United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended: December 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) (IRS Employer Identification Number)
6300 S. Syracuse #300, Englewood, Colorado 80111
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (303) 290-9300
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
Common Stock, $1.00 par value New York Stock Exchange
Common Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 18, 1999, was $69,686,330. On that date 8,362,008
shares of Common Stock, $1.00 par value, were outstanding, the only class of
the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the definitive Proxy Statement of Katy Industries, Inc. (The
"1999 Proxy Statement") with respect to the 1999 annual meeting of
stockholders are incorporated by reference into Part III of this Form 10-K.
Exhibit index appears on page 56. Report consists of 59 pages.
PART I
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Item 1. BUSINESS
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Katy Industries, Inc. ("Katy" or the "Company") was organized as a
Delaware corporation in 1967. In accordance with Katy's Divestiture and
Reorganization Plan (the "Plan"), announced during 1997, Katy carries on
business through two principal operating groups: Electrical/Electronics and
Maintenance Products. Under the Plan, Katy is in the process of disposing its
entire previously reported Machinery Manufacturing Group and, accordingly that
group has been reported as "Discontinued operations" in the Consolidated
Statements of Operations. The other businesses being disposed comprise only
a portion of Katy's previously reported Distribution and Service Group and one
of Katy's equity investments. The operations of these businesses have been
reported as "Equity in income (loss) of operations to be disposed of" in the
1998 and 1997 Consolidated Statements of Operations. During the fourth
quarter of 1998, the Company decided to retain Hamilton Precision Metals,
Inc., ("Hamilton"), due to its earnings recovery and growth potential.
Accordingly, the results for Hamilton have been removed from the caption
"Equity in income (loss) of operations to be disposed of" and consolidated in
the financial statements with the continuing operations of the
Electrical/Electronics segment for both 1998 and 1997. Katy also has an
equity investment in one other company. Each Katy company operates within a
framework of broad policies and corporate goals established by Katy's
corporate management, which is responsible for overall planning, financial
management, acquisitions, dispositions, and other related administrative and
corporate matters.
During 1998, the Company emphasized acquisitions and, as a result,
completed five acquisitions including the Contico acquisition described below,
which closed shortly after year-end.
On January 8, 1999, the Company purchased all of the common membership
interest in Contico International, L.L.C., a Delaware limited liability
company ("Contico") and the successor to the business of Contico International
Inc. Contico, based in St. Louis, Missouri, manufactures and distributes
consumer storage, home and automotive products, as well as janitorial and food
service equipment and supplies, with annual sales of approximately
$220,000,000. See Note 17 to Consolidated Financial Statements.
On December 31, 1998 the Company acquired the assets of the Bay State
Gritcloth division of Tyrolit North America, Inc. The division manufactures
an industrial product line of specialty abrasives and has annual sales of
approximately $4,000,000. The estimated aggregate purchase price for this
division was approximately $4,000,000. See Note 3 to Consolidated Financial
Statements.
On August 11, 1998, the Company purchased substantially all of the assets
of The Wilen Companies, Incorporated. The Company operates the business
through its Wilen Products, Inc. subsidiary ("Wilen"). Wilen is a premier
manufacturer and distributor of a wide variety of professional cleaning
products including mops, brooms and plastic cleaning products. The estimated
aggregate purchase price for the Wilen business was approximately $50,000,000.
See Note 3 to Consolidated Financial Statements.
On May 21, 1998, the Company purchased substantially all of the assets
of the Consumer Electrical Division of Noma Industries, Limited. The Company
operates the business through its Woods Industries (Canada), Inc. subsidiary
("Woods Canada"). Woods Canada 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. The Company operates the business through its
Glit/Disco, Inc. subsidiary ("Disco"). Disco is a manufacturer and
distributor of cleaning and specialty products sold to the restaurant/food
service industry. The estimated aggregate purchase price for the Woods Canada
and Disco businesses was approximately $17,100,000. See Note 3 to
Consolidated Financial Statements.
Management continuously reviews each of the businesses. As a result of
these ongoing reviews management may determine to sell certain companies and
intends to augment certain businesses with acquisitions. Under current
financial conditions, any acquisitions would be funded through current cash
balances, available lines of credit and/or new borrowings.
Selected restated operating data for each operating group is incorporated
herein by reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Part II, Item 7. Information
regarding foreign and domestic operations and export sales is incorporated
herein by reference to Note 13 to Consolidated Financial Statements of Katy
included in Part II, Item 8. Set forth below is information about Katy's
operating groups and investments and about Katy's business in general:
Electrical/Electronics Group
- ----------------------------
The group's principal business is the manufacture, distribution,
packaging and sale of consumer electric corded products, electrical and
electronic accessories, electronic components and nonpowered hand tools and
specialty metals. The group accounted for 67% of the Company's consolidated
sales in 1998. Woods Industries, Inc. and Woods Canada are the only businesses
in this group that experiences seasonal sales trends. The six business units
comprising this group are described below:
GC Electronics. GC Electronics is headquartered in Rockford, Illinois,
and has a sourcing office in Taiwan. GC Electronics is a leading value-added
distributor of electrical and electronic parts and accessories. In addition
the company produces a full line of home entertainment component parts and
service technician products.
GC Thorsen. GC Thorsen is headquartered in Rockford, Illinois, and has
a sourcing office in Taiwan. GC Thorsen is a leading value-added distributor
of nonpowered hand tools.
Hamilton Precision Metals, Inc. Hamilton, located in Lancaster,
Pennsylvania, rerolls a wide range of precision metal strip and foil for the
medical, electronics, aerospace and computer industries. The company's
products are used in a wide range of high-tech applications.
Waldom Electronics, Inc. Waldom, located in Chicago, Illinois, is a
leading master distributor of high quality, brand name electrical and
electronic components, and loudspeakers and their components. Waldom
distributes primarily to the electronic, automotive and communication
industries.
Woods Industries (Canada), Inc. Woods Canada is headquartered in
Toronto, Ontario, Canada. Woods Industries (Canada) designs, manufactures and
markets a wide variety of consumer corded products including low voltage
garden lighting, extension cords, multiple outlet and surge strips, specialty
corded products, automotive products and electronic timers.
Woods Industries, Inc. Woods is headquartered in Carmel, Indiana and has
additional warehousing, distribution and manufacturing facilities in
Jasonville, Loogootee, Mooresville and Worthington, Indiana, Sparks, Nevada,
and London, Ontario, Canada. Woods manufactures and distributes consumer
electric corded products, supplies and electrical/electronics accessories.
These products are sold to retailers principally located in the United States
and Canada.
Maintenance Products Group
- --------------------------
The group's principal business is the manufacture, distribution,
packaging and sale of sanitary maintenance supplies, professional cleaning
products, abrasives and stains. The group accounted for 33% of the Company's
consolidated sales in 1998. Duckback Products, Inc. is the only business in
this group that experiences seasonal sales trends. The six business units
comprising this group are described below:
Glit/Disco, Inc. Disco is located in McDonough, Georgia. Disco is a
manufacturer and distributor of cleaning and specialty products sold to the
restaurant/food service industry.
Duckback Products, Inc. Duckback, located in Chico, California, is a
manufacturer of high quality exterior transparent stains, coatings and water
repellents. These products are sold under the trade names Superdeck,
Supershade and Fightback.
Glit/Microtron Abrasives. Glit/Microtron, is headquartered in Wrens,
Georgia, and has additional manufacturing and sales facilities in Pineville,
North Carolina, and Mississauga, Ontario, Canada. Glit/Microtron manufactures
nonwoven floor maintenance pads, scouring pads and sponges, and specialty
abrasive products for cleaning and finishing. Products are sold primarily to
the sanitary maintenance, restaurant supply and consumer markets. In
addition, Glit/Microtron manufactures a line of wood sanding products which
are sold through retail stores across the United States and Canada. Consumer
products are marketed under various brand names, including Kleenfast, through
supermarkets and drug and variety stores.
Glit/Gemtex Abrasives. Gemtex, is headquartered in Etobicoke, Ontario,
Canada and has an additional distribution plant in Buffalo, New York. Gemtex
is a manufacturer and distributor of fiber disks and coated abrasives for the
automotive, industrial and consumer markets.
Loren Products. Loren is headquartered in Lawrence, Massachusetts.
Loren is a manufacturer and distributor of cleaning and abrasive products for
the industrial markets and building products for the consumer markets. Loren
markets its institutional products under the brand names of Brillo, and
Boraxo, as well as some private label products.
Wilen Products, Inc. Wilen is headquartered in Atlanta, Georgia. Wilen
is a manufacturer and distributor of a wide variety of professional cleaning
products, including mops, brooms and plastic cleaning accessories for both the
industrial and consumer markets.
Operations to be Disposed Of
- ----------------------------
These business lines operate cold storage facilities, operate a waste-to-
energy facility and harvest shrimp. Note the gross sales of these operations
are excluded from the 1998 and 1997 Consolidated Statements of Operations, see
Note 4 to Consolidated Financial Statements for further discussion. The
companies in this group do not experience seasonal sales trends. All of these
companies have a number of competitors, with the exception of Savannah Energy
Systems Company, some of which are larger and have greater financial
resources. The three businesses comprising the operations to be disposed of
are described below:
Bee Gee Holding Company, Inc. This company farms and harvests shrimp off
the coast of South and Central America. Katy's investment in this company is
an equity investment. See Note 6 to Consolidated Financial Statements.
C.E.G.F. (USA), Inc. This company is headquartered in Plant City,
Florida, and operates refrigeration and cold storage facilities in Plant City,
Florida and in Houston, Texas. The facilities serve the needs of a variety of
firms in the frozen food, grocery and seafood industries. On June 11, 1998,
Katy completed the sale of C.E.G.F. (USA), Inc. See Note 3 to Consolidated
Financial Statements.
Savannah Energy Systems Company. Savannah Energy owns and operates a
waste-to-energy facility in Savannah, Georgia. See Note 10 to Consolidated
Financial Statements.
Discontinued Operations
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The group's business is the manufacture of machinery for the cookie
sandwich, food processing and wood working industries. Other businesses in the
group manufacture testing and recording devices for the transportation
industry, and another produces gauging and control systems for the
metalworking industry. Note that the group's sales are excluded from the
Consolidated Statements of Operations for all periods presented therein; see
Note 4 to Consolidated Financial Statements for further discussion. The
companies in this group do not experience seasonal sales trends. All the
companies in this group have a number of competitors, some of which are larger
and have greater financial resources. The four business units comprising this
group are described below:
Airtronics. Airtronics, which is located in Elgin, Illinois, supplies
the metalworking industry with engineered gauging and control systems. In
addition, Airtronics rebuilds and resells centerless grinding machines.
Bach-Simpson, Ltd. Bach Simpson is a manufacturer of transportation test
and monitoring system equipment, speed indicators, fuel gauges and
specialized diagnostic and testing products. Primary markets served are the
railroad and general industrial markets. Bach Simpson is located in London,
Ontario, Canada. The sale of Bach Simpson was completed in January of 1999.
See Note 17 to Consolidated Financial Statements.
Diehl Machines, Inc. Diehl, located in Wabash, Indiana, is a
manufacturer of ripsaws, veneer splicers, automatic lathes and moulders.
Primary customers are in the millwork industry and manufacturers of doors,
windows, cabinets and furniture.
Peters Machinery Company. Peters, which designs and manufactures
proprietary machinery for producing cookie and cracker sandwiches, is located
in Chicago, Illinois. Approximately 62% of Peters' sales are made outside the
United States.
Investments, at equity
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Katy has an investment, at equity, in one other company. Schon & Cie,
AG ("Schon"), located in Germany, manufactures a wide range of mechanical and
programmable four post, web and flat bed die-cutting equipment and shoe
manufacturing machines. Schon has a number of competitors, some of which are
larger and have greater financial resources. For additional information
related to investments, reference is made to Note 6 to Consolidated Financial
Statements in this report, which information is included in Part II, Item 8.
Customers
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Katy had one major customer in its Electrical/Electronics segment that
accounted for approximately 14% of the Company's consolidated 1998 annual
sales. On November 4, 1998, the Company announced that this major customer
withdrew its commitment to purchase extension corded products from Woods at or
about year-end. Katy is not dependent on any other single customer for a
material portion of its overall business.
Backlog
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Electrical/Electronics:
The Company's aggregate backlog position for this segment was $14,300,000
and $17,700,000 as of December 31, 1998 and 1997, respectively. The 1998
orders are firm and are expected to be shipped during 1999.
Maintenance Products:
The Company's aggregate backlog position for this segment was $5,000,000
and $2,900,000 as of December 31, 1998 and 1997, respectively. The 1998
orders are firm and are expected to be shipped during 1999.
Markets and Competition
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Electrical/Electronics:
The Company markets branded electrical and electronics products primarily
in North America through a combination of direct salesman, manufacturers sales
representatives and wholesale distributors. The Company's primary customer
base is made up of major national retail chains that service the home
improvement, hardware, mass merchant, discount and automotive markets, smaller
regional concerns serving a similar customer base and a variety of electrical
and electronic distributors.
Electrical and electronic products sold by the Company are generally used
by consumers and include such items as extension cords, work lights, surge
suppressors, power taps and strips, computer connectivity devices, telephone
accessories, outdoor lights and timers and a variety of electronic connectors
and switches. Overall demand for the Company's products is highly correlated
consumer demand, the performance of the general economy and to a lesser extent
home construction and resale activity.
The markets for the Company's electrical and electronic products are
highly competitive. Competition is based primarily on price and the ability
of the competitors to provide superior customer service in the form of
complete on-time product delivery. Other competitive factors include brand
recognition and product design, quality and performance. In the retail
extension cord market, there are two major competitors who collectively, with
the Company, account for the major share of the United States market.
The markets in the Company's remaining product lines are significantly
more fragmented and typically 5-8 primary competitors are competing for market
share. The basis for competition in these product categories is similar to
the extension cord market with brand identification representing a much
greater factor. In general, the Company believes it is competitive with
respect to each of the factors affecting each of the respective markets in
which it competes.
Maintenance Products:
The Company markets branded sanitary maintenance supplies, professional
cleaning products, abrasives and stains primarily in North America through a
combination of direct salesman, manufacturers sales representatives and
wholesale distributors. The Company's Maintenance Products Group services the
industrial, consumer, sanitary maintenance, food supply and automotive
markets.
Maintenance products sold by the Company include such items as floor
maintenance pads, scouring pads, sponges, specialty abrasive products for
cleaning and finishing; brooms, mops and plastic cleaning products; high
quality exterior transparent stains, coating and water repellents; cleaning
and specialty products for the restaurant/food service industry.
The markets for the Company's maintenance products are highly
competitive. Competition is based primarily on price and the ability to
provide superior customer service in the form of complete on-time product
delivery. Other competitive factors include brand recognition and product
design, quality and performance.
The Company competes for market share with several competitors in this
industry. The Company believes that it has established long standing
relationships with its major customers based on high quality products and
service, while continuing its position of being a low cost provider in this
industry.
Raw Materials
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Katy's operations have not experienced significant difficulty in
obtaining raw materials, fuels, parts or supplies for their activities during
the most recent fiscal year, but no prediction can be made as to possible
future supply problems or production disruptions resulting from possible
shortages.
Employees
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As of February 26, 1999, Katy employed 4,147 people, of which 3,862
related to the Company's continuing businesses. Approximately 940 employees of
the Company were members of various unions. Katy's labor relations are
generally satisfactory and there have been no strikes in recent years that
have materially affected its operations.
Regulatory and Environmental Matters
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Katy does not anticipate that federal, state or local environmental laws
or regulations will have a material adverse effect on its consolidated
operations or financial position. Katy anticipates making additional
expenditures for environmental control facilities during 1999, in accordance
with terms agreed upon with the United States Environmental Protection Agency
and various state environmental agencies. (See Part II, Item 7 -
Environmental and Other Contingencies)
Licenses, Patents and Trademarks
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The success of Katy's products has not depended on patent and license
protection, but rather on the quality of Katy's products, proprietary
technology, contract performance, customer service and the technical
competence and creative ability of Katy's personnel to develop and introduce
saleable products.
Item 2. PROPERTIES
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As of December 31, 1998, Katy's total building floor area owned or leased
was 2,851,000 square feet, of which 1,095,000 square feet were owned and
1,756,000 square feet were leased. The following table shows by industry
segment a summary of the size (in square feet) and character of the various
facilities included in the above totals together with the location of the
principal facilities.
