United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13
or 15(d) of the Securities Exchange Act of 1934
For Quarter Ended: March 31, 2001 Commission File Number 1-5558
Katy Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1277589
(State of Incorporation) (I.R.S. Employer Identification No.)
6300 S. Syracuse Way, Suite 300, Englewood, Colorado 80111
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (303)290-9300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _______
------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Outstanding at May 14, 2001
Common stock, $1 par value 8,393,908
KATY INDUSTRIES, INC.
FORM 10-Q
March 31, 2001
INDEX
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 2001 and December 31, 2000 (unaudited) 2,3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2001 and 2000 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2(a). Change in Securites and Use of Proceeds 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
- 1 -
PART I FINANCIAL INFORMATION
----------------------------
Item 1. Financial Statements
----------------------------
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
ASSETS
------
March 31, December 31,
2001 2000
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 5,520 $ 1,810
Accounts receivable, net 72,314 84,896
Inventories 99,162 103,068
Deferred income taxes 7,544 7,544
Other current assets 5,385 5,769
Net current assets of operations to be disposed of 3,829 941
------- -------
Total current assets 193,754 204,028
------- -------
OTHER ASSETS:
Cost in excess of net assets acquired 37,997 39,500
Other intangibles 46,329 47,214
Miscellaneous 6,411 6,900
Net noncurrent assets of operations to be disposed of 16,761 16,471
------- -------
Total other assets 107,498 110,085
------- -------
PROPERTIES:
Land and improvements 3,709 3,789
Buildings and improvements 22,995 23,273
Machinery and equipment 168,576 166,414
------- -------
Accumulated depreciation (66,614) (61,922)
------- -------
Net properties 128,666 131,554
------- -------
Total Assets $429,918 $445,667
======= =======
See Notes to Condensed Consolidated Financial Statements.
- 2 -
KATY INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars, Except Share Data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31, December 31,
2001 2000
---- ----
CURRENT LIABILITIES:
Accounts payable $ 46,347 $ 53,553
Accrued compensation 5,847 6,038
Accrued expenses 30,499 35,483
Accrued interest and taxes 2,102 3,523
Current maturities of indebtedness 147,066 133,067
Dividends payable - 629
--------- ---------
Total current liabilities 231,861 232,293
--------- ---------
LONG TERM DEBT, less current maturities - Note 3 754 771
--------- ---------
OTHER LIABILITIES 7,015 7,609
--------- ---------
EXCESS OF ACQUIRED NET
ASSETS OVER COST, Net 1,365 1,792
--------- ---------
DEFERRED INCOME TAXES 15,559 19,969
--------- ---------
COMMITMENTS AND CONTINGENCIES - Note 4
PREFERRED INTEREST OF SUBSIDIARY 32,900 32,900
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; authorized
25,000,000 shares; issued 9,822,204 shares 9,822 9,822
Additional paid-in capital 51,127 51,127
Accumulated other comprehensive income (4,321) (2,757)
Other adjustments (444) (518)
Retained earnings 104,325 112,697
Treasury stock, at cost, 1,428,146
and 1,427,446 shares, respectively (20,045) (20,038)
--------- ---------
Total stockholders' equity 140,464 150,333
--------- ---------
Total liabilities and stockholders' equity $429,918 $445,667
========= =========
See Notes to Condensed Consolidated Financial Statements.
- 3 -
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Thousands of Dollars, Except Share and Per Share Data)
(Unaudited)
2001 2000
---- ----
Net sales $115,635 $ 134,008
Cost of goods sold 88,042 92,237
--------- ---------
Gross profit 27,593 41,771
Selling, general and administrative expenses 34,791 36,234
--------- ---------
Operating (loss) income (7,198) 5,537
Equity in loss of operations to be disposed of (1,620) (644)
Interest and other, net (3,402) (3,246)
--------- ---------
(Loss) income before provision for income taxes and
distributions on preferred interest of subsidiary (12,220) 1,647
Benefit from (provision for) income taxes 4,276 (577)
--------- ---------
(Loss) income before distributions on preferred
interest of subsidiary (7,944) 1,070
Distributions on preferred interest of subsidiary (net of tax) (428) (425)
--------- ---------
Net (loss) income $ (8,372) $ 645
========= =========
Net (loss) income per share--Basic $ (1.00) $ 0.08
========= =========
Net (loss) income per share--Diluted $ (1.00) $ 0.08
========= =========
Weighted average shares outstanding
Basic 8,394 8,416
========= =========
Diluted 8,394 8,426
========= =========
Dividends paid per share - common stock $ .0750 $ .0750
========= =========
See Notes to Condensed Consolidated Financial Statements.
- 4 -
KATY INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Thousands of Dollars)
(Unaudited)
2001 2000
---- ----
Cash flows from operating activities:
Net (loss) income $ (8,372) $ 645
Depreciation and amortization 6,965 5,958
Other, net (4,842) (13,787)
--------- ---------
Net cash flows used in operating activities (6,249) (7,184)
--------- ---------
Cash flows from investing activities:
Payments for purchase of subsidiaries,
net of cash acquired - (121)
Capital expenditures (3,360) (4,560)
Proceeds from sale of assets 18 11
Collections of notes receivable 74 89
--------- ---------
Net cash flows used in investing activities (3,268) (4,581)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt,
net of repayments 13,982 4,982
Payment of dividends (629) (631)
Purchase of treasury shares - (109)
Other - 181
--------- ---------
Net cash flows provided by financing activities 13,353 4,423
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 7 (3)
Net decrease in cash and cash equivalents 3,843 (7,345)
Cash and cash equivalents, beginning of period 2,459 10,643
--------- ---------
Cash and cash equivalents, end of period 6,302 3,298
Cash of discontinued operations and
operations to be disposed of 782 31
--------- ---------
Cash and cash equivalents of continuing operations $ 5,520 $ 3,267
========= =========
See Notes to Condensed Consolidated Financial Statements.
