United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13
or 15(d) of the Securities Exchange Act of 1934
For Quarter Ended: September 30, 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 November 13, 1998
Common stock, $1 par value 8,299,414
KATY INDUSTRIES, INC.
FORM 10-Q
September 30, 1998
INDEX
-----
Page
PART I FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3,4
Statements of Condensed Consolidated Income
Three Months and Nine Months Ended September 30, 1998 and 1997 5
Statements of Condensed Consolidated Cash Flows
Nine Months Ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 6 Exhibits and Reports on Form 8-K 19
Signatures 19
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
ASSETS
------
September 30, December 31,
1998 1997
---- ----
(Thousands of dollars)
CURRENT ASSETS:
Cash and cash equivalents $ 6,924 $ 22,327
Accounts receivable, trade, net of allowance
for doubtful accounts 62,354 47,914
Notes and other receivables, net of allowance
for doubtful notes 1,421 2,263
Inventories 67,339 53,369
Deferred income taxes 13,233 13,233
Other current assets 9,877 3,167
Net current assets of discontinued operations 11,559 10,588
Net current assets of other operations
to be disposed of 4,572 6,692
------- -------
Total current assets 177,279 159,553
------- -------
OTHER ASSETS:
Notes receivable, net of allowance for
doubtful notes 989 1,106
Cost in excess of net assets of
businesses acquired 50,803 8,544
Miscellaneous 9,898 9,993
Net noncurrent assets of discontinued operations 4,253 4,964
Net noncurrent assets of other operations
to be disposed of 24,920 30,854
------- -------
Total other assets 90,863 55,461
------- -------
PROPERTIES:
Land and improvements 1,102 894
Buildings and improvements 13,367 12,433
Machinery and equipment 35,650 22,073
------- -------
Accumulated depreciation (17,071) (14,841)
------- -------
Net properties 33,048 20,559
------- -------
$301,190 $235,573
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
LIABILITIES
-----------
September 30, December 31,
1998 1997
---- ----
(Thousands of dollars)
CURRENT LIABILITIES:
Accounts payable $ 31,204 $ 24,354
Accrued compensation 5,433 2,289
Accrued expenses 40,315 28,801
Accrued interest and taxes 4,631 236
Dividends payable 621 621
Current maturities of long-term debt 78 -
------- -------
Total current liabilities 82,282 56,301
------- -------
OTHER LIABILITIES 8,800 10,666
------- -------
EXCESS OF ACQUIRED NET ASSETS OVER COST, Net 5,624 6,902
------- -------
LONG-TERM DEBT 35,929 -
------- -------
DEFERRED INCOME TAXES 23,136 22,533
------- -------
COMMITMENTS AND CONTINGENCIES (Note 2)
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 51,130 51,127
Foreign currency translation and other
adjustments (2,845) (2,276)
Retained earnings 108,786 102,194
Treasury stock, at cost, 1,523,040
and 1,542,197 shares respectively (21,474) (21,696)
------- -------
Total shareholders' equity 145,419 139,171
------- -------
$301,190 $235,573
======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMEBR 30, 1998 AND 1997
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Thousands of Dollars Except Per Share Data)
Net sales $ 90,948 $ 71,779 $223,680 $194,930
Cost of goods sold 63,959 51,975 157,399 138,311
------- ------- ------- -------
Gross profit 26,989 19,804 66,281 56,619
Selling, general and administrative 22,330 16,857 57,096 47,683
------- ------- ------- -------
Income from continuing operations 4,659 2,947 9,185 8,936
Income (loss) from other operations
to be disposed of 604 357 2,228 (108)
Interest and other, net 583 293 1,599 916
------- ------- ------- -------
Income from continuing operations
before provision for income taxes 5,846 3,597 13,012 9,744
Provision for income taxes (2,046) (1,276) (4,554) (3,477)
------- ------- ------- -------
Income from continuing operations 3,800 2,321 8,458 6,267
Income from operations of discontinued
businesses (net of tax) 0 289 0 1,392
