United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13
or 15(d) of the Securities Exchange Act of 1934
For Quarter Ended: March 31, 1998 Commission File Number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (I.R.S. Employer Identification No.)
6300 S. Syracuse Way, Suite 300, Englewood, Colorado 80111
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (303)290-9300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Outstanding at May 13, 1998
Common stock, $1 par value 8,280,356
KATY INDUSTRIES, INC.
FORM 10-Q
March 31, 1998
INDEX
-----
Page
PART I FINANCIAL INFORMATION ----
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 2,3
Statements of Condensed Consolidated Income
Three Months Ended March 31, 1998 and 1997 4
Statements of Condensed Consolidated Cash Flows
Three Months Ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Information 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 13
Item 6 Exhibits and Reports on Form 8-K 13
Signatures 13
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(Unaudited)
ASSETS
March 31, December 31,
1998 1997
---- ----
(Thousands of dollars)
CURRENT ASSETS:
Cash and cash equivalents $ 25,156 $ 22,327
Accounts receivable, trade, net of allowance
for doubtful accounts 43,140 47,914
Notes and other receivables, net of allowance
for doubtful notes 1,779 2,263
Inventories 51,988 53,369
Deferred income taxes 13,233 13,233
Other current assets 2,203 3,167
Net current assets of discontinued operations 9,979 10,588
Net current assets of other operations
to be disposed of 5,997 6,692
------- -------
Total current assets 153,475 159,553
------- -------
OTHER ASSETS:
Notes receivable, net of allowance for
doubtful notes 982 1,106
Cost in excess of net assets of
businesses acquired 8,262 8,544
Miscellaneous 9,940 9,993
Net noncurrent assets of discontinued operations 4,511 4,964
Net noncurrent assets of other operations
to be disposed of 30,946 30,854
------- -------
Total other assets 54,641 55,461
------- -------
PROPERTIES:
Land and improvements 894 894
Buildings and improvements 13,344 12,433
Machinery and equipment 22,634 22,073
------- -------
Accumulated depreciation (15,570) (14,841)
------- -------
Net properties 21,302 20,559
------- -------
$229,418 $235,573
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(Unaudited)
LIABILITIES
March 31, December 31,
1998 1997
---- ----
(Thousands of dollars)
CURRENT LIABILITIES:
Accounts payable $ 20,936 $ 24,354
Accrued compensation 2,959 2,289
Accrued expenses 26,724 28,801
Accrued interest and taxes 1,307 236
Dividends payable 621 621
------- -------
Total current liabilities 52,547 56,301
------- -------
OTHER LIABILITIES 7,706 10,666
------- -------
EXCESS OF ACQUIRED NET
ASSETS OVER COST, Net 6,476 6,902
------- -------
DEFERRED INCOME TAXES 22,398 22,533
------- -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; authorized
25,000,000 shares; issued 9,822,204 shares 9,822 9,822
Additional paid-in capital 51,127 51,127
Foreign currency translation and other
adjustments (2,407) (2,276)
Retained earnings 103,447 102,194
Treasury stock, at cost, 1,542,035
and 1,542,197 shares (21,698) (21,696)
------- -------
Total shareholders' equity 140,291 139,171
------- -------
$229,418 $235,573
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
Three Months
Ended March 31,
1998 1997
---- ----
(Thousands of Dollars Except
Per Share Data)
Net sales $ 65,193 $ 62,333
Cost of goods sold 46,973 43,612
------- -------
Gross profit 18,220 18,721
Selling, general and administrative 16,121 15,765
------- -------
Income from continuing operations 2,099 2,956
Income (loss) from other operations
to be disposed of 397 (251)
Interest and other, net 386 400
------- -------
Income from continuing operations
before provision for income taxes 2,882 3,105
Provision for income taxes (1,009) (1,118)
------- -------
Income from continuing operations 1,873 1,987
Income from operations of discontinued
businesses (net of tax) 0 503
------- -------
Net income $ 1,873 $ 2,490
======= =======
Earnings per share - Basic
Income from continuing operations $ 0.23 $ 0.24
Discontinued Operations $ 0.00 $ 0.06
------- -------
Net Income $ 0.23 $ 0.30
======= =======
Earnings per share - Diluted
Income from continuing operations $ 0.22 $ 0.24
Discontinued Operations $ 0.00 $ 0.06
------- -------
Net Income $ 0.22 $ 0.30
======= =======
Average shares outstanding
Basic 8,280 8,280
======= =======
Diluted 8,454 8,380
======= =======
Dividends paid per share - common stock $ .0750 $ .0750
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
Three Months
Ended March 31,
1998 1997
---- ----
(Thousands of dollars)
Cash flows from operating activities:
Net income $ 1,873 $ 2,490
Depreciation and amortization 1,591 472
Adjustments to reconcile net income to net cash
flows provided by (used in) operating activities
(mainly changes in working capital): 1,597 (3,642)
------ ------
Net cash flows provided by (used in)
operating activities 5,061 (680)
------ ------
Cash flows from investing activities:
Proceeds from sale of assets 10 56
Collections of notes receivable 128 67
Capital expenditures (2,183) (1,610)
------ ------
Net cash flows used in investing activities (2,045) (1,487)
------ ------
Cash flows from financing activities:
Principal payments on long-term debt (227) (204)
Payment of dividends (621) (619)
Purchase of treasury shares (4) (460)
Other 2 18
------ ------
Net cash flows used in financing activities (850) (1,265)
------ ------
Net increase (decrease) in cash and cash equivalents 2,166 (3,342)
Cash and cash equivalents, beginning of period 24,300 27,321
------ ------
Cash and cash equivalents, end of period 26,466 23,889
Cash of discontinued operations and other
Operations to be disposed of 1,310 1,440
------ ------
Cash and cash equivalents of continuing operations $25,156 $22,449
====== ======
Noncash investing and financing activities: During the first quarter ended
March 31, 1998, the Company incurred additional debt of $2,302,000 relating
to capital equipment.
