United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended: September 30, 2000 Commission File Number 1-5558 Katy Industries, Inc. (Exact name of registrant as specified in its charter) Delaware 75-1277589 (State of Incorporation) (I.R.S. Employer Identification No.) 6300 S. Syracuse Way, Suite 300, Englewood, Colorado 80111 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (303)290-9300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Class Outstanding at November 13, 2000 Common stock, $1 par value 8,396,933 INDEX PART I FINANCIAL INFORMATION Page Item 1. Financial Statements: Condensed Consolidated Balance Sheets September 30, 2000 and December 31, 1999 (unaudited) 2,3 Condensed Consolidated Statements of Operations Three and Nine Months Ended September 30, 2000 and 1999 (unaudited) 4 Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2000 and 1999 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II OTHER INFORMATION Item 1. Legal Proceedings 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 16 PART I FINANCIAL INFORMATION Item 1. Financial Statements KATY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) (Unaudited) ASSETS September 30, December 31, 2000 1999 CURRENT ASSETS: Cash and cash equivalents $ 6,231 $ 9,988 Accounts receivable, net 99,765 95,153 Inventories 118,477 117,400 Deferred income taxes 8,497 8,497 Other current assets 2,773 6,017 Net current assets of operations to be disposed of 692 737 ______ ______ Total current assets 236,435 237,792 OTHER ASSETS: Cost in excess of net assets acquired 37,821 40,037 Other intangibles 50,343 52,491 Miscellaneous 6,252 6,831 Net noncurrent assets of operations to be disposed of 16,788 15,898 ______ ______ Total other assets 111,204 115,257 PROPERTIES: Land and improvements 3,764 4,077 Buildings and improvements 23,204 24,074 Machinery and equipment 164,304 156,485 _______ _______ Accumulated depreciation (57,961) (45,849) Net properties 133,311 138,787 _______ _______ $480,950 $491,836 See Notes to Condensed Consolidated Financial Statements. KATY INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31, 2000 1999 CURRENT LIABILITIES: Accounts payable $58,063 $56,874 Accrued compensation 6,782 3,902 Accrued expenses 41,284 52,538 Accrued interest and taxes 1,426 2,887 Other current liabilities 696 698 _______ _______ Total current liabilities 108,251 116,899 LONG TERM DEBT, less current maturities 155,789 150,835 OTHER LIABILITIES 7,278 7,359 EXCESS OF ACQUIRED NET ASSETS OVER COST 2,218 3,495 DEFERRED INCOME TAXES 21,636 20,037 COMMITMENTS AND CONTINGENCIES - Note 2 PREFERRED INTEREST OF SUBSIDIARY 32,900 32,900 STOCKHOLDERS' EQUITY: Common stock, $1 par value; authorized 25,000,000 shares; issued 9,822,204 shares 9,822 9,822 Additional paid-in capital 51,127 51,127 Accumulated other comprehensive income (3,027) (434) Other adjustments (629) (1,010) Retained earnings 115,602 120,689 Treasury stock, at cost, 1,425,271 and 1,408,346 shares, respectively (20,017) (19,883) ________ ________ Total stockholders' equity 152,878 160,311 $480,950 $491,836 See Notes to Condensed Consolidated Financial Statements. KATY INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Thousands of Dollars, Except Share and Per Share Data) (Unaudited) Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Net sales $ 144,973 $ 145,548 $413,466 $401,371 Cost of goods sold 106,165 98,978 294,599 273,357 Gross profit 38,808 46,570 118,867 128,014 Selling, general and administrative expenses 38,081 36,520 110,426 107,536 Operating income 727 10,050 8,441 20,478 Equity in loss of operations to be disposed of (270) (32) (897) (922) Interest and other, net (3,701) (2,675) (10,457) (8,401) (Loss) income before income taxes and distributions on preferred interest of subsidiary (3,244) 7,343 (2,913) 11,155 Benefit from (provision for) income taxes 1,128 (2,570) 1,011 (3,904) _____ _____ _____ _____ (Loss) income before distributions on preferred interest of subsidiary (2,116) 4,773 (1,902) 7,251 Distributions on preferred interest of subsidiary (net of tax) (430) (465) (1,281) (1,255) (Loss) income from continuing operations (2,546) 4,308 (3,183) 5,996 Income from operations of discontinued businesses (net of tax) - - - - Net (loss) income $(2,546) $ 4,308 $ (3,183) $ 5,996 Earnings per share - Basic (Loss) income from continuing operations $ (0.30) $ 0.52 $ (0.38) $ 0.72 Discontinued operations - - - - ____ ____ ____ ____ Net (loss) income $ (0.30) $ 0.52 $ (0.38) $ 0.72 Earnings per share - Diluted (Loss) income from continuing operations $ (0.30) $ 0.48 $ (0.38) $ 0.71 Discontinued operations - - - - ____ ____ ____ ____ Net (loss) income $ (0.30) $ 0.48 $ (0.38) $ 0.71 Average shares outstanding (thousands) Basic 8,399 8,351 8,406 8,349 Diluted 8,399 9,960 8,406 8,412 Dividends paid per share - common stock $ 0.075 $ 0.075 $ 0.225 $ 0.225 See Notes to Condensed Consolidated Financial Statements. KATY INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Thousands of Dollars) (Unaudited) 2000 1999 Cash flows from operating activities: Net (loss) income $ (3,183) $ 5,996 Depreciation and amortization 18,056 14,491 Net changes in assets and liabilities, other (10,708) 1,100 ______ ______ Net cash flows provided by operating activities 4,165 21,587 Cash flows from investing activities: Payments for purchase of subsidiaries, net of cash acquired - (135,821) Capital expenditures (11,728) (11,256) Proceeds from sale of assets 850 187 Collections of notes receivable 167 647 Proceeds from sale of subsidiaries - 7,222 ______ _______ Net cash flows used in investing activities (10,711) (139,021) Cash flows from financing activities: Proceeds from issuance of long-term debt, net of repayments 4,948 117,937 Payment of dividends (1,892) (1,880) Purchase of treasury shares (262) (160) Other 83 - _____ _______ Net cash flows provided by financing activities 2,877 115,897 Net decrease in cash and cash equivalents (3,669) (1,537) Cash and cash equivalents, beginning of period 10,643 13,883 ______ ______ Cash and cash equivalents, end of period 6,974 12,346 Cash of discontinued operations and operations to be disposed of (743) (873) ______ ______ Cash and cash equivalents of continuing operations $ 6,231 $ 11,473 See Notes to Condensed Consolidated Financial Statements. KATY INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (Unaudited) (1) SIGNIFICANT ACCOUNTING POLICIES Consolidation Policy The condensed financial statements include, on a consolidated basis, the accounts of Katy Industries, Inc. and subsidiaries in which it has a greater than 50% interest, collectively "Katy" or the "Company". All significant intercompany accounts, profits and transactions have been eliminated in consolidation. Investments in affiliates that are not majority owned and where the Company does exercise significant influence are reported using the equity method. The condensed consolidated financial statements at September 30, 2000 and December 31, 1999 and for the three and nine months ended September 30, 2000 and September 30, 1999 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of financial condition and results of operations. Interim figures are subject to year-end audit adjustments and may not be indicative of results to be realized for the entire year. The condensed consolidated financial statements and notes thereto, should be read in conjunction with management's discussion and analysis of financial condition and results of operations, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Reclassifications Certain amounts from prior years have been reclassified to conform to the 2000 financial statement presentation. Discontinued Operations and Operations to be Disposed Of The historical operating results for "Discontinued Operations" have been segregated as "Income from operations of discontinued businesses (net of tax)" on the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 1999. Discontinued Operations have not been segregated on the condensed consolidated statements of cash flows, except for cash and cash equivalents. The net income from these operations during the three and nine months ended September 30, 1999 was deferred and recognized during the fourth quarter of 1999. The historical operating results for "Operations to be Disposed Of" have been segregated as "Equity in income (loss) of operations to be disposed of" on the accompanying condensed consolidated statements of operations for all periods presented. The related assets and liabilities have been separately identified on the condensed consolidated balance sheets as "Net current assets of operations to be disposed of" and "Net noncurrent assets of operations to be disposed of". Operations to be disposed of have not been segregated on the condensed consolidated statements of cash flows. Inventories The components of inventories are as follows: September 30, December 31, 2000 1999 (Thousands of Dollars) Raw materials $ 47,004 $ 37,878 Work in process 4,426 5,911 Finished goods 67,047 73,611 ______ ______ $118,477 $117,400 At September 30, 2000 and December 31, 1999, 33% and 36% respectively, of the Company's inventories were accounted for using the last-in, first-out ("LIFO") method. The remaining inventories are accounted for using the first-in, first-out ("FIFO") method. Current cost, as determined using the FIFO method, exceeded LIFO cost by $1.9 million at September 30, 2000, and by $1.0 million as of December 31, 1999. Earnings Per Share Basic and diluted earnings per share were arrived at using the calculations outlined below. Potentially dilutive securities, in the form of stock options and convertible preferred shares, have been included in the calculation of weighted average shares outstanding under the treasury stock method. There was no dilutive impact on earnings for the three and nine months ended September 30, 2000 as a result of net losses reported for those periods. Stock options were the only securities that had a dilutive impact on earnings per share for the three and nine months ended September 30, 1999. For the quarter ended September 30, 1999 stock options and convertible preferred