------- ------- ------- -------
Net income $ 3,800 $ 2,610 $ 8,458 $ 7,659
======= ======= ======= =======
Earnings per share - Basic
Income from continuing
operations $ 0.46 $ 0.28 $ 1.02 $ 0.76
Discontinued operations $ 0.00 $ 0.04 $ 0.00 $ 0.17
------- ------- ------- -------
Net Income $ 0.46 $ 0.32 $ 1.02 $ 0.93
======= ======= ======= =======
Earnings per share - Diluted
Income from continuing
operations $ 0.45 $ 0.28 $ 1.00 $ 0.74
Discontinued operations $ 0.00 $ 0.03 $ 0.00 $ 0.17
------- ------- ------- -------
Net Income $ 0.45 $ 0.31 $ 1.00 $ 0.91
======= ======= ======= =======
Average shares outstanding
Basic 8,294 8,269 8,290 8,271
======= ======= ======= =======
Diluted 8,442 8,416 8,449 8,400
======= ======= ======= =======
Dividends paid per share -
common stock $ .0750 $ .0750 $ .2250 $ .2250
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
Nine Months
Ended September 30,
-------------------
1998 1997
---- ----
(Thousands of dollars)
Cash flows from operating activities:
Net income $ 8,458 $ 7,659
Depreciation and amortization 6,270 2,999
Adjustments to reconcile net income to net cash
flows provided by (used in) operating activities
(mainly changes in working capital): (1,929) (14,811)
------ ------
Net cash flows provided by (used in)
operating activities 12,799 (4,153)
------ ------
Cash flows from investing activities:
Proceeds from sale of assets 31 598
Collections of notes receivable 584 320
Proceeds from sale of subsidiary 12,243 5,444
Payments for purchase of subsidiaries (66,575) (12,617)
Capital expenditures (8,047) (6,676)
------ ------
Net cash flows used in
investing activities (61,764) (12,931)
------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 35,013 -
Principal payments on long-term debt (251) (506)
Payment of dividends (1,866) (1,867)
Purchase of treasury shares (217) (566)
Other (248) 95
------ ------
Net cash flows provided by
(used in) financing activities 32,431 (2,844)
------ ------
Net decrease in cash and cash equivalents (16,534) (19,928)
Cash and cash equivalents, beginning of period 24,300 27,321
------ ------
Cash and cash equivalents, end of period 7,766 7,393
Cash of discontinued operations and other
operations to be disposed of 842 2,287
------ ------
Cash and cash equivalents of continuing operations $ 6,924 $ 5,106
====== ======
Noncash investing and financing activities: During the nine months ended
September 30, 1998, the Company incurred additional debt of $1,018,000
relating to capital equipment. The Company also incurred $3,589,000 of debt
for capital equipment relating to C.E.G.F. (USA), Inc. which the Company
disposed of during 1998. The repayment of $227,000 of debt also relates to
the C.E.G.F. (USA), Inc. disposition.
See Notes to Condensed Consolidated Financial Statements.
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 1998 and December 31, 1997
and for the three and nine month periods ended September 30, 1998 and
September 30, 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 September 30, 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 and nine months ended September 30, 1997. During the three and nine
months ended September 30, 1998, the income from the discontinued businesses
is included as a deferred gain in "Accrued expenses". The income from the
discontinued businesses realized during 1998 will be recognized at such time
that all of the businesses are disposed of, or when a gain on disposition of
all such businesses becomes reasonably assured.
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 September 30, 1998 and December 31, 1997
Condensed Consolidated Balance Sheets as "Net current assets or Net noncurrent
assets of other operations to be disposed of". Pre-tax net income from Other
operations to be disposed of is included in the line item "Income (loss) from
other operations to be disposed of" on the Statements of Condensed
Consolidated Income for the three and nine months ended September 30, 1998.