- 5 -
KATY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(1) Significant Accounting Policies
-------------------------------
Consolidation Policy
- --------------------
The condensed financial statements include, on a consolidated basis, the
accounts of Katy Industries, Inc. and subsidiaries in which it has a greater
than 50% interest, collectively "Katy" or the "Company". All significant
intercompany accounts, profits and transactions have been eliminated in
consolidation. Investments in affiliates that are not majority owned and where
the Company exercises significant influence are reported using the equity
method. The condensed consolidated financial statements at March 31, 2001 and
December 31, 2000 and for the three month periods ended March 31, 2001 and March
31, 2000 are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of financial condition and results of operations. Interim
figures are subject to year end audit adjustments and may not be indicative of
results to be realized for the entire year. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and analysis
of financial condition and results of operations, contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Operations to be Disposed Of
- ----------------------------
The historical operating results for the Company's investments in
Savannah Energy Systems Company ("SESCO") and Sahlman Holding Company, Inc.
("Sahlman") are "Operations to be Disposed Of"and have been segregated as
"Equity in loss of operations to be disposed of" on the accompanying Condensed
Consolidated Statements of Operations for all periods presented. The related
assets and liabilities have been separately identified on the Condensed
Consolidated Balance Sheets as "Net current assets of operations to be disposed
of" and "Net noncurrent assets of operations to be disposed of". During the
quarter ended March 31, 2001, the Company determined that it would dispose of
its investment in the Thorsen Tools business. The Company completed the sale on
May 3, 2001 and, accordingly, its operating results and financial position for
2001 are reported in a manner consistent with the other "Operations to be
Disposed of". Operations to be disposed of have not been segregated on the
Condensed Consolidated Statements of Cash Flows.
Inventories
- -----------
The components of inventories are as follows:
March 31, December 31,
2001 2000
---- ----
(Thousands of Dollars)
Raw materials $39,854 $ 38,736
Work in process 2,483 3,269
Finished goods (net of reserves) 56,825 61,063
------- --------
$99,162 $103,068
======= ========
At March 31, 2001 and December 31, 2000, approximately 37% of the
Company's inventories are accounted for using the last-in, first-out ("LIFO")
method of costing, while the remaining inventories were accounted for using the
first-in, first-out ("FIFO") method. Current cost, as determined using the FIFO
method, exceeded LIFO cost by $3.0 million at March 31, 2001 and by $1.7 million
at December 31, 2000.
- 6 -
New Accounting Pronouncements - In February 2001, the Financial
-----------------------------
Accounting Standards Board ("FASB") issued a limited revision exposure draft of
proposed Statement of Financial Accounting Standard ("SFAS") "Business
Combinations and Intangible Assets - Accounting for Goodwill." The proposed
Statement would establish a new accounting standard for goodwill acquired in a
business combination. It would continue to require recognition of goodwill as an
asset but would not permit amortization of goodwill as currently required by
Accounting Principles Board ("APB") Opinion No. 17, "Intangible Assets."
Furthermore, certain intangible assets that are not separable from goodwill will
also not be amortized.
This proposed Statement would establish a new method of testing goodwill
for impairment. It would require that goodwill be separately tested for
impairment using the fair-value-based approach. Entities would be required to
initially apply the provisions of this proposed Statement as of the beginning of
the first fiscal quarter following issuance of the final Statement. Those
provisions would apply not only to goodwill arising from acquisitions completed
after the issuance date of the final Statement but also to the unamortized
balance of goodwill at the date of adoption. The Company has not fully evaluated
the impact upon future operating results from the proposed standard. However,
the terms of the proposed recapitalization (see Note 2) and the related offer
price indicate that the fair value of the Company, and therefore the fair values
of certain underlying assets, may be less than their current carrying values.
Given these indications, it is likely that impairments of cost in excess of net
assets acquired currently carried on the Company's balance sheet will be
required following adoption of the proposed Statement.
Earnings Per Share
- ------------------
Basic and diluted earnings per share were arrived at using the
calculations outlined below. Potentially dilutive securities, in the form of
stock options, have been included in the calculation of weighted average shares
outstanding under the treasury stock method. Stock options were the only
securities that had a dilutive impact on earnings per share for the quarters
ended March 31, 2001 and 2000.
Three Months Ended
March 31,
---------
(Thousands of Dollars, Except Per Share Data)
2001 2000
---- ---
Net (loss) income $ (8,372) $ 645
======== =======
Earnings Per Share - Basic
Weighted Average Shares 8,394 8,416
Per share amount
Net (loss) income $ (1.00) $ 0.08
======== =======
Effect of potentially dilutive securities
Options - 10
Earnings Per Share - Diluted
Weighted Average Shares 8,394 8,426
Per share amount
Net (loss) income $ (1.00) $ 0.08
========= =======
- 7 -
(2) Proposed Recapitalization
-------------------------
On March 30, 2001, Katy announced that the Company had reached a
definitive agreement with KKTY Holding Company, LLC. ("KKTY"), an affiliate of
Kohlberg Investors IV, L.P. for the recapitalization of the Company (the
"Recapitalization"). To effectuate the Recapitalization, KKTY would purchase
from Katy not less than 400,000 shares of newly issued preferred stock, $100 par
value per share (the "Convertible Preferred Stock"), convertible into not less
than 5,000,000 common shares, for an aggregate purchase price of $40.0 million.
Under the current terms of the Recapitalization, nominees for directors
designated by KKTY would, if elected by Katy's shareholders, represent a
majority of Katy's Board of Directors. Shareholder approval will be required to
complete the Recapitalization. Accordingly, a proxy statement has been mailed to
shareholders, with a vote planned at the annual meeting of shareholders.
The Convertible Preferred Stock would be convertible at the option of the
holder at any time after the earlier of 1) the fifth anniversary of the closing
date of the Recapitalization, 2) board approval of a merger, consolidation or
other business combination involving a change in control of the Company, or a
sale of all or substantially all of the assets or liquidation of the Company, or
3) a contested election for directors of the Company nominated by KKTY. Each
preferred share would be convertible into 12.5 shares of common stock, and the
conversion price would be $8.00 for every share of common stock to be issued.
The preferred shares would be 1) non-voting, 2) non-redeemable, except in whole,
but not in part, at the Company's option not earlier than the 20th anniversary
of the closing date of the Recapitalization, 3) would not participate in
dividend distributions, 4) would have no preemptive rights with respect to any
other securities or instruments issued by the Company, and 5) would have
customary piggyback registration rights in the event of a a registration of
common shares by Katy. The Convertible Preferred Stock would have a liquidation
preference of $100.00 per share before any distribution could be made to common
shareholders.
