Katy's Common Stock is traded on the New York
Stock Exchange ("NYSE"). The following table sets
forth high and low sales prices for the Common
Stock in composite transactions as reported on the
NYSE Composite Tape for the prior two years and
dividends declared during such periods.
Cash
Dividends
Period High Low Declared
1995
First Quarter............. $ 10 1/8 $ 8 3/8 $ .0625
Second Quarter............ 9 5/8 7 .0625
Third Quarter............. 9 5/8 7 3/4 .0625
Fourth Quarter............ 10 7/8 9 1/8 .0625
1994
First Quarter............. $ 26 7/8 $ 25 1/8 $ .0625
Second Quarter............ 25 7/8 24 1/2 14.0000
Third Quarter............. 25 3/8 9 5/8 .0625
Fourth Quarter............ 9 7/8 7 1/2 .0625
In the third quarter of 1994, Katy paid a special dividend of $14 cash
per share to each common stockholder of the Company.
As of February 29, 1996, there were 1,485 record holders of the Common
Stock. There are no restrictions on Katy's ability to pay dividends on
its Common Stock.
SELECTED FINANCIAL DATA
Years Ended December 31,
1995 1994 1993 1992 1991
(Thousands of Dollars, except per share data and ratios)
Net sales........................... $171,269 $159,581 $168,723 $177,077 $181,494
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle .............. 28,571 ( 8,843) 5,496 1,102 7,718
Earnings per common share 3.18 ( .98) .60 .12 .82
Net income (loss)*................. 28,571 ( 8,843) ( 1,540) 1,102 11,090
Cash flows from operating activities..... 7,620 8,418 ( 1,844) 22,390
Total assets........................ 225,412 203,142 330,225 314,661 319,974
Total liabilities and minority
interest.......................... 95,082 92,364 86,459 67,461 71,217
Shareholders' equity................ 130,330 110,778 243,766 247,200 248,757
Long-term debt...................... 9,346 10,572 4,289 5,942 8,458
Depreciation and amortization....... 5,949 6,049 5,716 5,709 8,747
Capital expenditures................ 9,163 4,105 4,278 5,504 10,210
Working capital..................... 96,425 50,041 175,075 135,965 136,633
Ratio of debt to total debt and equity.... 15.8% 15.9% 6.7% 6.4% 7.6%
Shareholders' equity 14.94 12.21 27.03 27.41 27.57
Return on average shareholders'
equity............................. 23.7% ( 5.3%) ( .6%) .4% 4.4%
Shares outstanding-Common stock.... 8,724,187 9,076,387 9,017,387 9,017,387 9,023,187
Number of shareholders.............. 1,410 1,471 1,560 1,741 1,914
Number of employees................. 1,109 1,285 1,506 1,972 2,078
Cash dividends declared per
common share..................... $.25 $14.1875 $.25 $.25 $.25
* Includes extraordinary gains of $3,372 in 1991, loss from
discontinued operations of $5,618 in 1993 and the cumulative
effect of change in accounting principle of $1,418 loss in
1993.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
For purposes of this discussion and analysis section,
reference is made to the table below and the Company's
Statements of Consolidated Operations. Katy consists of
three business segments: Distribution and Service, Industrial
and Consumer Manufacturing and Machinery Manufacturing. The
Distribution and Service Group is primarily involved in the
distribution of electronic components and nonpowered hand
tools. Additionally this group provides cold storage
services, waste-to-energy services and produces specialty
metal products for high-tech industries. The Industrial
and Consumer Manufacturing Group produces sanitary
maintenance supplies, abrasives and paints and stains for
the consumer, maintenance, automotive and industrial markets.
The Machinery Manufacturing Group manufactures machinery for
the food packaging, food processing and wood working
industries and also manufactures testing and measuring
instruments for the electrical and electronic markets and
recording devices for the transportation industry and gauging
and control systems for the metalworking industry. These
segments represent a change from those reported in the
past and reflect the new alignment of the Company's
product lines as a result of recent acquisitions and
dispositions. The acquisitions of GC Thorsen, a
distributor of electronic and electrical parts and
components and nonpowered hand tools, and Gemtex, a
manufacturer of coated abrasives and the dispositions of
Schon and other operating units during the year have made
the new segmentation more meaningful and in line with
future plans of the Company. Katy intends to seek
additional acquisitions to grow these business segments and
which complement existing operations. Years prior to 1995
have been reclassified to reflect the new segmentation.
The table below and the narrative which follows summarize
the key factors in the year-to-year changes in operating
results.
Years Ended December 31
Dollars in Thousands 1995 1994 1993
Distribution and Service Group
Net sales $70,596 $ 32,343 $ 26,035
Income from operations 6,076 3,766 2,454
Operating margin 8.6% 11.6% 9.4%
Identifiable assets 76,713 42,520 32,477
Depreciation and amortization 2,930 1,741 1,280
Capital expenditures 6,638 1,742 968
Industrial and Consumer Manufacturing Group
Net sales $49,021 $ 46,283 $ 44,370
Income from operations 3,814 4,237 2,702
Operating margin 7.8% 9.2% 6.1%
Identifiable assets 33,093 21,917 22,705
Depreciation and amortization 1,527 1,185 1,058
Capital expenditures 1,055 892 1,474
Machinery Manufacturing Group
Net sales $51,652 $ 80,955 $ 98,318
Income (loss) from operations 1,319 ( 2,396) ( 7,860)
Operating margin 2.6% ( 3.0%) ( 8.0%)
Identifiable assets 27,153 50,501 70,796
Depreciation and amortization 1,318 2,754 3,136
Capital expenditures 1,303 1,319 1,769
Corporate
Corporate expenses $ 6,670 $ 12,624 $ 15,956
Identifiable assets 88,453 88,204 204,247
Depreciation and amortization 174 369 242
Capital expenditures 167 152 67
Company
Net sales $171,269 $159,581 $168,723
Income (loss) from operations 4,539 ( 7,017) ( 18,660)
Operating margin 2.7% ( 4.4%) ( 11.1%)
Identifiable assets 225,412 203,142 330,225
Depreciation and amortization 5,949 6,049 5,716
Capital expenditures 9,163 4,105 4,278
1995 Compared to 1994
Distribution and Service Group sales increased $38,253,000 or 118%.
The acquisition of GC Thorsen effective March 31, 1995, provided the
majority of the increase. Sales of cold storage services increased due to
added plant capacity brought on line during 1995, waste to energy services
increased due to increased market penetration, specialty metals increased due
to new product lines, and electronics distribution increased due to increased
market penetration.
Operating income for the group increased $2,310,000 or 61%. The
inclusion of GC Thorsen was a major factor in the increase, along with
sharply improved margins for waste to energy services and cold storage
services. Specialty metals and electronics distribution also posted slightly
higher margins for the year, primarily due to higher volume.
Capital expenditures for the group increased due primarily to a plant
expansion at the cold storage facility and a major machinery addition at the
specialty metals manufacturer.
The Industrial and Consumer Manufacturing Group's sales for the year
increased 6% for the year or $2,738,000. The addition of sales from
Gemtex effective August, 1995, along with increased sales of stains, offset
decreases in the filters business, which was disposed of at year end.
Increased marketing and penetration into new sales territories were the
primary factors in the increase in stain sales.
Operating income for the group decreased $423,000 or 10%, primarily
due to lower margins on filter products. Income in all other product lines
was relatively comparable to the prior year. Pricing pressures from
competitors were the main reasons for the lack of income growth.
Sales for the Machinery Manufacturing Group decreased $29,303,000 or
36%. The dispositions of Panhandle, a remanufacturer of machinery for the
oil, gas and petrochemical industries, and the Schon Group resulted in most
of this sales decrease. A decrease in sales of food packaging machinery
was offset by increased sales of food processing machinery, wood
processing machinery and gauging and control systems. These sales
increases resulted from new products and increased market penetration.
Operating income for the group increased $3,716,000 from a loss last
year. Inventory write downs of $4,330,000 in 1994 which did not recur
in 1995 were the primary factor in the increase. The lower volume in food
packaging machinery caused a 52% decline in operating income for the
product line. Most other products showed modest increases in income.
Corporate expenses in 1995 decreased $5,954,000 due primarily to lower
environmental, insurance and legal costs.
Although the results of these operating groups are significantly affected
by the strength of the general economy, the Company believes that it has
positioned itself well in segments which can be expanded both externally
through acquisitions and internally through new products, operational
improvements and increased market penetration.
Following is a discussion concerning other factors which affected the
Company's net income.
Gross profit increased $9,257,000 as margins improved to 30% from
26% a year ago, while selling, general and administrative expenses decreased
$2,299,000 or 5% due in large part to lower corporate expenses.
Other, net in 1995 was $3,591,000 of income versus expense of
$1,265,000 in 1994. 1995 was favorably impacted by the gain realized
on the sale of WSC Liquidating and Katy's holdings of Syratech stock of
$793,000. In addition, in 1995, the Company received settlements from
various insurance companies in the amount of $2,846,000 in settlement of
claims associated with environmental issues. 1994 was impacted by
$2,500,000 of special charges for environmental costs, moving the corporate
headquarters and cessation of production at Walsh Press.
Interest expense increased $837,000 due to borrowings in connection
with the purchase of GC Thorsen, while interest income declined $2,427,000
due to the special dividend paid in 1994 which significantly reduced the
Company's interest bearing cash and cash equivalent balance.
During the year the Company sold 248,566 shares of Union Pacific
stock, resulting in a gain of $7,675,000. The Company also sold one-half
of its 75% interest in Schon & Cie, AG. In connection with the sale, the
Company recorded a gain of $4,920,000 reflecting the reversal of previously
recorded losses of Schon.
Income from continuing consolidated operations before income taxes and
minority interest amounted to $18,149,000 in 1995 versus a loss of
$16,048,000 in 1994. An $11,566,000 increase in income from operating
units was augmented by the gains described above. In addition, 1994 was
adversely impacted by $9,288,000 for the write-off of various assets.
Income taxes of $3,771,000, or an effective rate of 21%, reflect the
fact that the gains on the Schon sale were not tax effected, since the
losses had not previously provided a tax benefit. The tax benefit in 1994
was adversely impacted by the fact that losses from Schon provided no tax
benefit.