shares had a dilutive impact on earnings per share. Three Months Nine Months Ended September 30, Ended September 30, (Thousands of Dollars, Except Per Share Data) 2000 1999 2000 1999 (Loss) income from continuing operations- Basic $(2,546) $4,308 $(3,183) $5,996 Income from discontinued operations - - - - _____ _____ _____ _____ Net (loss) income - Basic $(2,546) $4,308 $(3,183) $5,996 (Loss) income from continuing operations- Diluted $(2,546) $4,308 $(3,183) $5,996 Income from discontinued operations - - - - Distributions on preferred interest of subsidiary (net of tax) - 465 - - _____ _____ _____ _____ Net (loss) income - Diluted $(2,546) $4,773 $(3,183) $5,996 Earnings Per Share - Basic Weighted average shares (thousands) 8,399 8,351 8,406 8,349 Per share amount Continuing operations $(0.30) $0.52 $(0.38) $0.72 Discontinued operations - - - - ____ ____ ____ ____ $(0.30) $0.52 $(0.38) $0.72 Effect of potentially dilutive securities Options (thousands) - 43 - 63 Convertible preferred shares (thousands) - 1,566 - - Earnings Per Share - Diluted Weighted average shares (thousands) 8,399 9,960 8,406 8,412 Per share amount Continuing operations $(0.30) $0.48 $(0.38) $0.71 Discontinued operations - - - - ____ ____ ____ ____ $(0.30) $0.48 $(0.38) $0.71 (2) Commitments and Contingencies In December 1996, Banco del Atlantico, a bank located in Mexico, filed a lawsuit against Woods Industries, Inc. ("Woods"), a subsidiary of the Company, and against certain past and then present officers and directors and former owners of Woods, alleging that the defendants participated in a violation of the Racketeer Influenced and Corrupt Organizations Act involving allegedly fraudulently obtained loans from Mexican banks, including the plaintiff, and "money laundering" of the proceeds of the illegal enterprise. All of the foregoing is alleged to have occurred prior to the Company's purchase of Woods. The plaintiff also alleges that it made loans to an entity controlled by certain officers and directors based upon fraudulent representations. The plaintiff seeks to hold Woods liable for its alleged damage under principles of respondeat superior and successor liability. The plaintiff is claiming damages in excess of $24.0 million and is requesting treble damages under the statutes. The defendants have filed a motion, which has not been ruled on, to dismiss this action on jurisdictional grounds. Because the litigation is in preliminary stages, it is not possible at this time for the Company to determine an outcome or reasonably estimate the range of potential exposure. The Company may have recourse against the former owner of Woods and others for, among other things, violations of covenants, representations and warranties under the purchase agreement through which the Company acquired Woods, and under state, federal and common law. In addition, the purchase price under the purchase agreement may be subject to adjustment as a result of the claims made by Banco del Atlantico. The extent or limit of any such recourse cannot be predicted at this time. (3) Industry Segment Information The Company is a manufacturer and distributor of a variety of industrial and consumer products, including sanitary maintenance supplies, coated abrasives, stains, electrical and electronic components, and nonpowered hand tools. Principal markets are in the United States, Canada and Europe, and include the sanitary maintenance, restaurant supply, retail, electronic, automotive, and computer markets. These activities are grouped into two industry segments: Electrical/Electronics and Maintenance Products. The tables below summarize the key factors in the year-to-year changes in operating results. Three Months Ended Nine Months Ended September 30,September 30,September 30,September 30, 2000 1999 2000 1999 (Thousands of Dollars) Electrical/Electronics Net external sales $51,782 $49,682 $131,752 $134,637 Net intercompany sales 22,383 12,348 43,886 40,235 Operating Income 2,615 3,795 5,087 4,636 Operating margin 5.0% 7.64% 3.86% 3.44% Depreciation & amortization 722 454 2,162 1,848 Identifiable assets 127,963 143,917 127,963 143,917 Capital expenditures 208 479 1,393 2,086 Maintenance Products Net external sales 93,191 95,866 281,714 266,734 Net intercompany sales 2,295 3,422 6,844 8,106 Operating Income 1,181 8,565 10,811 24,026 Operating margin 1.27% 8.93% 3.84% 9.01% Depreciation & amortization 4,957 4,380 15,358 12,316 Identifiable assets 314,808 314,757 314,808 314,757 Capital expenditures 3,051 2,638 9,575 8,756 Discontinued Operations Net external sales - 1,565 - 9,391 Net intercompany sales - - - - Operating Income - (43) - 338 Operating margin - (2.75)% - 3.60% Depreciation & amortization - 34 - 249 Identifiable assets - 3,559 - 3,559 Capital expenditures - 12 - 80 Operations to be Disposed Of Net external sales 838 961 2,474 2,606 Net intercompany sales - - - - Operating Loss (172) (178) (1,191) (706) Operating margin (20.53)% (18.52)% (48.14)% (27.09)% Depreciation & amortization 39 1 76 1 Identifiable assets 18,610 16,843 18,610 16,843 Equity investments 