Under the Recapitalization, KKTY has commenced a tender offer (the
"Offer") to purchase 2,500,000 outstanding shares of Katy common stock, at $8.00
per common share, inclusive of the associated common stock rights (the "Rights")
issued pursuant to the Rights Agreement, dated as of January 13, 1995, as
amended. KKTY will in no event acquire more than 29.9% of the outstanding voting
securities of Katy in the Offer. The obligation of KKTY to purchase shares
tendered under the Offer is subject to the conditions set forth in KKTY's Offer
to Purchase dated April 25, 2001, and is subject to pro rata acceptance of
common shares tendered if the total number exceeds 2,500,000. The initial
expiration of the Offer, terms of which are detailed in the Offer to Purchase
mailed to shareholders by KKTY, is 5:00 p.m., New York City time, on Tuesday,
June 5, 2001. KKTY can extend the Offer for an additional 20 days (and must
extend the Offer at Katy's request if certain conditions are satisfied).
However, in no event shall the Offer be extended beyond June 30, 2001.
Katy expects to utilize funds from three sources to refinance Katy's
existing obligations under its current revolving credit agreement (the "Credit
Agreement"): 1) $30.0 million of proceeds from the issuance of the Convertible
Preferred Stock, 2) a $150.0 million five year credit facility (the "New Credit
Facility"), which would include a Term Loan Facility (the "Term Loan") and a
Revolving Credit Facility, for which KKTY has entered into a commitment letter
with Bankers Trust Company, which is contingent upon, among other things,
closing the sale of the Convertible Preferred Stock, and 3) the sale of Hamilton
Metals, L.P.("Hamilton"), a wholly owned subsidiary, for at least $20.0 million,
net of retained liabilities. Katy has entered into a non-binding letter of
intent with a potential buyer for a sale of substantially all of the assets of
Hamilton.
The Term Loan is expected to have a final maturity date of five years
after the closing of the transaction and be in an original principal amount of
$40.0 million. Quarterly amortization is expected to be required in aggregate
annual amounts of $8.0 million. The Revolving Credit Facility is expected to
have a final maturity date of five years after the closing date and be in an
original amount of up to $110.0 million (subject to certain borrowing base
limits). All extensions of credit to the Company would be secured by a first
priority perfected security interest in and lien upon the capital stock of each
material domestic subsidiary (66% of the capital stock of each material foreign
subsidiary), and all present and future material assets and properties of the
Company. Availability of loans and letters of credit under the Revolving Credit
Facility would be subject to a borrowing base determined by eligible inventory
and accounts receivable. Customary financial covenants would apply. The
obligation of Bankers Trust to provide such financing, which runs to KKTY and
not to the Company, is subject to a number of conditions precedent, including,
without limitation, the
- 8 -
consummation of the sale of Hamilton, the approval by the shareholders of the
authorization and issuance of the convertible preferred stock, and the absence
of any material adverse change in the business of the Company or in the
financing and credit facility syndication markets. Bankers Trust also reserves
the right unilaterally to adjust the terms of the credit facility, including the
maturity, to the extent necessary to achieve syndication. There can be no
assurance that such financing will be available on terms the Company finds
attractive or at all.
In connection with the Recapitalization, the Company has entered into an
agreement with the holder of the preferred interest in its Contico
International, LLC subsidiary to redeem at a discount approximately half of such
interest, which in total has a stated value at December 31, 2000 of $32.9
million. Katy will utilize approximately $10 million of the proceeds from the
issuance of the Convertible Preferred Stock for this purpose. The holder will
retain approximately 50% of the preferred interest, or a stated value of $16.4
million. Consummation of this redemption is conditioned on consummation of the
Recapitalization.
Consummation of the Recapitalization is subject to a number of
conditions, including: absence of a material adverse change in financial markets
that results in KKTY not obtaining funding under the commitment letter with
Bankers Trust; the shareholders electing KKTY's designees to Katy's Board of
Directors, amending Katy's certificate of incorporation to authorize the issue
of the Convertible Preferred Stock and to classify Katy's Board of Directors,
and authorizing the issuance and sale of the Convertible Preferred Stock to
KKTY; and Katy consummating the sale of its Hamilton subsidiary for gross
proceeds in cash of at least $20.0 million, net of retained liabilities.
On May 8, 2001, Katy announced that KKTY had advised Katy that it was
re-evaluating its tender offer and proposed purchase of preferred stock in light
of Katy's operating results for the first quarter and Katy's interim operating
results for April 2001 (which indicated a continued shortfall from previously
projected earnings before interest, taxes, depreciation and amortization). KKTY
advised Katy that based on these developments, it believes one or more of the
conditions to the tender offer may not be satisfied at the expiration date of
the offer. Consequently, KKTY further advised the Company that it is considering
alternative courses of action to be negotiated with Katy, including among other
things, an increase of its proposed preferred stock investment in Katy, a
decrease in the preferred stock conversion price and a decrease in the number of
shares of Katy's common stock and price per share to be purchased pursuant to
the tender offer.
(3) Indebtedness
------------
The Company's revolving credit agreement ("Credit Agreement") provides
for borrowings of up to $16.8 million under its Facility A commitment expiring
June 30, 2001, and $161.0 million under its Facility B commitment expiring
December 11, 2001. In accordance with terms outlined in the waiver and third
amendment to the Credit Agreement dated October 27, 2000, the Company, on March
30, 2001, granted security interests on the assets of the Company and its
subsidiaries to its bank group. The security interests include liens on all
tangible assets of U.S. operations, including mortgages on owned real property
and leaseholds, as well as stock pledges from foreign subsidiaries. Concurrent
with the granting of security interests in Company assets, the bank group has
agreed to waive compliance with covenant ratio levels established in the third
amendment for the quarter ended March 31, 2001, and which extend up to, but do
not include, June 30, 2001. This action is included in a Waiver and Fourth
Amendment to the Credit Agreement, dated as of March 30, 2001.
As discussed in Note 2, Katy has entered into an agreement for the
Recapitalization. If the Recapitalization occurs, the borrowings under the
Credit Agreement will be repaid, and Katy will incur new borrowings in the form
of a secured term loan and a revolving line of credit, agented by Bankers Trust.