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:
September 30, December 31,
1998 1997
---- ----
(Thousands of dollars)
Raw materials $26,909 $17,432
Work in process 2,903 1,591
Finished goods 37,527 34,346
------ ------
$67,339 $53,369
====== ======
Earnings Per Share
- ------------------
In accordance with the Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", the Company's earnings per share for the three and nine
months ended September 30, 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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(Thousands of Dollars Except Per Share Data)
Net Income
Income from continuing
operations $3,800 $2,321 $8,458 $6,267
Income from discontinued
operations $ 0 $ 289 $ 0 $1,392
----- ----- ----- -----
Net Income $3,800 $2,610 $8,458 $7,659
===== ===== ===== =====
Earnings Per Share - Basic
Weighted Average Shares 8,294 8,269 8,290 8,271
Per share amount
Continuing operations $ 0.46 $ 0.28 $ 1.02 $ 0.76
Discontinued operations $ 0.00 $ 0.04 $ 0.00 $ 0.17
----- ----- ----- -----
$ 0.46 $ 0.32 $ 1.02 $ 0.93
===== ===== ===== =====
Effect of potentially dilutive securities
Options 148 147 159 129
Earnings Per Share - Diluted
Weighted Average Shares 8,442 8,416 8,449 8,400
Per share amount
Continuing operations $ 0.45 $ 0.28 $ 1.00 $ 0.74
Discontinued operations $ 0.00 $ 0.03 $ 0.00 $ 0.17
----- ----- ----- -----
$ 0.45 $ 0.31 $ 1.00 $ 0.91
===== ===== ===== =====
(2) COMMITMENTS AND CONTINGINCIES
-----------------------------
In December 1996, Banco del Atlantico, a bank located in Mexico, filed
a lawsuit against Woods Industries, Inc. ("Woods"), and certain past and then
present officers and directors and former owners of Woods, alleging that,
before Woods was a subsidiary of the Company, it and the other defendants
fraudulently obtained loans from the plaintiff and other Mexican banks and
engaged in "money laundering." The plaintiff is seeking damages in excess of
$24,000,000. The lawsuit further alleges that the alleged activities violated
the Racketeer Influenced and Corrupt Organizations Act and requests that
damages be trebled under that act. The defendants have filed a motion to
dismiss this action on jurisdictional grounds. Because the litigation is in
preliminary stages, the Company is unable to determine a likely outcome or
reasonably estimate the range of potential exposure at this time. Katy may
have certain rights of recourse against the former owners of Woods and others
under the purchase agreement and applicable law. In addition, the purchase
price under the purchase agreement may be subject to adjustment as a result of
the claims made by the plaintiff. The Company cannot determine the extent of
or limits of any such rights of recourse at this time.
(3) ACQUISITIONS AND DISPOSITIONS
-----------------------------
Acquisitions
- ------------
On August 11, 1998, the Company purchased the Wilen Companies, Incorporated
("Wilen"). Wilen is a premier manufacturer and distributor of a wide variety
of professional cleaning products including mops, brooms and plastic cleaning
products. The acquisition has been accounted for under the purchase method and
accordingly the purchase price is preliminary and adjustments may be recorded
through August 1999. The accounts of these acquisitions have been included in
the Company's Consolidated Financial Statements from the acquisition date.
The estimated aggregate purchase price for Wilen was approximately
$49,670,000. The estimated cost in excess of net assets acquired of
approximately $40,944,000, subject to purchase accounting adjustments, has
been recorded as "Cost in excess of net assets of businesses acquired" in the
Consolidated Balance Sheet and is being amortized on a straight line basis
over twenty years. The following pro forma information reflects management's
best estimates of the pro forma results of operations for the Company giving
effect to the acquisition of Wilen as if the Company acquired Wilen on
January 1, 1997. The pro forma results were derived from the unaudited
historical financial statements of Wilen for the seven months ended July 31,
1998 and the nine months ended September 30, 1997. The pro forma results also
give effect to the unaudited actual results of operations of Wilen for the two
month period from August 1, 1998 to September 30, 1998 in which Katy owned
Wilen. The Company's historical information presented below excludes net
income of $1,448,000 or $0.17 per share (basic), and $1,334,000 or $0.16 per
share (basic) from discontinued operations and other operations to be disposed
of for the periods ended September 30 1998, and September 30, 1997
respectively.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands Except Per Share Data)
Katy Pro Katy Pro
Historical Forma Historical Forma
---------- ----- ---------- -----
Net Sales $223,680 $246,993 $194,930 $223,245
======= ======= ======= =======
Net Income $7,010 $6,993 $6,404 $6,328
======= ======= ======= =======
Earnings per share - Basic $0.85 $0.84 $0.77 $0.77
======= ======= ======= =======
Earnings per share - Diluted $0.83 $0.83 $0.76 $0.76
======= ======= ======= =======
On May 21, 1998, the Company purchased the Noma Consumer Electrical
Division, ("CE Division"), of Noma Industries, Limited. The CE Division is a
North American leader in the design, manufacturing and marketing of a wide
variety of consumer corded products including low voltage garden lighting,
extension cords, multiple outlet and surge strips, specialty cord products,
automotive products and electronic timers. On May 11, 1998, the Company
purchased substantially all of the assets of Disco, Inc. ("Disco"). Disco is
a manufacturer and distributor of cleaning and specialty products sold to the
restaurant/food service industry. Both acquisitions have been accounted for
under the purchase method and accordingly the purchase price is preliminary
and adjustments may be recorded through May 1999. The accounts of these
acquisitions have been included in the Company's Consolidated Financial
Statements from the acquisition date.