Industry Segment Owned Leased Total
- ---------------- ----- ------ -----
(in thousands of square feet)
Electrical/Electronics - primarily plant and
located in Rockford, Illinois; Taipei, Taiwan;
Chicago, Illinois; and Carmel, Indianapolis,
Jasonville, Loogootee, Mooresville, and
Worthington, Indiana; Sparks, Nevada;
Lancaster, Pennsylvania and Toronto,
Ontario, Canada 564 658 1,222
Maintenance Products - primarily
plant and office facilities with principal
facilities located in Chico, California; Wrens,
McDonough, and Atlanta, Georgia; Phoenix,
Arizona; Pineville, North Carolina; Buffalo,
New York; Lawrence, Massachusetts and
Etobicoke and Mississauga, Ontario, Canada 230 732 1,311
Other Operations to be Disposed Of - primarily
plant and office facilities with principal
facilities located in Savannah, Georgia 63 0 63
Discontinued Operations - primarily plant and
office facilities with principal facilities
located in Elgin and Chicago, Illinois; Wabash
and Elkhart, Indiana and London, Ontario, Canada 238 4 242
Corporate - office facilities in Englewood,
Colorado 0 13 13
All properties used in operations are owned or leased and are suitable
and adequate for Katy's operations. It is estimated that approximately 95% of
these properties are being utilized.
Item 3. LEGAL PROCEEDINGS
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Except as set forth below, no cases or legal proceedings are pending
against Katy, other than ordinary routine litigation incidental to Katy and
its businesses and other non-material cases and proceedings.
1. Environmental Claims
--------------------
(a) Administrative Order on Consent - W.J. Smith Wood Preserving
Company and Katy Industries, Inc., U.S. EPA Docket No. RCRA-VI-
7003-93-02 and Texas Water Commission Administrative Enforcement
Action.
(b) Notice of Claim - Medford, Oregon.
(c) Demand for Indemnification - Londonderry, New Hampshire.
The "W. J. Smith" case, matter (a) above, originated in the 1980's when the
United States and the State of Texas, through the Texas Water Commission
("TWC"), initiated environmental enforcement actions against W.J. Smith
alleging that certain conditions on the W.J. Smith property (the "Property")
violated environmental laws. Following such enforcement actions, W.J. Smith
engaged in a series of cleanup activities on the W.J. Smith property and
implemented a groundwater monitoring program.
In 1993, TWC referred the entire matter to the United States
Environmental Protection Agency ("USEPA"), which initiated a Unilateral
Administrative Order Proceeding under Section 7003 of the Resource
Conservation and Recovery Act ("RCRA") against W.J. Smith and Katy. The
proceeding requires certain actions at the site and certain off-site areas, as
well as development and implementation of additional cleanup activities to
mitigate off-site releases. In December 1995, W.J. Smith, Katy and USEPA
agreed to resolve the proceeding through an Administrative Order on Consent
under Section 7003 of RCRA. Pursuant to the Order, W.J. Smith is currently
implementing a cleanup to mitigate off-site releases.
Since 1990, the Company has spent in excess of $5,850,000 in undertaking
cleanup and compliance activities in connection with this matter and has
established a reserve, in excess of $1,650,000 before taxes, for future such
activities. The Company believes that the amount reserved will be adequate;
however, total cleanup and compliance costs cannot be determined at this time.
Concerning matter (b) above, by letter dated August 20, 1993, a claim was
asserted by Balteau Standard, Inc. ("Balteau") against Katy concerning PCB
contamination at the Medford, Oregon facility of the former Standard
Transformer division of American Gage. Balteau demanded that Katy accept
financial responsibility for investigation and cleanup costs incurred as a
result of the PCB contamination. Katy and Balteau agreed to share such costs.
Pursuant to such agreement, Katy paid 65% of the first $2,000,000 of such
costs and agreed to pay 50% of such costs to the extent that they exceed
$2,450,000. Since it executed the cost sharing agreement, Katy has paid
approximately $1,400,000 in cleanup costs. Katy believes the cleanup plan has
been successful and has requested that the Oregon Department of Environmental
Quality inspect and approve the remediation work. Katy has received such
approval with respect to a portion of the cleanup plan. Further monitoring of
groundwater and testing and cleanup of adjacent property may be required
before approval can be obtained with respect to the remainder of the plan.
Pending such approval, the liability of Katy and its subsidiary cannot be
determined at this time.
Concerning matter (c) above, pursuant to an agreement executed in
connection with the sale of assets of JEI Liquidating, Inc., a Katy
subsidiary, Katy has agreed to defend and indemnify the buyer of such assets,
Allard Industries, Inc. ("Allard"), in the case captioned United States v.
Exxon, et al. in U.S. District Court, D.N.H., consolidated nos. C-92-486;
C-93-95-L; C-94-148-Lcas. The case concerns the disposal of hazardous
substances at a landfill site in Londonderry, New Hampshire, at which JEI
Liquidating, Inc. allegedly disposed of hazardous substances from its
Manchester, New Hampshire facility. The case arises under the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA"), under
which generators and transporters of hazardous substances are generally held
to be jointly and severally liable for the cleanup of those substances when
released into the environment.
The parties to the litigation have reached a settlement in principle, the
specific terms of which are being negotiated in a Consent Decree. Under the
expected Consent Decree, Allard/Katy will pay approximately $300,000 and
perform no future work at the site, subject to limited re-openers. In
exchange, Allard and Katy will receive a release and contribution protection.
Honeywell Inc., a former owner and operator of JEI Liquidating, Inc.'s
Manchester, New Hampshire facility, has agreed in principle to pay $40,000 of
Allard/Katy's settlement under the Consent Decree. Pending entry of the
Consent Decree and receipt of a release, Katy's liability cannot be determined
at this time.
In addition to the claims specifically identified above, the Company and
certain of its current and former direct and indirect corporate predecessors,
subsidiaries and divisions have been identified by USEPA, state environmental
agencies and private parties as potentially responsible parties at a number of
waste disposal sites under CERCLA or equivalent state laws, and, as such, may
be liable for the costs of cleanup and other remedial activities at these
sites. The costs involved in these matters are, by nature, difficult to
estimate and subject to substantial change as litigation or negotiations with
the United States, states and other parties proceed. While ultimate liability
with respect to these matters is not easily determinable, the Company has
recorded and accrued amounts that it deems reasonable for such prospective
liabilities and the Company believes that any additional liability with
respect to such matters will not be material.
2. Banco del Atlantico, S.A. v. Woods Industries, Inc., et al.,
-----------------------------------------------------------
Civil Action No. L-96-139 (U.S. District Court, Southern District of
Texas).
In December 1996, Banco del Atlantico, a bank located in Mexico, filed
a lawsuit against Woods Industries, Inc. ("Woods"), a subsidiary of the
Company, and against certain past and then present officers and directors and
former owners of Woods, alleging that the defendants participated in a
violation of the Racketeer Influenced and Corrupt Organizations Act involving
allegedly fraudulently obtained loans from Mexican banks, including the
plaintiff, and "money laundering" of the proceeds of the illegal enterprise.
All of the foregoing is alleged to have occurred prior to the Company's
purchase of Woods. The plaintiff also alleges that it made loans to an entity
controlled by certain officers and directors based upon fraudulent
representations. The plaintiff seeks to hold Woods liable for its alleged
damage under principles of respondeat superior and successor liability. The
plaintiff is claiming damages in excess of $24,000,000 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. The Company may have recourse against the former owner
of Woods and others for, among other things, violations of covenants,
representations and warranties under the purchase agreement through which the
Company acquired Woods, and under state, federal and common law. In addition,
the purchase price under the purchase agreement may be subject to adjustment
as a result of the claims made by Banco del Atlantico. The extent or limit of
any such recourse cannot be predicted at this time.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.
PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
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
------ ---- --- --------
1998
First Quarter $20 1/4 $17 5/8 $.075
Second Quarter 19 15/16 17 7/8 .075
Third Quarter 18 13/16 13 7/8 .075
Fourth Quarter 21 15 1/16 .075
1997
First Quarter $16 $13 1/2 $.075
Second Quarter 17 1/4 14 1/2 .075
Third Quarter 18 14 15/16 .075
Fourth Quarter 20 3/8 17 3/8 .075
Dividends are paid at the discretion of the Board of Directors and are
reviewed on a quarterly basis.
As of March 18, 1999, there were 845 record holders of the Common Stock
and there were 8,362,008 shares of Common Stock outstanding.
Item 6. SELECTED FINANCIAL DATA
- --------------------------------
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Thousands of dollars, except per share data and ratios)
Net sales $342,315 $286,023 $156,024 $136,093 $124,928
Net income (loss)
Continuing segments -
businesses to be retained $ 11,007 $ 9,435 $ 5,803 $ 6,046 $ 2,127
Unusual Items 0 387 6,685 22,520 (12,864)
Operations to be disposed of 2,075 (179) 275 (2,139) 186
Discontinued operations [b] 0 1,959 953 2,144 1,708
------ ------ ------ ------ ------
Net income (loss) $ 13,082 $ 11,602 $ 13,716 $ 28,571 $ (8,843)
Earnings (loss)
per share - Basic
Continuing segments $ 1.33 $ 1.14 $ .70 $ .67 $ .23
Unusual Items .00 .05 .80 2.51 (1.42)
Operations to be
disposed of .25 (.03) .03 (.24) .02
Discontinued operations [b] .00 .24 .11 .24 .19
---- ---- ---- ---- ----
Earnings (loss)
per common share $ 1.58 $ 1.40 $ 1.64 $ 3.18 $ (0.98)
==== ==== ==== ==== ====
Earnings (loss)
per share - Diluted
Continuing segments $ 1.30 $ 1.12 $ .70 $ .67 $ .23
Unusual Items .00 .05 .80 2.51 (1.42)
Operations to be
disposed of .25 (.02) .03 (.24) .02
Discontinued operations [b] .00 .23 .11 .24 .19
---- ---- ---- ---- ----
Earnings (loss)
per common share $ 1.55 $ 1.38 $ 1.64 $ 3.18 $ (0.98)
==== ==== ==== ==== ====
Income (loss) from
continuing operations $ 13,082 $ 9,643 $ 12,763 $ 26,427 $(10,551)
Earnings (loss) per share
from continuing
operations - Basic $ 1.58 $ 1.16 $ 1.53 $ 2.94 $ (1.17)
Earnings (loss) per share
from continuing
operations - Diluted $ 1.55 $ 1.15 $ 1.53 $ 2.94 $ (1.17)
Total assets [a] $293,175 $237,160 $235,377 $225,412 $203,142
Total liabilities and
minority interest 143,859 97,989 105,331 95,082 92,364
Stockholders' equity 149,316 139,171 130,046 130,330 110,778
Long-term debt, excluding
current portion [a] 39,908 9,948 8,582 9,346 10,572
Depreciation and
amortization [a] 7,162 4,568 5,505 5,949 6,049
Capital expenditures 15,921 10,699 5,319 9,163 4,105
Working capital [a] 100,971 103,252 107,571 96,425 50,041
Ratio of debt to
capitalization 21.1% 7.1% 6.6% 15.8% 15.9%
Stockholders' equity
per share $ 17.91 $ 16.81 $ 15.78 $ 14.94 $ 12.21
Return on average
stockholders' equity 9.1% 8.6% 10.5% 23.7% (5.0%)
Weighted average
common shares
outstanding - Basic 8,289,915 8,272,836 8,339,189 8,984,513 9,031,541
Stockholders of record 845 907 1,351 1,410 1,471
Number of employees 2,472 1,907 2,049 1,109 1,285
Cash dividends declared
per common share $.30 $.30 $.30 $.25 $14.1875
[a] Total assets includes $15,238 of net assets from discontinued operations
and $16,724 of net assets from operations to be disposed of for 1998, $15,552
of net assets from discontinued operations and $26,543 of net assets from
operations to be disposed of for 1997 and $18,395 of net assets from
discontinued operations for 1996. Long-term debt includes $9,948 from
operations to be disposed of for 1997. Depreciation and amortization includes
$631, $681 and $747 from discontinued operations for 1998, 1997 and 1996,
respectively. Depreciation and amortization includes $1,009 and $1,549 from
other operations to be disposed of for 1998 and 1997 respectively. Working
capital includes $10,959, $10,588 and $12,569 of net current assets from
discontinued operations for 1998, 1997 and 1996, respectively. Working
capital also includes $1,203 and $2,005 of net current assets of other
operations to be disposed of for 1998 and 1997 respectively. See Note 4 to
Consolidated Financial Statements.
[b] Income from operations for discontinued operations for 1998 has been
deferred pending final disposition of such operations.
Item 7. 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 Consolidated Financial Statements
(included in Part II, Item 8). Katy has two principal operating groups:
Electrical/Electronics and Maintenance Products. Under the Plan, Katy is in
the process of disposing its entire previously reported Machinery
Manufacturing Group and, accordingly that group has been reported as
"Discontinued operations" in the Consolidated Financial Statements. The other
businesses being disposed comprise only a portion of Katy's previously
reported Distribution and Service Group and one of Katy's equity investments.
The operations of these businesses have been reported as "Equity in income
(loss) of operations to be disposed of" in the 1998 and 1997 Consolidated
Statement of Operations. During the fourth quarter of 1998, the Company
decided to retain Hamilton, due to its earnings recovery and growth potential.
Accordingly, the results for Hamilton have been removed from the caption
"Equity in income (loss) of operations to be disposed of" and consolidated in
the financial statements with the continuing operations of the
Electrical/Electronics segment for both 1998 and 1997. For purposes of
discussion and analysis, information for the discontinued operations and the
other operations to be disposed of is presented below. Katy intends to seek
additional acquisitions to grow its Electrical/Electronics and Maintenance
Products segments.
The table below and the narrative, which follows, summarize the key
factors in the year-to-year changes in operating results. The information
provided below has been retroactively restated to reflect Katy's realignment
of its operating units.
Years Ended December 31,
1998 1997 1996
---- ---- ----
(Thousands of dollars)
Electrical/Electronics Group
- ----------------------------
Net external sales $230,927 $218,237 $ 89,622
Net internal sales 32,103 175 180
Income from operations 14,839 13,191 7,250
Operating margin 6.4% 6.0% 8.1%
Identifiable assets 126,362 112,156 108,775
Depreciation and amortization 1,652 398 1,475
Capital expenditures 7,348 5,138 2,503
Maintenance Products Group
- --------------------------
Net external sales $111,388 $ 67,786 $ 56,391
Net internal sales 6,389 4,306 3,423
Income from operations 8,401 6,328 4,794
Operating margin 7.5% 9.3% 8.5%
Identifiable assets 110,317 46,333 31,065
Depreciation and amortization 3,779 1,854 1,745
Capital expenditures 2,725 1,234 1,235
Operations to be Disposed Of
- ----------------------------
Net external sales $ 6,297 $ 9,568 $ 10,011
Net internal sales - - -
Income (loss) from operations (3,262) 122 1,566
Operating margin (7.3%) 1.3% 15.6%
Identifiable assets 17,680 31,599 32,015
Equity Investments 7,034 6,500 6,382
Depreciation and amortization 1,009 1,549 1,384
Capital expenditures 5,126 3,034 515
Discontinued Operations
- -----------------------
Net external sales $ 23,349 $ 31,537 $ 32,494
Net internal sales 146 - -
Income from operations 1,663 [a] 3,046 1,566
Operating margin 7.1% 9.7% 4.8%
Identifiable assets 16,975 18,486 22,843
Depreciation and amortization 631 681 747
Capital expenditures 547 1,252 884
Corporate
- ---------
Corporate expenses $ 7,965 $ 6,496 $ 5,640
Identifiable assets 24,535 43,818 44,811
Depreciation and amortization 91 86 154
Capital expenditures 175 41 182
Company
- -------
Net external sales [a] $371,961 $327,128 $188,518
Net internal sales 38,638 4,481 3,603
Income from operations [a] 13,676 16,191 9,536
Operating margin [a] 4.4% 4.9% 5.1%
Identifiable assets [a] 295,869 252,392 239,509
Depreciation and amortization [a] 7,162 4,568 5,505
Capital expenditures 15,921 10,699 5,319
[a] Company balances include amounts from both "Discontinued Operations" and
"Operations to be Disposed of", whereas the Consolidated Financial Statements
classify such amounts as "Discontinued Operations" and "Operations to be
Disposed of" for 1998 and 1997 and "Discontinued Operations" for 1996. The
"Income from operations" for "Discontinued Operations" was deferred pending
final disposition of such operations. See Note 4 to Consolidated Financial
Statements for further discussion.
1998 Compared to 1997
- ---------------------
The Electrical/Electronics Group external sales increased $12,690,000 or
6%. The increased sales were primarily a result of the Woods Canada
acquisition in May of 1998. Excluding the Woods Canada acquisition, sales
decreased $10,223,000 or 5% due to lower volumes in the electric corded
products and the distribution of electronic and electrical components, parts
and accessories. These decreases were a result of unfavorable line reviews
from major customers pertaining to our electric corded products business and
additional program pricing pressures in the Electrical/Electronics segment.