The Term Loan is expected to have a final maturity date of five years after the
closing of the Recapitalization and to be in an original principal amount of
$40.0 million. Quarterly amortization is expected to be required in aggregate
annual amounts of $8.0 million. The Revolving Credit Facility is expected to
have a final maturity date of five years after the closing date and be in an
original amount of up to $110.0 million (subject to certain borrowing base
limits). All extensions of credit to the Company would be secured by a first
priority perfected security interest in and lien upon the capital stock of each
material domestic subsidiary (66% of the capital stock of each material foreign
subsidiary), and all present and future material assets and properties of the
Company. Availability of loans and letters of credit under the Revolving Credit
Facility would be subject to a borrowing base determined by eligible inventory
and accounts receivable. Customary financial covenants would apply. The
obligation of Bankers Trust to provide such financing, which runs to KKTY and
not to the Company, is subject to a number of conditions precedent, including,
without limitation, the consummation of the sale of Hamilton, the approval by
the shareholders of the authorization and issuance of the convertible preferred
stock, and the absence of any material
- 9 -
adverse change in the business of the Company or in the financing and credit
facility syndication markets. Bankers Trust also reserves the right unilaterally
to adjust the terms of the credit facility, including the maturity, to the
extent necessary to achieve syndication. There can be no assurance that such
financing will be available on terms the Company finds attractive or at all.
The infusion of $40.0 million of preferred equity capital under the
Recapitalization, along with proceeds from the sale of Hamilton, will
significantly de-leverage the Company. If the Recapitalization is not completed,
Katy could experience a number of negative consequences, including, but not
limited to, default on the Credit Agreement. In the event the Recapitalization
is not consummated, Katy intends to go forward with the sale of Hamilton, and
possibly other Company assets and operating divisions and seek to refinance its
existing credit agreement on a secured basis so as to provide additional time in
which to restructure its operations. Management believes that, in the current
market environment, a substantial risk exists that, if the Recapitalization is
not consummated on a timely basis, the Company will be unable to obtain further
waivers of defaults under its current credit facility in the future and that the
Company will be unable to obtain, on reasonable terms or at all, financing
necessary to replace its current credit facility.
(4) Commitments and Contingencies
-----------------------------
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods Industries, Inc. ("Woods"), a subsidiary of the Company,
and against certain past and then present officers and directors and former
owners of Woods, alleging that the defendants participated in a violation of the
Racketeer Influenced and Corrupt Organizations Act involving allegedly
fraudulently obtained loans from Mexican banks, including the plaintiff, and
"money laundering" of the proceeds of the illegal enterprise. All of the
foregoing is alleged to have occurred prior to the Company's purchase of Woods.
The plaintiff also alleges that it made loans to an entity controlled by certain
officers and directors based upon fraudulent representations. The plaintiff
seeks to hold Woods liable for its alleged damage under principles of respondeat
superior and successor liability. The plaintiff is claiming damages in excess of
$24.0 million and is requesting treble damages under the statutes. The
defendants have filed a motion, which has not been ruled on, to dismiss this
action on jurisdictional grounds. Because the litigation is in preliminary
stages, it is not possible at this time for the Company to determine an outcome
or reasonably estimate the range of potential exposure. The Company may have
recourse against the former owner of Woods and others for, among other things,
violations of covenants, representations and warranties under the purchase
agreement through which the Company acquired Woods, and under state, federal and
common law. In addition, the purchase price under the purchase agreement may be
subject to adjustment as a result of the claims made by Banco del Atlantico. The
extent or limit of any such recourse cannot be predicted at this time.
- 10 -
(5) Industry Segment Information
----------------------------
The Company is a manufacturer and distributor of a variety of industrial
and consumer products, including sanitary maintenance supplies, coated
abrasives, stains, and electrical and electronic components. Principal markets
are in the United States, Canada and Europe, and include the sanitary
maintenance, restaurant supply, retail, electronic, automotive, and computer
markets. These activities are grouped into two industry segments:
Electrical/Electronics and Maintenance Products.
The table below and the narrative, which follows, summarize the key
factors in the year-to-year changes in operating results.
Three Months Ended March 31,
----------------------------
2001 2000
---- ----
(Thousands of Dollars)
Electrical/Electronics [b]
Net external sales $32,696 $39,794
Net intercompany sales 9,031 12,986
Income from operations [c] (2,641) 1,394
Operating margin (8.08%) 3.50%
Depreciation & amortization 572 724
Identifiable assets 97,105 124,603
Capital expenditures 458 559
Maintenance Products
Net external sales 82,939 94,214
Net intercompany sales 3,704 2,417
Income from operations [c] 503 6,278
Operating margin 0.61% 6.67%
Depreciation & amortization 5,452 5,213
Identifiable assets 300,000 325,919
Capital expenditures 2,449 3,938
Operations to be Disposed Of [b]
Net external sales 3,257 830
Net intercompany sales 2 -
Income from operations [c] (1,517) (534)
Operating margin (46.56%) (64.34%)
Depreciation & amortization 901 5
Identifiable assets 23,448 16,580
Equity investments 6,793 6,845
Capital expenditures 453 63
- 11 -
Three Months Ended March 31,
----------------------------
2001 2000
---- ----
(Thousands of Dollars)
Corporate
Corporate expenses [c] (5,060) (2,135)
Depreciation & amortization 40 14
Identifiable assets 12,223 15,445
Capital expenditures - -
Company
Net external sales [a] 118,892 134,838
Net intercompany sales 12,737 15,403
Income from operations [a] (8,715) 5,003
Operating margin [a] (7.33%) 3.71%
Depreciation & amortization [a] 6,965 5,956
Identifiable assets [a] 432,776 482,547
Capital expenditures 3,360 4,560
[a] Company balances include amounts from "Operations to be Disposed of",
whereas the Condensed Consolidated Financial Statements separately classify such
amounts as "Operations to be Disposed of".
[b] 2001 amounts include the Thorsen Tools business, which was sold by Katy on
May 3, 2001. Amounts for Thorsen Tool were included in Electrical/Electronics in
2000.
[c] See the Results of Operations section of MD&A for a further discussion of
restructuring charges and unusual items.
The following tables reconcile the Company's total revenues, operating
income and assets to the Company's Condensed Consolidated Statements of
Operations and Condensed Consolidated Balance Sheets.