The estimated aggregate purchase price for the CE Division and Disco was
approximately $16,900,000. The estimated costs in excess of the net assets
acquired of approximately $2,400,000, subject to purchase accounting
adjustments, has been recorded as cost in excess of net assets of businesses
acquired in the Consolidated Balance Sheet and is being amortized on a
straight line basis over twenty years.
Dispositions
- ------------
On June 11, 1998, the Company completed its divestiture of C.E.G.F. (USA),
Inc. for approximately $12,200,000. C.E.G.F. (USA), Inc. is one of the
businesses included in the Divestiture and Reorganization Plan and,
accordingly, the gain on disposal has been deferred pending the disposal of
all the planned businesses, at which time the Company expects to recognize a
net gain. The Company believes that the businesses will be fully divested and
the plan completed by the period ending June 30, 1999.
(4) SUBSEQUENT EVENTS
-----------------
On November 4, 1998, the Company announced that it has been advised that
Home Depot, its largest single customer, intends to withdraw its commitment
to purchase extension cord products from Woods Industries at or about year
end.
KATY INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998
- -------------------------------------
Following are summaries of sales and operating income for the three months
ended September 30, 1998 and 1997 by industry segment:
Net Sales Increase (Decrease)
- --------- -------------------
1998 1997 Amount Percent
---- ---- ------ -------
Electrical/Electronics $58,036 $52,663 $5,373 10.2%
Maintenance Products 32,912 19,116 13,796 72.2
Other Operations to be Disposed Of 4,695 5,802 (1,107) (19.1)
Operating Income Increase (Decrease)
- ---------------- -------------------
1998 1997 Amount Percent
---- ---- ------ -------
Electrical/Electronics $ 4,235 $ 2,765 $1,470 53.2%
Maintenance Products 2,903 2,142 761 35.5
Other Operations to be Disposed Of 398 249 149 59.8
The Electrical/Electronics' group sales increased primarily due to the
acquisition of the Consumer Electric Division of Noma ("CE Division") in May
1998.
The increase in the group's operating income was mainly a result of
increased margins and the acquisition of the CE Division mentioned above.
The increase was slightly offset by higher selling, general and
administrative costs as a percentage of sales in the electrical parts and
accessories business.
The increase in sales from the Maintenance Products group was primarily
due to the acquisition of Wilen in August 1998, Disco in May 1998 and Loren
Products in August 1997 complemented by increased volumes in the group's
previously owned sanitary maintenance and stain businesses.
The group's operating income increased primarily from improved operating
income in the previously owned sanitary maintenance and stain businesses.
The sales for Other Operations to be Disposed Of decreased mainly as a
result of the disposition of C.E.G.F. (USA), Inc. in June 1998. The
decrease was partially offset by higher volumes in the precision metal
business.
The group's operating income increased primarily due to the increased
volumes and increased gross margins in the precision metal business.
Selling, general and administrative expenses increased as a percentage of
sales to 24.6% in the third quarter of 1998 from 23.5% for the same period
in 1997. The increase was primarily a result of higher selling, general and
administrative expenses as a percentage of sales in the
Electrical/Electronics group, previously mentioned above, and higher
corporate general and administrative expenses.
Interest and other, net increased for the three months ended September 30,
1998 compared to the same period of 1997 primarily as a result of
maintaining higher cash levels during the first half of the third quarter.
The increase was partially offset by decreased cash levels and increased
interest expense in the second half of the third quarter as a result of
borrowing $35 million against the Company's $80 million unsecured credit
line for the acquisition of Wilen.