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 1998
(1) Significant Accounting Policies
-------------------------------
Consolidation Policy
- --------------------
The condensed financial statements include, on a consolidated basis, the
accounts of Katy Industries, Inc. and subsidiaries (the "Company") in which
it has a greater than 50% voting interest. Investments in affiliates which are
not majority owned are reported using the equity method. The condensed
consolidated financial statements at March 31, 1998 and December 31, 1997 and
for the three month periods ended March 31, 1998 and March 31, 1997 are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of financial condition and results of operations. Interim figures
are subject to year end audit adjustments and may not be indicative of results
to be realized for the entire year. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and
analysis of financial condition and results of operations, contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
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
condensed 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.
Discontinued Operations and Other Operations to be Disposed of
- --------------------------------------------------------------
The historical operating results for "Discontinued operations" have been
segregated on the accompanying Statements of Condensed Consolidated Income for
all periods presented. The related assets and liabilities have been aggregated
and separately identified on the March 31, 1998 and December 31, 1997
Condensed Consolidated Balance Sheets as "Net current assets or Net noncurrent
assets of discontinued operations". Discontinued operations have not been
segregated on the Condensed Consolidated Statements of Cash Flows, except for
cash and cash equivalents. Net Income from discontinued operations has been
classified as "Income from operations of discontinued businesses" for the
three months ended March 31, 1997. During the three months ended March 31,
1998, the income before taxes from the discontinued businesses is included as
a deferred gain in "Accrued expenses" with an offsetting amount for income
taxes included in "Other Liabilities". The net income of $395,000 from the
discontinued businesses will be recognized at such time that the businesses
are disposed of.
The historical operating results for "Other operations to be disposed of"
have been segregated on the accompanying Statements of Condensed Consolidated
Income for all periods presented. The related assets and liabilities have
been separately identified on the March 31, 1998 and December 31, 1997
Condensed Consolidated Balance Sheets as "Net current assets or Net noncurrent
assets of other operations to be disposed of". Other operations to be
disposed of have not been segregated on the Condensed Consolidated Statements
of Cash Flows.
Inventories
- -----------
The components of inventories are as follows:
March 31, December 31,
1998 1997
(Thousands of dollars)
Raw materials $17,779 $ 17,432
Work in process 1,658 1,591
Finished goods 32,551 34,346
------ ------
$51,988 $53,369
====== ======
Earnings Per Share
- ------------------
In accordance with the Statement of Financial Accounting Standard No. 128,
"Earnings Per Share", the Company's earnings per share for the three months
ended March 31, 1998 and 1997 are computed by dividing net income by the
weighted average number of shares of common stock outstanding for Basic EPS,
and weighted average number of shares of common stock and potentially dilutive
securities outstanding for Diluted EPS, during the period. Potentially
dilutive securities, in the form of stock options, have been included in the
calculation of weighted average shares outstanding under the treasury stock
method.