March 31, March 31,
2001 2000
---- ----
(Thousands of Dollars)
Revenues
Total revenues for reportable segments $131,629 $150,241
Elimination of intersegment revenues (12,737) (15,403)
Revenues included in equity in loss
of operations to be disposed of (3,257) (830)
-------------- -------------
Total consolidated revenues $ 115,635 $ 134,008
============== =============
Operating Income
Total operating income for
reportable segments $ (8,715) $ 5,003
Operating loss included in equity in
loss of operations to be disposed of 1,517 534
-------------- -------------
Total consolidated operating income $ (7,198) $ 5,537
============== =============
- 12 -
March 31, March 31,
2001 2000
---- ----
(Thousands of Dollars)
Assets
Total assets for reportable segments $ 432,776 $ 482,547
Liabilities included in net assets from
operations to be disposed of (2,858) (769)
--------- -----------
Total consolidated assets $ 429,918 $ 481,778
========= ===========
(6) Comprehensive (loss) income
---------------------------
March 31, March 31,
2001 2000
---- ----
(Thousands of Dollars)
Net (loss) income $ (8,372) $ 645
Foreign currency translation adjustments (1,564) (527)
--------- ---------
Comprehensive (loss) income $ (9,936) $ 118
========= =========
(7) Restructuring Charge
--------------------
During the first quarter of 2001, the Company's Woods Industries
division undertook a restructuring effort that involved reductions in senior
management headcount as well as facilities closings. The Company closed
facilities in Loogootee and Bloomington, Indiana, as well as the Hong Kong
office of Katy International, a subsidiary which coordinates sourcing of
products from Asia. Sixteen management and administrative employees received
severance packages. Total severance and other exit costs were $0.7 million.
Approximately 42% of these costs were paid through the end of the first quarter.
During the third and fourth quarters of 2000, the Company implemented a
workforce reduction that reduced headcount by approximately 90. Employees
affected were primarily in general and administrative functions, with the
largest number of affected employees coming from the Maintenance Products
Segment.
The workforce reduction included severance and related costs for certain
employees. Total severance and related costs were $2.5 million pre-tax, which
are included as selling, general and administrative expenses in the consolidated
statements of operations. Approximately 70% of these costs were paid through the
end of the first quarter of 2001.
Severance expenses and exit costs are included in selling, general and
administrative expenses line item in the Consolidated Statements of Operations.
As of March 31, 2001, accrued severance and exit costs totaled $1.2 million
which will be paid through the year 2009. The table on the following page
summarizes the future obligation for the programs described:
- 13 -
(Thousands of Dollars)
2001 658
2002 180
2003 180
2004 55
2005 55
Thereafter 22
-----
Total payments 1,150
=====
- 14 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-----------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001
- ---------------------------------
Following are summaries of sales and operating income for the three
months ended March 31, 2001 and 2000 by industry segment (In thousands):
Net sales Increase (Decrease)
- --------- -------------------
2001 2000 Amount Percent
---- --- ------ -------
Electrical/Electronics $32,696 $ 39,794 $(7,098) (17.84)%
Maintenance Products 82,939 94,214 (11,275) (11.97)%
Operations to be Disposed Of 3,257 830 2,427 292.4 %
Operating (loss) income Increase (Decrease)
- ----------------------- -------------------
2001 2000 Amount Percent
---- --- ------ -------
Electrical/Electronics $ (2,641) $ 1,394 (4,035) (289.45)%
Maintenance Products 503 6,278 (5,775) (91.99)%
Operations to be Disposed Of (1,517) (534) (983) (184.08)%
The Electrical/Electronics Group's sales decreased $7.1 million or
17.8%. $2.4 million of this decrease is explained by the classification of the
Thorsen Tools business as Operations to be Disposed Of in 2001. Excluding this
factor, sales decreased $4.7 million, or 12%, primarily due to decreased volumes
in the consumer electric corded products and electrical and electronic parts and
accessories businesses, partially offset by increased volumes in the precision
metal business.
The Group's operating income decreased $4.0 million primarily as a
result of unusual charges related to losses on inventory associated with the
exit from branded product lines ($3.3 million) at Woods Industries and as a
result of costs associated with restructuring efforts ($0.7 million), also at
Woods. Aside from these factors, operating income in the Electrical/Electronics
group was lower by $0.4 million, driven by lower volume in the consumer electric
corded businesses, but offset by higher gross margins in the precision metals
business.
Sales in the Maintenance Products Group decreased $11.3 million or
12.0%. The largest sales shortfalls were in the plastics, mop and broom, and
exterior stain businesses. Sales to both retail and institutional customers were
adversely affected, with general economic conditions contributing to the
shortfalls.
The Group's operating income decreased $5.8 million. The decrease is
primarily due to volume-related declines in operating margins in the plastics,
mop and broom, and exterior stain businesses, and price-driven margin decreases
in the abrasives business. The plastics business also recorded a charge of $1.3
million to increase its LIFO inventory reserve in the first quarter of 2001.
- 15 -
Sales from Operations to be Disposed Of increased due to the inclusion
of the Thorsen Tools business in this segment in 2001.
The Group's operating loss increased $983,000 primarily because of
impairments recorded on Thorsen Tools' assets in connection with the sale of
Thorsen Tools.
Selling, general and administrative expenses for the Company's
continuing segments increased as a percentage of sales to 30% in 2001 from 27.0%
for the same period in 2000. One-time costs incurred in the corporate segment
related to the Recapitalization ($2.5 million), as well as severance to the
former President and CEO ($0.5 million) contributed to this increase.
Interest and other, net increased $156,000 for the first quarter of 2001
compared to the first quarter of 2000. Amortization of capitalized debt costs
was higher in 2001, while interest on outstanding borrowings was lower.
LIQUIDITY AND CAPITAL RESOURCES
Combined cash and cash equivalents increased to $5.52 million on March
31, 2001 compared to $1.81 million on December 31, 2000. Current ratios were
0.84 to 1 at March 31, 2001 compared to 0.88 to 1 at December 31, 2000. Working
capital decreased to $ (38.1) million at March 31, 2001 from $(28.3) million on
December 31, 2000 primarily as a result of lower receivables and inventory.