Nine Months Ended September 30, 1998
- ------------------------------------
Following are summaries of sales and operating income for the nine months
ended September 30, 1998 and 1997 by industry segment:
Net Sales Increase (Decrease)
- --------- -------------------
1998 1997 Amount Percent
---- ---- ------ -------
Electrical/Electronics $144,226 $143,739 $ 487 0.3%
Maintenance Products 79,454 51,191 28,263 55.2
Other Operations to be Disposed Of 16,764 16,021 743 4.6
Operating Income Increase (Decrease)
- ---------------- -------------------
1998 1997 Amount Percent
---- ---- ------ -------
Electrical/Electronics $ 7,780 $ 8,202 $ (422) (5.1)%
Maintenance Products 8,185 6,322 1,863 29.5
Other Operations to be Disposed Of 1,648 357 1,291 361.6
The Electrical/Electronics' group sales increased primarily due to the
acquisition of the CE Division in May 1998. The increase was partially
offset by lower volumes in the first half of the year due to unfavorable
line reviews from major customers pertaining to our consumer electric corded
products business and additional program pressures in the
Electrical/Electronics group.
The decrease in the group's operating income was mainly a result of the
decreased volumes associated with the line reviews pertaining to the
consumer electric corded products business mentioned above. Higher selling,
general and administrative expenses as a percentage of sales in the electric
corded products and electrical parts and accessories businesses also
contributed to the decrease. The decrease was partially offset by the
acquisition of the CE Division.
The increase in sales from the Maintenance Products group was primarily
due to the acquisition of Wilen in August 1998, Disco in May 1998 and Loren
Products in August 1997. The group also experienced general volume
increases in the previously owned stain and sanitary maintenance businesses.
The group's operating income increased primarily from improved operating
income in the previously owned sanitary maintenance and stain businesses,
complemented by lower selling, general and administrative expenses as a
percentage of sales for the group.
Sales from Other Operations to be Disposed Of increased primarily due to
increased volumes for the precision metal business. The increase was
largely offset by lower volumes associated with the disposition of C.E.G.F.
(USA), Inc. in June 1998.
The increase in the group's operating income was primarily due to the
previously mentioned volume increases in the precision metals business,
complemented by lower selling, general and administrative expenses as a
percentage of sales for the precision metals business.
Selling, general and administrative expenses as a percentage of sales
increased to 25.5% for the first nine months of 1998 from 24.5% in the same
period in 1997. The increase is primarily due to the previously mentioned
increase in the Electrical/Electronics group and an increase in corporate
general and administrative expenses.
Interest and other, net increased primarily as a result of maintaining
higher cash levels during the first seven months of fiscal year 1998
compared to the same period of 1997. The increase was partially offset by
decreased cash levels and increased interest expense in the second half of
the third quarter as a result of borrowing $35 million against the Company's
$80 million unsecured credit to acquire Wilen.
LIQUIDITY AND CAPITAL RESOURCES
Combined cash and cash equivalents decreased to $6,924,000 on September 30,
1998 compared to $22,327,000 on December 31, 1997. This decrease is a result
of acquiring the CE Division and Disco in May 1998, and the financing of Wilen
which included a portion of available cash. The decrease was partially offset
by the sale of C.E.G.F. (USA), Inc., and an increased focus on managing the
Company's working capital.
Katy expects to commit an additional $2,000,000 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
facility. In December 1998, the Company expects to execute a $200 million
unsecured revolving credit facility with a syndicated bank group agented by
the Bank of America that will amend the current $80 million credit facility.
The Company expects to incur debt under this facility to replace the existing
debt and to finance the acquisition of Contico International, Incorporated.
The Company may also incur additional debt for appropriate acquisition
candidates in the future.
At September 30, 1998, Katy had short and long-term indebtedness of
$36,007,000 incurred for the acquisition of Wilen and capital expenditures.
The Company has a committed unsecured $80 million credit agreement agented by
Bank of America.
YEAR 2000
The Year 2000 issue is a problem that has potentially material adverse
impact on the Company as well as governments, businesses, and individuals
throughout the world. The Year 2000 affects computer programs and microchips
that cannot properly recognize the first two digits of a year, beginning after
December 31, 1999. The problem has the potential to disrupt the operation of
products that contain these computer programs or microchips.