Operating income for the group increased $1,648,000 or 12%. Excluding
the increased volumes associated with the Woods Canada acquisition, operating
income increased 5%. This increase was attributable to increased margins in
the specialty metal business resulting from favorable product mix. These
increases were partially offset by lower volumes associated with the line
reviews discussed above and higher selling, general and administrative costs
as a percentage of sales in the electric corded products and electrical
components, parts and accessories businesses. Consolidation and intense
pricing pressures by national distributors had a negative impact on both
revenues and margins in the electrical components, parts and accessories
businesses.
Identifiable assets for the group increased during the year mainly as a
result of the Woods Canada acquisition in May of 1998.
Sales for the Maintenance Products Group increased $43,602,000 or 64%.
The increase in sales was primarily due to the Disco acquisition in May of
1998, the Wilen acquisition in August of 1998, and a full year of sales from
Loren, acquired in August of 1997. Excluding these acquisitions, sales
increased approximately $3,600,000 due to general volume increases in the
previously owned sanitary maintenance and stain businesses.
Operating income for the group increased $2,073,000 or 33%. Excluding
the Maintenance Products Group acquisitions discussed above, operating income
increased $911,000 or 14% primarily as a result of the above mentioned volume
improvements offset partially by slightly lower margins in the stain and
sanitary maintenance businesses.
Identifiable assets for the group increased during the year mainly as a
result of the previously announced acquisitions of Disco and Wilen in 1998.
Sales for operations to be disposed of decreased $3,271,000 or 34%. The
decrease was a result of lower volumes associated with the disposition of the
cold storage facility business in June of 1998. Excluding the disposition,
sales remained relatively stable in 1998 compared to 1997.
Operating income for operations to be disposed of decreased $3,384,000.
The decrease was primarily a result of an impairment related to the
waste-to-energy business combined with the disposition of the cold storage
facility in June of 1998. Excluding the impairment and disposition, operating
income decreased slightly due to lower margins in the waste-to-energy
business.
Identifiable assets for operations to be disposed of decreased during the
year mainly as a result of the previously announced disposition of the
Company's cold storage facility in June of 1998.
Sales for discontinued operations decreased $8,188,000 or 26%. The
decrease in sales was primarily a result of the disposition of Beehive
effective July 1997, combined with lower volumes in the cookie sandwich
machinery, wood processing machinery and gauging and control systems
businesses.
Operating income for the group decreased $1,383,000 or 45%. The decrease
in operating income was primarily a result of lower volumes combined with
diminished margins in the wood processing machinery and cookie sandwich
machinery businesses.
Corporate expenses increased $1,469,000 or 23%. This increase was mainly
a result of banking fees, increased outside service fees and salary and
compensation increases for 1998 as compared to 1997.
Identifiable assets at Corporate decreased primarily as a result of lower
cash levels at year-end.
Although the results of these operating groups can be significantly
affected by the strength of the general economy, the Company believes that it
has positioned itself well in segments that can be expanded both externally
through acquisitions particularly in the electrical/electronics and
maintenance products areas, and internally through new products, operational
improvements and increased market penetrations.
Following is a discussion concerning other factors that affected the
Company's net income.
Gross profit from continuing operations increased $19,541,000 or 25% as
gross margins increased slightly to 29% from 28% in 1997 while selling,
general and administrative expenses increased $17,289,000 or 26% in 1998
compared to the prior year. The increase in gross profit and selling, general
and administrative expenses is attributable to both the increased volumes and
the acquisition activity previously mentioned.
Interest expense increased $978,000 from 1997 primarily as a result of
the borrowings associated with the acquisition of Wilen in August of 1998.
Interest income decreased slightly due to the Company maintaining lower
average cash and cash equivalent balances during 1998 compared to 1997.
Other, net in 1998 was income of $1,523,000 versus income of $920,000 in
1997. The increase was a result of the Company receiving past due balances on
previously written-off investments.
Income before provision for income taxes increased to $19,821,000 in 1998
from $14,565,000 in 1997. The increase resulted primarily from the gain on
sale of the Company's cold storage facility of $6,122,000, which was partially
offset by the impairment loss resulting from the reduction in the fair value
of the waste-to-energy facility of $2,800,000 being recorded in "Equity in
income (loss) of operations to be disposed of" on the Consolidated Statement
of Operations. Excluding these items, the income from continuing operations
before income taxes increased $1,934,000 primarily as a result of increased
operating income from both the Electrical/Electronics and the Maintenance
Products Groups.
Provision for income taxes in 1998 was $6,739,000 or an effective tax
rate of 34% and $4,922,000 or an effective tax rate of 33.8% in 1997.
1997 Compared to 1996
- ---------------------
The Electrical/Electronics Group sales increased $128,615,000 or 144%.
The increased sales were primarily due to the acquisition of Woods effective
December 1996. Excluding the acquisition, sales decreased $3,629,000 or 4% as
a result of lower volumes in the distribution of electronic and electrical
parts and accessories and diminished volumes from the specialty metal
business.
Operating income for the group increased $5,941,000 or 82%. Excluding
the increased sales volume associated with the acquisition of Woods, operating
income decreased $3,213,000 or 44% as a result of lower margins in the
specialty metals, distribution of electronic parts, accessories, components
and nonpowered hand tool businesses. Lower margins in the above areas were a
result of competitive pressure on selling prices and higher than expected
material costs. Increased margins in the electric corded products and
supplies business as a result of lower copper prices further contributed to
the increased operating income.
Sales for the Maintenance Products Group increased $11,395,000 or 20%.
The increase in sales was primarily associated with the acquisition of Loren
Products, effective August 1997. Excluding the acquisition, sales increased
$4,449,000 or 8% primarily due to increased volumes in the sanitary
maintenance and stain businesses resulting from various sales promotions.
Operating income for the group increased $1,534,000 or 32%. Excluding
the acquisition of Loren, operating income increased $1,211,000 or 25%. The
improvement was primarily due to increased sales and increased margins in the
sanitary maintenance business complemented by lower selling, general and
administrative costs as a percentage of sales within the stain business.
Identifiable assets for the group increased during the year mainly as a
result of the acquisition of Loren, effective August 1997.
Sales for the other operations to be disposed of decreased $443,000 or
4%. The decrease was primarily a result of decreased volume in the waste
energy business, balanced partially by increased volume in the cold storage
facility business.
Operating income for the group decreased $1,444,000 or 92%. The
decrease was a result of lower sales volume in the previously mentioned
business coupled with lower margins in the waste energy facility and cold
storage facility businesses. These lower margins were a result of unfavorable
product mix. Higher selling, general and administrative expenses as a
percentage of sales in each of the above-mentioned areas also contributed to
the decrease in operating income.
Sales for Discontinued Operations decreased $957,000 or 3%. Excluding
the disposition of Beehive, effective July 1997, sales increased $2,136,000 or
7%. The increase was primarily a result of volume improvements in both the
cookie sandwich and gauging and control system businesses.
Operating income for the group increased $1,480,000 or 95%. Excluding
the disposition of Beehive, operating income increased $1,389,000 or 89% due
to improved margins in wood processing machinery, cookie sandwich machinery,
gauging and control systems, and testing and recording devices for the
transportation industry. Increased margins were a result of successful cost
saving measures and favorable product mix in the wood processing and gauging
and control system businesses. Lower selling, general and administrative
costs as a percentage of sales for the wood processing and cookie sandwich
businesses further contributed to the increase in operating income.
Identifiable assets decreased during the year mainly due to the
disposition of Beehive in July of 1997.
Corporate expenses increased $856,000 or 15%. This increase was mainly
a result of greater insurance costs and salary and compensation increases for
1997 as compared to 1996.
Identifiable assets at Corporate decreased slightly during the year
mainly due to lower cash levels at year-end.
Although the results of these operating groups can be significantly
affected by the strength of the general economy, the Company believes that it
has positioned itself well in segments that can be expanded both externally
through acquisitions particularly in the electrical/electronics and
maintenance products areas, and internally through new products, operational
improvements and increased market penetrations.
Following is a discussion concerning other factors that affected the
Company's net income.
Gross profit from continuing operations increased $31,457,000 as gross
margins decreased to 28% from 30% in 1996 while selling, general and
administrative expenses increased $26,404,000 in 1997 compared to the prior
year. The increase in gross profit and slight decrease in gross margin is
attributable to assuming a full year of operations from Woods, which
essentially is a higher volume, lower margin business than the existing
businesses of the Company. The increase in selling, general and
administrative expenses is primarily due to the increase in sales volumes
during 1997, offset partially by lower selling, general and administrative
costs as a percentage of sales in the Maintenance Products Group.
Interest expense decreased $833,000 from 1996 primarily as a result of
reclassifying the operations of C.E.G.F. (USA), Inc., including interest
expense, into the line item "Equity in income (loss) of other operations to be
disposed of" in the 1997 Consolidated Statement of Operations. Interest income
decreased $1,196,000 during 1997 due to the Company maintaining less average
cash and cash equivalent balances during 1997 compared to 1996.
Other, net in 1997 was income of $920,000 versus income of $1,074,000 in
1996. The decrease was a result of the Company receiving settlements from
various insurance companies associated with environmental issues in the prior
year.
Income before provision for income taxes to $14,565,000 in 1997 from
$20,966,000 in 1996. This decrease relates primarily to the gain on sale of
Union Pacific stock recognized in 1996, offset partially by increased
operating income from both the Electrical/Electronics and the Maintenance
Products Groups.
Provision for income taxes was $4,922,000 or an effective tax rate of
33.8% in 1997, and $7,639,000 or an effective rate of 36.4% in 1996. The
effective tax rate in 1997 reflects the benefits obtained from the Woods
acquisition effective December 1996.
Equity in income of unconsolidated affiliates increased $636,000 in 1997
primarily due to Bee Gee Holding Company improving upon an unfavorable year in
1996. Note that the income from this equity investment has been included
within the line item "Equity in income of other operations to be disposed of"
on the Consolidated Statement of Operations for 1997. See Note 6 to
Consolidated Financial Statements.
Liquidity and Capital Resources
- -------------------------------
Combined cash and cash equivalents decreased 42% to $12,898,000 on
December 31, 1998, from $22,351,000 on December 31, 1997, mostly due to the
acquisition activity during the current year. Excluding current year
acquisitions, cash flow from operations was substantial enough to cover
liquidity and capital resource requirements with the exception of the debt-
financed acquisition of Contico International, L.L.C. in January of 1999, the
Company believes that cash flow from operating activities should be able to
cover its 1999 liquidity and capital resource requirements. Current ratios
were 2.52 to 1.00 and 2.80 to 1.00 at December 31, 1998 and 1997,
respectively. Working capital decreased 2% to $100,971,000 on December 31,
1998, from $103,252,000 on December 31, 1997. This decrease is primarily
attributable to the previously mentioned cash and cash equivalents decrease in
1998, offset by the Company's emphasis on better management of working
capital.
Katy has authorized and expects to commit approximately $24,000,000 for
capital projects in 1999, of which $22,500,000 will be expended by the
Company's ongoing operations, exclusive of acquisitions, if any, and expects
to meet these capital expenditure requirements through the use of available
cash and internally generated funds. The Company continues to search for
appropriate acquisition candidates, and may obtain all or a portion of the
financing for future acquisitions through its unsecured $215 million credit
agreement described below.
On December 11, 1998, the Company amended and restated its revolving
credit agreement agented by Bank of America with LaSalle National Bank acting
as the managing agent. The amended and restated credit agreement is for an
unsecured $215 million revolving loan which replaced an unsecured $80 million
revolving loan facility. The Company had $39,000,000 outstanding under this
agreement as of December 31, 1998. The borrowings under this agreement
resulted from the Wilen purchase in August of 1998. On January 8, 1999, the
Company completed the Contico acquisition, resulting in additional borrowings
of $132,000,000 under this credit agreement. The Company had $162,000,000
outstanding under this agreement as of March 18, 1999.
At December 31, 1998, Katy had short and long-term indebtedness of
$39,980,000. Total debt was 21.1% of total capitalization at December 31,
1998. See Note 7 to Consolidated Financial Statements for further discussion.
On May 19, 1998, Katy's Board of Directors authorized the Company to
repurchase an additional 250,000 shares, bringing the total authorized shares
to 1,150,000 since 1995. In connection therewith, Katy repurchased 12,000,
38,000 and 509,800 of its common shares during the years ended December 31,
1998, 1997 and 1996, at a total cost of $217,000, $566,000 and $6,367,000,
respectively. During 1998, the repurchase activities were minimal due to
restrictions resulting from acquisition activity. As of December 31, 1998,
238,000 common shares may still be purchased to complete the repurchase
program.
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
Notes 3 and 4 to Consolidated Financial Statements for further discussion.
New Accounting Pronouncements
- -----------------------------
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that
specified costs incurred in developing or obtaining internal-use software, as
defined by SOP 98-1, be capitalized once certain criteria have been met and
amortized in a systematic and rational manner over the software's estimated
useful life. SOP 98-1 is effective for fiscal years beginning after December
15, 1998, and stipulates that costs incurred prior to initial application of
the statement not be adjusted according to the statement's provisions.
Adoption of SOP 98-1 is not expected to have a significant impact on the
Company's financial position or results of operations.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires that costs of start-up activities, as defined
by SOP 98-5, be expensed as incurred. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998, and stipulates that adoption would be
reported as a cumulative change in accounting principle, meaning that any
previously capitalized start-up costs would be written off. Adoption of
SOP 98-5 is not expected to have a significant impact on the Company's
financial position or results of operations.
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 requires that all
derivatives be recognized as either assets or liabilities in the statement of
financial position and requires that those assets and liabilities be measured
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and its resulting designation.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Since the Company is not actively engaged in hedging
activities, adoption of this statement is not expected to have a significant
impact on the Company's financial position or results of operations.
Environmental and Other Contingencies
- -------------------------------------
In December 1996, Banco del Atlantico, a bank located in Mexico, filed
a lawsuit against Woods Industries, Inc. ("Woods"), a subsidiary of the
Company, and against certain past and then present officers and directors and
former owners of Woods, alleging that the defendants participated in a
violation of the Racketeer Influenced and Corrupt Organizations Act involving
allegedly fraudulently obtained loans from Mexican banks, including the
plaintiff, and "money laundering" of the proceeds of the illegal enterprise.
All of the foregoing is alleged to have occurred prior to the Company's
purchase of Woods. The plaintiff also alleges that it made loans to an entity
controlled by certain officers and directors based upon fraudulent
representations. The plaintiff seeks to hold Woods liable for its alleged
damage under principles of respondeat superior and successor liability. The
plaintiff is claiming damages in excess of $24,000,000 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. The Company may have recourse against the former owner
of Woods and others for, among other things, violations of covenants,
representations and warranties under the purchase agreement through which the
Company acquired Woods, and under state, federal and common law. In addition,
the purchase price under the purchase agreement may be subject to adjustment
as a result of the claims made by Banco del Atlantico. The extent or limit of
any such recourse cannot be predicted at this time.
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.
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency, state environmental agencies
and private parties as potentially responsible parties ("PRPs") at a number of
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") or equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
Under the federal Superfund statute, parties could be held jointly and
severally liable, thus subjecting them to potential individual liability for
the entire cost of cleanup at the site. Based on its estimate of allocation
of liability among PRPs, the probability that other PRPs, many of whom are
large, solvent, public companies, will fully pay the costs apportioned to
them, currently available information concerning the scope of contamination,
estimated remediation costs, estimated legal fees and other factors, the
Company has recorded and accrued for indicated environmental liabilities in
the aggregate amount of approximately $5,000,000 at December 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.
The most significant environmental matters in which the Company is
currently involved are as follows:
1. In 1993, the United States Environmental Protection Agency ("USEPA")
initiated a Unilateral Administrative Order Proceeding under Section
7003 of the Resource Conservation and Recovery Act ("RCRA") against
W.J. Smith and Katy. The proceeding requires certain actions at the
W.J. Smith site and certain off-site areas, as well as development
and implementation of additional cleanup activities to mitigate off-
site releases. In December 1995, W.J. Smith, Katy and USEPA agreed
to resolve the proceeding through an Administrative Order on Consent
under Section 7003 of RCRA. Pursuant to the Order, W.J. Smith is
currently implementing a cleanup to mitigate off-site releases.