Increases in borrowings outstanding were offset by decreases in accounts payable
and accrued expenses. The Company's 2001 budget called for capital expenditures
of approximately $20.6 million. Katy's management evaluates capital requirements
and priorities on an ongoing basis, and expects to reduce the level of capital
commitments given sales and operating performance.
At March 31, 2001, Katy had short-term indebtedness for money borrowed
of $147.1 million. Total debt was 46% of total capitalization at March 31, 2001.
The Company's revolving credit agreement ("Credit Agreement") provides for
borrowings of up to $16.8 million under its Facility A commitment expiring June
30, 2001, and $161.0 million under its Facility B commitment expiring December
11, 2001. In accordance with terms outlined in the Waiver and Third Amendment to
the Credit Agreement dated October 27, 2000, the Company, on March 30, 2001,
granted security interests on the assets of the Company and its subsidiaries to
its bank group. The security interests include liens on all tangible assets of
U.S. operations, including mortgages on owned real property and leaseholds, as
well as stock pledges from foreign subsidiaries. Concurrent with the granting of
security interests in Company assets, the bank group has agreed to waive
compliance with covenant ratio levels established in the third amendment for the
quarter ended March 31, 2001, and which extend up to, but do not include, June
30, 2001. This action is included in a Waiver and Fourth Amendment to the Credit
Agreement, dated as of March 30, 2001.
As discussed in Note 2 to the condensed financial statements, Katy has
entered into an agreement for the Recapitalization. If the Recapitalization
occurs, the borrowings under the Credit Agreement will be repaid, and Katy will
incur new borrowings in the form of a secured term loan and a revolving line of
credit, agented by Bankers Trust. The Term Loan is expected to have a final
maturity date of five years after the closing of the Recapitalization and to be
in an original principal amount of $40.0 million. Quarterly amortization is
expected to be required in aggregate annual amounts of $8.0 million. The
Revolving Credit Facility is expected to have a final maturity date of five
years after the closing date and be in an original amount of up to $110.0
million (subject to certain borrowing base limits). All extensions of credit to
the Company would be secured by a first priority perfected security interest in
and lien upon the capital stock of each material domestic subsidiary (66% of the
capital stock of each material foreign subsidiary), and all present and future
material assets and properties of the Company. Availability of loans and letters
of credit under the Revolving Credit Facility would be subject to a borrowing
base determined by eligible inventory and accounts receivable. Customary
financial covenants would apply. The obligation of Bankers Trust to provide such
financing, which runs to KKTY and not to the Company, is subject to a number of
conditions precedent, including, without limitation, the consummation of the
sale of Hamilton, the approval by the shareholders of the authorization and
issuance of the convertible preferred stock, and the absence of any material
adverse change in the business of the Company or in the financing and credit
facility syndication markets. Bankers Trust also reserves the right unilaterally
to adjust the terms of the credit facility, including the maturity, to the
extent necessary to achieve syndication. There can be no assurance that such
financing will be available on terms the Company finds attractive or at all.
The infusion of $40.0 million of preferred equity capital under the
Recapitalization, along with proceeds from the
- 16 -
sale of Hamilton, will significantly de-leverage the Company. If the
Recapitalization is not completed, Katy could experience a number of negative
consequences, including, but not limited to, default on the Credit Agreement. In
the event the Recapitalization is not consummated, Katy intends to go forward
with the sale of Hamilton, and possibly other Company assets and operating
divisions and seek to refinance its existing credit agreement on a secured basis
so as to provide additional time in which to restructure its operations.
Management believes that, in the current market environment, a substantial risk
exists that, if the Recapitalization is not consummated on a timely basis, the
Company will be unable to obtain further waivers of defaults under its current
credit facility in the future and that the Company will be unable to obtain, on
reasonable terms or at all, financing necessary to replace its current credit
facility.
On May 8, 2001, Katy announced that KKTY had advised Katy that it was
re-evaluating its tender offer and proposed purchase of preferred stock in light
of Katy's operating results for the first quarter and Katy's interim operating
results for April 2001 (which indicated a continued shortfall from previously
projected earnings before interest, taxes, depreciation and amortization). KKTY
advised Katy that based on these developments, it believes one or more of the
conditions to the tender offer may not be satisfied at the expiration date of
the offer. Consequently, KKTY further advised the Company that it is considering
alternative courses of action to be negotiated with Katy, including among other
things, an increase of its proposed preferred stock investment in Katy, a
decrease in the preferred stock conversion price and a decrease in the number of
shares of Katy's common stock and price per share to be purchased pursuant to
the tender offer.
ENVIRONMENTAL AND OTHER CONTINGENCIES
The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency, state environmental agencies and
private parties as potentially responsible parties ("PRPs") at a number of
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") or equivalent state laws and, as
such, may be liable for the cost of cleanup and other remedial activities at
these sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
Under the federal Superfund statute, parties could be held jointly and severally
liable, thus subjecting them to potential individual liability for the entire
cost of cleanup at the site. Based on its estimate of allocation of liability
among PRPs, the probability that other PRPs, many of whom are large, solvent,
public companies, will fully pay the costs apportioned to them, currently
available information concerning the scope of contamination, estimated
remediation costs, estimated legal fees and other factors, the Company has
recorded and accrued for indicated environmental liabilities in the aggregate
amount of approximately $3.0 million at March 31, 2001. The ultimate cost will
depend on a number of factors and the amount currently accrued represents
management's best current estimate of the total cost to be incurred. The Company
expects this amount to be substantially paid over the next one to four years.
Katy also has a number of product liability and workers' compensation
claims pending against it and its subsidiaries. Many of these claims are
proceeding through the litigation process and the final outcome will not be
known until a settlement is reached with the claimant or the case is
adjudicated. It can take up to 10 years from the date of the injury to reach a
final outcome for such claims. With respect to the product liability and
workers' compensation claims, Katy has provided for its share of expected losses
beyond the applicable insurance coverage, including those incurred but not
reported, which are developed using actuarial techniques. Such accruals are
developed using currently available claim information, and represent
management's best estimates. The ultimate cost of any individual claim can vary
based upon, among other factors, the nature of the injury, the duration of the
disability period, the length of the claim period, the jurisdiction of the claim
and the nature of the final outcome.