Equity in income of unconsolidated subsidiaries increased by $10,914,000
due to a gain recognized on the sale of Syroco, Inc. by Syratech, and the
tax benefit realized from the reversal of taxes previously provided on Katy's
share of Syratech's income, which is no longer required because of the sale
of WSC Liquidating and Katy's holdings of Syratech stock.
1994 Compared to 1993
Distribution and Service Group sales were up $6,308,000 or 24%.
Approximately one-half of this increase was due to the inclusion of C.E.G.F.
(USA) since its acquisition in March 1994. Electronic distribution sales
increased and sales of specialty metals increased, both due to new
products and increased market penetration.
Operating income for the group increased $1,312,000 or 53% due to
the inclusion of C.E.G.F. and improved margins in both electronic distribution
and specialty metals.
The Industrial and Consumer Manufacturing Group's sales increased
$1,913,000 or 4% primarily due to a sales increase in stains. This strong
sales performance was due to continued efforts to find new markets and
applications for this product line. A decrease in filters was offset by sales
increases in abrasive product lines.
Operating income for the group increased $1,535,000 or 57% in large
part as a result of 1993 being impacted by the operating loss and asset
write-downs of $2,300,000 following discontinuance of the IAQ-2000 product
line. Higher operating income and margins in stains were offset by lower
margins due to competitive pressures in the abrasives product lines.
Sales for the Machinery Manufacturing Group decreased $17,363,000 or
18%. Double digit sales increases in food packaging machinery, food
processing machinery, wood processing machinery and test and monitoring
equipment were more than offset by the divestitures of certain group
companies in 1994 and 1993. Included in 1993 were sales of $19,031,000
from the Company's pump manufacturing business which was sold in
November, 1993. Additionally, the Company's business that refitted machinery
for the oil, gas and petrochemical industries was sold effective October,
1994. Included in 1994 and 1993 are sales of $7,690,000 and $9,767,000,
respectively, for this business. Further contributing to the decline was a 9%
decrease in sales at Schon which, again in 1994, experienced a further
decline in sales of shoe-making machinery reflecting the continuing economic
uncertainty in Eastern Europe and Russia, its principal markets.
Operating losses for the group decreased $5,464,000 due to a number
of factors. The divestiture of the pump manufacturing companies, which had
reported an operating loss of $2,055,000 in 1993 was a significant factor.
Another factor favorably impacting the group's operating results was the
decrease in the operating losses of Schon, as margins improved on decreased
volume, the result of charges incurred in previous years to restructure and
streamline the operation. Additional severance charges of $1,000,000 were
incurred in 1994 which were offset by a partial recovery of trade
receivables, owed by customers in the former Soviet Union, which had been
written off in prior years, of approximately $1,710,000. The strong sales
performances and improved margins in other product lines contributed to the
decrease in losses for the group also.
Corporate expenses decreased $3,332,000 primarily due to lower
retirement plan expenses.
Following is a discussion concerning other factors which affected the
Company's net income.
Gross profit increased $7,512,000 as margins improved to 26% from
20% in 1993. As noted above, all three operating groups contributed to
the improvements. Selling, general and administrative expenses decreased
$4,131,000 or 8% due in part to the divestitures during 1993 and 1994,
and lower corporate expenses.
Other, net in 1994 was $1,265,000. This expense primarily represents
charges of $1,250,000 in the fourth quarter relating to additional provisions
for costs associated with environmental remediation at certain sites where the
Company previously conducted operations. Additionally in June, 1994,
charges of $650,000 were incurred relating to the cost of moving the
Company's corporate office to Englewood, Colorado, including severance
compensation for those employees not relocating, and $600,000 for the costs
associated with the cessation of production and rebuild activities at the
manufacturer of presses. These charges were offset by dividend income on
the Union Pacific common stock of $829,000.
Interest expense remained generally the same as in 1993, however,
interest income decreased by $1,782,000 due to the payment of the special
dividend in August, 1994, which significantly reduced the Company's interest
bearing cash and cash equivalents balances.
In 1994, management of Katy met with Katy's oil exploration joint
venture partners and, based on then current facts and circumstances, Katy
decided not to commit further funds to the oil exploration project, and not
to participate in any further activities on the site. Accordingly, in 1994,
the
Company wrote-off its investment ($6,580,000) in the oil exploration joint
venture.
Katy-Seghers, Inc., a wholly-owned subsidiary of the Company, has been
the vehicle used to commercialize and bid on new projects in the waste-to-
energy industry utilizing the Seghers technology. The Company currently
owns and operates a waste-to-energy facility utilizing this technology in
Savannah, Georgia. In 1994, the Supreme Court of the United States of
America ruled that the ash generated by such waste-to-energy facilities is
hazardous waste. This ruling has resulted in higher operating costs for
waste-to-energy facilities. Based on the developments within the waste-to-
energy industry in recent years and the ruling discussed above, management
concluded that further commercialization of the Seghers technology is unlikely,
that the value of the technology was significantly impaired and, accordingly,
wrote down its investment in this technology ($2,708,000) to zero in 1994.
The loss from continuing consolidated operations before income taxes and
minority interest in 1994 of $16,048,000 compares to income of $2,259,000
in 1993. The $11,643,000 decrease in loss from operations was offset
by the asset write-offs and reduction in interest income described above.
Additionally, 1993 income includes $14,668,000 in gains on the sale of stock
investments. Minority interest in 1994 relates to the 95% owned subsidiary
which operates cold storage facilities in the United States.
The income tax benefit of $3,923,000, or an effective rate of 24%,
reflects the fact that the Company did not benefit from approximately
$2,150,000 (tax effect) of losses from its German subsidiary. In 1993 the
effective income tax rate was similarly affected by not recognizing a tax
benefit from such losses.
Equity in income of unconsolidated subsidiaries increased by $415,000
to $3,295,000 as increased sales and earnings at Syratech Corporation and
Bee Gee Holding Company, Inc. more than offset the exclusion of nine
months of operations from C.E.G.F. (USA), which Katy now includes in its
consolidated operations due to its purchase of an additional 50% of the
outstanding common stock of C.E.G.F. (USA) in March, 1994. For additional
information on unconsolidated subsidiaries and the acquisition of additional
shares of C.E.G.F. (USA) see Notes 2 and 3 of Notes to Consolidated
Financial Statements.
New Accounting Pronouncements
Katy has not adopted Statement of Financial Accounting Standards No.
123 "Accounting for Stock Based Compensation" at this time. This
pronouncement is effective for years beginning after December 15, 1995, and
will be adopted by the Company for the year ending December 31, 1996.
Management does not believe that the adoption of this pronouncement will
have a significant effect on the results of operations or financial position of
the Company.
During 1995 the Company adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of". This pronouncement calls for the
recognition of a loss whenever the carrying value of assets is impaired.
Management continuously reviews the value of the Company's assets and
records necessary adjustments when an asset becomes impaired. The
adoption of this pronouncement had no material impact on the Company's
results of operations or financial position.
Financial Position and Cash Flow
Combined cash, cash equivalents and marketable securities
increased $28,123,000 to $60,354,000 on December 31, 1995,
from $32,231,000 on December 31, 1994. Current ratios were
2.81 to 1.00 and 2.00 to 1.00 at December 31, 1995 and
1994, respectively. Working capital increased $46,384,000
in 1995. The increase in working capital and in the
current ratio in 1995, primarily resulted from the sale
of Katy's wholly owned subsidiary, WSC Liquidating, Inc.,
and Katy's holdings of Syratech Corporation stock on
December 29, 1995, for net proceeds of $50,800,000.
Additionally, in 1995, Katy sold 248,566 shares of Union
Pacific common stock for proceeds of $15,550,000, resulting
in a pre-tax gain of $7,675,000. Katy retains certain
investments in marketable securities and will periodically
evaluate such investments.
In August, 1995, Katy's Board of Directors authorized
the Company to repurchase up to 400,000 shares of its
common stock over the subsequent twelve months in open
market transactions. On January 2, 1996, Katy's board
authorized the Company to repurchase an additional 500,000
shares, bringing the total authorization to 900,000 shares.
In connection therewith, Katy repurchased 352,200 of its
common shares in the year ended December 31, 1995, at
a total cost of $3,341,000. Additionally, during the
first quarter of 1996, the Company repurchased 316,200
shares, at a cost of $3,636,000, bringing the total
shares repurchased to 668,400.
Katy has authorized and expects to commit approximately
$7,000,000 for capital projects in 1996, exclusive of
acquisitions, if any, and expects to meet its capital
expenditure requirements through the use of available cash
and internally generated funds. Katy believes that it will generate
sufficient cash flow from operations to meet its operating requirements and
planned capital expenditures. The Company also continues to search for
appropriate acquisition candidates, and may obtain all or a portion of the
financing for future acquisitions through the incurrence of additional debt,
which the Company believes it can obtain at reasonable terms and pricing.
At December 31, 1995, Katy had short and long-term
indebtedness of $24,452,000. On January 2, 1996, the Company
received the remaining proceeds of the transaction with Syratech and fully
paid the short-term indebtedness outstanding at December 31, 1995 referred
to below. Total debt was 16% of total debt and equity at
December 31, 1995. Katy has a commitment for a secured
short-term line of credit with The Northern Trust Company
in the amount of $20,000,000 which it expects to use
principally for letters of credit.
Management continuously reviews each of its businesses.
As a result of these ongoing reviews, management may
determine to sell certain companies and may augment its
remaining businesses with acquisitions. When sales do
occur, management anticipates that funds from these sales
will be used for general corporate purposes or to fund
acquisitions. Acquisitions may also be funded through cash
balances, available lines of credit and future borrowings.
See Note 2 to the Consolidated Financial Statements for
a discussion of acquisitions and dispositions.