2. During 1995, the Company reached agreement with the Oregon Department
of Environmental Quality ("ODEQ") as to a cleanup plan for PCB
contamination at the Medford, Oregon facility of the former Standard
Transformer division of American Gage. The agreement required the
Company to pay $1,300,000 of the first $2,000,000 in clearing costs.
Those funds were expended in 1998. The present occupant of the
site, Balteau Standard, Inc. was responsible for the remaining
$700,000 of the first $2,000,000 and the next $450,000 in cleanup
costs above the $2,000,000. The parties are now sharing equally in
cleanup costs. Katy believes the cleanup plan has been
successful and has requested that the ODEQ inspect and approve the
remediation work. Katy has received such approval with respect to a
portion of the cleanup plan. Further monitoring of groundwater and
testing and cleanup of adjacent property may be required before
approval can be obtained with respect to the remainder of the plan.
Pending such approval, the liability of Katy and its subsidiary
cannot be determined at this time.
3. Pursuant to an agreement executed in connection with the sale of
assets of JEI Liquidating, Inc., a Katy subsidiary, Katy has agreed
to defend and indemnify the buyer of such assets, Allard Industries,
Inc. ("Allard"), in the case captioned United States v. Exxon, et al.
in U.S. District Court, D.N.H., consolidated nos. C-92-486; C-93-95-
L; C-94-148-Lcas. The case concerns the disposal of hazardous
substances at a landfill site in Londonderry, New Hampshire, at which
JEI Liquidating, Inc. allegedly disposed of hazardous substances from
its Manchester, New Hampshire facility. The case arises under the
Superfund law. The parties to the litigation have reached a
settlement in principle, the specific terms of which are being
negotiated in a Consent Decree. Under the expected Consent Decree,
Allard/Katy will pay approximately $300,000 and perform no future
work at the site, subject to limited re-openers. In exchange, Allard
and Katy will receive a release and contribution protection.
Honeywell Inc., a former owner and operator of JEI Liquidating, Inc.'s
Manchester, New Hampshire facility, has agreed in principle to pay
$40,000 of Allard/Katy's settlement under the Consent Decree.
Pending entry of the Consent Decree and receipt of a release, Katy's
liability 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.
Year 2000
- ---------
The year 2000 issue is a problem that has a potentially material adverse
impact on the Company as well as governments, businesses, and individuals
throughout the world. The year 2000 issue 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 and services that rely on these computer programs or
microchips.
Based on assessment activities conducted by the Company beginning in 1997
regarding the year 2000 problem, Katy determined that the Company required
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 that it has
identified the major sources of potential internal year 2000 issues and
implemented a company wide year 2000 remediation program (the "Y2K Program")
during 1998 which includes the performance of due diligence procedures for all
acquisitions made by the Company. The Company has significantly completed the
Y2K Program as of December 31, 1998 and expects to fully complete the Y2K
Program by July 31, 1999, however, testing of new systems will continue
throughout the year. The Company believes that completion of the Y2K Program
will substantially mitigate all known significant potential internal year 2000
problems by July 31, 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 guarantee of the year 2000 readiness of those entities or the potential
material adverse effect on the Company.
The Company has expensed approximately $824,000 of costs incurred to date
related to the Y2K Program. Approximately $549,000 has been expensed for
fiscal year 1998. The total remaining costs of remediation are estimated to
be $500,000. 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.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially adversely affect the Company's
results of operations, liquidity and financial condition. Due to the
general uncertainty of the year 2000 readiness of third-party suppliers,
customers and others, the Company is unable to determine at this time
whether the consequences of year 2000 failures will have a material impact
on its results of operations, liquidity or financial condition. However,
the Y2K Program is expected to significantly reduce Katy's level of
uncertainty about the year 2000 problem.
Other
- -----
Katy's 1999 operating plan of the continuing segments indicates an
improvement in results compared to those reported in 1998. The plan reflects
slightly lower results in the first quarter of 1999 from continuing segments
compared to the year earlier periods due mainly to acquisition accounting of
inventory purchased at Contico International, L.L.C., as well as the loss of
business at Woods Industries, Inc., previously announced on November 4, 1998.
The plan for the second, third and fourth quarters of 1999 exceed the year
earlier periods and projects an improved year to year result.
Some of the statements in this Form 10-K, as well as statements by the
Company in periodic press releases, oral statements made by the Company's
officials to analysts and stockholders 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.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The Company's exposure to market risk associated with changes in
interest rates relates primarily to its debt obligations and temporary cash
investments. The Company does not use derivative financial instruments
relating to either of these exposures. The Company's debt obligations are
generally at short-term LIBOR rates, and its temporary cash investments earn
rates of interest available on securities with maturities of three months or
less.
(In Thousands) Expected Maturity Dates
ASSETS
- ------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Temporary cash
investments
Fixed rate $3,600 $ - $ - $ - $ - $ - $3,600 $3,600
Average interest
rate 4.5% - - - - - 4.5%
LONG-TERM DEBT
- --------------
Fixed rate debt $ 72 $ 71 $ 71 $ 766 $ - $ - $ 980 $ 980
Average
interest rate 7.14% 7.14% 7.14% 7.14% - - 7.14%
Variable rate
debt $ - $ - $39,000 $ - $ - $ - $39,000 $39,000
Average
interest rate 7.33% 7.33% 7.33% 7.33% - - 7.33%
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
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.
/S/John R. Prann, Jr.
- ---------------------
John R. Prann, Jr.
President and Chief Executive Officer
/S/Stephen P. Nicholson
- -----------------------
Stephen P. Nicholson
Vice President, Finance and Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO KATY INDUSTRIES, INC.:
We have audited the accompanying consolidated balance sheet of KATY
INDUSTRIES, INC., (a Delaware corporation) and subsidiaries as of December 31,
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audit 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Katy
Industries, Inc. and subsidiaries as of December 31, 1998, and the results
of its operations and its cash flows for the year then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
January 26, 1999.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of Katy Industries, Inc.
We have audited the accompanying consolidated balance sheet of Katy
Industries, Inc. and subsidiaries (the "Company") as of December 31, 1997,
and the related statements of consolidated operations, stockholders' equity
and cash flows for each of the two years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with 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 provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Katy Industries, Inc. and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for each of the two years in the period then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado,
January 27, 1998.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(Thousands of Dollars)
ASSETS
------
1998 1997
CURRENT ASSETS: ---- ----
Cash and cash equivalents - Note 1 $ 12,898 $ 22,351
Accounts receivable, trade, net of allowance
for doubtful accounts of $963 and $857 53,449 49,721
Notes and other receivables, net of allowance
for doubtful notes of $198 and $410 3,246 2,263
Inventories - Note 1 69,394 57,113
Deferred income taxes - Note 11 13,268 13,233
Other current assets 3,158 3,252
Net current assets of
operations to be disposed of - Note 4 1,203 2,005
Net current assets of
discontinued operations - Note 4 10,959 10,588
------- -------
Total current assets 167,575 160,526
------- -------
OTHER ASSETS:
Notes receivable, net of allowance for
doubtful notes of $2,452 and $2,500 953 1,106
Cost in excess of net assets
acquired - Notes 1 and 3 33,576 8,544
Other intangibles - Note 3 23,621 8,803
Miscellaneous - Note 8 2,551 1,272
Net noncurrent assets of
operations to be disposed of - Note 4 15,521 24,538
Net noncurrent assets of
discontinued operations - Note 4 4,279 4,964
------- -------
Total other assets 80,501 49,227
------- -------
PROPERTIES - Note 1:
Land and improvements 1,435 1,214
Buildings and improvements 10,677 14,987
Machinery and equipment 60,340 34,710
------- -------
72,452 50,911
Accumulated depreciation (27,353) (23,504)
------- -------
Net properties 45,099 27,407
------- -------
$293,175 $237,160
======= =======
See Notes to Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(Thousands of Dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
CURRENT LIABILITIES: ---- ----
Accounts payable $28,017 $24,974
Accrued compensation 5,354 2,485
Accrued expenses - Note 1 31,626 28,946
Accrued interest and taxes 910 248
Current maturities, long-term debt - Note 7 72 -
Dividends payable 625 621
------- -------
Total current liabilities 66,604 57,274
------- -------
LONG-TERM DEBT, less current maturities - Note 7 39,908 -
------- -------
OTHER LIABILITIES - Note 8 9,310 11,280
------- -------
EXCESS OF ACQUIRED NET
ASSETS OVER COST, Net - Notes 1 and 3 5,198 6,902
------- -------
DEFERRED INCOME TAXES - Note 11 22,839 22,533
------- -------
COMMITMENTS AND CONTINGENCIES - Notes 7, 12 and 14
STOCKHOLDERS' EQUITY - Note 9:
Common stock, $1 par value; authorized
25,000,000 shares; issued 9,822,204 shares 9,822 9,822
Additional paid-in capital 51,243 51,127
Accumulated other comprehensive income (2,309) (1,462)
Other adjustments (1,302) (814)
Retained earnings 112,784 102,194
Treasury stock, at cost, 1,483,890
and 1,542,197 shares, respectively (20,922) (21,696)
------- -------
Total stockholders' equity 149,316 139,171
------- -------
$293,175 $237,160
======= =======
See Notes to Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(Thousands of Dollars, Except Per Share Amounts)
1998 1997 1996
---- ---- ----
Net sales $342,315 $286,023 $156,024
Cost of goods sold 243,751 207,000 108,458
------- ------- -------
Gross profit 98,564 79,023 47,566
Selling, general and administrative expenses (83,289) (66,000) (39,596)
Equity in income (loss) of operations to be
disposed of - Note 2, 3, 4 and 6 3,144 (325) -
Interest expense (1,214) (236) (1,069)
Interest income 1,093 1,183 2,379
Gain on sales of marketable
securities - Notes 1 and 15 - - 10,612
Other, net 1,523 920 1,074
------- ------- -------
Income before provision for income
taxes and equity in loss of
unconsolidated affiliates 19,821 14,565 20,966
Provision for income taxes - Note 11 (6,739) (4,922) (7,639)
------- ------- -------
Income from operations before equity in
loss of unconsolidated affiliates 13,082 9,643 13,327
Equity in loss of unconsolidated
affiliates (net of tax) - Note 6 - - (564)
------- ------- -------
Income from continuing operations 13,082 9,643 12,763
Discontinued operations - Note 4:
Income from operations of
discontinued businesses (net of tax) - 1,959 953
------- ------- -------
Net income $ 13,082 $ 11,602 $ 13,716
======= ======= =======
Earnings per share of
common stock - Basic (Note 5):
Income from continuing operations $ 1.58 $ 1.16 $ 1.53
Discontinued operations - .24 .11
------- ------- -------
Net income $ 1.58 $ 1.40 $ 1.64
======= ======= =======
Earnings per share of
common stock - Diluted (Note 5):
Income from continuing operations $ 1.55 $ 1.15 $ 1.53
Discontinued operations - .23 .11
------- ------- -------
Net income $ 1.55 $ 1.38 $ 1.64
======= ======= =======
Dividends paid per share of common stock $ .30 $ .30 $ .2875
======= ======= =======
See Notes to Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other
Number Par Paid-in Comprehensive Other Retained Treasury Comprehensive
of Shares Value Capital Income(Loss) Adjustments Earnings Stock Income(Loss)
--------- ----- ------- ------------ ----------- -------- ----- ------------
(Thousands of dollars)
Balance, January 1, 1996 9,821,329 $9,821 $51,111 $4,006 $(349) $81,925 $(16,184)
Net income - - - - - 13,716 - $13,716
Foreign currency
translation adjustments - - - 3 - - - 3
Unrealized holding gains
adjustment - Note 1 - - - (5,297) - - - (5,297)
------
Comprehensive income $ 8,422
Common stock dividends - - - - - (2,499) - ======
Issuance of shares under
Stock Purchase Plan
- Note 9 875 1 6 - (141) (43) 337
Purchase of Treasury
Shares - Note 9 - - - - - - (6,367)
--------- ------ ------- ------ ----- ------- --------
Balance, December 31, 1996 9,822,204 9,822 51,117 (1,288) (490) 93,099 (22,214)
Net income - - - - - 11,602 - $11,602
Foreign currency
translation adjustments - - - (174) - - - (174)
------
Comprehensive income $11,428
Common stock dividends - - - - - (2,481) - ======
Issuance of shares under
Stock Purchase Plan
- Note 9 - - (31) - - (26) 295
Other issuance of
shares - Note 9 - - 41 - (324) - 876
Purchase of Treasury
Shares - Note 9 - - - - - - (653)
--------- ------ ------- ------ ----- ------- --------
Balance, December 31, 1997 9,822,204 9,822 51,127 (1,462) (814) 102,194 (21,696)
Net income - - - - - 13,082 - $13,082
Foreign currency
translation adjustments - - - (847) - - - (847)
------
Comprehensive income $12,235
Common stock dividends - - - - - (2,492) - ======
Issuance of shares under
Stock Option Plan
- Note 9 - - (54) - - - 274
Other issuance of
shares - Note 9 - - 170 - (488) - 717
Purchase of Treasury
Shares - Note 9 - - - - - - (217)
---------- ------ ------- ------ ----- ------- --------
Balance, December 31, 1998 9,822,204 $9,822 $51,243 $(2,309) $(1,302) $112,784 $(20,922)
========== ====== ======= ====== ====== ======= ========
See Notes to Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(Thousands of Dollars)
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $13,082 $11,602 $13,716
Depreciation and amortization 7,162 4,568 5,505
(Gain) loss on sale of assets (2,864) (653) 160
Gain on marketable security transactions - - (10,612)
Equity in (income) loss of
unconsolidated affiliates (534) - 564
Deferred income taxes 1,117 1,287 6,239
Changes in assets and liabilities,
net of acquisition/disposition
of subsidiaries:
Receivables 7,890 (5,528) 9,547
Inventories 463 2,996 (1,983)
Other current assets (636) (553) (373)
Accounts payable and accrued liabilities (2,051) 682 (44)
Other, net (1,096) 21 (195)
------ ------ ------
Net cash flows provided by
operating activities 22,533 14,422 22,524
------ ------ ------
Cash flows from investing activities:
Proceeds from sale of assets 482 1,487 1,205
Collections of notes receivable and
receivable from sale of business 710 451 13,211
Proceeds from sales of marketable securities - - 18,681
Proceeds from sale of subsidiary 12,237 5,493 -
Payments for purchase of subsidiaries,
net of cash acquired (71,091) (12,788) (42,648)
Capital expenditures (11,314) (8,654) (5,319)
------ ------ ------
Net cash flows used in
investing activities (68,976) (14,011) (14,870)
------ ------ ------
Cash flows from financing activities:
Notes payable activity, net - - (14,193)
Proceeds from issuance of long-term debt 44,012 - -
Principal payments on long-term debt (5,277) (657) (1,019)
Payments of dividends (2,492) (2,481) (2,452)
Purchase of treasury shares (217) (653) (6,367)
Other - 359 -
------ ------ ------
Net cash flows provided by
(used in) financing activities 36,026 (3,432) (24,031)
------ ------ ------
Effect of exchange rate changes on cash - - (3)
------ ------ ------
Net decrease in cash and cash equivalents (10,417) (3,021) (16,380)
Cash and cash equivalents
at beginning of year 24,300 27,321 43,701
------ ------ ------
Cash and cash equivalents at end of year 13,883 24,300 27,321
Cash of discontinued operations
and operations to be disposed of 985 1,949 982
------ ------ ------
Cash and cash equivalents of
continuing operations $12,898 $22,351 $26,339
====== ====== ======
See Notes to Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy - The consolidated financial statements include the
accounts of Katy Industries, Inc. and subsidiaries in which it has a greater
than 50% interest, collectively "Katy" or the "Company". All significant
intercompany accounts, profits and transactions have been eliminated in
consolidation. Investments in affiliates that are not majority owned and
where the Company does not exercise significant influence are reported using
the equity method.
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 the years ended December
31, 1998, 1997, and 1996 are described in Note 3.
There are no restrictions on the payment of dividends by consolidated
subsidiaries to Katy. Katy's consolidated retained earnings as of December
31, 1998 include $6,256,000 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 affiliates 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.
Cash and Cash Equivalents - Cash equivalents consist of highly liquid
investments with original maturities of three months or less and total
$12,898,000 and $22,351,000, as of December 31, 1998 and 1997, respectively,
which approximates their fair value. The Company places its temporary cash
investments in quality financial institutions. As such, the Company believes
no significant concentration of credit risk exists with respect to these
investments.