In December 1996, Banco del Atlantico, a bank located in Mexico, filed a
lawsuit against Woods, a subsidiary of the Company, and against certain past and
then present officers and directors and former owners of Woods, alleging that
the defendants participated in a violation of the Racketeer Influenced and
Corrupt Organizations Act involving allegedly fraudulently obtained loans from
Mexican banks, including the plaintiff, and "money laundering" of the proceeds
of the illegal enterprise. All of the foregoing is alleged to have occurred
prior to the Company's purchase of Woods. The plaintiff also alleges that it
made loans to an entity controlled by certain officers and directors based upon
fraudulent representations. The plaintiff seeks to hold Woods liable for its
alleged damage under principles of respondeat superior and successor liability.
The plaintiff is claiming damages in excess of $24.0 million and is requesting
treble damages under the statutes. The defendants have filed a motion, which has
not been ruled on, to dismiss this action on jurisdictional grounds. Because the
- 17 -
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk associated with changes in
interest rates relates primarily to its debt obligations and temporary cash
investments. The Company currently does not use derivative financial instruments
relating to either of these exposures. The Company's debt obligations are
generally indexed from short-term LIBOR rates, and its temporary cash
investments earn rates of interest available on securities with maturities of
three months or less. The holder of the preferred interest has a put option
which allows, at certain times beginning on January 8, 2001, or upon the
occurrence of certain events, the preferred interest to be exchangeable for Katy
common stock.
The holder of the preferred interest also has a put option which allows
the holder to require the Company to purchase the preferred interest for cash
upon a Change in Control (as defined in the Agreement governing the option). The
holder of the preferred interest has acknowledged that consummation of the
Recapitalization will not constitute such a Change in Control and has agreed
with Katy to redeem at a discount approximately half of such interest. Katy will
utilize $9.9 million of the proceeds from the issuance of the Convertible
Preferred Stock for these purposes. The holder will retain approximately 50% of
the preferred interest, or a stated value of $16.4 million. Consummation of this
redemption is conditioned on consummation of the Recapitalization. Also, subject
to the Recapitalization occurring, the Agreement governing the put option will
be amended to, among other things, change the circumstances in which the holder
of the preferred interest can exercise its put option and the consideration
payable upon such exercise.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2001, the Financial Accounting Standards Board ("FASB")
issued a limited revision exposure draft of proposed Statement of Financial
Accounting Standard ("SFAS") "Business Combinations and Intangible Assets -
Accounting for Goodwill." The proposed Statement would establish a new
accounting standard for goodwill acquired in a business combination. It would
continue to require recognition of goodwill as an asset but would not permit
amortization of goodwill as currently required by Accounting Principles Board
("APB") Opinion No. 17, "Intangible Assets." Furthermore, certain intangible
assets that are not separable from goodwill will also not be amortized.
This proposed Statement would establish a new method of testing goodwill
for impairment. It would require that goodwill be separately tested for
impairment using the fair-value-based approach. Entities would be required to
initially apply the provisions of this proposed Statement as of the beginning of
the first fiscal quarter following issuance of the final Statement. Those
provisions would apply not only to goodwill arising from acquisitions completed
after the issuance date of the final Statement but also to the unamortized
balance of goodwill at the date of adoption. The Company has not fully evaluated
the impact upon future operating results from the proposed standard. However,
the terms of the proposed recapitalization (see Note 2) and the related offer
price indicate that the fair value of the Company, and therefore the fair values
of certain underlying assets, may be less than their current carrying values.
Given these indications, it is likely that impairments of cost in excess of net
assets acquired currently carried on the Company's balance sheet will be
required following adoption of the proposed statement.
OUTLOOK FOR 2001
Net sales are expected to decrease in 2001 over 2000 (excluding the
impact of lost sales as a result of the possible sale of Hamilton and the sale
of Thorsen), due mainly to expected sales decreases in the consumer electric
corded businesses and the mop and broom business. The Company has a significant
concentration of customers in the mass-market retail, discount, and do-it-
yourself market channels. The Company's ability to maintain and increase its
sales levels depends in part
- 18 -
on its ability to retain and improve relationships with these customers. The
Company faces the continuing challenge of recovering costs increases for items
such as raw materials given the market power of these customers.
Cost of goods sold are expected to continue to be negatively impacted in
2001 by higher costs for polyethylene, polypropylene, and other thermoplastic
resins (based on price levels in early 2001) that are used in the Company's
production processes, especially at Contico. Given that Contico's resin use
approximates just over 100 million pounds annually, this commodity price risk
impacts gross margin by approximately $ 1.0 million annually for each $0.01
change in the price of plastic resins. It is anticipated that resin prices
affecting cost of goods sold will be consistent or slightly favorable in 2001
compared to 2000 levels. Katy has not employed any hedging techniques in the
past, and has no immediate plans to do so in the future, regarding this
commodity market risk. Prices for copper, a significant raw material in the
Electrical/Electronics Group, may also increase in 2001. The Company anticipates
mitigating these costs by creating efficiencies in and improvements to its
production processes.
Selling, general and administrative costs are expected to improve as a
percentage of sales from 2000 levels, excluding severance, restructuring, and
other unusual charges. Certain cost reduction efforts were implemented during
the first quarter of 2001 at Woods, including the closing of facilities and
reduction of administrative and executive staff. The Company is also pursuing
its strategy of developing the Katy Maintenance Group ("KMG"). This process
involves bundling certain products of Continental (janitorial/sanitation
business of Contico), Wilen and Glit for customers in the janitorial/sanitation
markets. The new organization would allow customers to order certain products
from the three companies using a single purchase order, and billing and
collection would be consolidated as well. Katy is beginning the process during
the first half of 2001 of transferring most back-office functions of Wilen from
Atlanta to St. Louis, the headquarters of Contico/Continental. In addition to
administrative efficiencies, the Company believes that combining sales and
marketing efforts of the three entities will allow Katy a unique marketing
opportunity to have improved delivery of both products and customer service.
Katy does not expect significant financial benefits from this project in 2001,
but believes it to be a key to future profitability and success of the Company.
It should be noted that the Company anticipates unusual charges during 2001 for
both the Woods and KMG efforts, including severance, other plant closure costs,
asset impairments, and systems development costs.