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 U.S. Environmental
Protection Agency and certain 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") and 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. The means of determining allocation
among PRPs is generally set forth in a written agreement
entered into by the PRPs at a particular site. An
allocation share assigned to a PRP is often based on the
PRP's volumetric contribution of waste to a site. Under
the federal Superfund statute, parties are held to be
jointly and severally liable, thus subjecting them to
potential individual liability for the entire cost of
cleanup at the site. The Company is also involved in
remedial response and voluntary environmental cleanup at a
number of other sites which are not currently the subject
of any legal proceedings under Superfund, including certain
of its current and formerly owned manufacturing facilities.
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
believes that it has an adequate accrual for all known
liabilities at December 31, 1995.
The United States had alleged violations of the Resource Conservation
and Recovery Act ("RCRA") based upon the alleged status of sludge drying
beds of W.J. Smith Wood Preserving Company, a Company subsidiary, as
a hazardous waste management unit. Since 1990, the Company has spent
in excess of $4,000,000 in undertaking cleanup and compliance activities in
connection with this matter and has established reserves for future
remediation activities. An Administrative Order on Consent was entered
effective December 29, 1995, with estimated additional remediation costs of
$1,200,000.
During 1995, the Company reached agreement with the
Oregon Department of Environmental Quality (ODEQ) as to a clean
up plan for PCB contamination at the Medford, Oregon
facility of the former Standard Transformer division of
American Gage. The plan calls for the Company to
provide a trust fund of $1,300,000 to fund clean up
costs at the site. The plan also calls for the present
occupants of the site, Balteau Standard, Inc., to provide
the next $450,000 of cost, with any additional costs to
be shared equally between the two parties. The Company
has requested that the ODEQ inspect the property and
approve the remediation work to release the Company from
any future liability.
In September of 1993, Katy received a letter from counsel to Allard
Industries, Inc. ("Allard") requesting that Katy and its subsidiaries,
American Gage and JEI Liquidating, Inc., indemnify Allard for any liability
incurred by it in connection with a case captioned Town of
Londonderry v. Exxon Corporation, et al., Case No. C-93-95-L (United States
District Court, District
of New Hampshire). Such request stems from certain agreements among
Katy, Allard and other parties. The case at issue concerns the disposal and
treatment of hazardous wastes and substances at a landfill site in
Londonderry, New Hampshire (the "Londonderry Site"), states claims under
CERCLA and state law, and seeks, inter alia recovery of response costs with
respect to the Londonderry Site, declaratory judgment with respect to the
defendants' liability for future response costs and unspecified monetary
damages. Katy has agreed to defend and indemnify Allard in this matter.
Katy and its counsel have not yet fully evaluated the underlying claims and
the liability of Katy and its subsidiaries with respect to this matter,
if any, cannot be determined at this time.
Although management believes that environmental actions individually, and
in the aggregate, are not likely to have a material adverse effect on Katy
over and above amounts previously accrued, further costs could be significant
and will be recorded as a charge to operations when such costs become
probable and reasonably estimable.
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.
MANAGEMENT REPORT
Katy Industries, Inc. management is responsible for the fair presentation and
consistency of all financial data included in this Annual Report in accordance
with generally accepted accounting principles. Where necessary, the data
reflect management's best estimates and judgements.
Management also is responsible for maintaining an internal control structure
with the objective of providing reasonable assurance that Katy's assets are
safeguarded against material loss from unauthorized use or disposition and
that authorized transactions are properly recorded to permit the preparation
of accurate financial data. Cost-benefit judgements are an important
consideration in this regard. The effectiveness of internal controls is
maintained by: (1) personnel selection and training; (2) division of
responsibilities; (3) establishment and communication of policies; and (4)
ongoing internal review programs and audits. Management believes that
Katy's system of internal controls is effective and adequate to accomplish the
above described objectives.
John R. Prann, Jr.
President, Chief Executive Officer and Chief Operating Officer
Stephen P. Nicholson
Treasurer, Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
KATY INDUSTRIES, INC.
Englewood, Colorado
We have audited the accompanying consolidated balance sheets of Katy
Industries, Inc. and subsidiaries (the "Company") as of December 31, 1995
and 1994, and the related statements of consolidated operations, shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Katy Industries, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Notes 5 and 8, respectively, to the consolidated financial
statements, in 1993, the Company changed its methods of accounting for
post retirement benefits other than pensions, and income taxes.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 29, 1996
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
As of December 31, 1995 1994
(Thousands of Dollars)
CURRENT ASSETS:
Cash and cash equivalents - Note 1 $ 43,701 $ 8,475
Marketable securities - available for sale - Note 1 16,653 23,756
Accounts receivable, trade, net of
allowance for doubtful accounts of
$886 and $3,183 22,399 20,423
Receivable from sale of business - Note 3 12,444 -
Notes and other receivables, net of
allowance for doubtful notes of $966 and $854 3,201 2,112
Inventories - Note 1 35,902 31,312
Deferred income taxes - Note 8 12,170 10,441
Other current assets 3,127 3,343
Total current assets 149,597 99,862
OTHER ASSETS:
Investments, at equity, in unconsolidated
subsidiaries - Note 3 7,328 45,310
Investment in waste-to-energy facility - Note 7 11,360 11,759
Notes receivable, net of allowance for
doubtful notes of $2,500 and $2,500 1,566 2,283
Cost in excess of net assets of
businesses acquired - Note 2 7,249 3,318
Miscellaneous - Notes 2, 5, 7 and 12 5,664 2,070
Total other assets 33,167 64,740
PROPERTIES - Note 1:
Land and improvements 4,308 4,868
Buildings and improvements 32,464 25,152
Machinery and equipment 38,723 56,743
75,495 86,763
Accumulated depreciation ( 32,847) ( 48,223)
Net properties 42,648 38,540
$225,412 $203,142
See Notes to Consolidated Financial Statements.
KATY INDUSTRIES, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES
As of December 31, 1995 1994
(Thousands of Dollars except shares)
CURRENT LIABILITIES:
Notes payable - Note 4 $ 14,193 $ 7,948
Accounts payable 8,361 6,807
Accrued compensation 3,792 6,180
Accrued expenses - Note 1 23,947 25,060
Accrued interest and taxes 1,342 773
Current maturities, long-term debt - Note 4 913 2,407
Dividends payable 624 646
Total current liabilities 53,172 49,821
LONG-TERM DEBT, less current maturities - Note 4 9,346 10,572
OTHER LIABILITIES - Note 5 7,738 10,183
DEFERRED INCOME TAXES - Note 8 24,598 21,576
MINORITY INTEREST 228 212
SHAREHOLDERS' EQUITY - Note 6:
Common stock, $1 par value; authorized
25,000,000 shares, issued - 9,821,329
shares 9,821 9,821
Additional paid-in capital 51,111 51,111
Foreign currency translation and other
adjustments ( 1,640) 2,676
Unrealized holding gains 5,297 4,426
Retained earnings 81,925 55,587
Treasury stock, at cost, 1,097,142 and
744,942 shares ( 16,184) ( 12,843)
Total shareholders' equity 130,330 110,778
$225,412 $203,142
See Notes to Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
For the years ended December 31, 1995 1994 1993
(Thousands of Dollars except per share amounts)
Net sales............................. $171,269 $159,581 $168,723
Cost of goods sold.................... 120,437 118,006 134,660
Gross profit 50,832 41,575 34,063
Selling, general and administrative expenses 46,293 48,592 52,723
Income (loss) from operations 4,539 ( 7,017) ( 18,660)
Other, net............................ 3,591 ( 1,265) 2,811
Interest expense...................... ( 2,753) ( 1,916) ( 1,780)
Interest income....................... 1,011 3,438 5,220
Gain on sales of stock - Notes 1 and 12 6,841 - 14,668
Reversal of previously recorded losses - Note 2 4,920 - -
Write-off of assets - Note 12......... - ( 9,288) -
Income (loss) from continuing consolidated
operations before income taxes, minority
interest and cumulative effect of change in
accounting principle............... 18,149 ( 16,048) 2,259
Provision (benefit) for income taxes - Note 8 3,771 ( 3,923) 1,939
Minority shareholders' share of income (loss) 16 13 ( 1,461)
Income (loss) from continuing
consolidated operations before cumulative
effect of change in accounting principle 14,362 ( 12,138) 1,781
Equity in income of unconsolidated
subsidiaries (net of tax) - Note 3
Income from continuing operations 1,920 1,364 1,136
Income from discontinued operations 678 1,931 1,744
Gain on sale of Syroco, Inc. 4,904 - -
Tax benefit from sale of investment
in Syratech - Note 3 6,707 - -
Total 14,209 3,295 2,880
Gain as a result of an initial public offering
by an unconsolidated subsidiary (net of tax)-
Note 3...................................... - - 835
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle................... 28,571 ( 8,843) 5,496
Loss from discontinued operations (net of tax)
Note 2...................................... - - ( 5,618)
Income (loss) before cumulative effect
of change in accounting principle......... 28,571 ( 8,843) ( 122)
Cumulative effect of change in
accounting principle (net of tax) - Note 5.. - - ( 1,418)
Net income (loss)........................... $ 28,571 ($ 8,843) ($ 1,540)
Earnings (loss) per share of common stock -
Note 1:
Income (loss) from continuing operations.....$ 3.18 ($ .98) $ .60
Discontinued operations...................... - - ( .62)
Cumulative effect of change in
accounting principle...................... - - ( .15)
Net income (loss)......................... $ 3.18 ($ .98) ($ .17)
Dividends paid per share-
Common Stock................................. $ .25 $ 14.1875 $ .25
See Notes to Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Foreign
Common Stock Additional Currency Unrealized
Number Par Paid-in and Other Holding Retained Treasury
of Shares Value Capital Adjustments Gains Earnings Stock
(Thousands of Dollars, Except Number of Shares)
Balance, January 1, 1993 9,821,329 $ 9,821 $ 51,723 $ 2,908 $ - $196,608 ($ 13,860)
Net loss - - - - - ( 1,540) -
Common stock dividends - - - - - ( 2,254) -
Foreign currency translation
adjustments - - - 972 - - -
Purchase of stock warrants
by an investee company - - ( 612) - - - -
Balance, December 31, 1993 9,821,329 9,821 51,111 3,880 - 192,814 ( 13,860)
Net loss - - - - - ( 8,843) -
Common stock dividends - - - - - ( 127,942) -
Foreign currency translation
adjustments - Note 6 - - - ( 822) - - -
Issuance of shares under the Stock
Purchase Plan - Note 6 - - - ( 382) - ( 442) 1,017
Unrealized holding gains