7,204 6,779 7,204 6,779 Capital expenditures - 140 755 147 Three Months Ended Nine Months Ended September 30,September 30,September 30,September 30, 2000 1999 2000 1999 (Thousands of Dollars) Corporate Corporate expenses $(3,069) $(2,310) $(7,457) $(8,184) Depreciation & amortization 432 39 460 77 Identifiable assets 20,700 19,412 20,700 19,412 Capital expenditures 5 - 5 187 Company Net external sales [a] 145,811 148,074 415,940 413,368 Net intercompany sales 24,678 15,770 50,730 48,341 Operating Income[a] 555 9,829 7,250 20,110 Operating margin [a] 0.38% 6.64% 1.74% 4.86% Depreciation & amortization [a] 6,150 4,908 18,056 14,491 Identifiable assets [a] 482,081 498,488 482,081 498,488 Capital expenditures 3,264 3,269 11,728 11,256 [a] Company balances include amounts from both "Discontinued Operations" and "Operations to be Disposed of", whereas the Condensed Consolidated Financial Statements separately classify such amounts as "Discontinued Operations" and "Operations to be Disposed of". The following tables reconcile the Company's total revenues, operating income and assets to the Company's condensed consolidated statements of operations and condensed consolidated balance sheets. Three Months Ended Nine Months Ended September 30,September 30,September 30,September 30, 2000 1999 2000 1999 (Thousands of Dollars) Revenues Total net sales for reportable segments $170,489 $163,844 $466,670 $461,709 Elimination of net intercompany sales (24,678) (15,770) (50,730) (48,341) Net sales included in equity in income of operations to be disposed of (838) (961) (2,474) (2,606) Net sales included in discontinued operations - (1,565) - (9,391) _______ _______ ________ _______ Total consolidated net sales $144,973 $145,548 $413,466 $401,371 Operating income Total income from operations for reportable segments $555 $9,829 $7,250 $20,110 Operating loss included in equity in income of operations to be disposed of 172 178 1,191 706 Operating income included in discontinued operations - 43 - (338) _______ _______ ________ _______ Total consolidated operating income $727 $10,050 $8,441 $20,478 Assets Total assets for reportable segments $482,081 $498,488 $482,081 $498,488 Liabilities included in net assets from operations to be disposed of (1,131) (1,230) (1,131) (1,230) Liabilities included in net assets from discontinued operations - (237) - (237) _______ _______ ________ _______ Total consolidated assets $480,950 $497,021 $480,950 $497,021 (4) Comprehensive (Loss) Income Comprehensive (loss) income for the nine months ended September 30, 2000 and 1999 are as follows: September 30, September 30, 2000 1999 (Thousands of Dollars) Net (loss) income $ (3,183) $ 5,996 Foreign currency translation adjustments (2,521) 1,714 Comprehensive (loss) income $ (5,704) $ 7,710 (5) Indebtedness On October 27, 2000, the Company amended its unsecured revolving credit agreement (the "Credit Agreement"). The Credit Agreement provides for borrowings of up to $16,750,000 under its Facility A commitment expiring June 30, 2001 and $161,160,000 under its Facility B commitment expiring December 11, 2001. As a part of the amendment, compliance with certain covenants required by the Credit Agreement was waived as of September 30, 2000, and new ratio levels for certain covenants were established for measurement at December 31, 2000. Also as part of the amendment, the Company agreed to grant the lenders under the Credit Agreement a security interest in all of its and its subsidiaries' assets on March 31, 2001, if certain events do not occur before that date. A security interest will not be required to be granted if (1) on or before February 28, 2001, a letter of intent (satisfactory to the bank group) exists for the sale of the Company as a whole or (ii) one or more of its material subsidiaries if (in the case of clause (ii)) the Company demonstrates that following such sale the Company would be in compliance with a specified leverage ratio, or (2) the Company is in compliance with certain covenants at pre-amendment ratio levels. (6) Supplemental Cash Flow Information A portion of the net assets included in the condensed consolidated financial statements as a result of the acquisition of the business of Contico International, Inc, ("Contico") which occurred during the first quarter of 1999, was financed through a preferred membership interest in the acquiring company, held by the former owners of the business. This interest has a stated value of $32.9 million. (7) Restructuring Charge During the third quarter of 2000, the Company implemented a workforce reduction that reduced headcount by approximately 90. Employees affected were primarily in general and administrative functions, with the largest number of affected employees coming from the Maintenance Products Segment. The workforce reduction included severance and related costs for certain employees. Total severance and related costs was $2.1 million pre-tax, which are included as selling, general and administrative expenses in the condensed consolidated statements of operations. Approximately 