Interest expense will be affected by debt levels and current rates of
interest. Assuming the current Credit Agreement were to remain intact, interest
expense is expected to be lower in 2001 than in 2000, due mainly to lower
expected interest rates, with debt levels remaining at reasonable levels through
continued management of working capital and proceeds from the sale of certain
Company assets, including Hamilton Precision Metals. If the recapitalization
were to occur, interest expense would be significantly lower as a result of
lower debt levels due to infusions of cash, excluding the impact of writing off
previously capitalized costs associated with the Credit Agreement.
The effective tax rate for 2001 is not expected to differ significantly
from the federal statutory rate.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
- ----------------------------------------------------------------------
Securities Litigation Reform Act of 1995
- ----------------------------------------
This report contains "forward-looking statements" within the meaning of
the federal securities laws. The forward-looking statements include, among
others, statements concerning the Company's outlook for 2001, the possible
recapitalization of the Company, cost reduction strategies and their results,
the Company's expectations for funding its 2001 capital expenditures and
operations and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends, and similar expressions concerning
matters that are not historical facts. Words such as "expects", "will",
"believes", "anticipates" and the like indicate the presence of forward-looking
statements. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ dramatically from those
expressed in or implied by the statements.
To improve its financial performance, the Company must reduce its cost
structure and improve its production efficiency, improve its management of
working capital, and grow its existing base of retail and distribution
customers. The most important factors that could influence the achievement of
these goals, and cause actual results to differ materially from those expressed
in the forward-looking statements, include, but are not limited to the
following:
. The Company's inability to complete the Recapitalization plan
discussed in the Liquidity and Capital Resources of this section,
which is subject to a number of conditions and contingencies, some of
which are not within the
- 19 -
Company's control.
. The Company's inability to meet covenants associated with its current
Credit Agreement.
. The Company's inability to refinance its current Credit Agreement on
attractive terms or at all.
. The Company's inability to sell certain assets to raise cash and
de-leverage its financial condition.
. Increases in the cost of, or in some cases continuation of the
current price levels of, plastic resins, copper, paper board
packaging and other raw materials.
. The Company's inability to reduce manufacturing costs.
. The inability of the Company to achieve product price increases,
especially as they relate to potentially higher raw material costs.
. The potential impact of losing lines of business at large retail
outlets in the discount and do-it-yourself markets.
. Competition from foreign competitors.
. The potential impact of new distribution channels, such as
e-commerce, negatively impacting the Company and its existing
channels.
. The potential impact of rising interest rates on the Company's LIBOR-
based credit facility.
. Labor issues, including union activities that require an increase in
production costs or lead to a strike, thus impairing production and
decreasing sales.
. Changes in significant laws and government regulations affecting
environmental compliance and income taxes.
These and other risks and uncertainties affecting the Company are discussed in
greater detail in this report and in the Company's other filings with the
Securities and Exchange Commission.
- 20 -
PART II - OTHER INFORMATION
---------------------------
Item 1. LEGAL PROCEEDINGS
- -------------------------
During the quarter for which this report is filed, there have been no
material developments in previously reported legal proceedings, and no other
cases or legal proceedings, other than ordinary routine litigation incidental to
the Company's business and other nonmaterial proceedings, have been brought
against the Company.
Item 2(a). CHANGE IN SECURITIES AND USE OF PROCEEDS
- ---------------------------------------------------
On March 30, 2001, the Company entered into the Third Amendment to the
Rights Agreement dated as of January 13, 1995, as amended (the "Third
Amendment") between the Company and LaSalle Bank National Association as Rights
Agent. The Third Amendment has the effect of exempting the transactions
contemplated by the Recapitalization from triggering the Rights Agreement.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibit
Number Exhibit Title
------- -------------
2.1 Preferred Stock Purchase and Recapitalization Agreement, dated
as of March 29, 2001, incorporated by reference to Exhibit 99.1
to the Company's Current Report on Form 8-K filed April 13,
2001.
3.1 The By-laws of the Company, as amended, filed herewith.
4.1 Third Amendment to Rights Agreement, dated March 30, 2001,
between the Company and LaSalle Bank, N.A., as Rights Agent,
incorporated by reference to Exhibit (e)(3) to the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 filed
April 25, 2001.
10.12 Waiver and Fourth Amendment to Amended and Restated Credit
Agreement dated as of March 30, 2001, filed herewith.
10.13 Preferred Unit Repurchase Agreement, dated as of March 28,
2001, between the Company, Contico International, LLC, and
Newcastle Industries, Inc., filed herewith.
10.14 Amendment No. 1, dated as of March 28, 2001, to the Members
Agreement dated as of January 8, 1999, between the Company and
Newcastle Industries, Inc., filed herewith.
(b) Reports on Form 8-K
Current Report on Form 8-K was filed on April 13, 2001, reporting the
entering into of a definitive agreement with KKTY for the Recapitalization. The
proposed recapitalization was described, and the agreement, dated March 29,
2001, was filed as Exhibit 99.1.
- 21 -
Signatures
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KATY INDUSTRIES, INC.
--------------------
Registrant
DATE: May 15, 2001 By /s/ Stephen P. Nicholson
---------------------------
Stephen P. Nicholson
Vice President, Finance &
Chief Financial Officer
- 22 -
Index of Exhibits
March 31, 2001
Exhibit
Number Exhibit Title Page
- ------- ------------- ----
2.1 Preferred Stock Purchase and Recapitalization Agreement, dated 21
as of March 29, 2001, incorporated by reference to Exhibit 99.1
to the Company's Current Report on Form 8-K filed April 13,
2001.
3.1 The By-laws of the Company, as amended, filed herewith. 21
4.1 Third Amendment to Rights Agreement, dated March 30, 2001, 21
between the Company and LaSalle Bank, N.A., as Rights Agent,
incorporated by reference to Exhibit (e)(3) to the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 filed
April 25, 2001.
10.12 Waiver and Fourth Amendment to Amended and Restated Credit 21
Agreement dated as of March 30, 2001, filed herewith.
10.13 Preferred Unit Repurchase Agreement, dated as of March 28, 21
2001, between the Company, Contico International, LLC, and
Newcastle Industries, Inc., filed herewith.
10.14 Amendment No. 1, dated as of March 28, 2001, to the Members 21
Agreement dated as of January 8, 1999, between the Company and
Newcastle Industries, Inc., filed herewith.
- 23 -