Three Months Ended
March 31,
Net Income 1998 1997
Income from continuing operations $1,873 $1,987
Income from discontinued operations 0 503
----- -----
Total Income $1,873 $2,490
===== =====
Earnings Per Share - Basic
Weighted Average Shares 8,280 8,280
Per share amount
Continuing operations $0.23 $0.24
Discontinued operations $0.00 $0.06
---- ----
$0.23 $0.30
==== ====
Effect of potentially dilutive securities
Options 174 100
Earnings Per Share - Diluted
Weighted Average Shares 8,454 8,380
Per share amount
Continuing operations $0.22 $0.24
Discontinued operations $0.00 $0.06
---- ----
$0.22 $0.30
==== ====
(2) Contingencies
-------------
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods Industries, Inc. ("Woods"), a subsidiary of the Company,
and against certain past and then present officers and directors and former
owners of Woods, alleging that the defendants participated in a violation of
the Racketeer Influenced and Corrupt Organizations Act involving allegedly
fraudulently obtained loans from Mexican banks, including the plaintiff, and
"money laundering" of the proceeds of the illegal enterprise. The plaintiff
also alleges that it made loans to an entity controlled by certain officers
and directors based upon fraudulent representations. The plaintiff seeks to
hold Woods liable for its alleged damage under principles of respondeat
superior and successor liability. The plaintiff is claiming damages in excess
of $24,000,000 and is requesting treble damages under the statutes. The
defendants have filed a motion, which has not been ruled on, to dismiss this
action on jurisdictional grounds. Because the litigation is in preliminary
stages, it is not possible at this time for the Company to determine an
outcome or reasonably estimate the range of potential exposure. Katy may have
recourse against the former owner of Woods and others for, among other things,
violations of covenants, representations and warranties under the purchase
agreement, and under state, federal and common law. In addition, the purchase
price under the purchase agreement may be subject to adjustment as a result of
the claims made by Banco del Atlantico. The extent or limit of any such
recourse cannot be predicted at this time.
(4) Subsequent Events
-----------------
On April 15, 1998, the Company signed letters of intent to sell six companies
as part of its Divestiture and Reorganization Plan. One letter of intent
provides for the sale of five of the companies as a group to Publicker
Industries Inc. The group is comprised of Airtronics, Inc., Bach-Simpson
Limited, Diehl Machines, Inc., Hamilton Precision Metals, Inc. and Peters
Machinery Company. The other letter of intent provides for the sale of
C.E.G.F. (USA), Inc. to Meridian Refrigerated, Inc. The combined sales price,
net of debt assumed by the buyer, is expected to approximate $44,000,000.
Both transactions are currently structured as cash transactions and are
anticipated to close during the second quarter of 1998.
On May 1, 1998, the Company purchased substantially all the assets of Disco,
Inc., McDonough, Georgia. Disco is a manufacturer and distributor of cleaning
and specialty products sold to the restaurant/food service industry. Disco's
annual sales are approximately $20,000,000.
KATY INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998
- ---------------------------------
Following are summaries of sales and operating income for the three months
ended March 31, 1998 and 1997 by industry segment:
Net Sales Increase (Decrease)
- --------- -------------------
1998 1997 Amount Percent
---- ---- ------ -------
Electrical/Electronic $43,219 $46,407 $(3,188) (6.9)%
Maintenance Products 21,974 15,926 6,048 38.0
Other Operations to be Disposed Of 6,032 5,064 968 19.1
Operating Income Increase (Decrease)
- ---------------- -------------------
1998 1997 Amount Percent
---- ---- ------ -------
Electrical/Electronic $ 1,416 $3,012 $(1,596) (53.0)%
Maintenance Products 2,765 2,030 735 36.2
Other Operations to be Disposed Of 419 64 355 554.7
The Electrical/Electronic Group's sales decreased primarily due to
decreased volumes in the consumer electric corded products business. These
lower volumes were a result of product line reviews from major customers
during the quarter. This decrease was partially offset by increased volumes
in the distribution of electrical and electronic parts and accessories and
nonpowered hand tools businesses.
The decrease in the Group's operating income was mainly a result of both
decreased volume in the above mentioned areas and lower margins in the
distribution of electronic and electrical parts, accessories and nonpowered
hand tools businesses. Higher selling, general and administrative costs as a
percentage of sales in the distribution of electrical and electronic
components and consumer electrical corded products businesses further
contributed to the decrease in the Group's operating income.
The increase in sales from the Maintenance Products Group was primarily
due to the acquisition of Loren, in August 1997 complemented with increased
volume in the Group's stain business. The Group also experienced improvements
in sales volume for each of its other maintenance products businesses.
The increase in the Group's operating income was primarily a result of the
Loren acquisition, complemented with increased margins in the sanitary and
maintenance products businesses. Decreased selling, general and administrative
expenses as a percentage of sales in each of its sanitary and maintenance
products businesses further contributed to the improvement.
Sales from Other Operations to be Disposed of increased mainly as a result
of increased volumes in the refrigeration and cold storage facilities and
specialty metal businesses.
The increase in the Group's operating income was primarily due to
increased sales complemented with higher margins in the refrigeration and cold
storage facilities business. The Group also experienced a decrease in the
selling, general and administrative expenses as a percentage of sales for the
above mentioned businesses.