64% of these costs were paid during the third quarter of 2000. In the second quarter of 1999, the Company undertook a restructuring of the Electrical/Electronics businesses. Approximately 22 employees accepted severance packages. Total severance and related costs were $600,000. Substantially all of these costs were paid during the third quarter of 1999. (8) Subsequent Event On November 6, 2000, the Company announced that it is exploring strategic alternatives, including the possible sale of the Company. The Company indicated that it is in discussions with one potential purchaser relating to a transaction that would involve the purchase of the Company at a premium to its current market price. Katy indicated, however, that there can be no assurance that an agreement will be reached, or if reached, that a sale will be completed. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Three months Ended September 30, 2000 Following are summaries of sales and operating income (loss) for the three months ended September 30, 2000 and 1999 by industry segment (thousands of dollars): Net Sales Increase (Decrease) 2000 1999 Amount Percent Electrical/Electronics $51,782 $49,682 $2,100 4.2% Maintenance Products 93,191 95,866 (2,675) (2.8)% Operations to be Disposed Of 838 961 (123) (12.8)% Discontinued Operations - 1,565 (1,565) (100.0)% Operating Income (Loss) Increase (Decrease) 2000 1999 Amount Percent Electrical/Electronics $ 2,615 $ 3,795 $(1,180) (31.1)% Maintenance Products 1,181 8,565 (7,384) (86.2)% Operations to be Disposed Of (172) (178) (6) (3.4)% Discontinued Operations - (43) 43 100.0)% The Electrical/Electronics Group's sales increased $2.1 million or 4.2% primarily because of higher volumes in the precision metals and consumer electric corded businesses. The Electrical/Electronics Group's operating income decreased $1.2 million or 31.1% mainly as a result of decreased margins in the consumer electric corded products business and the non-powered hand tools business. Operating results were also negatively impacted by a $0.8 million product recall in the consumer electric corded products business during the three months ended September 30, 2000. Sales from the Maintenance Products Group decreased $2.7 million or 2.8% primarily as a result of decreased volumes in the mop and broom and abrasive businesses. . The Maintenance Products Group's operating income decreased $7.4 million or 86.2%. The decrease is partially attributable to decreased margins in the plastic maintenance and storage products business resulting from increased resin costs. The Company estimates that resin costs negatively impacted third quarter operating income versus prior year by $2.9 million. In addition, unusual items including a $0.9 million increase to a LIFO inventory reserve and a $1.2 million charge for severance and restructuring costs also impacted the decrease. Excluding the aforementioned factors, operating income decreased $2.3 million, primarily as a result of poor performance in the mop and broom operations. Sales from Operations to be Disposed Of decreased $0.1 million, or 12.8%, primarily as a result of lower volumes in the waste-to-energy business. Operating income for this group remained flat for the three months ended September 30, 2000. All Discontinued Operations were disposed of during 2000. Selling, general and administrative expenses for the Company's continuing segments increased as a percentage of sales to 26.3% in the third quarter of 2000 from 25.1% for the same period in 1999. The increase was primarily attributed to unusual items associated with severance and a product recall both previously mentioned. Excluding these unusual items, selling, general and administrative costs decreased as a percentage of sales to 24.2%. Interest and other, net increased $1.0 million for the third quarter of 2000 compared to the third quarter of 1999. The increase is primarily due to higher variable interest rates on the Company's long-term debt. Nine months Ended September 30, 2000 Following are summaries of sales and operating income for the nine months ended September 30, 2000 and 1999 by industry segment (In thousands): Net Sales Increase (Decrease) 2000 1999 Amount Percent Electrical/Electronics $ 131,752 $134,637 $ (2,885) (2.1)% Maintenance Products 281,714 266,734 14,980 5.6 % Operations to be Disposed Of 2,474 2,606 (132) (5.1)% Discontinued Operations - 9,391 (9,391) (100.0)% Operating Income (Loss) Increase (Decrease) 2000 1999 Amount Percent Electrical/Electronics $ 5,087 $ 4,636 $ 451 9.7% Maintenance Products 10,811 24,026 (13,215) (55.0)% Operations to be Disposed Of (1,191) (706) (485) (68.7)% Discontinued Operations - 338 (338) (100.0)% The Electrical/Electronics Group's sales decreased $2.9 million or 2.1% primarily due to decreased volumes in the consumer non-powered hand tools and electrical and electronic parts and accessories businesses, partially offset by increased volumes in the precision metals and the electric corded businesses. The Electrical/Electronics Group's operating income increased $0.5 million