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(a) Mr. Wendt is no longer an employee of Whitco. He did not purchase any
partnership units while employed and all options, vested and unvested,
terminated ninety (90) days after his termination as an employee of Whitco.
Item 27. Exhibits.
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2.1 Securities Exchange Agreement dated February 12, 2003 by
and among Wentworth III, Inc., Whitco Company, L.L.P and
the partners of Whitco (Incorporated herein by reference
to Exhibit 2.1 of the Company's Form 8-K, filed with the
Securities and Exchange Commission on September 15,
2003)
--------------------------------------------------------------------------------
3.1 Certificate of Incorporation (Incorporated herein by
reference to the exhibits of the Company's Registration
Statement on Form SB-2, filed with the Securities and
Exchange Commission on December 12, 2001)
--------------------------------------------------------------------------------
3.2 By-Laws (Incorporated herein by reference to the
exhibits of the Company's Registration Statement on Form
SB-2, filed with the Securities and Exchange Commission
on December 12, 2001)
--------------------------------------------------------------------------------
3.3 Certificate of Incorporation of Catalyst Lighting Group,
Inc. (Incorporated herein by reference to Exhibit 3.3 of
the Company's Form 10-KSB, filed with the Securities and
Exchange Commission December 29, 2003)
--------------------------------------------------------------------------------
3.4 Certificate of Ownership and Merger of Catalyst Lighting
Group, Inc. into Wentworth III, Inc. (Incorporated
herein by reference to Exhibit 3.3 of the Company's Form
10-KSB, filed with the Securities and Exchange
Commission December 29, 2003)
--------------------------------------------------------------------------------
5.1 Opinion of Feldman Weinstein LLP
--------------------------------------------------------------------------------
10.1 Securities Purchase Agreement (Incorporated herein by
reference to Exhibit 10.1 of the Company's Form 8-K,
filed with the Securities and Exchange Commission
October 5, 2004)
--------------------------------------------------------------------------------
10.2.1 Form of Common Stock Purchase Warrant issued to Keating
Reverse Merger Fund, LLC (Incorporated herein by
reference to the exhibits of the Company's Registration
Statement on Form SB-2, filed with the Securities and
Exchange Commission on December 10, 2004)
--------------------------------------------------------------------------------
10.2.2 Secured Convertible Term Note (Incorporated herein by
reference to Exhibit 10.2 of the Company's Form 8-K,
filed with the Securities and Exchange Commission on
October 5, 2004)
--------------------------------------------------------------------------------
68
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10.3 Common Stock Purchase Warrant (Incorporated herein by
reference to Exhibit 10.3 of the Company's Form 8-K,
filed with the Securities and Exchange Commission on
October 5, 2004)
--------------------------------------------------------------------------------
10.4 Registration Rights Agreement (Incorporated herein by
reference to Exhibit 10.4 of the Company's Form 8-K,
filed with the Securities and Exchange Commission on
October 5, 2004)
--------------------------------------------------------------------------------
10.5 Master Security Agreement (Incorporated herein by
reference to Exhibit 10.5 of the Company's Form 8-K,
filed with the Securities and Exchange Commission on
October 5, 2004)
--------------------------------------------------------------------------------
10.6 Security Agreement (Incorporated herein by reference to
Exhibit 10.6 of the Company's Form 8-K, filed with the
Securities and Exchange Commission on October 5, 2004)
--------------------------------------------------------------------------------
10.7 Secured Revolving Note (Incorporated herein by reference
to Exhibit 10.7 of the Company's Form 8-K, filed with
the Securities and Exchange Commission on October 5,
2004)
--------------------------------------------------------------------------------
10.8 Secured Convertible Minimum Borrowing Note (Incorporated
herein by reference to Exhibit 10.8 of the Company's
Form 8-K, filed with the Securities and Exchange
Commission on October 5, 2004)
--------------------------------------------------------------------------------
10.9 Omnibus Amendment No. 1 (Incorporated herein by
reference to Exhibit 10.1 of the Company's Form 8-K,
filed with the Securities and Exchange Commission on
December 9, 2004)
--------------------------------------------------------------------------------
10.10 Common Stock Purchase Warrant (Incorporated herein by
reference to Exhibit 10.2 of the Company's Form 8-K,
filed with the Securities and Exchange Commission on
December 9, 2004)
--------------------------------------------------------------------------------
23.1 Consent of Hein & Associates LLP
--------------------------------------------------------------------------------
Item 28. Undertakings.
The registrant hereby undertakes:
1) To file, during any period in which if offers or sells securities, a
post-effective amendment to this registration statement to:
a. include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
b. reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum offering price set forth
in the "Calculation of Registration Fee" table in the
effective registration statement; and
c. include any additional or changed material information on the
plan of distribution.
2) For determining liability under the Act, to treat each post-effective
amendment, including those that contain a form of prospectus, as a new
registration statement for the securities offered, and the offering of the
securities at that time to be the initial bona fide offering of those
securities.
3) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities, other
than the payment by the small business issuer of expenses incurred or paid
by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding, is asserted
by such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.
69
4) To, if registering securities under Rule 415 of the Securities Act of
1933, as amended, file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of such
offering.
70
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized the registration
statement to be signed on its behalf by the undersigned, in the City of Fort
Worth, State of Texas, on January 31, 2005.
CATALYST LIGHTING GROUP, INC.
By: /s/ Dennis H. Depenbusch
-----------------------------------------------------------
Dennis H. Depenbusch, Chief Executive Officer
and Principal Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Dennis H. Depenbusch, his or her true and
lawful agent, proxy and attorney-in-fact, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to (i) act on, sign and file with the Securities and
Exchange Commission any and all amendments (including post-effective amendments)
to this Registration Statement on Form SB-2 together with all schedules and
exhibits thereto, (ii) act on, sign and file such certificates, instruments,
agreements and other documents as may be necessary or appropriate in connection
therewith and (iii) take any and all actions that may be necessary or
appropriate to be done, as fully for all intents and purposes as he or she might
or could do in person, hereby approving, ratifying and confirming all that such
agent, proxy and attorney-in-fact or any of his substitutes may lawfully do or
cause to be done by virtue thereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of January 31, 2005:
SIGNATURES TITLE
----------------------------- --------------------------------------------
/S/ DENNIS H. DEPENBUSCH CHIEF EXECUTIVE OFFICER, DIRECTOR PRINCIPAL
----------------------------- EXECUTIVE OFFICER, FINANCIAL AND ACCOUNTING
DENNIS H. DEPENBUSCH OFFICER
/S/ HENRY GLOVER PRESIDENT AND DIRECTOR
-----------------------------
HENRY GLOVER
/S/ KEVIN R. KEATING DIRECTOR
----------------------------
KEVIN R. KEATING
/S/ MARY TITUS DIRECTOR
-----------------------------
MARY TITUS
/S/ TRACY B. TAYLOR DIRECTOR
-----------------------------
TRACY B. TAYLOR
71