adjustment - Note 1 - - - - 4,426 - -
Balance, December 31, 1994 9,821,329 9,821 51,111 2,676 4,426 55,587 ( 12,843)
Net income - - - - - 28,571 -
Common stock dividends - - - - - ( 2,233) -
Foreign currency translation
and other adjustments - Note 6 - - - ( 4,316) - - -
Purchase of Treasury Shares - Note 6 - - - - - - ( 3,341)
Unrealized holding gains adjustment
- Note 1 - - - - 871 - ( 16,184)
Balance, December 31, 1995 9,821,329 $ 9,821 $ 51,111 ($ 1,640) $ 5,297 $ 81,925 ($ 16,184)
See Notes to Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the years ended December 31, 1995 1994 1993
(Thousands of Dollars)
Cash flows from operating activities:
Net income (loss)........................... $ 28,571 ( $ 8,843) ($ 1,540)
Depreciation and amortization............... 5,949 6,049 5,716
Gain on sale of assets...................... ( 150) ( 266) ( 16,382)
Disposition of portion of investment
in subsidiary............................ ( 7,920) - -
Write-off of assets......................... - 9,288 -
Gain on marketable security transactions ( 6,841) - -
Equity in income of unconsolidated
subsidiaries.............................. ( 14,209) ( 3,295) ( 3,715)
Deferred income taxes....................... ( 819) ( 2,182) 1,604
Change in accounting principle.............. - - 1,418
Loss from discontinued operations........... - - 5,618
Changes in assets and liabilities, net of
acquisition/disposition of subsidiaries:
Receivables............................... ( 13,919) 1,884 2,768
Inventories............................... 1,191 6,107 3,725
Other current assets...................... 10,819 451 222
Accounts payable and accrued liabilities.. 5,280 ( 1,930) ( 2,985)
Other, net................................ ( 332) 1,155 1,707
Net cash flows from operating activities 7,620 8,418 ( 1,844)
Cash flows from investing activities:
Proceeds from sale of assets................ 43,032 5,782 38,891
Collections of notes receivable............. 1,168 1,455 535
Time deposits and marketable securities
activity, net............................. 15,550 - 62,630
Payments for purchase of subsidiaries,
net of cash acquired...................... ( 30,416) ( 3,241) ( 417)
Capital expenditures........................ ( 9,163) ( 4,105) ( 4,278)
Other, net.................................. - - 617
Net cash flows from investing activities.. 20,171 ( 109) 97,978
Cash flows from financing activities:
Notes payable activity, net................. 12,529 ( 2,214) 2,009
Proceeds from issuance of long-term debt.... 2,852 4,830 165
Principal payments on long-term debt........ ( 2,403) ( 4,992) ( 1,428)
Payments of dividends....................... ( 2,233) ( 127,939) ( 2,254)
Purchase of treasury shares.................. ( 3,341) - -
Net cash flows from financing activities.. 7,404 ( 130,315) ( 1,508)
Effect of exchange rate changes on cash....... 31 192 862
Net increase (decrease) in cash and cash
equivalents................................ 35,226 ( 121,814) 95,488
Cash and cash equivalents at beginning of year 8,475 130,289 34,801
Cash and cash equivalents at end of year...... $ 43,701 $ 8,475 $ 130,289
See Notes to Consolidated Financial Statements.
Note 1. SIGNIFICANT ACCOUNTING POLICIES:
Consolidation Policy - The financial statements include, on a consolidated
basis, the accounts of Katy Industries, Inc. and subsidiaries (Katy) in which
it has a greater than 50% interest. All intercompany accounts, profits and
transactions have been eliminated in consolidation. The financial statements
of Schon & Cie, AG, and its subsidiaries, included in Katy's consolidated
financial statements are as of October 31, 1994 and for each of the two years
in the period ended October 31, 1994 and the six months ended April 30, 1995
(the effective date of Katy's disposition of Schon stock - see Note 2).
The financial statements of these subsidiaries are as of a different date
because of the time required to prepare and translate such financial
statements under United States generally accepted accounting principles.
As part of the continuous evaluation of its operations, Katy has acquired
and disposed of a number of its operating units in recent years. Those which
affected the consolidated financial statements for each of the three years
in the period ended December 31, 1995 are described in Note 2.
There are no restrictions on the payment of dividends by consolidated
subsidiaries to Katy. Katy's consolidated retained earnings as of December 31,
1995 include $5,708,000 of undistributed earnings of 50% or less owned
investments accounted for by the equity method. No dividends have been paid
by any of these unconsolidated subsidiaries to Katy.
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 could differ from those estimates.
Significant estimates used by management in the preparation of these
financial statements include the valuation of accounts receivable, the
carrying value of inventories, the useful lives and recoverability of
property, plant and equipment and cost in excess of net assets of businesses
acquired, potential product liability and workers compensation claims, and
environmental claims as discussed in Note 11.
Cash and Cash Equivalents - Cash equivalents consist of highly liquid
investments with original maturities of three months or less and total
$40,140,000 and $4,705,000, as of December 31, 1995 and 1994, respectively,
which approximates their fair value.
Supplemental Disclosure of Noncash Investing and Financing Activities -
Details regarding noncash investing and financing activities are disclosed in
Notes 1, 2, 3 and 6 to the Consolidated Financial Statements. Cash paid
during the year for interest and income taxes is as follows:
1995 1994 1993
Interest......................... $ 2,231 $ 2,021 $ 1,759
Income taxes........................ $ 2,646 $ 3,759 $ 5,719
Marketable Securities - available for sale - Marketable equity securities
are stated at their fair value based on quoted market prices. The cost basis
of these securities was $8,073,000 and $16,588,000 at December 31, 1995 and
1994, respectively. During 1995 and 1994, unrealized holding gains, net of
income taxes, included in shareholders' equity increased $871,000 and
$4,426,000 respectively.
Marketable securities available for sale decreased during 1995 when Katy
sold 248,566 shares of Union Pacific Corporation common stock for proceeds
of $15,550,000, resulting in a pre-tax gain of $7,675,000.
Notes and Other Receivables - The carrying value of notes and other
receivables approximates their fair value.
Inventories - Inventories are stated at the lower of cost, determined by
the first-in, first-out method, or market. The components of inventories
are:
December 31,
1995 1994
(Thousands of Dollars)
Raw materials....................... $ 14,471 $ 11,304
Work in process..................... 7,132 7,137
Finished goods...................... 14,299 12,871
$ 35,902 $ 31,312
Properties - Properties are stated at cost and depreciated over their
estimated useful lives - buildings (10-40 years) generally using the
straight-line method; machinery and equipment (3-20 years) and leased
machines (lease period) using straight-line, accelerated or composite
methods; and leasehold improvements using the straight-line method over the
remaining lease period. Management annually reviews the carrying value of
its long-lived assets for impairment and adjusts the carrying value and/or
amortization period of such assets whenever events or changes in
circumstances warrant.
Note 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Accrued Expenses - The components of accrued expenses are:
December 31,
1995 1994
(Thousands of Dollars)
Accrued insurance $ 8,541 $10,465
Accrued EPA costs 6,351 7,327
Other accrued expenses 9,055 7,268
$23,947 $25,060
Fair Value of Financial Instruments - Where the fair values of Katy's
financial instrument assets and liabilities differ from their carrying value
or Katy is unable to establish the fair value without incurring excessive
costs, appropriate disclosures have been given in the Notes to Consolidated
Financial Statements. All other financial instrument assets and liabilities
not specifically addressed are believed to be carried at their fair value in
the accompanying Consolidated Balance Sheets.
Earnings Per Share - Earnings per share are based on the weighted average
number of shares of common stock outstanding during the year (8,985,921 in
1995, 9,031,541 in 1994 and 9,017,387 in 1993).
New Accounting Pronouncements - Katy has not adopted Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation" at this
time. This pronouncement is effective for years beginning after December 15,
1995, and will be adopted by the Company for the year ending December 31,
1996. Management does not believe that the adoption of this pronouncement will
have a significant effect on the results of operations or financial position
of the Company. During 1995, the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". This pronouncement
calls for the recognition of a loss whenever the carrying value of assets is
impaired. Management continuously reviews the value of the Company's assets
and records necessary adjustments when an asset becomes impaired. The
adoption of this pronouncement had no material impact on the Company's
results of operations or financial position.
Reclassifications - Certain amounts from prior years have been
reclassified to conform with the 1995 financial statement presentation.
Note 2. ACQUISITIONS, DISPOSITIONS AND DISCONTINUED OPERATIONS
Acquisitions
On August 10, 1995, the Company purchased the assets of Gemtex Company
Limited and its United States affiliate, Gemtex Abrasives, Inc.("Gemtex").
Gemtex is a manufacturer and distributor of coated abrasives for the
automotive, industrial and retail markets. The purchase price approximated
net book value. The acquisition has been accounted for under the purchase
method. The accounts of Gemtex have been included in the Company's
Consolidated Financial Statements from the acquisition date. This
acquisition does not materially impact the Company's results of operations
or financial position.
Effective March 31, 1995, the Company purchased all of the outstanding
shares of common stock of GC Thorsen, Inc., ("GC Thorsen"), a value added
distributor of electronic and electrical parts and accessories, and nonpowered
hand tools. The purchase price, including acquisition costs, was $24,076,000
in cash, of which $19,500,000 was financed through the Company's bank line of
credit. The acquisition has been accounted for under the purchase method, and
accordingly, the excess of the purchase price over the fair value of the net
assets acquired of approximately $3,553,000, is being amortized over 20 years.
The accounts of GC Thorsen have been included in the Company's Consolidated
Financial Statements from the acquisition date.
In March, 1994, the Company purchased an additional 50% of the outstanding
common stock of C.E.G.F. (USA), an operator of cold storage facilities in the
United States, for $2,750,000 in cash, which purchase resulted in the Company
owning 95% of C.E.G.F. The excess of the purchase price over the net book
value of assets purchased has been allocated to properties and is being
depreciated over the remaining lives of the assets. The accounts of
C.E.G.F. have been included in the Company's Consolidated Financial
Statements from the acquisition date. This acquisition of this former equity
investee did not materially impact the Company's results of operations or
financial position.