Based on ongoing assessment activities conducted by the Company regarding
the year 2000 problem, Katy has determined that the Company requires
modification or replacement of a moderate number of computer programs and
microchips. The changes required are necessary for a wide variety of assets
which include, but are not limited to, computer hardware and software,
production machinery and phone systems. The Company believes it has identified
the major sources of potential internal year 2000 issues and has commenced a
year 2000 remediation program (the "Y2K Program"). The Company has
significantly completed the Y2K Program as of September 30, 1998 and expects
to fully complete the Y2K Program by June 30, 1999. The Company believes that
completion of the Y2K Program will substantially mitigate all known
significant potential internal year 2000 problems by June 30, 1999. The
Company will continue to investigate additional year 2000 risks as they come
to the attention of the Company.
The Company has contacted many of its critical suppliers, financial
institutions, public utilities and other entities to determine the year 2000
readiness of its material business relationships. While the Company has not
been informed of any material risks associated with these entities, there is
no absolute guarantee of the year 2000 readiness of those entities or the
potential material adverse effect on the Company.
In addition, the Company intends to develop reasonable contingency plans
for its material operations. The contingency plans will minimize the impact
of the year 2000 problems on the operations of the Company in the event that
any year 2000 problems originating internally or externally arise.
Contingency planning will begin in the fourth quarter of fiscal year 1998.
The Company has expensed approximately $754,000 of costs incurred to date
related to the Y2K Program. Approximately $479,000 has been expensed for
fiscal year 1998 through September 30, 1998. The total remaining costs of
remediation are estimated to be $500,000. Estimated costs remaining in fiscal
year 1998 are $150,000. The costs of the Y2K Program to date and estimated
future costs, as well as Y2K Program completion dates are based on
management's best estimates. However, there can be no assurance that these
estimates will be achieved and actual results could differ materially from
those anticipated.
ACQUISITIONS AND DISPOSITIONS
Acquisitions
- ------------
On September 8, 1998, the Company announced that Katy has entered into a
letter of intent to acquire the business of Contico International, Inc.
("Contico") in St. Louis, Missouri for an estimated purchase price of
$165,000,000. Contico is a premier manufacturer and distributor of a wide
variety of consumer storage, home and automotive products, as well as
janitorial and food service equipment and supplies with annual sales of
approximately $220,000,000. The acquired business will be operated as a
Limited Liability Company ("LLC") where Katy will own all of the common
interest in the LLC and the seller will retain a preferred interest in the
LLC that may be sold to Katy for cash or exchanged for Katy common stock in
the future. The seller also will lease certain real estate that is not
included in the purchase to the LLC. The Company intends to incur
approximately $130,000,000 in debt from the acquisition of Contico.
On August 11, 1998, the Company purchased the Wilen Companies, Incorporated
("Wilen"). Wilen is a premier manufacturer and distributor of a wide variety
of professional cleaning products including mops, brooms and plastic cleaning
products. The acquisition has been accounted for under the purchase method and
accordingly the purchase price is preliminary and adjustments may be recorded
through August 1999. The accounts of these acquisitions have been included in
the Company's Consolidated Financial Statements from the acquisition date.
The estimated aggregate purchase price for Wilen was approximately
$49,670,000. The estimated cost in excess of net assets acquired of
approximately $40,944,000, subject to purchase accounting adjustments, has
been recorded as "Cost in excess of net assets of businesses acquired" in the
Consolidated Balance Sheet and is being amortized on a straight line basis
over twenty years. The following pro forma information reflects management's
best estimates of the pro forma results of operations for the Company giving
effect to the acquisition of Wilen as if the Company acquired Wilen on
January 1, 1997. The pro forma results were derived from the unaudited
historical financial statements of Wilen for the seven months ended July 31,
1998 and the nine months ended September 30, 1997. The pro forma results also
give effect to the unaudited actual results of operations of Wilen for the two
month period from August 1, 1998 to September 30, 1998 in which Katy owned
Wilen. The Company's historical information presented below excludes net
income of $1,448,000 or $0.17 per share (basic), and $1,334,000 or $0.16 per
share (basic) from discontinued operations and other operations to be disposed
of for the periods ended September 30 1998, and September 30, 1997
respectively.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands Except Per Share Data)
Katy Pro Katy Pro
Historical Forma Historical Forma
---------- ----- ---------- -----
Net Sales $223,680 $246,993 $194,930 $223,245
======= ======= ======= =======
Net Income $7,010 $6,993 $6,404 $6,328
======= ======= ======= =======
Earnings per share - Basic $0.85 $0.84 $0.77 $0.77
======= ======= ======= =======
Earnings per share - Diluted $0.83 $0.83 $0.76 $0.76
======= ======= ======= =======
On May 21, 1998, the Company purchased the Noma Consumer Electrical
Division, ("CE Division"), of Noma Industries, Limited. The CE Division is a
North American leader in the design, manufacturing and marketing of a wide
variety of consumer corded products including low voltage garden lighting,
extension cords, multiple outlet and surge strips, specialty cord products,
automotive products and electronic timers. On May 11, 1998, the Company
purchased substantially all of the assets of Disco, Inc. ("Disco"). Disco is
a manufacturer and distributor of cleaning and specialty products sold to the
restaurant/food service industry. Both acquisitions have been accounted for
under the purchase method and accordingly the purchase price is preliminary
and adjustments may be recorded through May 1999. The accounts of these
acquisitions have been included in the Company's Consolidated Financial
Statements from the acquisition date.