Supplemental Cash Flow Information - Noncash investing and financing
activities are disclosed in Notes 1, 3, 6 and 9. Cash paid during the year
for interest and income taxes is as follows:
1998 1997 1996
---- ---- ----
(Thousands of dollars)
Interest $1,064 $1,076 $1,143
===== ===== =====
Income taxes $6,910 $3,694 $3,445
===== ===== =====
Marketable Securities - During 1996, the Company sold its remaining
investment in Union Pacific common stock and Union Pacific Resources common
stock for total proceeds of $18,681,000 resulting in a pre-tax gain of
$10,612,000. During 1996, unrealized holding gains, net of income taxes,
included in stockholders' equity decreased $5,297,000.
Research and Development Costs - Research and development costs are
expensed as incurred.
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,
1998 1997
---- ----
(Thousands of dollars)
Raw materials $26,155 $ 8,314
Work in process 6,073 3,110
Finished goods 37,166 45,689
------ ------
$69,394 $57,113
====== ======
Cost in Excess of Net Assets Acquired - In connection with certain
acquisitions, the Company recorded an intangible asset for the cost of the
acquisition in excess of the fair value of the net assets acquired. This
intangible asset is being amortized using the straight-line method over
periods ranging from 10 to 20 years.
Excess of Acquired Net Assets Over Cost - In connection with the
acquisition of Woods Industries, Inc., the Company recorded negative goodwill
for the excess of the fair value of the net assets acquired over the cost of
the acquisition. Negative goodwill is being amortized using the straight-line
method over a period of 5 years.
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.
During 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 CEGF that the Company disposed of during 1998. During
1997, the Company incurred additional debt of $2,045,000 relating to capital
equipment. These are classified as non-cash investing and financing for
purposes of the Consolidated Statement of Cash Flows.
Impairment of Assets - Long-lived assets are reviewed for impairment if
events or circumstances indicate the carrying amount of these assets may not
be recoverable. If this review indicates that the carrying value of these
assets will not be recoverable, based on future net cash flows from the use or
disposition of the asset, the carrying value is reduced to fair value. See
Note 2 for 1998 asset impairment discussion.
Accrued Expenses - The components of accrued expenses are:
December 31,
1998 1997
---- ----
(Thousands of dollars)
Accrued insurance $ 6,509 $ 6,538
Accrued environmental costs 4,931 4,355
Other accrued expenses 20,186 18,053
------ ------
$31,626 $28,946
====== ======
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.
New Accounting Pronouncements - In February 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") 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 has adopted this statement and the application of this pronouncement
is included in Note 8.
In June 1997, the Financial Accounting Standards Board issued SFAS 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
statements for the year ending December 31, 1998. The Company has adopted
this statement and the application of this pronouncement is included in
Note 13.
In June 1997, the Financial Accounting Standards Board issued SFAS 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. The Company has adopted this statement and the
application of this pronouncement is included in the Consolidated Financial
Statements.
Revenue Recognition - Sales are recognized upon shipment of products to
customers or when services are performed.
Reclassifications - Certain amounts from prior years have been
reclassified to conform to the 1998 financial statement presentation.
Note 2. ASSET IMPAIRMENT
During 1998, Katy evaluated the carrying value of Savannah Energy Systems
Company ("SESCO"). Continued operating and cash flow losses combined with the
efforts to dispose of SESCO led to the Company's review of SESCO's carrying
value. Accordingly, during the fourth quarter of 1998, Katy adjusted the
carrying value of SESCO's long-lived assets to their estimated fair value,
resulting in a pre-tax impairment of $2,800,0000. The estimated fair value
was based upon comparable asset values and anticipated future cash flows
discounted at a rate commensurate with the risk involved. SESCO is one of the
"Operations to be Disposed Of" included in the previously reported Divestiture
and Reorganization Plan announced on January 5, 1998. SESCO's historical
operating results have been segregated as "Equity in income (loss) of
operations to be disposed of" on the accompanying Consolidated Statements of
Operations for the years ended December 31, 1998 and 1997. The related net
assets have been separately identified on the Consolidated Balance Sheets as
"Net current assets or Net noncurrent assets of operations to be disposed of".
After recording the above impairment, the net assets held for sale for SESCO
are as follows:
Current assets $1,414
Current liabilities $ 211
-----
Net current assets $1,203
=====
Noncurrent assets $8,487
Noncurrent liabilities $ -
-----
Net noncurrent assets $8,487
-----
Note 3. ACQUISITIONS AND DISPOSITIONS
Acquisitions
- ------------
On December 31, 1998, the Company acquired the assets of the Bay State
Gritcloth division of Tyrolit North America, Inc. The division manufactures
an industrial product line of specialty abrasives and has annual sales of
approximately $4,000,000. The acquisition has been accounted for under the
purchase method and, accordingly, the purchase price is preliminary and
adjustments may be recorded through December 1999. The accounts of this
acquisition have been included in the Company's Consolidated Financial
Statements from the acquisition date. The estimated aggregate purchase price
for this division was approximately $4,000,000. The estimated cost in excess
of net assets acquired of approximately $1,950,000, subject to additional
purchase accounting adjustments, has been recorded as "Cost in excess of net
assets acquired" in the Consolidated Balance Sheets and is being amortized on
a straight line basis over twenty years.
On August 11, 1998, the Company purchased substantially all of the assets
of The Wilen Companies, Incorporated. The Company operates the business
through its Wilen Products, Inc. subsidiary ("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 this acquisition have been included in the
Company's Consolidated Financial Statements from the acquisition date. The
estimated aggregate purchase price for the Wilen business was approximately
$50,000,000. The estimated cost in excess of net assets acquired of
approximately $24,000,000, subject to additional purchase accounting
adjustments, has been recorded as "Cost in excess of net assets acquired" in
the Consolidated Balance Sheets and is being amortized on a straight line
basis over twenty years. In addition, Katy has recorded intangible assets of
approximately $14,900,000, consisting of customer lists, trademarks and
tradenames, and accumulated work force. These intangible assets are being
amortized over periods ranging from 7 1/2 to 20 years. The following
unaudited pro forma information reflects the pro forma results of operations
for the Company giving effect to the Wilen acquisition as if the Wilen
acquisition occurred on January 1, 1997. The unaudited pro forma results
include the unaudited historical operating results of Wilen for the seven
months ended July 31, 1998 and the twelve months ended December 31, 1997.
The Company's historical information presented below excludes net income of
$2,075,000 or $0.25 per share (basic) from discontinued operations and other
operations to be disposed of for December 31, 1998. The Company's historical
information presented below excludes net income of $1,780,000 or $0.21 per
share (basic) from discontinued operations and other operations to be disposed
of and $387,000 or $.05 per share for the sale of property for December 31,
1997. Disclosure results may not be indicative of future results.
Year Ended Year Ended
December 31, 1998 December 31 ,1997
----------------- -----------------
(In Thousands, Except Per Share Data)
Katy Pro Katy Pro
Historical Forma Historical Forma
Net Sales $342,315 $365,628 $286,023 $324,017
Income from Operations $ 15,275 $ 17,054 $ 13,023 $ 15,928
Net Income $ 11,007 $ 11,006 $ 9,435 $ 9,363
Earnings per share - Basic $ 1.33 $ 1.33 $ 1.14 $ 1.13
Earnings per share - Diluted $ 1.30 $ 1.30 $ 1.12 $ 1.11
On May 21, 1998, the Company purchased substantially all of the assets
of the Consumer Electrical Division of Noma Industries, Limited. The Company
operates the business through its Woods Industries (Canada), Inc. subsidiary
("Woods Canada"). Woods Canada 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. The Company operates the business through its Glit/Disco, Inc.
subsidiary ("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 Woods Canada and Disco
businesses was approximately $17,100,000. The estimated costs in excess of the
net assets acquired of approximately $400,000, subject to additional purchase
accounting adjustments, has been recorded as "Cost in excess of net assets
acquired" in the Consolidated Balance Sheets and is being amortized on a
straight line basis over twenty years.
On August 6, 1997, the Company purchased Loren Products ("Loren"). Loren
is a manufacturer and distributor of cleaning and abrasive products for the
industrial markets and building products for the consumer markets. The
estimated purchase price, including acquisition costs was $12,788,000. The
acquisition has been accounted for under the purchase method, and accordingly,
the estimated cost in excess of the net assets acquired of approximately
$2,650,000 has been recorded as cost in excess of net assets of business
acquired in the Consolidated Balance Sheets and is being amortized over twenty
years. In addition, Katy has recorded intangible assets of approximately
$4,790,000, consisting of customer lists, trademarks and tradenames, and
accumulated work force. These intangible assets are being amortized over
periods ranging from 7 1/2 to 20 years. The accounts of Loren have been
included in the Company's Consolidated Financial Statements from the
acquisition date.
On December 2, 1996, the Company purchased all of the outstanding shares
of common stock of Woods Industries, Inc., ("Woods"). Woods is a manufacturer
and distributor of electrical corded products as well as electrical and
electronic passive components. The estimated purchase price, including
acquisition costs, was $45,100,000. The purchase price was paid in cash, of
which $3,250,000 was funded through a borrowing against the Company's
unsecured line of credit at The Northern Trust Company. The acquisition has
been accounted for under the purchase method, and accordingly, the estimated
excess of acquired net assets over cost of approximately $8,605,000 has been
recorded as "Excess of acquired net assets over cost" in the Consolidated
Balance Sheets and is being amortized over five years. The accounts of Woods
have been included in the Company's Consolidated Financial Statements from the
acquisition date.
The following unaudited pro forma information has been prepared assuming
the acquisition of Woods had occurred at the beginning of 1996. The pro forma
information includes adjustments for (1) the elimination of Woods'
depreciation due to the write-down of plant and equipment pursuant to purchase
accounting, (2) the elimination of Woods' amortization due to the write-down
of cost in excess of businesses acquired pursuant to purchase accounting,
(3) the amortization of the estimated excess of acquired net assets over cost
recorded pursuant to purchase accounting, (4) elimination of Woods' interest
expense as all debt is repaid on date of purchase pursuant to the purchase
agreement, (5) decrease in interest income due to use of cash for the purchase
price, and (6) the estimated related income tax effects. The pro forma
financial information is presented for informational purposes only and may not
be indicative of the results of operations as they would have been had the
transaction been effected on the assumed dates nor is it necessarily
indicative of the results of operations which may occur in the future.
Year ended December 31,
1996
----
(In Thousands, Except Per Share)
Net sales $301,863
Income from operations $ 17,736
Net income $ 18,538
Earnings per share - Basic and Diluted $ 2.22
Dispositions
- ------------
On June 11, 1998, the Company completed its divestiture of C.E.G.F.
(USA), Inc., ("CEGF") for approximately $12,237,000. The net pre-tax book
gain of $6,122,000 had been recorded and included as "Equity in income (loss)
of operations to be disposed of" on the accompanying Consolidated Statement of
Operations for the year ended December 31, 1998. See Note 4 for further
discussion.
On July 14, 1997, the Company completed its divestiture of the Beehive
division of Hamilton Precision Metals, Inc., ("Hamilton") for net proceeds of
approximately $5,493,000 and the assumption of certain liabilities of Beehive.
Beehive is one of the businesses that comprise the discontinued operations.
See Note 4 for further discussion. Accordingly, the gain on disposal has been
deferred pending the disposal of all of the discontinued operations.
On April 4, 1996, the Company sold substantially all of the assets of its
Walsh Press subsidiary for net proceeds of $1,125,000 which included net cash
of $721,000 and a note receivable of $404,000, resulting in a nominal loss.
The note receivable portion of the consideration is a noncash investing
transaction. The Consolidated Financial Statements include Walsh Press'
results of operations through that date.
Note 4. DISCONTINUED OPERATIONS AND OPERATIONS TO BE DISPOSED OF
On December 31, 1997, the Board of Directors approved a plan to dispose
of the Company's previously reported Machinery Manufacturing segment. The
businesses included as "Discontinued operations" are Airtronics, Inc.,
Beehive, Bach-Simpson, Ltd., Diehl Machines, Inc., and Peters Machinery
Company. The divestiture of Beehive was completed in July of 1997 and the
sale of Bach Simpson, Ltd. closed on January 25, 1999. The Company believes
that the remaining businesses will be fully divested and the plan completed
during the year ending December 31, 1999. On October 20, 1998, the Company
announced that the proposed sale of the five companies announced on April 15,
1998, was terminated. All of the remaining discontinued operations were
included in this proposed sale to Publicker Industries, Inc., thus, undergoing
due diligence from the period April 15, 1998 through September 30, 1998. The
Company believes that the remaining businesses will be fully divested and the
plan completed during the year ending December 31, 1999. The expected manner
of disposition for these businesses is to sell the net assets of each of these
operations. See Notes 3 and 17 for further discussion.
The historical operating results have been segregated as "Discontinued
operations" on the accompanying Consolidated Statements of Operations for all
periods presented. The related assets and liabilities have been separately
identified on the Consolidated Balance Sheets as "Net current assets or Net
noncurrent assets of discontinued operations". Discontinued operations have
not been segregated on the Consolidated Statements of Cash Flows. The net
income from these operations during 1998 has been deferred and will not be
recognized until the total of the gains and losses from the sales of these
companies can be determined with certainty to be a net gain.
Selected financial data for the discontinued operations is summarized as
follows:
For the Year Ended December 31,
1998 1997 1996
---- ---- ----
(In Thousands, Except Per Share Data)
Net sales $23,349 $31,537 $32,494
Income before income taxes $ - $ 3,110 $ 1,513
Income taxes - 1,151 560
------ ------ ------
Net income $ - $ 1,959 $ 953
====== ====== ======
Net income per share - Basic $ - $ .24 $ .11
====== ====== ======
Net income per share - Diluted $ - $ .23 $ .11
====== ====== ======
In connection with the previously mentioned divestiture plan, the Board
of Directors also approved the disposal of a portion of the Company's
previously reported Distribution and Service segment and one of the Company's
equity investments. These businesses are reported as "Operations to be
disposed of" and include CEGF, SESCO and the Company's equity investment in
Bee Gee Holding Company, Inc. ("Bee Gee"). Katy has decided to retain
Hamilton, due to its earnings recovery and growth potential. Accordingly,
Hamilton has been removed from the caption "Equity in income (loss) of
operations to be disposed of" and consolidated in the financial statements
with the continuing operations of the Electrical/Electronics segment for both
1998 and 1997. The sale of CEGF was closed on June 11, 1998 and the Company
continues to explore its options with respect to SESCO. The Company believes
that Bee Gee will be fully divested during the year ending December 31, 1999.
The historical operating results of "Operations to be disposed of" have
been segregated as "Equity in income (loss) of operations to be disposed of"
on the accompanying Consolidated Statements of Operations for 1998 and 1997.
The related assets and liabilities have been separately identified on the
Consolidated Balance Sheets as "Net current assets or Net noncurrent assets of
operations to be disposed of". The operating financial data for the year
ended December 31, 1998 includes a net pre-tax gain of $6,122,000 offset
partially by a pre-tax impairment of $2,800,000 relating to the reduction in
the book value of SESCO. See Notes 2 and 15 for further discussion.
Selected financial data for operations to be disposed of, is summarized
as follows:
For the Year Ended December 31,
1998 1997 1996
---- ---- ----
(In Thousands, Except Per Share Data)
Net sales $ 6,297 $ 9,568 $10,011
Income (loss) before income taxes $ 3,144 $ (325) $ 432
Income taxes (benefit) 1,069 (146) 157
------ ------ ------
Net income (loss) $ 2,075 $ (179) $ 275
====== ====== ======
Net income (loss)
per share - Basic $ .25 $ (.03) $ .03
====== ======= ======
Net income (loss)
per share - Diluted $ .25 $ (.02) $ .03
====== ======= ======
Net assets held for sale for "discontinued operations" are carried at cost,
which does not exceed estimated net realizable value, as follows:
December 31,
1998 1997
---- ----
(In Thousands)
Discontinued Operations
-----------------------
Current assets $13,431 $14,202
Current liabilities (2,472) (3,614)
------ ------
Net current assets of
discontinued operations $10,959 $10,588
====== ======
Noncurrent assets $ 4,288 $ 5,027
Noncurrent liabilities (9) (63)
------ ------
Net noncurrent assets of
discontinued operations $ 4,279 $ 4,964
====== ======
Net assets held for sale for "operations to be disposed of" are valued in
accordance with SFAS No. 121, lower of cost or estimated proceeds less cost to
sell, as follows:
December 31,
1998 1997
---- ----
(In Thousands)
Operations to be Disposed Of
----------------------------
Current assets $ 1,414 $ 3,379
Current liabilities (211) (1,374)
------ ------
Net current assets of
operations to be disposed of $ 1,203 $ 2,005
====== ======
Noncurrent assets $15,521 $34,719
Noncurrent liabilities - (10,181)
------ ------
Net noncurrent assets of
operations to be disposed of $15,521 $24,538
====== ======
Note 5. EARNINGS PER SHARE
The Company's diluted earnings per share were calculated using the
Treasury Stock method in accordance with the SFAS No. 128. The basic and
diluted earnings per share calculations are as follows:
For the Year Ended December 31,
1998 1997 1996
---- ---- ----
(In Thousands, Except Per Share Data)
Basic EPS:
Income from continuing operations $13,082 $ 9,643 $12,763
Income from discontinued operations - 1,959 953
------ ------ ------
Net income $13,082 $11,602 $13,716
====== ====== ======
Shares - Basic 8,290 8,273 8,339
Per-share amount:
Continuing operations $ 1.58 $ 1.16 $ 1.53
Discontinued operations - .24 .11
------ ------ ------
Total $ 1.58 $ 1.40 $ 1.64
====== ====== ======
Effect of potentially dilutive securities:
Options 152 132 46
Diluted EPS:
Income from continuing operations $13,082 $ 9,643 $12,763
Income from discontinued operations - 1,959 953
------ ------ ------
Net income $13,082 $11,602 $13,716
====== ====== ======
Shares - Diluted 8,442 8,405 8,385
Per-share amount:
Continuing operations $ 1.55 $ 1.15 $ 1.53
Discontinued operations - .23 .11
------ ------ ------
Total $ 1.55 $ 1.38 $ 1.64
====== ====== ======
Rights to purchase one common share of stock for $35 for each common
share of stock held were not included in the computation of diluted EPS
because the rights' exercise price was greater than the average price of the
common shares. See Note 9 for further discussion.