As part of its 1991 purchase of substantially all of the net operating
assets of the paint and stain business of Sinecure Financial Corp.
(formerly Duckback Industries, Inc.), the Company was obligated to pay to
the seller additional purchase price amounts which were contingent upon the
attainment of certain earnings levels during the period from the date of
acquisition to September 30, 1994. The Company provided $1,496,000 and
$1,723,000 in 1994 and 1993, respectively, for such additional payments
and recorded these amounts as goodwill, included in "Cost in Excess of
Assets of Businesses Acquired" in the Consolidated Balance Sheets. The
accrual of these future cash payments is a noncash investing transaction.
During 1995 and 1994, the Company paid $1,787,000 and $1,015,000, respectively,
to Sinecure, to complete the Company's obligation under the earnout
provision of the purchase agreement. Goodwill relating to this acquisition
is being amortized over 10 years.
Dispositions
In December, 1995, the Company concluded the sale of its Moldan Filters
operation for net proceeds of $2,808,000 which included net cash of $1,350,000
and accounts and notes receivable of $1,458,000, resulting in a nominal gain.
The notes receivable portion of the consideration is a noncash investing
transaction. The effective date of sale was December 28, 1995, therefore, the
consolidated financial statements include results of operations through that
date. Sales of this unit were $4,592,000, $6,066,000 and $6,390,000 and
operating income (loss) was ($892,000), ($610,000) and $11,000 in 1995, 1994
and 1993, respectively.
On August 25, 1995, the Company sold the assets and business of the
Laboratory Equipment Division of its Bach Simpson Limited operation for net
proceeds of $900,000 in cash, resulting in a nominal loss. This operation was
not material to Katy and, accordingly, its sale does not significantly affect
Katy's consolidated financial position or results of operations.
On June 30, 1995, the Company concluded the irrevocable sale of one-half
of its 75% interest (90,000 shares) in Schon & Cie, AG (Schon). The sale was
made on the basis of a contingent price, whereby the Company will receive two
thirds of the amount ultimately realized by the purchasers in any future sale of
such shares or, under some circumstances, the Company will be entitled to find
a buyer for two-thirds of such shares and receive the proceeds of the sale
thereof. The Company continues to hold 90,000 shares, or a 37.5% interest in
Schon. With the reduction in its ownership interest and influence, the Company
began reporting its continuing investment in Schon using the equity method of
accounting for this minority owned subsidiary effective June 30, 1995. With
the
change to the equity method the Company will not record future losses of
Schon,
and will only record income when the Company's equity becomes positive. In
connection with the sale, in the second quarter of 1995, the Company recorded
a gain of $4,920,000 reflecting the reversal of previously recorded losses of
Schon and a deferred tax asset of $3,000,000. The Company's investment in
Schon is recorded at zero as of December 31, 1995.
On June 14, 1995, the Company sold its B.M. Root operation for net
proceeds of $700,000 in cash, resulting in a nominal gain. The consolidated
financial statements include results of operations through that date. Sales
of this unit were $1,416,000, $2,781,000 and $3,003,000 and operating income
was $103,000, $168,000 and $134,000 in 1995, 1994 and 1993, respectively.
Effective October 28, 1994, the Company concluded the sale of its
Panhandle
Industrial operation for net proceeds of $7,378,000, which included net
cash of
$4,878,000 and notes receivable of $2,500,000 resulting in a nominal gain.
The
notes receivable portion of the consideration is a noncash investing
transaction. Sales of this unit were $7,690,000 and $9,767,000 and
operating income was $814,000 and $243,000 in 1994 and 1993, respectively.
In June, 1994, the Company sold, for a nominal loss, its Bach Simpson,
U.K. operation. This operation was not material to Katy and, accordingly,
its sale does not significantly affect Katy's consolidated financial
position or results of operations.
In November, 1993, the Company sold its La Bour Pump operation for net
proceeds of $9,937,000, resulting in a nominal gain. Sales of this operation
were $19,031,000, and the operating loss was $2,055,000 in 1993.
Discontinued Operations
In 1993, the Company provided $5,618,000, net of income tax benefits of
$3,064,000, for additional environmental cleanup costs at plant sites of units
discontinued in prior years and to record the loss on disposal of assets of a
unit discontinued in a prior year.
Note 3. INVESTMENTS, AT EQUITY, IN UNCONSOLIDATED SUBSIDIARIES:
The Company's investments in unconsolidated subsidiaries are comprised
of the following:
1995 1994
(Thousands of Dollars)
Schon & Cie, AG $ - $ -
Bee Gee Holding Company, Inc. 7,328 6,985
Syratech Corporation - 38,325
$7,328 $45,310
Syratech Corporation ("Syratech")
On December 29, 1995, the Company sold its wholly owned subsidiary, WSC
Liquidating Co., whose sole asset consisted of 2,555,500 common shares of
Syratech to Syratech. The Company also sold to Syratech the remaining 509,251
shares of Syratech stock held directly by Katy. None of these shares had been
previously registered and could not have been sold without Katy bearing the
costs of registration. In addition, because of the nature of the shares, the
Company was restricted as to the number of shares which could be sold at any
one time. The net proceeds from both transactions was approximately
$50,800,000. The transactions reflected a per share price of $17, which
represented a discount of 15% to the closing price of Syratech's shares on
the New York Stock Exchange on the day of the transaction. The transactions
resulted in a total after-tax gain of $7,500,000 which is comprised of a gain
of $793,000 and the reversal of $6,707,000 of deferred income taxes
previously provided on Katy's share of Syratech's income, which has been
determined to not be required as a result of these transactions. In
connection with the sale, Katy recorded a receivable in the amount of
$12,444,000 from Syratech which was subsequently paid on January 2, 1996.
On March 28, 1995, Syratech sold its subsidiary, Syroco, Inc. for
$160,000,000 resulting in a gain of $30,451,000. Katy's share of the gain
($4,904,000, net of tax) is reflected in Katy's Consolidated Statement of
Operations as gain on sale of Syroco. Syroco's results from operations are
shown below in the results of operations of unconsolidated subsidiaries and
in Katy's Consolidated Statements of Operations as income from discontinued
operations in the "Equity in Income of Unconsolidated Subsidiaries" section.
In November, 1992, Syratech completed an initial public offering at $16.50 a
share, the effect of which diluted the Company's ownership percentage and
resulted in a credit in 1993 of $835,000, net of income taxes of $534,000, to
the Company's Statement of Consolidated Operations, for Katy's share of
Syratech's increased shareholder equity accounts.
Bee Gee Holding Company, Inc. ("Bee Gee")
The Company owns 30,000 shares of common stock, a 39% interest, of Bee
Gee, which consists of several subsidiaries engaged in the business of
harvesting shrimp off the coast of South America and processing shrimp and
other seafoods for domestic and foreign markets.
Schon & Cie, AG (Schon)
The Company owns 90,000 shares of common stock, a 37.5% interest, of
Schon, which consists of three operating companies engaged in the business of
manufacturing a wide range of mechanical and programmable four post, web and
flat bed die-cutting equipment and shoe manufacturing machinery. Schon's
assets and liabilities and sales and costs and expenses are included in the
following table subsequent to June 30, 1995, but there is no effect on the
Company's investment or equity in income of unconsolidated subsidiaries.
Goodwill
Goodwill related to the Bee Gee investment is being amortized over ten years.
Financial Information
The condensed financial information which follows reflects the Company's
proportionate share in the financial position and results of operations of its
unconsolidated subsidiaries:
1995 1994
(Thousands of Dollars)
Current assets $ 15,968 $ 40,474
Current liabilities ( 15,105) ( 16,196)
Working capital 863 24,278
Properties, net 9,112 27,590
Other assets 3,785 836
Long-term debt ( 3,998) ( 4,894)
Other liabilities ( 1,514) ( 3,086)
Shareholders' equity 8,248 44,724
Shareholders' equity of Schon ( 1,604) -
Unamortized excess of cost over
net assets acquired 684 586
Investments, at equity, in
unconsolidated subsidiaries $ 7,328 $ 45,310
1995 1994 1993
(Thousands of Dollars)
Sales $81,892 $ 65,376 $ 64,912
Costs and expenses ( 79,451) ( 62,505) ( 62,292)
Net income, from continuing operations 2,441 2,871 2,620
Unrecorded losses of Schon 1,336 - -
Amortization of excess of
cost over net assets acquired ( 384) ( 305) ( 774)
Provision for income taxes ( 1,473) ( 1,202) ( 710)
Equity in net income of continuing
unconsolidated subsidiaries 1,920 1,364 1,136
Discontinued operation:
Gain on sale of Syroco,
Inc. - net of tax 4,904 - -
Income from discontinued
operations - net of tax 678 1,931 1,744
Equity in net income of
unconsolidated subsidiaries $7,50 $ 3,295 $2,880
Note 4. INDEBTEDNESS:
Notes Payable
Notes payable at December 31, 1995 are comprised of short-term borrowings
under the Company's short-term line of credit and cash overdrafts. The maximum
short-term borrowings outstanding at any month-end were $27,140,000 in 1995 and
$14,488,000 in 1994. Interest rates on such short-term borrowings
averaged 8.5%
at December 31, 1995 and 8.3% at December 31, 1994. The average short-term
borrowings were $17,283,000 during 1995 and $11,135,000 in 1994. The weighted
average interest rates on short-term borrowings from banks averaged
approximately 8.9% and 11.7% during 1995 and 1994.
Credit Agreement
In August, 1994, the Company entered into a credit agreement with a bank
providing for a secured revolving credit facility not to exceed $20,000,000.
The credit agreement is secured by 250,000 shares of Union Pacific
Corporation common stock and other marketable securities and expires
March 31, 1997. Interest on the revolving
credit facility is, at the Company's option, either the bank's prime
interest rate, 8.5% at December 31, 1995, or 1% above the LIBOR interest
rate in effect at the time funds are borrowed.