The estimated aggregate purchase price for the CE Division and Disco was
approximately $16,900,000. The estimated costs in excess of the net assets
acquired of approximately $2,400,000, subject to purchase accounting
adjustments, has been recorded as cost in excess of net assets of businesses
acquired in the Consolidated Balance Sheet and is being amortized on a
straight line basis over twenty years.
Dispositions
- ------------
On August 5, 1998, the Company announced that it had terminated
negotiations concerning the sale of five companies to Publicker Industries,
Inc. The negotiations terminated due to the inability of the parties to reach
agreement on certain aspects of the transaction. The businesses involved in
this transaction were Airtronics, Inc., Bach-Simpson Limited, Diehl Machines
Inc., Hamilton Precision Metals, Inc. and Peters Machinery Company. All of the
companies mentioned above except Hamilton Precision Metals, Inc. are reported
as discontinued operations on the consolidated financial statements. Hamilton
Precision Metals, Inc. is included in other operations to be disposed of on
the consolidated financial statements. The Company has placed all of the above
mentioned operations back on the market. The Company expects to divest the
operations mentioned above for a net gain by June 30, 1999.
On June 11, 1998, the Company completed its divestiture of C.E.G.F. (USA),
Inc. for approximately $12,200,000. C.E.G.F. (USA), Inc. is one of the
businesses included in the Divestiture and Reorganization Plan and,
accordingly, the gain on disposal has been deferred pending the disposal of
all the planned businesses, at which time the Company expects to recognize a
net gain. The Company believes that the businesses will be fully divested and
the plan completed by the period ending June 30, 1999.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement establishes accounting and reporting
standards for derivative instruments and hedging activities that requires a
company to recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. This statement is
effective for the Company's financial statements for the quarter ending March
31, 2000. The statement is not applicable for the Company at this time.
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 of
Financial Accounting Standards 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 MATTERS
On November 4, 1998, the Company announced that it has been advised that
Home Depot, its largest single customer, intends to withdraw its commitment
to purchase extension cord products from Woods Industries at or about year
end. The loss of these sales of approximately $31,000,000 is estimated to
reduce 1999 net income by approximately $1,100,000, or $.13 per share
(basic). The equivalent earnings per share on a fully diluted basis,
assuming the completion of the proposed purchase of Contico International,
Incorporated, would be $.11 per share. The effect on the fourth quarter of
1998 is not estimated to be significant. These estimates are based on
preliminary assumptions and consider no replacement of capacity utilization
through new sales.
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. Liability for cleanup and other remedial activities at a
Superfund site is joint and several, however, costs are typically shared among
PRPs based on an allocation formula which is often based on the PRP's
volumetric contribution of waste to a site. The Company is also involved in
remedial response and voluntary environmental cleanup at other currently or
formerly owned sites which are not currently the subject of any legal
proceedings under Superfund. 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
September 30, 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.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Reports on Form 8-K
On August 14, 1998, the Company filed a current report on Form 8-K
providing information in response to Item 2 to Form 8-K with respect to the
acquisition of the assets of the Wilen Companies, Incorporated.
On September 15, 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 September 8, 1998. The press release
announced the Company's intention to acquire the businesses of Contico
International, Incorporated.
Signatures
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KATY INDUSTRIES, INC.
---------------------
Registrant
DATE: November 13, 1998 By /s/ Stephen P. Nicholson
-------------------------
Stephen P. Nicholson
Vice President, Finance &
Chief Financial Officer