Note 6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company's investments in unconsolidated affiliates are comprised of
the following:
1998 1997
---- ----
(Thousands of dollars)
Schon & Cie, AG $ - $ -
Bee Gee Holding Company, Inc. 7,034 6,500
----- -----
7,034 6,500
Less amounts classified
with net noncurrent assets of
operations to be disposed of (7,034) (6,500)
----- -----
$ - $ -
===== =====
Bee Gee Holding Company, Inc.
- -----------------------------
At December 31, 1998, the Company owns 30,000 shares of common stock, a
43% interest, of Bee Gee, which consists of several subsidiaries engaged in
the business of farming and harvesting shrimp off the coast of South and
Central America and, during 1996, processed shrimp and other sea foods for
domestic and foreign markets. In January 1997, Bee Gee sold its processing
operations to a major competitor in the same geographical area. Goodwill
related to the Bee Gee investment was amortized over ten years and was
completed in 1997.
Financial Information
- ---------------------
The condensed financial information that follows reflects the Company's
proportionate share in the financial position and results of operations of Bee
Gee:
1998 1997
---- ----
(Thousands of dollars)
Current assets $ 3,619 $ 4,353
Current liabilities (2,063) (2,107)
------ ------
Working capital 1,556 2,246
====== ======
Properties, net 9,034 7,423
Other assets 417 411
Long-term debt (2,444) (3,044)
Other liabilities (1,529) (536)
------ ------
Stockholders' equity $ 7,034 $ 6,500
====== ======
Investments, at equity,
in unconsolidated affiliates $ 7,034 $ 6,500
====== ======
1998 1997 1996
---- ---- ----
(Thousands of dollars)
Sales $ 7,597 $11,648 $26,890
Costs and expenses (7,063) (11,129) (27,414)
------ ------ ------
Net income (loss),
from continuing operations 534 519 (524)
Amortization of excess of cost
over net assets acquired - 401 421
Income taxes (benefit) 208 46 (381)
------ ------ ------
Equity in net income (loss)
of continuing
unconsolidated affiliates $ 326 $ 72 $ (564)
====== ====== ======
Schon & Cie, AG ("Schon")
- ------------------------
At December 31, 1998, the Company maintains an equity interest in
Schon. Schon 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
investment was written down to zero at December 31, 1995 due to the continuous
losses. During the second quarter, 1996, Schon acquired J. Sandt AG, a major
competitor in the same geographical area. This transaction reduced Katy's
interest in Schon from 37.5% to 27.6%. The transaction had no effect on
Katy's results for the period. In January 1998, the Company, in agreement
with Schon's other major stockholders, surrendered some of its stock ownership
in lieu of contributing additional funds. As a result of this transaction,
Katy's interest in Schon was reduced. This transaction had no effect on
Katy's results for the period.
Note 7. INDEBTEDNESS
On December 11, 1998, the Company amended and restated its unsecured
revolving credit agreement agented by Bank of America, with LaSalle National
Bank acting as the managing agent. The Credit Agreement provides for
borrowings of up to $215 million. The Company had $39 million outstanding
under the Credit Agreement as of December 31, 1998.
Under the credit agreement, the Company must meet certain net worth and
other financial covenants. At December 31, 1998, the Company is in compliance
with all such covenants.
Letters of credit totaling $6,640,000 were outstanding at December 31,
1998.
Long-term debt at December 31 includes: 1998 1997
---- ----
(Thousands of dollars)
Revolving loans payable, interest at various LIBOR
Rates (7.31% - 7.65%), due through 2001, unsecured $39,000 $ -
Real estate and chattel mortgages, with interest
at fixed rates (7.14%), due through 2002 980 10,628
Less current maturities (72) (680)
------ ------
39,908 9,948
Less amount classified with net noncurrent
assets of other operations to be disposed of - (9,948)
------ ------
$39,908 $ -
====== ======
Aggregate scheduled maturities of long-term debt are as follows:
(Thousands of dollars)
1999 $ 72
2000 71
2001 39,071
2002 766
------
Total $39,980
======
Other
- -----
As of December 31, 1998, the Company is contingently liable for
$8,000,000 (original face value) of 8-1/8% Subordinated Industrial Development
Bonds issued by Bee Gee. As of December 31, 1998, the outstanding balance on
these bonds is $5,510,000.
Note 8. RETIREMENT BENEFIT PLANS
Pension and Other Postretirement 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. The Company also provides certain health care and life
insurance benefits for some of its retired employees.
Pension Benefits Other Benefits
1998 1997 1998 1997
---- ---- ---- ----
(Thousands of dollars)
Change in benefit obligation:
Benefit obligation at
beginning of year $3,614 $3,307 $2,105 $2,142
Service cost 232 226 20 20
Interest cost 257 253 139 143
Actuarial (gain)/loss (35) 220 - -
Benefits paid (538) (392) (200) (200)
----- ----- ----- -----
Benefit obligation at end of year 3,530 3,614 2,064 2,105
Change in plan assets:
Fair value of plan assets at
beginning of year 4,111 3,670 - -
Actuarial return on plan assets 303 649 - -
Employer contribution 173 184 200 200
Benefits paid (538) (392) (200) (200)
----- ----- ----- -----
Fair value of plan asset at end of year 4,049 4,111 - -
Reconciliation of prepaid(accrued)
benefit cost:
Funded status 519 497 (2,064) (2,105)
Unrecognized net actuarial (gain)/loss 328 323 (493) (538)
Unrecognized prior service cost 70 76 29 33
Unrecognized net transition
asset/(obligation) (328) (366) - -
----- ----- ----- -----
Prepaid/(Accrued) benefit cost 589 530 (2,528) (2,610)
Components of net periodic benefit cost:
Service cost 232 226 20 20
Interest cost 257 253 139 143
Expected return on plan assets (313) (339) - -
Amortization of net transition asset (38) (38) - -
Amortization of prior service cost (6) (3) 5 5
Amortization of net gain/(loss) 29 76 (45) (45)
----- ----- ----- -----
Net periodic benefit cost $ 161 $ 175 $ 119 $ 123
===== ===== ===== =====
Assumptions as of December 31:
Discount rates 7-7.5% 7-7.5% 7% 7%
Expected return on plan assets 7.5-8% 7.5-8%
Assumed rates of compensation increases 0-5% 0-5%
Impact of one-percent increase in health care trend rate:
Increase in accumulated postretirement benefit obligation $213 $212
Increase in service cost and interest cost $ 4 $ 19
Impact of one-percent decrease in health care trend rate:
Increase in accumulated postretirement benefit obligation $171 $170
Increase in service cost and interest cost $ 3 $ 15
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1998 was 10% for 1998
decreasing linearly each successive year until it reaches 4.5% in 2001, after
which it remains constant.
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 that vested immediately upon Board approval and is
to be paid for services rendered to date.
401(k) Plans
- ------------
The Company offers its employees the opportunity to voluntarily
participate in one of six 401(k) plans administered by the Company or one of
its subsidiaries. The Company makes matching and other contributions in
accordance with the provisions of the plans and, under certain provisions, at
the discretion of the Company. The Company made annual matching and other
contributions of $632,000, $623,000 and $474,000 in 1998, 1997 and 1996,
respectively.
Note 9. STOCKHOLDERS' EQUITY
Share Repurchase
- ----------------
On May 19, 1998, Katy's Board of Directors authorized the Company to
repurchase an additional 250,000 common shares, bringing the total authorized
shares to 1,150,000 since 1995. In connection therewith, Katy repurchased
12,000, 38,000 and 509,800 of its common shares during the years ended
December 31, 1998, 1997 and 1996, at a total cost of $217,000, $566,000 and
$6,367,000, respectively. As of December 31, 1998, 238,000 common shares may
still be purchased pursuant to the repurchase program.
During 1997, the Company initiated an "Odd Lot Buyback" program to
repurchase common shares held by stockholders owning fewer than 100 shares.
During the year ended December 31, 1997, Katy repurchased 4,695 of its common
shares at a cost of $87,000.
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 stockholder 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 changes of
control events occur. As of December 31, 1998, there are 8,338,314 rights
outstanding, of which none are exercisable.
Stock Purchase Plan for Key Employees and Directors
- ---------------------------------------------------
In 1994, the Board of Directors approved the Stock Purchase Plan for Key
Employees and Directors ("Stock Purchase Plan"). Under the Stock Purchase
Plan, shares of the Company's common stock, held in the treasury, were
reserved for issuance at a purchase price equal to 65% (50% in certain cases)
of the market value of the shares as determined based upon the offering period
established by the Compensation Committee of the Board of Directors. During
1996, 24,000 shares were issued at prices ranging from $6.17 to $8.02 per
share. As of December 31, 1998, 83,000 common shares have been issued at
prices ranging from $6.17 to $8.02 per share. The issuance of these shares,
in 1996, for total notes receivable of $141,000, was a noncash financing
transaction.
Proceeds from the sale of these shares consisted of cash or 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 of
$43,000 was charged to retained earnings in 1996. The excess of the market
value of the shares over the purchase price of $113,000 was charged to
compensation expense in 1996.
Restricted Stock Grant
- ----------------------
During 1998 and 1997, the Company issued restricted stock grants in the
amount of 37,800 and 44,250 shares, respectively, to certain key employees of
the Company. These stock grants vest over a four-year period, of which 25%
vested immediately upon distribution. As a result of this transaction, the
Company has recognized compensation expense for 1998 and 1997 in the amount of
$162,000 and $324,000, respectively.
Director Stock Grant
- --------------------
During 1998 and 1997, the Company granted all non-employed Directors 500
shares of Company common stock. The total grant to the Directors for the
years ended December 31, 1998 and 1997 was 4,000 and 4,500 shares,
respectively.
Stock Option Plans
- ------------------
At the 1998 Annual Meeting, the Company's stockholders approved a Long-Term
Incentive Plan (the "Incentive Plan"), authorizing the issuance of up to
875,000 shares of Company Common Stock pursuant to the grant or exercise of
stock options, including incentive stock options, nonqualified stock options,
stock appreciation rights ("SARs"), restricted stock, performance units or
shares and other incentive awards. The Board of Directors administers the
Incentive Plan and determines to whom awards may be granted, the type of award
as well as the number of shares of Company Common Stock to be covered by each
award, and the terms and conditions of such awards. The exercise price of
stock options granted under the Incentive Plan cannot be less than 100 percent
of the fair market of such stock on the date of grant. Related to the
Incentive Plan, the Company granted SARs as follows:
SARs (204,473) become exercisable at any time after the earliest that (a)
up to and including July 22, 2001, the Company's average closing stock price
over a 45 calendar day period has equaled or exceeded $39.125 per share; or
(b) up to and including January 22, 2005, the Company's average closing stock
price over a 45 calendar day period has equaled or exceeded $53.80 per share.
In addition, in the event that goal (a) above is met, only 50% of the SARs
thus vested will be immediately exercisable, with, 25% exercisable upon the
first anniversary of the performance vesting date, and 25% exercisable upon
the second anniversary of the performance vesting date. In addition, SARs
(163,579) become exercisable at such time up to and including January 22,
2005, the Company's average closing stock price over a 45 calendar day period
has equaled or exceeded $53.80 per share. All SARs which have met the
performance goals above, as the case may be, will expire December 9, 2007.
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 exercisable at a price equal to the market
value of the stock at the date of grant. The options, in the case of
nonemployee directors, are immediately exercisable, and in the case of
executives and key employees, become exercisable from one to four years from
the date of grant, and generally expire 10 years from the date of grant. The
following table summarizes option activity under the plan:
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Options Exercise Price Life Price
------- -------------- ---- -----
Outstanding at
December 31, 1995 197,000 $ 8.50 - 9.25 9.8 years $ 8.96
Granted 304,750 $12.69 - 13.57 $13.21
Canceled (12,000) $ 8.50 - 9.25 $ 9.00
-------
Outstanding at
December 31, 1996 489,750 $ 8.50 - 13.57 9.5 years $11.60
Granted 33,000 $16.13 - 19.56 $17.87
Exercised (21,850) $ 8.50 - 13.19 $11.25
Canceled (17,500) $ 8.50 - 9.25 $12.69
-------
Outstanding at
December 31, 1997 483,400 $ 8.50 - 19.56 8.5 years $11.99
=======
Granted 16,000 $ 18.13 $18.13
Exercised (19,436) $ 8.50 - 13.19 $11.31
Canceled (8,864) $ 8.50 - 19.56 $12.74
-------
Outstanding at
December 31, 1998 471,100 $ 8.50 - 19.56 7.6 years $12.21
=======
Vested and exercisable
at December 31, 1998 305,787 $11.92
=======
The Company applies Accounting Principles Bulletin Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized. SFAS No. 123, "Accounting for Stock-Based Compensation" was
issued and, if fully adopted by the Company, would change the method for
recognition of cost. Under SFAS No. 123, cost is based upon the fair value of
each option at the date of grant using an option-pricing model that takes into
account as of the grant date the exercise price and expected life of the
option, the current price of the underlying stock and its expected volatility,
expected dividends on the stock and the risk-free interest rate for the
expected term of the option. Had compensation cost been determined based on
the fair value method of SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below.
The weighted average fair values of options granted in 1998, 1997 and 1996
were $5.67, $7.02 and $4.80, respectively.
The fair value of each option grant is estimated on the date of grant
using the binomial option-pricing model with the following assumptions used
for grants on June 8, 1995, December 29, 1995, May 20, 1996, July 30, 1996,
December 9, 1996, May 19, 1997 and December 9, 1997, May 19, 1998,
respectively: dividend yield of 1.65%, 1.82% and 2.35% for the periods 1998,
1997 and 1996, respectively; expected volatility ranging from 17.8% to 35.5%
for all grants, risk free interest rates ranging from of 4.66% to 6.44% for
all grants; and expected lives of 5 years for all grants.
1998 1997 1996
---- ---- ----
(In Thousands, Except Per Share Data)
Net income as reported $13,082 $11,602 $13,716
====== ====== ======
Net income - pro forma $12,762 $11,334 $13,628
====== ====== ======
Earnings per share as reported - Basic $1.58 $1.40 $1.64
==== ==== ====
Earnings per share - pro forma - Basic $1.54 $1.37 $1.63
==== ==== ====
Earnings per share as reported - Diluted $1.55 $1.38 $1.64
==== ==== ====
Earnings per share - pro forma - Diluted $1.52 $1.35 $1.63
==== ==== ====
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
Note 10. WASTE-TO-ENERGY FACILITY
SESCO owns a waste-to-energy facility in Savannah, Georgia. SESCO is
under contract with the Resource Recovery Development Authority ("Authority")
of the City of Savannah (the "City") to receive and dispose of the City's
solid waste through 2007. The contract provides for minimum levels of SESCO'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.
In substance, the City desired a solid waste disposal and resource
recovery facility, issued bonds to finance construction of the facility, and
contracted SESCO 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. SESCO
is obligated to perform under the various agreements. SESCO 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.
Under terms of the contract, SESCO made contributions to the Authority
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 Authority. SESCO has made
capital expenditures to improve the operating facility, and these expenditures
have been accounted for as deferred expenses and prior to the impairment loss,
were being amortized through 2007. See Note 2 and 4 for further discussion.