or 9.7%, mainly as a result of higher gross margins at the precision metals and electrical and electronic parts businesses. Operating results were reduced in 2000 by a $0.8 million product recall in the consumer electric corded products business. The Maintenance Products Group's sales increased $15.0 million or 5.6% due primarily to higher sales volumes in the plastic maintenance and storage business. Sales in 1999 were lower also as a result of the exclusion of one week of pre-acquisition Contico activity. The Maintenance Products Group's operating income decreased $13.2 million or 55.0%. The decrease is partially attributable to reduced margins in plastic maintenance and storage products resulting from increased resin costs. The Company estimates that resin costs negatively impacted the nine months ended operating income by $8.9 million. In addition, unusual items including a $0.9 million inventory LIFO adjustment and a $1.2 million charge for severance and restructuring also impacted the decrease. Excluding these factors, operating income decreased $2.2 million or 9.2%, primarily as a result of the poor performance in the mop and broom business. Sales from Operations to be Disposed Of were comparable to prior year while operating income for this group declined $0.5 million or 68.7% primarily due to higher plant maintenance costs. All Discontinued Operations were disposed of during 1999. Selling, general and administrative expenses as a percentage of sales for the Company's continuing segments remained unchanged, 26.9% for the first nine months of 2000 and 26.7% for the same period in 1999. Excluding third quarter restructuring charges of $2.9 million in 2000, sales, general and administrative expenses as a percentage of sales were 26.0%. The decrease was primarily attributable to reduced costs in the consumer electric corded business and the cleaning and specialty food service products. Interest and other, net increased $2.0 million for the first nine months of 2000 compared to the same period of 1999. The increase is primarily due to higher interest rates on the Company's long-term debt. Accumulated other comprehensive income was negatively impacted during the first nine months of 2000 by adjustments resulting from the translation of results and financial position of operations in the United Kingdom and Canada. LIQUIDITY AND CAPITAL RESOURCES Combined cash and cash equivalents from continuing operations decreased 37.6% to $6.2 million on September 30, 2000 compared to $10.0 million on December 31, 1999 primarily due to an effort to operate on lower cash balances to minimize outstanding borrowings on the Company's unsecured revolving credit agreement (the "Credit Agreement"). Current ratios were 2.7 to 1.0 at September 30, 2000 compared to 2.0 to 1.0 at December 31, 1999. Working capital increased $9.0 million to $128.2 at September 30, 2000 from $120.9 million on December 31, 1999, primarily as a result of, increased accounts receivable and settlements of customer sales and allowance plans (accrued expenses). Katy expects to commit an additional $3.9 million for capital projects in the continuing businesses during the remainder of the year for a total of $15.6 million during 2000. Funding for these expenditures and for working capital needs is expected to be accomplished through the use of available cash and internally generated funds. At September 30, 2000, Katy had short and long-term indebtedness for money borrowed of $155.9 million, substantially all of which was outstanding under the Credit Agreement. On October 27, 2000, the Company amended its unsecured revolving credit agreement (the "Credit Agreement"). The Credit Agreement provides for borrowings of up to $16,750,000 under its Facility A commitment expiring June 30, 2001 and $161,160,000 under its Facility B commitment expiring December 11, 2001. As a part of the amendment, compliance with certain covenants required by the Credit Agreement was waived as of September 30, 2000, and new ratio levels for certain covenants were established for measurement at December 31, 2000. Also as part of the amendment, the Company agreed to grant the lenders under the Credit Agreement a security interest in all of its and its subsidiaries' assets on March 31, 2001, if certain events do not occur before that date. A security interest will not be required to be granted if (1) on or before February 28, 2001, a letter of intent (satisfactory to the bank group) exists for the sale of the Company as a whole or (ii) one or more of its material subsidiaries if (in the case of clause (ii)) the Company demonstrates that following such sale the Company would be in compliance with a specified leverage ratio, or (2) the Company is in compliance with certain covenants at pre-amendment ratio levels. Total debt was 45.6% of total capitalization at September 30, 2000. If the Company does grant the lenders such security interest by March 31, 2001, then the new ratio levels will continue to apply for the quarter ending March 31. If not, then the Company would either have to be in compliance with the pre-amendment ratios or seek a new waiver for lack of compliance at March 31, 2001. The Company believes that the financing available to it under the Credit Agreement is sufficient for its purposes through March 31, 2001 and, assuming it either grants the lenders thereunder such security interest or otherwise comes into compliance with the pre-amendment ratios or obtains further waivers of compliance thereunder, until June 30, 2001, when the Company will need to refinance the Facility A revolving loan facility under its Credit Agreement and, unless it is then in compliance with the ratios thereunder, the Facility B facility as well. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission staff released Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101 provides interpretive guidance on the recognition, presentation and disclosure of revenue in financial statements. The Company is required to determine the impact of SAB 101 no later than the end of the fourth quarter of fiscal 2000. Depending on the results of the evaluation, the implementation of SAB 101 may require the Company to restate its current year results to reflect any cumulative effect of change in accounting principal as if SAB 101 had been implemented on January 1, 2000. The Company is currently reviewing SAB 101 to determine what impact, if any, the adoption of SAB 101 will have on its financial position or results of operations. However, based upon a preliminary review, the Company does not believe that the adoption of SAB 101 will have a material impact. ENVIRONMENTAL AND OTHER CONTINGENCIES The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency, state environmental agencies and private parties as potentially responsible parties ("PRPs") at a number of hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") or equivalent state laws and, as such, may be liable for the cost of cleanup and other remedial activities at these sites. Responsibility for cleanup and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. Under the federal Superfund statute, parties could be held jointly and severally liable, thus subjecting them to potential individual liability for the entire cost of cleanup at the site. Based on its estimate of allocation of liability among PRPs, the probability that other PRPs, many of whom are large, solvent, public companies, will fully pay the costs apportioned to them, currently available information concerning the scope of contamination, estimated remediation costs, estimated legal fees and other factors, the Company has recorded and accrued for indicated environmental liabilities in the aggregate amount of approximately $3.2 million at September 30, 2000. The ultimate cost will depend on a number of factors and the amount currently accrued represents management's best current estimate of the total cost to be incurred. The Company expects this amount to be substantially paid over the next one to four years. Katy also has a number of product liability and workers' compensation claims pending against it and its subsidiaries. Many of these claims are proceeding through the litigation process and the final outcome will not be known until a settlement is reached with the claimant or the case is adjudicated. It can take up to 10 years from the date of the injury to reach a final outcome for such claims. With respect to the product liability and workers' compensation claims, Katy has provided for its share of expected losses beyond the applicable insurance coverage, including those incurred but not reported, which are developed using actuarial techniques. Such accruals are developed using currently available claim information, and represent management's best estimates. The ultimate cost of any individual claim can vary based upon, among other factors, the nature of the injury, the duration of the disability period, the length of the claim period, the jurisdiction of the claim and the nature of the final outcome. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk associated with changes in interest rates relates primarily to its debt obligations and temporary cash investments. The Company currently does not use derivative financial instruments relating to either of these exposures. The Company's debt obligations are generally indexed from short-term LIBOR rates, and its temporary cash investments earn rates of interest available on securities with maturities of three months or less. Book value approximates fair value for both the debt obligations and temporary cash investments. The holder of the preferred interest has a put option which allows, at certain times beginning on January 8, 2001, or upon the occurrence of certain events, the preferred interest to be exchangeable for Katy common stock. OUTLOOK Net sales are expected to be relatively flat for the full year 2000 versus 1999, due mainly to the introduction of new products and core growth in the Maintenance Products Group offset by lower sales in the electrical segment and mop and broom businesses. Cost of goods sold are expected