The Company had $13,855,000 outstanding under this agreement at
December 31,
1995 which is included in Notes Payable on the Consolidated Balance Sheet.
This
facility is used for working capital and letters of credit. Letters of credit
totaling $2,663,000 are outstanding at December 31, 1995.
Long Term Debt
Long-term debt at December 31 includes:
1995 1994
(Thousands of Dollars)
Real estate and chattel mortgages, with interest
at various rates, due through 2008.......... $ 9,995 $ 8,657
Other notes payable........................... 264 4,322
10,259 12,979
Less current maturities................... ( 913) ( 2,407)
$ 9,346 $ 10,572
Aggregate maturities of long-term debt during the five years ending
December 31, 2000 are as follows:
(Thousands of Dollars)
1996............ $ 913
1997............ 766
1998............ 693
1999............ 651
2000............ 621
Later years 6,615
Total $10,259
Other
As of December 31, 1995, the Company is contingently liable for $8,000,000
of 8-1/8% Subordinated Industrial Development Bonds issued by Bee Gee.
The carrying amounts of the Company's long and short-term debt agreements
approximate their fair market values.
Note 5. RETIREMENT BENEFIT PLANS:
Pension Plans
Several domestic and foreign subsidiaries have pension plans covering
substantially all of their employees. These plans are noncontributory,
defined
benefit pension plans. The benefits to be paid under these plans are
generally
based on employees' retirement age and years of service. The companies'
funding
policies, subject to the minimum funding requirements of the applicable U.S.
or
foreign employee benefit and tax laws, are to contribute such amounts as are
determined on an actuarial basis to provide the plans with assets
sufficient to
meet the benefit obligations. Plan assets consist primarily of fixed income
investments, corporate equities and government securities. Schon's pension
plan, which is funded by a note receivable from Schon, is not included in the
following data subsequent to June 30, 1995, the date on which the Company
sold one-half of its 75% ownership interest.
Net pension expense includes the following components:
1995 1994 1993
(Thousands of Dollars)
Service cost $ 117 $ 161 $ 173
Interest cost 331 478 482
Actual return on plan assets ( 359) ( 336) ( 377)
Net amortization and deferral 178 92 103
Net pension expense $ 267 $ 395 $ 381
Major assumptions used to determine pension obligations:
Discount rates for obligations 7-8.5% 7-8.5% 6- 8.5%
Discount rates for expenses 7-8.5% 7-8.5% 6- 8.5%
Expected long-term
rates of return 7-8.5% 7-8.5% 6- 8.5%
Assumed rates of compensation
increases 5% 2-5% 2-5%
U.S. plans have been valued using a discount rate of 7%. Foreign plans
have been valued using discount rates ranging from 7.0 - 8.5% which
approximate
rates for obligations of similar duration in those countries to which the
plans
apply.
The funded status of all plans at December 31 follows:
1995 1994
Assets Accumulated Assets Accumulated
Exceed Benefit Exceed Benefit
Accumulated Obligations Accumulated Obligations
Benefit Exceed Benefit Exceed
Obligations Assets Obligations Assets
(Thousands of Dollars)
Vested benefits ($ 1,834) ($ 374) ($2,031) ($4,267)
Nonvested benefits ( 180) ( - ) ( 42) ( 117)
Accumulated benefit obligation ( 2,014) ( 374) ( 2,073) ( 4,384)
Effect of future compensation
increases ( - ) ( - ) ( 41) ( 192)
Projected benefit obligation ( 2,014) ( 374) ( 2,114) ( 4,576)
Plan assets at fair value 2,659 307 2,799 1,810
Projected benefit obligation
less than (in excess of)
plan assets 645 ( 67) 685 ( 2,766)
Unrecognized net loss (gain) 14 93 68 ( 437)
Unrecognized net transition
obligation (asset) ( 528) 89 ( 592) 1,390
Unrecognized prior service cost 89 - 103 -
Additional minimum liability - ( 182) - ( 784)
Prepaid (accrued) pension
cost $ 220 ($ 67) $ 264 ($2,597)
In addition to the plans described above, in 1993 the Company's Board of
Directors approved a retirement compensation program for certain officers and
employees of the Company and a retirement compensation arrangement for the
Company's then Chairman and Chief Executive Officer.The Board approved a total
of $3,500,000 to fund such plans. This amount represents the best estimate of
the obligation which vested immediately upon Board approval and is to be paid
for services rendered to date. This amount was included in selling, general
and administrative expenses in the accompanying 1993 Statement of Consolidated
Operations.
Postretirement Benefits Other than Pensions
The Company provides certain health care and life insurance benefits for
some of its retired employees. Effective January 1, 1993, Katy adopted SFAS
No. 106, "Employer's Accounting for Postretirement Benefits Other Than
Pensions," which requires Katy to accrue the estimated cost of retiree
benefit payments for health and life insurance benefits during the years the
employee provides services. Katy previously expensed the cost of these
benefits, which are principally for health care, as claims were incurred.
Katy elected to recognize the cumulative effect of this obligation on the
immediate recognition basis as of January 1, 1993, and the cumulative effect
was an increase in accrued postretirement benefit cost $2,343,000 and a
decrease in net income for the year ended December 31, 1993 of $1,418,000
($.15 per share), net of income tax benefits of $925,000. This charge has
been reported in the Statement of Consolidated Operations under caption
"Cumulative effect of change in accounting principle." The postretirement
benefit plans currently are not funded.
The accumulated postretirement benefit obligation at December 31, 1995 and
1994 is as follows:
1995 1994
(Thousands of Dollars)
Retirees $1,663 $2,163
Fully eligible active plan participants 213 199
Other active plan participants 303 264
Unrecognized net gain 644 928
Prior service cost ( 44) ( 48)
$2,779 $3,506
Net postretirement benefit costs for 1995, 1994 and 1993 include the
following:
1995 1994 1993
(Thousands of Dollars)
Service cost - benefits earned
during the year $ 20 $ 27 $ 103
Interest cost on accumulated
postretirement benefit obligation 162 183 233
Amortization of unrecognized gain ( 56) ( 44) -
Total cost $ 126 $ 166 $ 336
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1995 was 10% for 1995
decreasing linearly each successive year until it reaches 4.5% in 2001, after
which it remains constant. A one-percentage-point increase in the assumed
health care cost trend rate for each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995 and net
postretirement health care cost by approximately 11%. The assumed discount
rates used in determining the accumulated postretirement benefit obligation
at December 31, 1995 and 1994, were 7.0% and 7.25%, compounded annually,
respectively.
401(k) Plans
The Company offers its employees the opportunity to participate in one of
nine 401(k) plans administered by the Company or one of its subsidiaries.
Participation by employees in any of the 401(k) plans is voluntary. The
Company is not required to make contributions to these plans, however,
historically, the Company, at its discretion, has made annual contributions of
$227,000, $258,000 and $350,000 in 1995, 1994 and 1993, respectively, which,
on average, have approximated 20% in 1995 and 1994, and 10% in 1993 of the
employees' annual contributions.
Note 6. SHAREHOLDERS' EQUITY:
Share Repurchase
In August, 1995, Katy's Board of Directors authorized the Company to
repurchase up to 400,000 shares of its common stock over the subsequent twelve
months in open market transactions.On January 2, 1996, Katy's Board authorized
the Company to repurchase an additional 500,000 shares, bringing the total
authorization to 900,000 shares. In connection therewith, Katy repurchased
352,200 of its common shares in the period ended December 31, 1995, at a
total cost of $3,341,000. Additionally, during the first quarter of 1996, the
Company repurchased 316,200 shares, at a cost of $3,636,000, bringing the
total shares repurchased to 668,400.
Stockholder Rights Plan
In January, 1995, the Board of Directors adopted a Stockholder Rights
Plan and distributed one right for each outstanding share of the Company's
common stock. Each right entitles the shareholder to acquire one share of
the Company's common stock at an exercise price of $35, subject to adjustment.
The rights are not and will not become exercisable unless certain change of
control events occur. None of the rights are exercisable as of December 31,
1995.
Special Cash Dividend
On June 29, 1994, the Company's Board of Directors declared a special cash
dividend payable on August 19, 1994 to shareholders of record on July 22, 1994.
The dividend amounted to $126,243,000.
1994 Key Employee and Director Stock Purchase Plan
In 1994, the Board of Directors approved the Stock Purchase Plan for Key
Employees and Directors. Under the Plan, 75,000 shares of the Company's
common stock, held in the treasury, were reserved for issuance at a purchase
price equal to 65% of the market value of the shares as determined based upon
the offering period established by the Compensation Committee of the Company's
Board of Directors. As of December 31, 1995, 59,000 shares have been issued
at a purchase price of $6.47 per share. The issuance of these shares, in 1994,
for total notes receivable of $382,000 was a noncash financing transaction.
Proceeds from the sale of these shares consisted of notes receivable due on
demand but no later than sixty months from date of purchase with an interest
rate equal to the Federal Short-Term Funds Rate. The Company is holding the
shares as collateral for all notes receivable. Further, these shares cannot
be sold until twenty-four months from the date of purchase provided the notes
have been repaid. Notes receivable from plan participants are included in
the Consolidated Balance Sheets under the caption "Foreign currency
translation and other adjustments". The excess of the cost of the treasury
shares over the market value of the shares at the date of purchase
($442,000) was charged to retained earnings in 1994. The excess of the
market value of the shares over the purchase price, ($194,00) was
charged to compensation expense in 1994.
Stock Option Plans
During 1995 the Company established stock option plans providing for the
grant of options to purchase common shares to outside directors, executives
and certain key employees. The Compensation Committee of the Board of
Directors administers the plans and approves stock option grants. Stock
options granted under the plans are excercisable at a price equal to the
market value of the stock at the date of grant. The options, in the case of
non-employee directors are immediately exercisable, and in the case of
executives and key employees, become exercisable from one to five years
from the date of grant and generally expire 10 years from the date of grant.