Note 11. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes,
exclusive of equity in income of unconsolidated affiliates, are:
1998 1997 1996
---- ---- ----
(Thousands of dollars)
Domestic
Continuing $19,179 $14,148 $21,469
Discontinued - 3,159 1,361
------ ------ ------
Total domestic $19,179 $17,307 $22,830
====== ====== ======
Foreign
Continuing $ 642 $ 417 (503)
Discontinued - (49) 152
------ ------ ------
Total foreign $ 642 $ 368 $ (351)
====== ====== ======
Total worldwide $19,821 $17,675 $22,479
====== ====== ======
The components of the net provision (benefit) for income taxes are:
1998 1997 1996
---- ---- ----
Continuing operations: (Thousands of dollars)
Current:
Federal $ 4,240 $ 2,786 $ 1,385
State 590 340 243
Foreign 285 47 -
------ ------ ------
Total 5,115 3,173 1,628
------ ------ ------
Deferred:
Federal 1,585 1,315 5,729
State 171 269 87
Foreign (132) 165 (186)
------ ------ ------
Total 1,624 1,749 5,630
------ ------ ------
Total continuing operations $ 6,739 $ 4,922 $ 7,258
====== ====== ======
Discontinued operations:
Federal $ - $ 1,065 $ 674
State - 104 52
Foreign - (18) (166)
------ ------ ------
Total - 1,151 560
------ ------ ------
Net provision for income taxes $ 6,739 $ 6,073 $ 7,818
====== ====== ======
The total income tax provision for continuing operations 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, 1998, 1997 and 1996 were as
follows:
1998 1997 1996
---- ---- ----
(Thousands of dollars)
Provision for income taxes
at statutory rate $ 6,937 $ 5,098 $ 7,338
State income taxes, net of
federal benefit 476 492 403
Foreign tax rate differential 10 20 -
Amortization of negative goodwill (596) (596) -
Benefit of net operating loss carryforwards (66) (49) (22)
Other, net (22) (43) (80)
------ ------ ------
Provision for income taxes from
continuing consolidated operations 6,739 4,922 7,639
Undistributed loss of equity investees - - (381)
------ ------ ------
Net provision for income taxes $ 6,739 $ 4,922 $ 7,258
====== ====== ======
The tax effects of significant items comprising the Company's net
deferred tax liability as of December 31, 1998 and 1997 are as follows:
1998 1997
---- ----
(Thousands of dollars)
Deferred tax liabilities:
Difference between book and tax basis of property $ 449 $ 149
Waste-to-energy facility 18,763 17,581
Undistributed earnings of equity investees 10,372 10,616
------ ------
29,584 28,346
------ ------
Deferred tax assets:
Allowance for doubtful receivables 2,156 1,837
Inventory costs 3,470 2,698
Accrued expenses and other items 11,708 11,806
Operating loss carryforwards - domestic 2,574 3,097
Operating loss carryforwards - foreign 555 361
Tax credit carryforwards - 46
------ ------
20,463 19,845
Less valuation allowance (450) (799)
------ ------
20,013 19,046
------ ------
Net deferred income tax liability $ 9,571 $ 9,300
====== ======
The valuation allowance primarily relates to domestic net operating loss
carryforwards 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
$349,000 during the year ended December 31, 1998, due to partial utilization
of available net operating losses, the disposition of CEGF and the utilization
of foreign tax credit carryovers. The domestic net operating loss
carryforwards primarily relate to SESCO and CEGF and can only be used to
offset income from those operations.
One of the Company's foreign subsidiaries has net operating loss
carryforwards of approximately $1,542,000 at December 31, 1998 that expire in
the years 2002 through 2005. SESCO has state net operating loss carryforwards
of $51,481,000 at December 31, 1998 that expire in the years 2003 through
2013.
Note 12. LEASE OBLIGATIONS:
The Company has entered into noncancelable leases for manufacturing and
data processing equipment and real property with lease terms of up to ten
years. Future minimum lease payments as of December 31, 1998 are as follows:
(Thousands of dollars)
1999 $ 5,314
2000 3,569
2001 2,860
2002 1,991
2003 1,677
Later years 2,587
------
Total minimum payments $17,998
======
Rental expense for 1998, 1997 and 1996 for operating leases was
$5,138,000, $3,928,000 and $1,456,000, respectively.
Note 13. 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, stains, electrical and electronic components, and nonpowered hand
tools. Principal markets are in the United States and Canada, and include the
sanitary maintenance, restaurant supply, retail, electronic, automotive, and
computer markets. These activities are grouped into two industry segments:
Electrical/Electronics and Maintenance Products. Katy had one major customer
in the Electrical/Electronics segment that accounted for approximately
$46,796,000 or 14% of the Company's consolidated sales in 1998. On November
4, 1998, the Company announced that this major customer withdrew its
commitment to purchase extension corded products from Woods at or about
year-end. Katy is not dependent on any other single customer for a material
portion of its overall business. The Company is not reliant upon any one
significant vendor or material.
The table below and the narrative, which follows, summarize the key
factors in the year-to-year changes in operating results. The information
provided below has been retroactively restated to reflect Katy's realignment
of its operating units.
Years Ended December 31,
1998 1997 1996
---- ---- ----
(Thousands of dollars)
Electrical/Electronics Group
- ----------------------------
Net external sales $230,927 $218,237 $ 89,622
Net internal sales 32,103 175 180
Income from operations 14,839 13,191 7,250
Operating margin 6.4% 6.0% 8.1%
Identifiable assets 126,362 112,156 108,775
Depreciation and amortization 1,652 398 1,475
Capital expenditures 7,348 5,138 2,503
Maintenance Products Group
- --------------------------
Net external sales $111,388 $ 67,786 $ 56,391
Net internal sales 6,389 4,306 3,423
Income from operations 8,401 6,328 4,794
Operating margin 7.5% 9.3% 8.5%
Identifiable assets 110,317 46,333 31,065
Depreciation and amortization 3,779 1,854 1,745
Capital expenditures 2,725 1,234 1,235
Operations to be Disposed Of
- ----------------------------
Net external sales $ 6,297 $ 9,568 $ 10,011
Net internal sales - - -
Income (loss) from operations (3,262) 122 1,566
Operating margin (7.3%) 1.3% 15.6%
Identifiable assets 17,680 31,599 32,015
Equity Investments 7,034 6,500 6,382
Depreciation and amortization 1,009 1,549 1,384
Capital expenditures 5,126 3,034 515
Discontinued Operations
- -----------------------
Net external sales $ 23,349 $ 31,537 $ 32,494
Net internal sales 146 - -
Income from operations 1,663 [a] 3,046 1,566
Operating margin 7.1% 9.7% 4.8%
Identifiable assets 16,975 18,486 22,843
Depreciation and amortization 631 681 747
Capital expenditures 547 1,252 884
Corporate
- ---------
Corporate expenses $ 7,965 $ 6,496 $ 5,640
Identifiable assets 24,535 43,818 44,811
Depreciation and amortization 91 86 154
Capital expenditures 175 41 182
Company
- -------
Net external sales [a] $371,961 $327,128 $188,518
Net internal sales 38,638 4,481 3,603
Income from operations [a] 13,676 16,191 9,536
Operating margin [a] 4.4% 4.9% 5.1%
Identifiable assets [a] 295,869 252,392 239,509
Depreciation and amortization [a] 7,162 4,568 5,505
Capital expenditures 15,921 10,699 5,319
[a] Company balances include amounts from both "Discontinued Operations" and
"Operations to be Disposed of", whereas the Consolidated Financial Statements
classify such amounts as "Discontinued Operations" and "Operations to be
Disposed of" for 1998 and 1997 and "Discontinued Operations" for 1996. The
"Income from operations" for "Discontinued Operations" was deferred pending
final disposition of such operations. See Note 4 to Consolidated Financial
Statements for further discussion.
The following tables reconcile the Company's total revenues, operating
income and assets to the Company's Consolidated Statements of Operations and
Consolidated Balance Sheets.
1998 1997 1996
---- ---- ----
(Thousands of dollars)
Revenues
Total revenues for reportable segments $410,599 $331,609 $192,121
Elimination of inter-company revenues (38,638) (4,481) (3,603)
Revenues included in Equity in income
(loss) of operations to be disposed of (6,297) (9,568) -
Revenues included in Discontinued
operations (23,349) (31,537) (32,494)
------- ------- -------
Total consolidated revenues $342,315 $286,023 $156,024
======= ======= =======
Operating Income
Total operating income for
reportable segments $13,676 $16,191 $ 9,536
Operating income included in Equity in
income (loss) of operations to
be disposed of 462 (122) -
Loss from impairment of assets 2,800 - -
Operating income included in
Discontinued operations (1,663) (3,046) (1,566)
------ ------ ------
Total consolidated operating income $15,275 $13,023 $ 7,970
====== ====== ======
Total Assets
Total assets for reportable segments $295,869 $252,392
Liabilities included in Net current
and Net noncurrent assets of
operations to be disposed of (956) (11,555)
Liabilities included in Net current
and Net noncurrent assets of
discontinued operations (1,738) (3,677)
------- -------
Total consolidated assets $293,175 $237,160
======= =======
Export sales of products, primarily to Canada, Mexico, Europe, and the
Far East, were $19,641,000, $15,197,000, and $5,960,000 in 1998, 1997 and
1996, respectively.
The Company operates businesses in the United States and foreign
countries. The operations for 1998, 1997 and 1996 of businesses within major
geographic areas are summarized as follows:
United Canada/
States Mexico Europe Other Consolidated
------ ------ ------ ----- ------------
(Thousands of dollars)
1998:
Sales to unaffiliated
customers $298,572 $35,876 $ 5,246 $ 2,621 $342,315
======= ====== ====== ====== =======
Operating income $ 12,539 $ 1,852 $ 626 $ 258 $ 15,275
======= ====== ====== ====== =======
Identifiable assets [a] $261,309 $31,866 $ - $ - $293,175
======= ====== ====== ====== =======
1997:
Sales to unaffiliated
customers $266,403 $13,526 $ 3,541 $ 2,553 $286,023
======= ====== ====== ====== =======
Operating income $ 11,551 $ 958 $ 299 $ 215 $ 13,023
======= ====== ====== ====== =======
Identifiable assets [a] $222,300 $14,860 $ - $ - $237,160
======= ====== ====== ====== =======
1996:
Sales to unaffiliated
customers $145,184 $ 4,907 $ 3,747 $ 2,186 $156,024
======= ====== ====== ====== =======
Operating income $ 7,004 $ 342 $ 418 $ 206 $ 7,970
======= ====== ====== ====== =======
Identifiable assets [a] $220,796 $14,581 $ - $ - $235,377
======= ====== ====== ====== =======
Net sales for each geographic area include sales of products produced in
that area and sold to unaffiliated customers, as reported in the Consolidated
Statements of Operations.
[a] Amounts represent total identifiable assets, net of liabilities of
$2,693,000, $15,232,000 and $4,131,000 for 1998, 1997 and 1996, respectively.
The $2,693,000 and $15,232,000 represent the total liabilities of both
Discontinued Operations and Other Operations to be Disposed Of, whereas, the
$4,131,000 represents the total liabilities of Discontinued Operations.
Note 14. CONTINGENT LIABILITIES
In December 1996, Banco del Atlantico, a bank located in Mexico, filed
a lawsuit against Woods Industries, Inc. ("Woods"), a subsidiary of the
Company, and against certain past and then present officers and directors and
former owners of Woods, alleging that the defendants participated in a
violation of the Racketeer Influenced and Corrupt Organizations Act involving
allegedly fraudulently obtained loans from Mexican banks, including the
plaintiff, and "money laundering" of the proceeds of the illegal enterprise.
All of the foregoing is alleged to have occurred prior to the Company's
purchase of Woods. The plaintiff also alleges that it made loans to an entity
controlled by certain officers and directors based upon fraudulent
representations. The plaintiff seeks to hold Woods liable for its alleged
damage under principles of respondeat superior and successor liability. The
plaintiff is claiming damages in excess of $24,000,000 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. The Company may have recourse against the former owner
of Woods and others for, among other things, violations of covenants,
representations and warranties under the purchase agreement through which the
Company acquired Woods, and under state, federal and common law. In addition,
the purchase price under the purchase agreement may be subject to adjustment
as a result of the claims made by Banco del Atlantico. The extent or limit of
any such recourse cannot be predicted at this time.
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.
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency, state environmental agencies
and private parties as potentially responsible parties ("PRPs") at a number of
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") or equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
Under the federal Superfund statute, parties could be held jointly and
severally liable, thus subjecting them to potential individual liability for
the entire cost of cleanup at the site. Based on its estimate of allocation
of liability among PRPs, the probability that other PRPs, many of whom are
large, solvent, public companies, will fully pay the costs apportioned to
them, currently available information concerning the scope of contamination,
estimated remediation costs, estimated legal fees and other factors, the
Company has recorded and accrued for indicated environmental liabilities in
the aggregate amount of approximately $5,000,000 at December 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.
The most significant environmental matters in which the Company is
currently involved are as follows:
1. In 1993, the United States Environmental Protection Agency ("USEPA")
initiated a Unilateral Administrative Order Proceeding under Section
7003 of the Resource Conservation and Recovery Act ("RCRA") against
W.J. Smith and Katy. The proceeding requires certain actions at the
W.J. Smith site and certain off-site areas, as well as development
and implementation of additional cleanup activities to mitigate off-
site releases. In December 1995, W.J. Smith, Katy and USEPA agreed
to resolve the proceeding through an Administrative Order on Consent
under Section 7003 of RCRA. Pursuant to the Order, W.J. Smith is
currently implementing a cleanup to mitigate off-site releases.
2. During 1995, the Company reached agreement with the Oregon Department
of Environmental Quality ("ODEQ") as to a cleanup plan for PCB
contamination at the Medford, Oregon facility of the former Standard
Transformer division of American Gage. The agreement required the
Company to pay $1,300,000 of the first $2,000,000 in clearing costs.
Those funds were expended in 1998. The present occupant of the
site, Balteau Standard, Inc. was responsible for the remaining
$700,000 of the first $2,000,000 and the next $450,000 in cleanup
costs above the $2,000,000. The parties are now sharing equally in
cleanup costs. Katy believes the cleanup plan has been
successful and has requested that the ODEQ inspect and approve the
remediation work. Katy has received such approval with respect to a
portion of the cleanup plan. Further monitoring of groundwater and
testing and cleanup of adjacent property may be required before
approval can be obtained with respect to the remainder of the plan.
Pending such approval, the liability of Katy and its subsidiary
cannot be determined at this time.
3. Pursuant to an agreement executed in connection with the sale of
assets of JEI Liquidating, Inc., a Katy subsidiary, Katy has agreed
to defend and indemnify the buyer of such assets, Allard Industries,
Inc. ("Allard"), in the case captioned United States v. Exxon, et al.
in U.S. District Court, D.N.H., consolidated nos. C-92-486; C-93-95-
L; C-94-148-Lcas. The case concerns the disposal of hazardous
substances at a landfill site in Londonderry, New Hampshire, at which
JEI Liquidating, Inc. allegedly disposed of hazardous substances from
its Manchester, New Hampshire facility. The case arises under the
Superfund law. The parties to the litigation have reached a
settlement in principle, the specific terms of which are being
negotiated in a Consent Decree. Under the expected Consent Decree,
Allard/Katy will pay approximately $300,000 and perform no future
work at the site, subject to limited re-openers. In exchange, Allard
and Katy will receive a release and contribution protection.
Honeywell Inc., a former owner and operator of JEI Liquidating, Inc.'s
Manchester, New Hampshire facility, has agreed in principle to pay
$40,000 of Allard/Katy's settlement under the Consent Decree.
Pending entry of the Consent Decree and receipt of a release, Katy's
liability 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.
Note 15. UNUSUAL ITEMS:
During 1998, 1997 and 1996, various charges and credits, as follows, were
recorded in the Company's Consolidated Statements of Operations:
1998
- ----
During 1998, the Company recorded a pre-tax gain of $6,122,000 from the
sale of CEGF. In addition, Katy recorded a pre-tax impairment loss of
$2,800,000 reducing SESCO's book value.
1997
- ----
During 1997, the Company recorded a pre-tax gain of $585,000 on the sale
of property.
1996
- ----
During 1996, the Company sold its remaining investment in Union Pacific
common stock and Union Pacific Resources common stock for total proceeds of
$18,681,000 resulting in a pre-tax gain of $10,612,000.
Note 16: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Quarterly results of operations have been affected by unusual or
infrequently occurring items as discussed in Notes 6 and 15.