Selling, general and administrative expenses decreased as a percentage of
sales to 24.7% in 1998 from 25.3% for the same period in 1997. The decrease
in this percentage is primarily due to the previously mentioned decrease in
the Maintenance Products Group, partially offset by the previously mentioned
increase in the Electrical/Electronic Group
Interest and other, net remained fairly consistent for the first quarter
of 1998 compared to the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Combined cash and cash equivalents increased to $25,156,000 on March 31,
1998 compared to $22,327,000 on December 31, 1997 primarily due to better
management of its working capital.
Katy expects to commit an additional $7,801,000 for capital projects in the
continuing businesses during the remainder of 1998. Funding for these
expenditures and for working capital needs is expected to be accomplished
through the use of available cash and internally generated funds. 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 using the Company's unsecured $80 million credit
line.
At March 31, 1998, Katy had no short or long-term indebtedness for money
borrowed. The Company has a committed unsecured $80 million credit agreement
agented by Bank of America. Katy may secure additional commitments of bank
credit in amounts it determines appropriate for future acquisitions.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". This statement revises
employers' disclosures about pension and other postretirement benefit plans
and standardizes the disclosure requirements to the extent practicable. This
statement is effective for the Company's financial statements for the year
ending December 31, 1998. The Company does not expect the adoption of SFAS
132 to materially impact the financial statement presentation.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement establishes standards for
the way public business enterprises report information about operating
segments. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This statement
is effective for the Company's financial statement for the year ending
December 31, 1998 and the Company does not expect the adoption of SFAS 131 to
materially impact the financial statement presentation.
In June 1997, the Financial Accounting Standards Board issued Statement
Financial Accounting Standard No. 130, "Reporting Comprehensive Income". This
statement establishes standards for reporting and display of comprehensive
income in financial statements. Under this statement, all components of
comprehensive income shall be reported in the financial statements for the
period in which they are recognized. This statement divides comprehensive
income into net income and other comprehensive income. Other comprehensive
income shall be classified separately into foreign currency items, minimum
pension liability adjustments, and unrealized gains and losses on certain
investments in debt and equity securities. The accumulated balance of other
comprehensive income shall be reported in the equity section of the balance
sheet separately from retained earnings and additional paid-in-capital. On
January 1, 1998, the Company implemented SFAS No. 130. The Company believes
that other comprehensive income is not material and as such the Company has
not included a separate presentation of other comprehensive income in its
Condensed Consolidated Financial Statements.
OTHER FACTORS
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency, state environmental agencies
and private parties as potentially responsible parties ("PRPs") at a number of
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") or equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
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
March 31, 1998. The ultimate cost will depend on a number of factors and the
amount currently accrued represents management's best current estimate of the
total cost to be incurred. The Company expects this amount to be
substantially paid over the next one to four years.
Katy also has a number of product liability and workers' compensation
claims pending against it and its subsidiaries. Many of these claims are
proceeding through the litigation process and the final outcome will not be
known until a settlement is reached with the claimant or the case is
adjudicated. It can take up to 10 years from the date of the injury to reach
a final outcome for such claims. With respect to the product liability and
workers' compensation claims, Katy has provided for its share of expected
losses beyond the applicable insurance coverage, including those incurred but
not reported, which are developed using actuarial techniques. Such accruals
are developed using currently available claim information, and represent
management's best estimates. The ultimate cost of any individual claim can
vary based upon, among other factors, the nature of the injury, the duration
of the disability period, the length of the claim period, the jurisdiction of
the claim and the nature of the final outcome.
Some of the statements in this Form 10-Q, as well as statements by the
Company in periodic press releases, oral statements made by the Company's
officials to analysts and shareholders in the course of presentations about
the Company and conference calls following earning releases, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
the forward-looking statements.
KATY INDUSTRIES, INC.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
During the quarter for which this report is filed, there have been no
material developments in previously reported legal proceedings, and no other
cases or legal proceedings, other than ordinary routine litigation incidental
to the Company's business and other nonmaterial proceedings, have been brought
against the Company.
EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------
(a) Reports on Form 8-K
On January 14, 1998, the Company filed a current report on Form 8-K
providing information in response to Item 5 to Form 8-K with respect to a
press release filed by the company on January 5, 1998. The press release
announced the Company's divestiture plan and the reorganization of the
remaining businesses into two operating units, Electrical/Electronic and
Maintenance Products.
On April 6, 1998, the Company filed a current report on Form 8-K providing
information in response to Item 4 to Form 8-K with respect to a change in the
Company's certifying accountant.
Signatures
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KATY INDUSTRIES, INC.
---------------------
Registrant
DATE: May 13, 1998 By /s/ Stephen P. Nicholson
--------------------------
Stephen P. Nicholson
Vice President, Finance &
Chief Financial Officer