The following table summarizes option activity under the plans:
Number Option Price
Of Options Per Share
Outstanding at December 31, 1994..... - -
Granted.......................... 197,000 $8.50-9.25
Outstanding at December 31, 1995..... 197,000 $8.50-9.25
Excercisable at December 31, 1995.... 17,000 $8.50
Available for grant at December 31, 1995 503,000 -
Foreign Currency Translation and Other Adjustments
The components of the foreign currency translation and other adjustments
section of shareholders' equity are as follows:
December 31, 1995 1994
(Thousands of Dollars)
Foreign currency translation adjustments ($ 1,290) $ 3,058
Notes receivable from key employees and
directors under the Stock Purchase Plan ( 350)( 382)
($ 1,640) $ 2,676
Note 7. WASTE-TO-ENERGY FACILITY:
A Katy limited partnership has a contract to operate a waste-to-energy
facility in Savannah, Georgia through the year 2007. This facility is owned
by a limited partnership, all the partners of which are the Company's
subsidiaries. The limited partnership is under contract with the Resource
Recovery Development Authority of the City of Savannah (the City) to receive
and dispose of the City of Savannah's solid waste through 2007. The
contract provides for minimum levels of the limited partnership's disposal
fee income to be used to retire the $50,700,000 of industrial revenue bonds
issued by an Authority of the City to finance construction of the plant.
Under certain circumstances, the Company is contingently liable to the
extent of its investment in the limited partnership.
In substance, the City desired a solid waste disposal and resource recovery
facility, issued bonds to finance construction of the facility, and
contracted the Company (inclusive of its subsidiaries and their partnership
interests) to construct, operate and maintain the facility. In return for its
services, it was intended that the Company would receive a reasonable profit
and the facility upon the termination of the various agreements. The
Company is obligated to perform under the various agreements. The Company
is therefore merely the operator of the facility and has not recorded the cost
of the facility or the obligations related to its construction in its
consolidated financial statements since a right of offset exists.
Under terms of the contract, the Company has made contributions to the
trust fund totaling $9,200,000. In consideration for these contributions,
the waste-to-energy facility will revert to the Company, subject to
collateral agreements under
the bond indentures, when the service agreement expires. The Company is not
required to make any additional payments to the trust fund. The Company's
subsidiary has made capital expenditures to improve the operating facility,
and these expenditures have been accounted for as deferred expenses and are
being amortized through 2007, the period during which the Company expects to
realize the economic benefits associated with such expenditures. At December
31, 1995 and 1994, expenditures of $2,160,000 and $2,559,000, net of
accumulated amortization of $5,539,000 and $5,078,000, respectively, and
the contributions to the trust fund are included in "Investment in
Waste-To-Energy Facility" in the Consolidated Balance Sheets.
Note 8. INCOME TAXES:
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes".The effect of this
adoption on 1993 operations was not material. Separate provisions for income
taxes are calculated for continuing operations, for all operations and for net
income. The provision (benefit) allocated to discontinued operations and
accounting changes represents the incremental effect on The Company's total
income tax provision of income (loss) as a result of each such item. Federal
current and deferred income tax provisions for 1995, 1994 and 1993 have been
reduced due to the recognition of net operating loss and tax credit
carryforwards.
The domestic and foreign components of income (loss) before income taxes,
exclusive of equity in income of unconsolidated subsidiaries, are:
1995 1994 1993
(Thousands of Dollars)
Domestic:
Continuing operations................. $17,237 ($ 10,115) $ 9,723
Discontinued operations............... - - ( 8,682)
Change in accounting principle........ - - ( 2,343)
Total domestic...................... 17,237 ( 10,115) ( 1,302)
Foreign:
Continuing operations................. 912 ( 5,946) ( 6,003)
Total worldwide..................... $18,149 ($ 16,061) ($ 7,305)
The components of the net provision (benefit) for income taxes are:
1995 1994 1993
Continuing operations: (Thousands of Dollars)
Current:
Federal............................. $ 3,413 $ 197 $ 1,980
State............................... ( 512) 428 1,020
Foreign............................. 25 450 ( 31)
Total............................. 2,926 1,075 2,969
Deferred:
Federal............................. 980 ( 2,948) 1,770
State............................... ( 1,915) 1,100 ( 197)
Foreign............................. 116 ( 334) 31
Total............................. ( 819) ( 2,182) 1,604
Total continuing operations.... 2,107 ( 1,107) 4,573
Discontinued operations:
Federal............................. - - ( 2,842)
State............................... - - ( 222)
Total............................. - - ( 3,064)
Change in accounting principle............ - - ( 925)
Net provision (benefit) for
income taxes $ 2,107 ($ 1,107) $ 584
The total income tax provision differed from the amount computed by
applying the statutory federal income tax rate to pretax income from
continuing
operations. The computed amount and the differences for the years ended
December 31, 1995, 1994 and 1993 were as follows:
1995 1994 1993
(Thousands of Dollars)
Provision (benefit) for income taxes
at statutory rate...................... $ 6,352 ($ 5,621) $ 1,265
State income taxes, net of federal
benefit................................ 1,080 993 630
Foreign tax rate differential............ ( 14) 549 178
Foreign losses for which no tax benefit is
available............................... - 2,311 3,181
Tax Benefit from Schon Sale - Note 2..... ( 3,000) - -
Alternative minimum tax.................. - - 1,289
Benefit of net operating loss carryforwards ( 49) ( 336) ( 4,091)
Benefit of tax credit carryforwards...... - ( 2,450) ( 764)
Other, net............................... ( 598) 631 251
Provision (benefit) for income taxes from
consolidated operations.............. $ 3,771 ($ 3,923) $ 1,939
Undistributed earnings of equity investees ( 1,664) 2,816 2,634
Net provision (benefit) for income taxes $ 2,107 ($ 1,107) $ 4,573
The tax effects of significant items comprising the Company's net deferred tax
liability as of December 31, 1995 and 1994 are as follows:
1995 1994
Deferred tax liabilities: (Thousands of Dollars)
Difference between book and tax
basis of property $ 1,954 $ 1,490
Waste-to-energy facility 17,303 17,450
Undistributed earnings of equity
investees 7,695 13,784
Unrealized holding gain - marketable
securities - available for sale 3,282 2,742
30,234 35,466
Deferred tax assets:
Allowance for doubtful receivables 1,673 1,604
Inventory costs 1,871 3,507
Accrued expenses and other items 10,131 11,529
Operating loss carryforwards - domestic 3,234 4,126
Operating loss carryforwards - foreign - 12,717
Tax credit carryforwards 2,390 7,978
19,299 41,461
Less valuation allowance (1,493) ( 17,130)
17,806 24,331
Net deferred tax liability $12,428 $ 11,135
The valuation allowance primarily relates to domestic net operating loss
carryforwards (foreign in 1994) and foreign tax credit carryforwards that may
not be realized due to uncertainties as to certain subsidiaries realization of
future income and to past losses from foreign operations. The valuation
allowance decreased $15,637,000 during the year ended December 31, 1995,
primarily due to the partial disposition of the Company's interest in Schon.
The domestic net operating loss carryforwards primarily relate to the waste
to energy facility and the business that operates cold storage facilities
and can only be used to offset income from those
operations. Domestic net operating loss carryforwards have expiration dates
ranging from 1996 to 2007.
At December 31, 1995, foreign tax credit carryforwards of $622,000 (with an
expiration date in 1998) and alternative minimum tax carryforwards of $1,768,000
(with no expiration date), are available.
Note 9. LEASE OBLIGATIONS:
The Company has entered into noncancelable leases for manufacturing and data
processing equipment and real property with lease terms of up to 5 years. The
Company is generally obligated for the cost of property taxes, insurance and
maintenance. Future minimum lease payments as of December 31, 1995 are as
follows:
(Thousands of Dollars)
1996......................................... $ 883
1997......................................... 811
1998......................................... 568
1999......................................... 406
2000......................................... 6
Later years.................................. 3
Total minimum payments..................... $2,677
Rental expense for 1995, 1994 and 1993 for operating leases was
$1,458,000, $1,567,000 and $2,005,000, respectively.
Note 10. INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION:
The Company is a manufacturer and distributor of a variety of industrial and
consumer products, including sanitary maintenance supplies, coated abrasives,
paints, stains, electronic components, nonpowered hand tools, specialty metal
products, testing and measuring instruments, recording devices for the
transportation industry, machinery for the food processing and packaging and
woodworking industries, and
also operates cold storage facilities and a waste-to-energy facility.
Principal markets are in the United States and Canada, and include the
sanitary maintenance, restaurant supply, retail, food processing, millwork,
transportation, electronic, automotive, and computer markets.The diversity of
the Company's products and markets insure that there is not a material impact
on the Company in total from one product or one marketplace. These activities
are grouped into three industry segments: Distribution and Service, Industrial
and Consumer Manufacturing and Machinery Manufacturing.There were no material
sales to any single customer, and the Company is not reliant upon any one
significant vendor or material.
Segment information for the years ended December 31, 1995, 1994 and 1993
is presented under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 8.
Export sales of products, primarily to Central and South America, Western
Europe, the Middle East and the Far East, were $18,870,000, $15,062,000, and
$15,494,000 in 1995, 1994 and 1993, respectively.
The Company operates businesses both in the United States and foreign
countries. The operations for 1995, 1994 and 1993 of businesses within major
geographic areas are summarized as follows:
United Western
States Europe Other Consolidated
(Thousands of Dollars)
1995
Sales to unaffiliated
customers................. $149,967 $11,072 $ 10,230 $171,269
Operating income (loss)..... $ 13,921 ($ 2,913) $ 201 $ 11,209
Identifiable assets......... $121,481 $ - $ 15,478 $136,959
1994
Sales to unaffiliated
customers................. $128,739 $ 23,453 $ 7,389 $159,581
Operating income (loss)..... $ 8,511 ($ 2,505) ($ 399) $ 5,607
Identifiable assets......... $ 92,625 $ 18,168 $ 4,145 $114,938
1993
Sales to unaffiliated
customers................. $127,157 $ 34,062 $ 7,504 $168,723
Operating income (loss)..... $ 2,557 ($ 5,067) ($ 194) ($ 2,704)
Identifiable assets......... $ 96,078 $ 24,557 $ 5,343 $125,978
Net sales for each geographic area include sales of products produced in
that area and sold to unaffiliated customers, as reported in the Statements of
Consolidated Operations.