1998 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ---- ------- ------- ------- -------
(Thousands of Dollars, Except Per Share Data)
Net sales $68,856 $71,626 $94,814 $107,019
====== ====== ====== =======
Gross profit $19,171 $22,344 $28,182 $ 28,867
====== ====== ====== =======
Income from continuing operations $ 1,873 $ 2,785 $ 3,800 $ 4,624
Discontinued operations - - - -
------ ------ ------ -------
Net income $ 1,873 $ 2,785 $ 3,800 $ 4,624
====== ====== ====== =======
Earnings per share - Basic
Continuing operations $ .23 $ .34 $ .46 $ .56
Discontinued operations - - - -
------ ------ ------ -------
Net income $ .23 $ .34 $ .46 $ .56
====== ====== ====== =======
Earnings per share - Diluted
Continuing operations $ .22 $ .33 $ .45 $ .55
Discontinued operations - - - -
------- ------ ------ -------
Net income $ .22 $ .33 $ .45 $ .55
======= ====== ====== =======
1997 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ---- ------- ------- ------- -------
(Thousands of Dollars, Except Per Share Data)
Net sales $65,424 $63,657 $75,132 $81,810
====== ====== ====== ======
Gross profit $19,539 $18,699 $20,405 $20,380
====== ====== ====== ======
Income from continuing operations $ 1,987 $ 1,959 $ 2,321 $ 3,376
Discontinued operations 503 600 289 567
------ ------ ------ ------
Net income $ 2,490 $ 2,559 $ 2,610 $ 3,943
====== ====== ====== ======
Earnings per share - Basic
Continuing operations $ .24 $ .24 $ .28 $ .41
Discontinued operations .06 .07 .04 .07
------ ------ ------ ------
Net income $ .30 $ .31 $ .32 $ .48
====== ====== ====== ======
Earnings per share - Diluted
Continuing operations $ .24 $ .23 $ .28 $ .40
Discontinued operations .06 .07 .03 .07
------ ------ ------ ------
Net income $ .30 $ .30 $ .31 $ .47
====== ====== ====== ======
Note 17: SUBSEQUENT EVENTS:
On January 8, 1999, the Company purchased all of the common membership
interest (the "Common Interest") in Contico International, L.L.C.,
(the "LLC"), the successor to the janitorial, consumer products and industrial
packaging businesses of Contico International, Inc. ("Contico"). Contico had
previously contributed substantially all of the assets and certain of the
liabilities of the business to the LLC and entered into leases with the LLC
for certain real property used in the business and retained by Contico. The
purchase price for the Common Interest was approximately $132,100,000. The
payment of the purchase price was financed under the Credit Agreement.
Contico has retained a preferred membership interest in the LLC (the
"Preferred Interest"), having a stated value of $32,900,000, which yields an
8% annual return on its stated value while outstanding. At certain times
beginning on January 8, 2001, or upon the occurrence of certain events, all
or a portion of the Preferred Interest is exchangeable for shares of Katy
common stock at a rate of $21 per share (for an aggregate of 1,567,000
shares). The LLC, based in St. Louis, Missouri, manufactures and distributes
consumer storage, home and automotive products, as well as janitorial and food
service equipment and supplies.
On January 25, 1999, the Company completed the divestiture of Bach
Simpson, Ltd. for approximately $1,200,000. The Company will retain ownership
of Bach Simpson, Ltd.'s building and will lease it to the buyer. The net loss
from this sale did not exceed the deferred gains realized from the sale of
companies reported as "Discontinued Operations." As such, neither will be
recognized until the total of the gains and losses from the sales of these
companies can be determined with certainty to be a net gain.
Item 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING
- -----------------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
- ------------------------
On March 30, 1998, the Company dismissed Deloitte & Touche LLP as
Independent Public Accountants. The decision was approved by the Audit
Committee of the Company's Board of Directors.
Deloitte & Touche LLP's reports on the consolidated financial statements
for the Company's fiscal years ended December 31, 1997 and December 31, 1996
did not contain an adverse opinion or a disclaimer of opinion, and were not
modified as to uncertainty, audit scope or accounting principles.
Deloitte & Touche LLP has advised the Company that a disagreement occurred
between the Company's management and Deloitte & Touche LLP in connection with
the 1997 audit. The disagreement concerned the accounting for an presentation
of the results of operations for those subsidiaries and divisions of Katy that
are a part of the reorganization plan that was approved by the Company's Board
of Directors on December 31, 1997 and announced on January 5, 1998. The
disagreement was resolved to the satisfaction of Deloitte & Touche LLP during
the December 31, 1997 audit of the consolidated financial statements. The
Audit Committee of the Board of Directors discussed the disagreement and the
subject matter of the disagreement with Deloitte & Touche LLP. The Company
has authorized Deloitte & Touche LLP to respond fully to any inquiries
concerning the disagreement and the subject matter of the disagreement by the
successor public accountant.
On May 19, 1998, Arthur Andersen LLP was engaged as the Company's
Independent Public Accountants.
Part III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information regarding the directors of Katy is incorporated herein by
reference to the information set forth under the section entitled "Election of
Directors" in the 1999 Proxy Statement.
Information regarding executive officers of the Company is incorporated
herein by reference to the information set forth under the section
"Information Concerning Directors and Executive Officers" in the 1999 Proxy
Statement.
Item 11. EXECUTIVE COMPENSATION
- --------------------------------
Information regarding compensation of executive officers is incorporated
by reference to the materials under the caption "Executive Compensation" in
the 1999 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information regarding beneficial ownership of stock by certain beneficial
owners and by management of Katy is incorporated herein by reference to the
information set forth under the section "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the 1999 Proxy
Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information regarding certain relationships and related transactions with
management is incorporated herein by reference to the information set forth
under the section "Certain Relationships and Related Transactions" in the 1999
Proxy Statement.
Part IV
-------
Item 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------------------
(a) 1. Financial Statement Schedules
The financial statement schedule filed with this report is listed on
the "Index to Financial Statement Schedules."
2. Exhibits
The exhibits filed with this report are listed on the "Exhibit Index."
(b) Reports on Form 8-K
On October 21, 1998, the Company filed a current report on Form 8-K/A
providing information in response to Item 7 to Form 8-K/A with respect to the
pro forma financial statements related to the acquisition of Wilen Companies,
Incorporated.
On November 6, 1998, the Company filed a current report on Form 8-K
providing information in response to Item 57 to Form 8-K with respect to the
loss of business at Woods Industries, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: March 18, 1999 KATY INDUSTRIES, INC.
Registrant
/S/ John R. Prann, Jr.
----------------------
John R. Prann, Jr.
President and
Chief Executive Officer
POWER OF ATTORNEY
Each person signing below appoints John R. Prann, Jr. and Stephen P.
Nicholson, or either of them, his attorneys-in-fact for him in any and all
capacities, with power of substitution, to sign any amendments to this report,
and to file the same with any exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of this 18th day of March, 1999.
Signature Title
- --------- -----
/S/ Jacob Saliba Chairman of the Board and Director
- ----------------
Jacob Saliba
/S/ John R. Prann, Jr. President, Chief Executive Officer and
- ---------------------- Director (Principal Executive Officer)
John R. Prann, Jr.
/S/ Stephen P. Nicholson Vice President, Finance and Chief Financial
- ------------------------ Officer (Principal Financial and
Stephen P. Nicholson Accounting Officer)
/S/ Glenn W. Turcotte Executive Vice President, Chief Operating
- --------------------- Officer and Director
Glenn W. Turcotte
/S/ Arthur R. Miller Executive Vice President, Corporate
- -------------------- Development, General Counsel and Director
Arthur R. Miller
/S/ William F. Andrews Director
- ----------------------
William F. Andrews
/S/ Amelia M. Carroll Director
- ---------------------
Amelia M. Carroll
/S/ Daniel B. Carroll Director
- ---------------------
Daniel B. Carroll
/S/ Wallace E. Carroll, Jr. Director
- ---------------------------
Wallace E. Carroll, Jr.
/S/ Lester I. Miller Director
- --------------------
Lester I. Miller
/S/ William H. Murphy Director
- ---------------------
William H. Murphy
/S/ Lutz Raettig Director
- ----------------
Lutz Raettig
/S/ Charles W. Sahlman Director
- ----------------------
Charles W. Sahlman
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
----
Independent Accountants' Reports 54
Independent Auditors' Consent 59
Schedule II - Valuation and Qualifying Accounts 55
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements of Katy or the Notes thereto.
INDEPENDENT ACCOUNTANTS' REPORT ON SUPPLEMENTAL SCHEDULE
TO KATY INDUSTRIES, INC.:
We have audited the consolidated financial statements of Katy Industries, Inc.
and subsidiaries (the "Company") as of December 31, 1998, and for the period
ended December 31, 1998, and have issued our report thereon dated January 26,
1999; such report is included elsewhere in this Form 10-K. Our audits also
included the financial statement schedule of Katy Industries, Inc., listed in
Item 14. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ARTHUR ANDERSEN LLP
Denver, Colorado
January 26, 1999
INDEPENDENT ACCOUNTANTS' REPORT ON SUPPLEMENTAL SCHEDULE
To the Board of Directors and Stockholders of Katy Industries, Inc.
We have audited the consolidated financial statements of Katy Industries, Inc.
and subsidiaries (the "Company") as of December 31, 1997, and for each of the
two years in the period ended December 31, 1997, and have issued our report
thereon dated January 27, 1998; such report is included elsewhere in this Form
10-K. Our audits also included the financial statement schedule of Katy
Industries, Inc., listed in Item 14. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Denver, Colorado
January 27, 1998
KATY INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Thousands of dollars)
Balance at Additions Balance
Beginning Charged to Write-offs Other at End
Description of Year Expense to the Reserve Adjustments of Year
- ----------- ------- ------- -------------- ----------- -------
Year ended December 31, 1998:
Reserve for
doubtful accounts:
Trade receivables $857 $382 $(106) $(170)[a] $963
Current notes and
other accounts
receivable 410 - - 48 [b] 198
(260)[a]
Long-term notes
receivable 2,500 - - (48)[b] 2,452
----- ---- ---- ---- -----
$3,767 $382 $(106) $(430) $3,613
===== ==== ==== ==== =====
Year ended December 31, 1997: [c]
Reserve for
doubtful accounts:
Trade receivables $1,041 $526 $(430) $(155)[a] $857
(94)[d]
(31)[e]
Current notes and
other accounts
receivable 329 - - 94 [d] 410
(13)[a]
Long-term notes
receivable 2,500 - - - 2,500
----- ---- ---- ---- -----
$3,870 $526 $(430) $(199) $3,767
===== ==== ==== ==== =====
Year ended December 31, 1996:
Reserve for
doubtful accounts:
Trade receivables $886 $455 $(174) $42 [f]$1,181
(28)[a]
Current notes and
other accounts
receivable 966 146 (667) - 445
Long-term notes
receivable 2,500 - - - 2,500
----- ---- ---- ---- -----
$4,352 $601 $(841) $14 $4,126
===== ==== ==== ==== =====
[a] Doubtful accounts and credit memos written-off against the reserve.
[b] Amount reclassed from "Long-term notes receivable" to "Current notes and
other accounts receivable".
[c] In accordance with the divestiture plan, beginning balances for 1997
reflect the exclusion of the reserves for discontinued operations.
[d] Amount reclassed from the "Trade receivables" to "Current notes and other
accounts receivable".
[e] Amount included in "Net current assets of other operations to be disposed
of" line item in the current year and in the "Accounts receivable, trade"
line item in the prior year.
[f] Adjustment due to acquisition of subsidiary.
KATY INDUSTRIES, INC.
INDEX OF EXHIBITS
DECEMBER 31, 1998
Exhibit
Number Exhibit Title Page
- ------ ------------- ----
3.1 Certificate of Incorporation (incorporated by reference to *
Katy's Form 10-K for year ended December 31, 1987, filed
March 29, 1988).
3.2 By-Laws (incorporated by reference to Katy's Form 8-K filed *
February 15, 1996).
4.1 Rights Agreement dated as of January 13, 1995 between Katy *
and Harris Trust and Savings Bank as Rights Agent
(incorporated by reference to Katy's Form 8-K filed
January 24, 1995).
4.1a Amendment dated as of October 31, 1996 to the Rights *
Agreement dated as of January 13, 1995 between Katy and
Harris Trust and Savings Bank as Rights Agent
(incorporated by reference to Katy's Form 8-K filed
November 8, 1996).
4.1b Amendment dated as of January 8, 1999 to the Rights 60
Agreement dated as of January 13, 1995 between Katy and
LaSalle National Bank as Rights Agent (incorporated by
reference to Katy's Form 8-K filed January 15, 1999).
10.1 Katy's Industries, Inc. 1994 Key Employee and Director Stock *
Purchase Plan (incorporated by reference to Katy's
Registration Statement on Form S-8 filed September 28, 1994,
Reg. No. 33-55647).
10.2 Katy Industries, Inc. Long-Term Incentive Plan (incorporated *
by reference to Katy's Registration Statement on Form S-8 filed
June 21, 1995, Reg. No. 33-60443).
10.3 Katy Industries, Inc. Non-Employee Director Stock Option Plan *
(incorporated by reference to Katy's Registration Statement on
Form S-8 filed June 21, 1995, Reg. No. 33-60449).
10.4 Katy Industries, Inc. Supplemental Retirement and Deferral *
Plan effective as of June 1, 1995.
10.5 Katy Industries, Inc. Directors' Deferred Compensation Plan *
effective as of June 1, 1995.
10.6 Katy Industries, Inc. Form of Compensation and Benefits *
Assurance Agreement (covering Tier I employees: John R.
Prann, Jr., Glenn W. Turcotte, Arthur R. Miller and Robert
M. Baratta).
10.7 Katy Industries, Inc. Form of Compensation and Benefits *
Assurance Agreement (covering Tier II employees: Michael G.
Gordono, Peter S. More and Stephen P. Nicholson).
4 Credit Agreement 63
21 Subsidiaries of registrant 58
23 Independent Auditors' Consent 59
23.1a Independent Auditors' Consent 59
27 Financial Data Schedule
* Indicates incorporated by reference.
Exhibit 21
----------
SUBSIDIARIES OF REGISTRANT
The following list sets forth subsidiaries of Katy Industries, Inc. as
of March 18, 1999, with successive indentation indicating parent/subsidiary
relationships of such subsidiaries. The percentage (unless 100%) of
outstanding equity securities owned by the immediate parent and the state of
jurisdiction or incorporation of each such subsidiary is stated in
parentheses. Omitted subsidiaries do not, in the aggregate, constitute a
"significant subsidiary".
American Gage & Machine Company (Illinois)
Bach-Simpson, Ltd. (Ontario, Canada)
Glit/Gemtex, Ltd. (Ontario, Canada) (June 1, 1997 and forward)
Woods Industries (Canada), Inc. (Ontario, Canada)
Bee Gee Holding Company, Inc. (Florida) (43%)
Bush Universal, Inc. (New York)
Hamilton Precision Metals, Inc. (Delaware)
Waldom Electronics, Inc. (Delaware)
Waldom Electronics, Inc. (Illinois)
Contico International, L.L.C. (Delaware)
Glit/Disco, Inc. (Delaware)
Duckback Products, Inc. (Delaware)
Hallmark Holdings, Inc. (Delaware)
Diehl Machines, Inc.
GC Thorsen, Inc.
Glit/Gemtex, Inc.
Loren Products
Katy Oil Company of Indonesia (Delaware)
Katy-Teweh Petroleum Company (Delaware)
Katy-Seghers, Inc. (Delaware)
Savannah Energy Systems Company (Delaware)
Peters Machinery Company (Delaware)
Schon & Cie, AG (Germany) (3%)
American Shoe Machinery Corporation, Inc. (Delaware)
Societe de Fabrication Europeenne des Machines, S.A.R.L. (France)
Schoen Machinery U.S.A., Inc. (Illinois)
Schon Engineering KFT (Hungary)
Schon-Kaev-Eger KFT (Hungary)
W.J. Smith, Wood Preserving Company (Texas)
Wilen Products, Inc. (Delaware)
Woods Industries, Inc. (Delaware)
Exhibit 23
----------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-55647, Registration Statement No. 33-60443 and Registration Statement No.
33-60449 of Katy Industries, Inc. on Forms S-8 of our reports dated January
27, 1998, appearing in this Annual Report on Form 10-K of Katy Industries,
Inc. for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 17, 1999
Exhibit 23.1a
-------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statement No. 33-55647, Registration Statement No. 33-60443 and
Registration Statement No. 33-60449.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 17, 1999.