to continue to be negatively impacted in 2000 by higher costs for polyethylene, polypropylene, and other thermoplastic resins that are used in the Company's production processes, especially at Contico. Katy estimates the full-year (1999 to 2000) impact on earnings of increased resin prices to be approximately $12.0 million, pre-tax. The Company's mop and broom business, Wilen Products, has also under-performed significantly during 2000, which is expected to have a negative pre-tax impact on 2000 earnings compared to 1999 of $3.0 million. Selling, general and administrative costs as a percentage of sales in the aggregate are expected to improve from 1999 levels, excluding the impact of a $2.2 million third quarter charge for restructuring and a $0.8 million product recall. Interest expense is expected to increase in 2000 by approximately $2.5 million, due mainly to higher short-term interest rates. The above factors indicate that full year results from continuing segments for 2000 will not meet prior expectations and will fall well short of 1999's results. While many factors will impact the eventual results, an important component will certainly be the impact of plastic resin costs. Improved results for 2000 and beyond will depend on softening resin prices and/or the Company achieving price increases on resin-based and other products. Also, the Company expects increased efficiencies through its plans to reorganize plant assets, implement further workforce reductions, outsourcing of some manufacturing through partnering, and the consolidation of certain operating systems and financial functions. The results are expected to have a significant impact on Katy's effectiveness and ability to control costs going forward. Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 This report contains "forward-looking statements" within the meaning of the federal securities laws. The forward-looking statements include, among others, statements concerning the Company's outlook for 2000, cost reduction strategies and their results, the Company's expectations for funding its 2000 capital expenditures and operations and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ dramatically from those expressed in or implied by the statements. To improve its financial performance, the Company must reduce its cost structure and improve its production efficiency, improve its management of working capital, and grow its existing base of retail and distribution customers. The most important factors that could influence the achievement of these goals, and cause actual results to differ materially from those expressed in the forward-looking statements, include, but are not limited to the following: - Increases in the cost of plastic resins, copper, and other raw materials. - The Company's inability to reduce manufacturing costs. - The inability of the Company to achieve product price increases, especially as they relate to potentially higher raw material costs. - The potential impact of losing lines of business at large retail outlets in the discount and do-it-yourself markets. - Competition from foreign competitors. - The potential impact of new distribution channels, such as e-commerce, negatively impacting the Company and its existing channels. - The potential impact of rising interest rates on the Company's LIBOR-based credit facility. - The Company's inability to negotiate a new credit facility on favorable terms. - Labor issues, including union activities that require an increase in production costs or lead to a strike, thus impairing production and decreasing sales. - Changes in significant laws and government regulations affecting environmental compliance and income taxes. - The potential impact of the strategic alternatives now under consideration by the Company or any failure to reach agreement on a possible sale of the company or to consummate such a transaction if an agreement is reached. These and other risks and uncertainties affecting the Company are discussed in greater detail in this report and in the Company's other filings with the Securities and Exchange Commission. PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS During the quarter for which this report is filed, there have been no material developments in previously reported legal proceedings, and no other cases or legal proceedings, other than ordinary routine litigation incidental to the Company's business and other nonmaterial proceedings, have been brought against the Company. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Reports on Form 8-K None (b) Exhibits 4.1 First Amendment to Amended and Restated Credit Agreement dated as of November 18, 1999. 4.2 Second Amendment to Amended and Restated Credit Agreement dated as of March 22, 2000 4.3 Waiver and Third Amendment to Credit Agreement dated as of October 27, 2000. 27. Financial Data Schedule Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KATY INDUSTRIES, INC. Registrant DATE: November 11, 2000 By /s/ Stephen P. Nicholson Stephen P. Nicholson Vice President, Finance & Chief Financial Officer