Note 11. CONTINGENT LIABILITIES
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
U.S. Environmental Protection Agency and certain 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") and 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. The means of determining
allocation among PRPs is generally set forth in a written agreement entered
into by the PRPs at a particular site. An allocation share assigned to a PRP
is often based on the PRP's volumetric contribution of waste to a site.
Under the federal Superfund statute, parties are held to be jointly and
severally liable, thus subjecting them to
potential individual liability for the entire cost of cleanup at the site.
The Company is also involved in remedial response and voluntary environmental
cleanup at a number of other sites which are not currently the subject of any
legal proceedings under Superfund, including certain of its current and
formerly owned manufacturing
facilities. 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 $6,350,000 at December 31, 1995. 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.
The most significant environmental matters in which the Company is currently
involved are as follows:
1. The United States had alleged violations of the Resource Conservation
and Recovery Act ("RCRA") based upon the alleged status of sludge
drying beds of W.J. Smith Wood Preserving Company, a Company
subsidiary ("W.J. Smith"), as a hazardous waste management unit.
Since 1990, the Company has spent in excess of $4,000,000 in
undertaking cleanup and compliance activities in connection with
this matter and has established
reserves for future remediation activities. An Administrative Order on
Consent was entered effective December 29, 1995, with estimated
additional remediation costs of $1,200,000.
2. During 1995 the Company reached agreement with the Oregon Department
of Environmental Quality ("ODEQ") as to a clean up plan for PCB
contamination at the Medford, Oregon facility of the former Standard
Transformer division of American Gage. The plan called for the Company
to provide a trust fund of $1,300,000 to fund clean up costs at the
site. These funds were expended in 1995. The plan also called for
the present occupants of the site, Balteau Standard, Inc. to provide
the next $450,000 of cost, with any additional costs to be shared
equally between the two parties. The Company believes the clean up
plan has been successful and has
requested that the ODEQ inspect the property and approve the
remediation work to release the Company from any future liability.
3. In September of 1993, Katy received a letter from counsel to Allard
Industries, Inc. ("Allard") requesting that Katy and its subsidiaries,
American Gage and JEI Liquidating, Inc., indemnify Allard for any
liability incurred by it in connection with a case captioned
Town of Londonderry v. Exxon Corporation,
et al., Case No. C-93-95-L (United States District Court, District
of New Hampshire). Such request stems from certain agreements among
Katy, Allard and other parties. The case at issue concerns the
disposal and treatment of hazardous wastes and substances at a
landfill site in Londonderry, New Hampshire (the "Londonderry Site"),
states claims under CERCLA and state law, and seeks, inter alia
recovery of response costs with respect to the Londonderry Site,
declaratory judgment with respect to the
defendants' liability for future response costs and unspecified
monetary damages. Katy has agreed to defend and indemnify Allard
in this matter. Katy and its counsel have not yet fully evaluated the
underlying claims and the liability of Katy and its subsidiaries
with respect to this matter, if any, cannot be determined at this
time.
Although management believes that these actions individually and in the
aggregate are not likely to have a material adverse effect on the Company,
further costs could be significant and will be recorded as a charge to
operations when such costs become probable and reasonably estimable.
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.
Note 12. UNUSUAL ITEMS:
During 1995, 1994 and 1993, various charges, as follows, were recorded in
the Company's Statements of Consolidated Operations:
1995
During the second quarter of 1995, the Company sold one-half of its 75%
interest in Schon & Cie, AG. With the reduction in its ownership interest,
the
Company began reporting its continuing investment in Schon using the equity
method of accounting. In connection with the sale, the Company recorded a
gain
of $4,920,000 reflecting the reversal of previously recorded losses of
Schon and
a deferred tax asset of $3,000,000.
During the third quarter of 1995, the Company sold a portion of its holdings
of Union Pacific Corporation common stock for proceeds of $15,550,000,
resulting
in a gain of $7,675,000.
During 1995, the Company received settlements from various insurance
companies in the amount of $2,846,000 in settlement of claims associated with
environmental issues.
In the fourth quarter of 1995, the Company sold its wholly owned subsidiary,
WSC Liquidating Co., whose sole asset consisted of common shares of Syratech
Corporation. Katy also sold additional shares which were held directly by
Katy. The net proceeds from these transactions was approximately $50,800,000
and resulted in an after tax gain of $7,500,000, comprised of a gain of
$793,000
and the reversal of $6,707,000 of deferred taxes previously provided on Katy's
share of Syratech's income, which has been determined to not be required as a
result of these transactions.
1994
The Company has a 15% interest in a joint venture which holds exclusive
exploratory and production rights in a specified on-shore area of Indonesia
under a production sharing contract with Pertamina, the Indonesian government
oil and gas enterprise. A 60% interest is held by a major American oil
company,
and 25% is held by a Japanese concern. In April, 1994, management of the
Company
met with the Company's oil exploration joint venture partners and, based on
current facts and circumstances, the Company and its partners decided not to
commit further funds to the oil exploration project, and the Company will not
participate in any further activities on the site. Accordingly, the Company
wrote off its ($6,580,000) investment in the oil exploration joint venture
in March, 1994.
During the second quarter of 1994, the Supreme Court of the United States
of America ruled that the ash generated by waste-to-energy facilities, like
the
Company's subsidiary in Savannah, Georgia, is hazardous waste. This ruling
has
resulted in higher operating costs for waste-to-energy facilities. Based
upon this ruling and developments within the waste-to-energy industry in
recent
years, management concluded that further commercialization of the Seghers
technology, which it owns, is unlikely and that the value of the technology
was significantly impaired. Accordingly, the Company wrote down its
investment ($2,708,000) in this technology to zero.
During the second quarter of 1994, management decided that for consolidated
financial reporting purposes, a consistent methodology for estimating
inventory
valuation reserves should be applied for all subsidiaries, regardless of
their unique business or foreign financial reporting requirements. As a
result consolidated inventory valuation reserves increased for excess and
potentially unsaleable inventories due to price erosion, low sales in recent
years and current low sales order backlogs for certain industrial companies,
primarily foreign operations. An aggregate charge to cost of goods sold of
$5,072,000 was recorded for these items.
During the second quarter of 1994, management decided to cease production
and rebuild of presses at its Walsh Press operation, resulting in a $600,000
charge and also incurred a charge of $650,000 for moving its corporate office to
Englewood, Colorado, including severance compensation for those employees not
relocating. Such charges were included in "Other, net" in the Consolidated
Statements of Operations.
In the fourth quarter of 1994, the Company incurred charges of $1,250,000
relating to additional provisions for costs associated with environmental
remediation at certain sites where the Company used to conduct operations.
This charge is included in other expense rather than discontinued operations,
as the sale or shutdown of those operations in prior years was not classified
as discontinued. Additionally, a charge of $900,000 was included in cost of
sales to reflect adjustments to casualty insurance and product warranty claim
liabilities to reflect information received in the fourth quarter related to
certain claims.
The Company's German subsidiary, Schon & Cie, AG, recorded a charge, during
1994, of $1,000,000 for further severance costs, which was offset by a
partial
recovery of trade receivables, owed by customers in the former Soviet Union,
which had been written off in prior years, of approximately $1,710,000.
1993
A pre-tax charge of $4,000,000 was included in cost of sales to reflect
adjustments to casualty insurance and product warranty claim liabilities to
reflect information received in the fourth quarter related to certain claims
and the bankruptcy of the Company's excess insurance carrier.
A pre-tax charge of $3,500,000 was included in selling, general and
administrative expenses for retirement compensation programs for certain
officers and employees of the Company.
A pre-tax charge of $2,300,000 was included in cost of sales related to the
IAQ-2000 product line of the Company's Moldan unit. This charge reflects the
decision to remove this product from the market and represents IAQ-2000's
operating loss for the year as well as the write-down of the net assets of
this product line in the fourth quarter.
The Company incurred legal and other related costs of approximately
$1,300,000, included in selling, general and administrative expenses, in
1993 associated with proposed merger agreements and a shareholder action
lawsuit. The mergers did not occur and the lawsuit's application for a
mandatory preliminary injunction was denied.
In January, 1993, the Company sold its 8% interest, (78,145 shares of
common stock) in Compagnie des Entrepots et Gares Frigorifigues, a French cold
storage company, for cash proceeds of $10,953,000 resulting in a pre-tax gain
of
$6,081,000.
In the first quarter of 1993, the Company exchanged $24,526,000 of notes
receivable from the Missouri Pacific Railroad Company into 774,166 shares of
Union Pacific Corporation (UP) common stock at an exchange rate of $31.68 per
share. In the third quarter of 1993 the Company sold 300,000 shares of UP
stock for proceeds of $18,001,000, resulting in a pre-tax gain of $8,497,000.
Note 13 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Quarterly results of operations have been affected by unusual or
infrequently occurring items as discussed in Notes 3 and 12.
1995 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
(Thousands of Dollars, except per share amounts)
Net sales................ $ 38,358 $ 49,609 $ 42,336 $ 40,966
Gross profit............. $ 10,984 $ 14,391 $ 13,789 $ 11,668
Net income (loss)........ ($ 737) $ 8,355 $ 10,689 $ 10,264
Earnings (loss) per share ($ .08) $ .92 $ 1.18 $ 1.16
1994 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
(Thousands of Dollars, except per share amounts)
Net sales................ $ 38,423 $ 42,641 $ 40,561 $ 37,956
Gross profit............. $ 10,492 $ 5,456 $ 13,298 $ 12,328
Net income (loss)........ ($ 3,188) ($ 7,847) $ 2,033 $ 159
Earnings (loss) per share ($ .35) ($ .87) $ 22 $ .02
During the fourth quarter of 1995, the Company sold its subsidiary, WSC
Liquidating Co., and its holdings of Syratech Corporation common shares,
resulting in an after tax gain of $7,500,000 (Note 3).
During the fourth quarter of 1994, the Company provided approximately
$1,300,000
(net of tax) of additional reserves for casualty insurance, product warranty
claim costs and environmental remediation matters and $1,000,000 for further
severance costs at its German subsidiary (Note 12).